Will China Agree to Change?

China's opposition to the “power-based system” is well known, especially against unilateral actions by the United States. For example, when the United States announced additional tariffs on Chinese products as the result of the 2018 Section 301 investigations, China responded that it “strongly condemns and firmly opposes such unilateral and protectionist behaviour,” which it regarded as “an intentional and gross violation of the WTO's fundamental principles of non-discrimination and bound tariffs.”Footnote ¹⁰ Following words with action, China also brought three successive WTO cases against the different tranches of additional U.S. tariffs in the trade war.Footnote ¹¹

Yet China's opposition to unilateral measures does not necessarily mean that China agrees with “those seeking to reinforce the WTO system with new rules that limit the state's role in the economy.”Footnote ¹² When the United States and other countries first started to push for WTO reform discussions after the eleventh ministerial conference, China was rather reluctant. In the view of Zhang, “the WTO agreement is a set of contracts achieved through negotiations. Within the scope of those contracts, Members abide by the conditions set forth in the contracts. Beyond the scope of those contracts, Members have their own policy space.”Footnote ¹³ In other words, China only accepted the rules in existing WTO agreements and its Accession Protocol and regarded the other issues as matters within each member's own policy space.

In particular, when China's Ministry of Commerce issued its official position paper on WTO reform in 2018, it made clear that “the reform should respect members’ development models” and that “China opposes special and discriminatory disciplines against state-owned-enterprises in the name of WTO reform.”Footnote ¹⁴ As put bluntly by Zhang, “if someone wishes, in the name of reform, [to] put China in a tailor-made straightjacket of trade rules to constrain China's development, I think they will be very much disappointed at the end of the day.”Footnote ¹⁵

Such adamant resistance to WTO reform might appear surprising to some observers, especially considering China's near-religious fervor in promoting the study of and compliance with WTO rules when it acceded to the WTO twenty years ago, as Shaffer and I have previously documented.Footnote ¹⁶ Yet, as I argued in two recent papers, such strong reactions are not really surprising for two reasons: First, China has always regarded such reform proposals as touching on its non-negotiable “core interests,”Footnote ¹⁷ which includes preserving China's basic state system and national security, national sovereignty, territorial integrity, and the continued stable development of China's economy and society. Second, China has arguably grown disillusioned with and even “alienated” from WTO rules, especially in response to perceived attacks by the United States and other WTO members.Footnote ¹⁸

The second reason above—China's disillusionment from WTO rules given the behavior of other parties—provides the key to understanding the recent statement by China's Deputy Permanent Representative to the United Nations, Geng Shuang, that the “rule-based international order” is a violation of the spirit of the rule of law, a statement which led to a great deal of controversy and confusion.Footnote ¹⁹ In a way, the statement elucidates the implicit message in President Xi's statement at the General Debate of the Seventy-Sixth Session of the UN General Assembly in September 2021, where he pointed out:

In other words, China is emphasizing the central roles of the existing international institutions and rules of international law to counter the accusations by the United States and others that China has violated the “rule-based international order.” The status quo institutions and instruments already have well-established texts and meanings, while the “so-called ‘rule-based international order’” “advocated by a small number of countries” could be as amorphous as its proponents want.Footnote ²¹ As pointed out by China's top diplomat Yang Jiechi at the first U.S.-China dialogue in Anchorage in early 2021, China “would not recognize that the rules made by a small number of people would serve as the basis for the international order.”Footnote ²²

The same battle of words is also fought on the trade front, with China sticking to the awkwardly phrased expression, “the multilateral trading system with the WTO at its core,” which first appeared in its 2018 white paper on “China and the World Trade Organization”Footnote ²³ and was most recently affirmed by Xi's speech at the opening ceremony of the Fourth China International Import Expo in November 2021.Footnote ²⁴ Again here, the intention is to make sure that no rules beyond those already present in the WTO agreements are snuck in without China's consent.

We can thus understand why it would be hard to get China to agree to WTO reform discussions aiming to change the salient features of its economic model, be it through the “Rule-Based Neoliberalism” approach that aims to introduce new rules to discipline China's trade practices, or through the “Rebalancing Within a Multilateral Framework” approach Shaffer outlined in his article. Instead, for a long time, China has been refusing any attempt to make new rules on sensitive issues such as state-owned enterprises and subsidies, which is why I have argued that the best way forward is to better utilize existing WTO rules, especially those contained in China's Accession commitments.Footnote ²⁵

A New Approach?

Interestingly, over the past few months, China has seemed to be changing its position. The policy shift was first announced in Xi's speech at the Import Expo in November 2021, where, after duly reiterating that “[t]he multilateral trading regime with the WTO at its core is the cornerstone of international trade,” he went on to state that “China will take an active and open attitude in negotiations on issues such as the digital economy, trade and the environment, industrial subsidies and state-owned enterprises (SOEs).”Footnote ²⁶ This seems to contradict China's earlier position, which explicitly stated that “during discussions on subsidy disciplines, no special or discriminatory disciplines should be instituted on SOEs in the name of WTO reform.”Footnote ²⁷ So, does this mean that China is now more receptive to the two reformist approaches mentioned in Shaffer's article?

For two reasons, I do not think this is the case: First, Xi's latest statement is still premised on the primacy of multilateral rules, as the sentence is followed by the affirmation that China would “uphold the position of the multilateral trading regime as the main channel for international rules-setting.”Footnote ²⁸ This is quite different from the two approaches discussed in Shaffer's article, which mainly rely on bilateral “rebalancing,” presumably without the sanction of the WTO.

Second, it is probably no coincidence that Xi's remarks were made shortly before President Biden gave explicit assurance that the United States would not seek to change the Chinese system,Footnote ²⁹ after the same message was hinted by U.S. Trade Representative Katherine TaiFootnote ³⁰ and National Security Advisor Jake Sullivan.Footnote ³¹ The interesting question, though, is how much substance there is in Xi's statement, which, depending on how it is carried out in actual negotiation, could either be simply a perfunctory overture or prelude to more meaningful changes. This leads us to another important issue: how to engage China.

Principles of Engagement

While it is encouraging to see that China is now more receptive to reform discussions in the multilateral context, such willingness to negotiate does not necessarily mean that China will regard all issues as negotiable, let alone accept the results of such negotiations. Notwithstanding this cautious note, negotiations with China could still be fruitful if the following principles of engagement are observed.

The first principle is non-discrimination. China regarded the period between the Opium War and the founding of the People's Republic as the “century of humiliation,” when “unequal treaties” were forced upon China by the imperialist powers.Footnote ³² Such experience made China very sensitive to discriminatory gestures. For example, when a key negotiation held in July 2008 on the Doha Round ran into an impasse due to India's refusal to make concessions on special agricultural safeguards, the United States pressured China to make additional concessions in certain sectors to make the results commercially meaningful for American businesses. China rejected the request because no such demands were made to the other emerging economies. In response to the U.S. complaint that China had failed to contribute to the round even though it was given “a seat at the big kids’ table” as requested,Footnote ³³ China's Ambassador to the WTO Sun Zhenyu gave a diatribe at the informal Trade Negotiations Committee meeting held afterward.Footnote ³⁴ Sun outlined China's contributions across all areas of agricultural and non-agricultural market access and services and blasted the United States and other developed countries for pressuring China while protecting their own sensitive areas. To have a productive negotiation, such mistakes must not be repeated. Instead, any proposed rules, be it on state-owned enterprises, subsidies, or competition, should be neutral, at least on their face, so that they would not be deemed as China-specific or discriminatory against China. Otherwise, proposed reforms could well be perceived by China as a “tailor-made straightjacket” and rejected.Footnote ³⁵

The second principle is reciprocity. It is too tempting to just fill the negotiation document with a long list of demands on China. The primary example for such an approach is the Phase One Agreement, which contains ninety-seven references to “China shall” (or ninety-nine references if “China and the United States shall” are also included), while only three references to “the United States shall.”Footnote ³⁶ Given the one-sided nature of the deal, it is no surprise that China has no incentive to implement it.Footnote ³⁷ Anyone with any level of familiarity with the Chinese culture would understand the importance of “saving face” to the Chinese. Thus, it is hard to imagine that China would be willing to engage unless it is offered something in return, even if just as a token. This point is also proven by China's warm reactions to President Biden's announcement that the United States will not try to change China's economic system. But this is just the starting point, and more substantive gestures of good will would be needed before more concrete results could be achieved. Such gestures could include discontinuing practices such as the non-market economy methodology in antidumping investigations against China; the WTO-inconsistent trade war tariffs; and the deprivation of China's right to invoke the general exceptions clause to justify its export restrictions on raw materials and rare earth.Footnote ³⁸

The third principle is understanding China's own priorities. In particular, a good understanding of China's own reform goals and policy movements is crucial as it provides important insights on what China may agree to. Xi's recent announcement on state-owned enterprises and subsidies is a good example, as it signals that China is now willing to discuss these issues. But a seasoned China observer could feel the wind of change long before this formal announcement just by reading other moves made by China, such as its agreement to commitmentsFootnote ³⁹ on state-owned enterprises and subsidies in the Comprehensive Agreement on Investment with the European Union last December and its recent application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.Footnote ⁴⁰

Lest anyone thinks that the three principles are too abstract to be useful in practice, let us apply them to the issues discussed in Shaffer's article. First, the principle of reciprocity could be applied to pure economic policies. In particular, by raising the issues of industrial subsidies and safeguard measures, the United States should also be prepared to address the issues of agricultural subsidies and antidumping measures, which are China's main concerns. If the United States is willing to concede on these two issues, there could be some room for agreement.

Second, a key to addressing national security policies could be following the principle of non-discrimination. In particular, the United States will need to explain to China that its restrictions on Huawei and TikTok are not unfairly picking on China alone, but are justified by universal public policy considerations.

Third, a deep understanding of China's own policies and priorities would be especially important for negotiation on social policy issues, given that China has a very different approach to such issues than the United States. In particular, while China has traditionally shunned social issues in general in its trade agreements, it has become more willing to discuss certain issues such as environmental protection in recent years.Footnote ⁴¹ Yet, on other issues such as labor and human rights, it has always insisted on a more rigid approach, despite including labor provisions in its recent investment agreement with the European Union, which uses mainly best-endeavor language and does not have a binding dispute settlement mechanism.Footnote ⁴²