China’s reliance on SOEs continues despite reform commitments
When contemplating the 20th anniversary of China’s accession to the World Trade Organization (WTO), which brought about much publicised and historical changes to the Chinese economy amid domestic political reforms, it would be remiss not to also mention the frictions China’s integration into the world economy has caused, not least in recent years. Shane Farrelly from D’Andrea & Partners examines China’s dispute record within the WTO system, the lingering tensions between other WTO members and China, and trade agreements negotiated since.
China’s changing attitude towards international litigation over the years evident when examining their approach to the WTO dispute settlement system, especially given Beijing’s previous position on resolution of disputes by international tribunals.[1] In recent years, China has trailed only the United States, the European Union and Japan in initiating disputes in the WTO.[2]
Lingering frustrations between other WTO members and China
It was generally believed within the WTO membership at the time of China’s accession that the Chinese economic system would gradually converge wirh liberal market economies. These hopes were most notably set out in the Protocol of Accession,[3] which predicted that China would become a market economy by 2015. However, it is important to note that while the Protocol of Accessopm contains many best-endeavour clauses, these are not legally enforceable obligations.
Therefore, in reality, there weren’t any provisions within the Protocol of Accession that would have obliged China to open its closed market. As a result, China’s integration into the world economy hasn’t been the seamless transition once anticipated, andBeijing’s foreign–investment-related policies and practices, encouragement of state-owned enterprises (SOEs) and enforcement of intellectual property rights (IPR) remain common concerns among the business community.
Chinese SOEs and the WTO
Regarding SOEs in particular, China joining the WTO was supposed to lead to a decline in the prevalence of and preferential treatment for these types of firms in the Chinese market. Unfortunately, this is not how it worked out over the past 20 years; in fact, the number of Chinese SOEs ranked among the Fortune Global 500 has continued to grow considerably since 2005.[4]
China’s SOEs still clearly play a substantial role in its economy, particularly in strategic sectors. A recent review conducted by the WTO heavily criticised China’s “unfair trade practices”, such as preferential treatment for SOEs, data restrictions, inadequate enforcement of IPR, cyber theft, and a general inconsistency with its WTO commitments.[5] While the responses from the Chinese side reiterated the country’s commitment to deepening reform and opening up its economy, no binding provisions have materialised.
Chinese SOEs enjoy considerable advantages unavailable to private enterprises—domestic or foreign—which stands in direct contravention of China’s accession promises that it “would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises.”[6]
China is an active litigant within the WTO dispute settlement system as an applicant; however, on the whole, the number of disputes China faces at the WTO as a respondent is relatively low in comparison to its size and global trade volumes. The most likely reason behind this is that foreign investors would perhaps prefer to stay in the good graces of the Chinese authorities than push for improvements on fair competition. [7]
In addition to this, the WTO Appellate Body has previously stated that SOEs 100 per cent owned by the Chinese state are not even presumptively ‘public bodies’, and therefore not subject to WTO rules. Even if a WTO member is successful in their dispute resolution proceedings against China’s preferential treatment for SOEs, China is not obliged to amend its regime, so alternative means of resolving this issue are required.[8]
Concluding remarks and moving forward
Alleviating problems of this magnitude perhaps cannot be achieved at a bilateral level, therefore, all nations should work on deepening and expanding strict measures on SOEs and forced technology transfers in trade agreements among market-based economies, as well as strengthening the WTO’s rules, in order to better discipline non-market activities. Examples of successfully negotiated trade agreements involving China, such as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), contain chapters detailing rules on SOEs. China has also already agreed on some of these disciplines in the EU-China Comprehensive Agreement on Investment, though this agreement is unlikely to be ratified in the near future. Moving forward, the WTO Agreement on Subsidies and Countervailing Measures should make it clear that all SOEs shall be deemed as public bodies and must act in accordance with commercial considerations.
D’Andrea & Partners Legal Counsel (DP Group) was founded in 2013 by Carlo Diego D’Andrea and Matteo Hanbin Zhi, both of whom have extensive backgrounds in Chinese and EU law. DP Group currently has four service entities: D’Andrea & Partners Legal Counsel; PHC Tax & Accounting Advisory; EASTANT Communication and Events; and Chance & Better Education Consulting. DP Group has branches around the world, with locations in several major developing economies.
[1] December 2009 was the first time that the People’s Republic of China had chosen to take part in International Court of Justice proceedings. Since then, though China has rarely taken part in oral hearings, it has been involved in terms of statements provided regarding advisory opinions. Additionally, China refused membership of the International Criminal Court (ICC) in 1998, despite maintaining a dialogue with the court.
[2] Disputes by member, WTO, <https://www.wto.org/english/tratop_e/dispu_e/dispu_by_country_e.htm>
[3] Protocols of accession for new members since 1995, including commitments in goods and services, WTO,<https://www.wto.org/english/thewto_e/completeacc_e.htm>
[4] Amir Guluzade, The role of China’s state-owned companies explained, World Economic Forum, 7th May 2019, viewed 24th November 2021, https://www.weforum.org/agenda/2019/05/why-chinas-state-owned-companies-still-have-a-key-role-to-play/.
[5] China’s trade practices come under fire, BBC <https://www.bbc.com/news/business-58991339>
[6] False Promises II: The Continuing Gap Between China’s WTO Commitments and Its Practices, ITIF, <https://itif.org/publications/2021/07/26/false-promises-ii-continuing-gap-between-chinas-wto-commitments-and-its>
[7] China and the WTO: Two systems meet, VOX, CEPR Policy Portal, <https://voxeu.org/article/china-and-wto-two-systems-meet>
[8] Definitive Anti-dumping and Countervailing Duties on Certain Products From China: Report of the Appellate Body (WT/DS379/AB/R) and Report of the Panel (WT/DS379/R), US Trade Representative, <https://ustr.gov/sites/default/files/uploads/Mar25%20Stmt%20US%20AD-CVD%20fin.pdf>
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