China’s membership in the World Trade Organization (“WTO“) has been one of the most important developments of trade law in the last two decades. It transformed the WTO into an inclusive organization as it brings in almost one-fifth of the world population under the formal trade law structure. China’s entry into the WTO has proven to be an opportunity and a challenge for both China and other industrialized countries like the United States.
The Chinese leadership was of the view that one of the main advantages of becoming a member of the WTO was the increase in competition it would bring to the Chinese domestic market, thereby leading to much needed structural changes in the domestic industries of China. The growing trend of globalization brought along with it the idea of production being globalized rather than restricted to a particular country. China recognized that the only way forward for them was to jump the globalization bandwagon and become the manufacturing centres of the world.
China was early to realize the investments that it would attract owing to its large market size, liberal investment regime, and cheap labour. This in turn also supplemented their participation in cross border production networks and deeper involvement in global supply chains, as China was now a new and sustainable base for global corporations. Treading this path, China is the world’s largest merchandise exporter, fourth largest commercial service exporter, and is the most preferred destination for FDI investments amongst developing countries.
China’s MFN Status With Regard to the Trade War with the United States
China was granted the “permanent normal trade relation” (PNTR) by the United States in 2000, which in turn greased their wheels for their accession into the WTO. Their actual inclusion as a Most Favored Nation (“MFN”) could be dated to 1980, when they obtained PNTR, under certain preconditions. In 1998, Congress further ruled that PNTR would now be considered Normal Trade Relations, thereby normalizing MFN as a trade practice with China. MFN, as defined under Article 1:1 of the GATT, is an economic position awarded to a country where any advantage granted by any contracting party to any product originating in or destined for any other country shall be given immediately to all other contracting parties of that country.
The main objective of the MFN treatment under Article I:1 is to ensure all WTO members the equality of opportunity to import from or export to other WTO members. China’s WTO entry has ensured that Chinese goods are treated on the same pedestal world over, owing to the concept of MFN. This has enabled a large portion of Companies to make their supply chain systems China-centric, owing to their manufacturing capacities, making China the manufacturing centres of the world.
Since 2001, China’s per capita income has increased by 431 per cent, which has resulted in greater spending by Chinese customers, which has resulted in the creation of opportunities for a portion of United States Corporations. The American agriculture industry, for instance, has seen an increase in exports by one thousand per cent to China. The MFN status to Chinese products has also benefitted American middle-class households, as the Chinese products often ease the pressures on budgets.
Despite all this progress, China continues to restrict certain industries to foreign firms like the technology sector, the banking sector and the pharmaceutical sector. The US government must focus on opening these markets to the US companies, rather than trying to reduce the trade deficit with China. Adopting a protectionist approach, as envisaged by the Trump administration to overcome the trade deficit, would further hurt American families, in their household budgets and in the opportunities of employment created owing to the Chinese market.
The WTO panel in 2019, imposed a sanction of 3.579 billion dollars on the United States for the use of anti-dumping duties against Chinese products. The ruling, given by a three-member arbitration panel had valued the loss of trade to the Chinese exporters at 3.579 billion, which is the third-highest sanction ever imposed by the WTO . China now awaits the use of retaliatory tariff measures on U.S imports from the WTO Dispute Settlement Body.
Regrettably, the US has continued the use of illegal practices to implement the WTO rules, as found by the Chinese Ministry of Commerce. Relying on the Appellate Body Report, the Ministry has stated that the US has repeatedly abused WTO rules and trade measures causing damage to the fair and impartial international trade environment envisaged by the WTO. The Trump administration, on the other hand, has explicitly stated that they are in no hurry to resolve the trade dispute with China, as the tariffs have supposedly taken a toll on the Chinese economy, thus succeeding in reducing the trade disparity between the two nations.
The accession requirements reduced the power of the Chinese state-owned companies, promoting private companies within China. The accession’s transparency requirements have also resulted in a greater appreciation for Chinese leaders and institutions amongst the WTO and other members.
China’s accession to the WTO in 2001, which brought along with it the status of MFN for China has greatly benefitted both China and the USA. The MFN status implied reduced barriers to trade and larger FDI inflows boosting the Chinese exports market. The booming export economy, in turn, led to the establishment of China-centric supply chains leading to the establishment of “Chimerica” as stated by trade analysts. The United States must look to engage in the trade battle with China in terms of product quality and production capacities rather than using a protectionist approach, which is fundamentally against the principles of the WTO.
Sirgapoor Sahil Reddy is a fourth year student at Jindal Global Law School.
Image: Financial Times