US president Donald Trump criticised China for engaging in unfair trade practices by taking advantage of its ‘developing country’ status in World Trade Organisation. President Trump also criticised World Trade Organisation for allowing countries like India, China, South Africa to engage in such practices that effect American economic interests. (Mason and Lawder 2019)
Trump argues that China is not a developing economy as it claims to be. He considers China to be developed economy that does not deserve preferential treatment from the WTO and developed countries such as the USA.(Mason and Lawder 2019)
China is the second largest economy in the world with $13.37 billion GDP. China is a major source of foreign direct investment in all corners of the world and provides billions of dollars in overseas development assistance. Twelve of the 100 largest companies in the world by capitalisation are Chinese, as are roughly one in eight of the world’s billionaires. (Cutler and Doyle 2019)
The question of Chinese exploitation of WTO arises due to the economic explosion China has achieved over 30 years. It is the world’s second largest economy and yet unlike any other country enjoys the economic benefits arising out of being categorised as a developing country. This article will further go ahead to trace China’s journey to WTO and the result of being a developing country in WTO.
Tracing China’s journey to WTO
After the heavy destruction caused by World War 2, countries including United states, United Kingdom and allied forces came together to discuss the economic reconstruction of the world. This meeting was called the Bretton Woods Conference. As a result of the conference, countries came together to establish the International Bank for Reconstruction and Development (IBRD) and International Monetary Fund (IMF).
International Trade Organisation (ITO)was also proposed to establish rules and regulations for international trade. But this was not supported by USA and hence, ITO could not come into existence. GATT or General Agreement on Trade and Tariffs was adopted in its place.
On July 10, 1986 China signed the General Agreement on Trade and Tariffs. Later, in the 1995 Uruguay rounds, GATT was replaced by World Trade Organisation (WTO). GATT only focussed on goods trade and did not cover trade in services and Intellectual Property Right.(Lardy 2001)
While GATT is set of multiple agreements signed and abided by nations, WTO is an intergovernmental organisation which focussed on trade of goods, services and intellectual property rights. (Lardy 2001)
After the opening up of its economy, China witnessed rapid growth in 1980’s. China had massive trade and ability to attract foreign direct investment. Chinese leadership came to understand that their liberal foreign investment regime and low-cost labour markets give them a wonderful opportunity to participate and compete in international markets and that this participation could provide a sustainable base for the continued growth and development of their domestic economy. (Lardy 2001)China requested to join WTO in November 1995, and on December 11, 2001, it officially became a member of WTO.
World Trade Organisation (WTO)
The WTO has 164 members and 23 observer governments including Iran, Iraq, Bhutan, Libya etc. (“WTO | Development)
WTO functions(“WTO | Development)
- Administering WTO Trade Agreement
- Act as forum for trade negotiation
- Handling trade disputes
- Monitoring trade policies
- Cooperation with other international organization
WTO Agreements(“WTO | Development)
- For Goods – Marrakesh Agreement (1995) and Trade Facilitation Agreement (2017)
- For Services – General Agreement on Trade in Services
- For Intellectual Property – The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
Benefits to Developing Countries in WTO:
Special and Preferential Treatment
The WTO Agreements contain special provisions which give developing countries some levy and benefits in their conduction of trade. The WTO also makes developed countries treat developing countries more favourably than other WTO Members. These provisions are referred to as “special and differential treatment” (S&D) provisions.(“WTO | Development)
The special provisions include:
- longer time periods for implementing Agreements and commitments
- measures to increase trading opportunities for developing countries
- provisions requiring all WTO members to safeguard the trade interests of developing countries
- support to help developing countries build the capacity to carry out WTO work, handle disputes, and implement technical standards, and
- provisions related to least-developed country Members.
It is important to note here that the WTO does not define countries as developed or developing. Countries declare their status themselves. According to the WTO, two-thirds of its 164 members, including China, currently consider themselves developing countries.
Non-Reciprocal Preferential Treatment
Non reciprocal preferential treatment for developing countries states that the grants and trade concessions given by developed countries to developing countries are not on reciprocal basis. It means the developing countries are not expected to make matching offers or concessions in return to the developed countries. (“WTO | Development)
GATT and WTO give developing countries the right to restrict imports in order to promote or protect their local industries or assist in cases of Balance of Payment difficulties. (“WTO | Development)
The World Trade Organisation explicitly states that international trade should benefit the economic development of developing and least developed countries. (“WTO | Development) The above-mentioned provisions also facilitate the same. This is to ensure that developing countries protect their agriculture sector and other industries which might be affected due to competition from goods of developed countries.
How did the developing country status facilitate Chinese economic growth?
China with its industrial strength, facilitated voluminous trade and enjoyed the benefits of free trade with other countries while protecting its local industries at the same time. The developing country status allowed China to subsidise its industries, support state-owned firms and discriminate against foreign investors. It had the opportunity to expand its domestic industries exponentially and further improve trade. This can be understood by the given data.
In 1995, Chinese imports and exports of goods totalled to $280.9 billion or 3 percent of the global trade. As of 2018, its total trade of goods jumped to $4.6 trillion or 12.4 percent of global trade. China is the world’s largest trader currently. USA comes only after China as the world’s second largest trader at 11.5 percent of total trade.(“Is China the World’s Top Trader?” 2018)
Taking advantage of the non reciprocal preferential treatment, China does not have to give concessions to developed countries like USA while they are obligated to give preferential treatment to China. China exported $480 billion worth of goods to the US in 2018 (19 percent of all its exports), but only imported $156 billion. In the case of Hong Kong, China exported $303 billion in 2017 (12.2 percent of total exports) and imported just $9 billion (0.4 percent of total imports).(“Is China the World’s Top Trader?” 2018)
Thus, in 2018, China exported $2.49 trillion in goods while it imported $2.13 trillion. China’s exports usually surpass their imports. Developed countries on the other hand, like USA, import more than they export. In 2019, USA trade deficit was $617 billion.
Chinese products and services overseas are levied lower rates of duty due to its developing country status. While China imposed high tariffs on its imports and offered more subsides to local producers, in order to protect domestic industries.
Also, the terms of WTO helped in forced transfer of technology and theft of intellectual property from the developed countries, benefitting China. (Lee 2019) Developed countries and other observers of international community claim this to be unfair asit puts developed countries at a relative disadvantage.
China’s Economic Might
China has always claimed to be a communist and socialist country. Historically, it has been dead against market reforms, opening up its economy and opposed anything that held western values. However, rapid industrialisation followed by opening up its economy, market reforms, trade with other countries, joining WTO, all facilitated rise in its economy. China has scored remarkable achievements in economic and social terms being a part of WTO. (“China in the WTO: Past, Present And Future” 2012) (Hu and Khan 1997)
- 2nd largest economy in terms of GDP
- 1st largest merchandise exporter
- 2nd largest merchandise importer
- 1st destination for inward FDI among developing countries
- 1st investor for outward FDI among developing countries
Developing country status
In spite of its economic development, China claims that it is a developing country because of its huge population and low per capita income. China’s Gross national income per capita is $9460 as per 2018 and it is classified as upper middle-income country by world bank. (Hu and Khan 1997) As per world bank indicators, countries with Gross National Income of $12,056 and above qualify as developed country. Hence, as per criteria China claims itself to be developing country and refuses to revoke its status.
Chinese Vice Commerce Minister Wang Shouwen said that Beijing will not allow other members to deprive China of the special and differential treatment that developing members deserve. His statements suggested that China is adamant on its developing country status and would reject future commitments if China’s status was questioned. (McDONALD 2018)
Martin Khor, Director of south centre said the following about China’s developing country status, “If China is forced to take on the duties of a developed country and forego the benefits of a developing country, the west could soon ask other developing countries that are ahead of China (at least in per capita terms) to do the same. China’s fight to retain its developing country status is of interest not only to the Chinese people, but also to their counterparts in other developing countries.”
If the developing countries or parts of the world feel that the economic criteria to categorise a country as a developed or developing nation is partial or not right, countries need to fight for a revision of such criteria. The excuse that some countries do not want to comply with the established standards, citing which China refuses to revoke its status, is unacceptable.
China also claims that many WTO rules have actually favoured the US and other developed countries, in the areas of agricultural support, textile quotas and intellectual property rights protection. (Lee 2019)
China defends its developing country status with the above arguments.
Development is a multidimensional concept that includes GDP or GNI per capita, but it includes other dimensions as well. A particular country can be more developed in some of these dimensions, and less so in others. This multi-dimensionality complicates the classification of countries as “developed” versus “developing.”
And hence, what really calls for a question is that, should the standards of measuring or categorising a country as developing and developed nation change? The world’s second largest economy (or actually the first largest economy as per purchasing power parity) is still categorised as a developing country. This is because the standard for such measurement is Gross Domestic Product per capita and Gross National Income per capita.
Should the feature for measurement change to nominal GDP or GDP as per PPP or any other economic indicator? A change in this criterion will bring about a lot of changes in the international economy. Is that a good change for the world? Will that change economically benefit the world countries? These questions are a subject of a whole new research.
In the current scenario, China can be rightly considered as a developing nation in WTO. When a certain standard is set it should be unbiasedly applied to all countries what so ever. However, With the approaching global recession, recent trade war between USA and China and with President Trump threatening to pull out of WTO, now is a good time to re-evaluate the economic status of countries.