How China Fooled America and Europe in the World Trade Organization

In 2001, the Americans and Europeans naively thought that China was moving toward a market economy and would respect the rules of the World Trade Organization. Nearly 20 years later, they are disillusioned.

In accepting China into the World Trade Organization in 2001, Western leaders were largely misled. Some 20 years later, the European Union and the United States are aware of being tricked. It’s a painful awakening. The rise of populist movements, questioning of globalization, widening of inequalities and the risk of trade wars are the embodiment of this. The West is paying today for its naiveté regarding China’s ways.

In anchoring China to the commercial system built at the end of World War II (by the General Agreement on Tariffs and Trade, then by the WTO), Brussels and Washington thought at the time that Beijing was going to adjust its economy, that China would gradually move toward a market economy and respect the rules of a liberal, non-command economy.* Europe and America thought about the opening of a market of more than 1 billion avid consumers of goods “made in America” or “made in Europe.”

Bill Clinton Defends the Addition of China to the WTO

In 1999, Bill Clinton, then president of the United States, ardently defended the membership of China in the WTO. “We’ll gain tough new safeguards against surges of imports, and maintain the strongest possible rules against dumping products that have hurt Americans in the past. … Bringing China into the WTO … will promote the right kind of change in China. … Encouraging China to play by international rules is an important step toward a safer, saner world,” he claimed. That was a wonderful promise that still hasn’t come to pass.

Since joining, China has been playing its own game. It has taken a very different path from what the West anticipated.

“The WTO was conceived as an international organization aiming to facilitate commerce between market economies, in which the role of the state is limited,” explained Elvire Fabry, senior researcher at the Jacques-Delors Institute, in a memo penned last May. In 2001, the challenge was colossal for Beijing. Its economy rested on a very large public sector mostly run by the central government. The West set a deadline of 15 years to make the necessary changes associated with privatization and deregulation of state-run enterprises. Without those changes, the entire WTO would be in danger, a warning that today seems prophetic.

Today’s China is characterized by reinforcement of the powers of China’s president for life (Xi Jinping), an increasingly authoritarian regime, the omnipresence of the state in the economy, large government subsidies and the persistence of government-owned enterprises – this is so far from the standards set forth by the West that in 2016, Washington and Brussels reneged on their promise to characterize China as a free-market economy.

China Doesn’t Respect WTO Rules

The mistake is to have thought that in China, state-run capitalism would be able to cede ground to market capitalism, because for Beijing, the Western model is in decline.

There is another significant difference: China doesn’t have the same notion of time as Europe or America. An example? A Western company would never finance a project that would not be profitable; not so with China, which thinks in the very long term. With its decades’ worth of public financial power, it doesn’t need to concern itself with short-term profitability unless its strategic interests call for it. This is that much easier when the state maintains a chokehold on the economy, which would be unthinkable in the West’s capitalist system.

Last May, the European Union ambassador to the WTO estimated that the current global trade imbalance and production overcapacity are due to non-free market manufacturing methods. Since 2001, researcher Fabry again observed, sizable Chinese government subsidies have focused as much on the steel and glass industries as on the paper industry, or even the spare car parts industry. And whether or not an attempt at Chinese economic liberalization has actually been made since the financial crisis, the emphasis on state enterprises has only been reinforced. “Today they represent close to 40 percent of China’s core industrial assets and 80 to 90 percent of market share in strategic industries,” Fabry said.

Ultimately, for all China says about the merits of free and open markets, it has let itself off the hook. Asked about the naiveté of the West, Pascal Lamy, former director general of the WTO, admitted in an interview in Le Monde last June, “China paid a lot more for its acceptance into the WTO in 2001 than other developing countries. […] Two particular issues should have been handled better – government subsidies to businesses and access to public contracts – from the moment China started developing quickly.” Let’s not forget about intellectual property theft and misappropriation of foreign technology, which the European Union and the United States are more and more forcefully denouncing. Apart from the fact that the economy is more closed in China than elsewhere, foreign companies face all sorts of intimidation if they don’t transfer their know-how to the Middle Kingdom.**

’Made in China 2025’ Fear

The Chinese government’s “Made in China 2025” plan offers a perfect illustration of local practices. For China’s economic partners in Europe and the United States, this plan could have offered them opportunities. “In principle, the global economy has good reasons to welcome China in its search for increased innovative capacity, on the condition that China respects the principles and rules of the open market and fair competition,” noted the Mercator Institute for China Studies in its study “Made in China 2025,” published in 2016. “However, in its current form, ‘Made in China 2025’ represents exactly the opposite: the government systematically intervenes in the national markets in order to encourage and facilitate the economic domination of Chinese businesses and handicap foreign competitors.” Washington and Brussels have reason to rage against Beijing. The time has come to reassess commercial relations and reform the rules of the WTO. Brussels and Washington must again bring China to the negotiating table, and not get fooled again.

*Editor’s note: Unlike market economies such as the U.S., England and Japan, a command economy is organized by a centralized government which owns most, if not all businesses, and whose officials direct all the factors of production. China, North Korea and the former Soviet Union are examples of command economies.

**Editor’s note: Middle Kingdom is the Chinese name for China; it dates from around 1000 B.C., when the Chou Empire believed it occupied the middle of the earth, surrounded by barbarians.