China’s Economic System Isn’t ‘Incompatible’ with WTO Rules

James Bacchus

The Select Committee of the House of Representatives on the Strategic Competition between the United States and the Chinese Communist Party has just issued its report, which is entitled “Reset, Prevent, Build: A Strategy to Win America’s Economic Competition with the Chinese Communist Party.”

This report includes some excellent recommendations, such as investing in US innovation, creating tax incentives to encourage private US investment, creating transparency in US supply chains, and more. Unfortunately, its recommendations on trade are based in part on the false premise that China’s economic system “is incompatible with the WTO.”

There is, to be sure, much to criticize in China’s economic system. It is founded on an authoritarian (and increasingly totalitarian) mix of communism and state capitalism that is in most respects the very opposite of what a free market should be in a free country. And numerous Chinese practices that affect trade are, to say the least, suspect under the rules of the World Trade Organization.

The committee is correct in reporting that China has often violated WTO rules and that it “uses an intricate web of industrial policies, including subsidies, forced technology transfer, and market access restrictions, to distort market behavior, achieve dominance in global markets, and increase US dependency on PRC imports.”

It is equally correct in contending that “the PRC has failed to live up to its World Trade Organization (WTO) commitments by empowering its state‐​owned enterprises, massively subsidizing its domestic industry, and closing its markets” while “at the same time, the CCP has pursued extensive industrial policies that provide low-cost—often free—capital and regulatory support to PRC companies, which puts US companies at a severe disadvantage globally.”

The committee is, though, a bit too clever in saying that, in response to the many cases brought and won in the WTO by the United States against China in the past twenty years, “even if the PRC changed the specific practices at issue, it did not change the underlying problem.” The record is clear that when China has lost a case before the WTO, in almost every instance it has complied with the WTO ruling in a reasonable period.

For many of the reasons set out in the report, most WTO scholars and practitioners—including this one—would agree with the committee that “the PRC’s state‐​led economic system is antithetical to the founding principles of the WTO.” But this is not the same as saying that the Chinese economic system is “incompatible” with the WTO, which implies that it is inconsistent with the WTO treaty and thus constitutes a violation of international trade law. 

Nothing in the WTO treaty requires that the 164 member countries of the WTO‐​based multilateral trading system structure their domestic markets around free private enterprise—as desirable as that would be. The WTO treaty establishes a framework for freeing trade and opening markets, but it in no way mandates it. For the most part, the WTO treaty simply obliges WTO members not to discriminate between and among traded products irrespective of how their domestic economies may be structured.

For example, state restrictions on trade to safeguard the balance of payments of a WTO member are permitted under Article XII of the General Agreement on Tariffs and Trade, which is one of the multilateral trade agreements that comprise the WTO treaty. In addition, state trading enterprises are allowed under Article XVII of the GATT and many governmental subsidies are permissible under the WTO Agreement on Subsidies and Countervailing Measures.

Although China is the most extreme example, China is far from alone among WTO members in having an economy that is in numerous respects directed by the state. Brazil, India, and South Africa, though democracies, are far from being paragons of free market principles. The same is true of quite a few other WTO members. Indeed, in their protectionist industrial policies, both former President Donald Trump and current President Joe Biden have moved in the direction of China by having the state, directly and indirectly, dictate decisions that would better be left to the free market.

Some of the recommendations on trade in the report could constitute violations by the United States of its own WTO treaty obligations. For one, “moving the PRC to a new tariff column” separate and apart from all other US trading partners could set the stage for any number of violations of the “most favored nation” rule of non‐​discrimination among traded products that is one of the most basic rules of the WTO‐​based multilateral trading system.

But one place where the report is right is in recommending that the United States and like‐​minded countries should make better use of the WTO dispute settlement system instead of continuing the current Biden policy of largely abandoning it. The report urges Congress to:

Direct USTR to bring a comprehensive WTO dispute against the PRC’s subsidization, support for state‐​owned enterprises, and non‐​market economy policies and practices with a broad coalition of countries documenting how the PRC has undermined a world trading system ‘based upon open, market‐​oriented policies’ and impaired the benefits that many Members expected to receive from expanded trade relations with the PRC.

Along with my Cato colleagues, I have long recommended that the United States and other WTO members harmed by China’s errant trade policies bring such a broad‐​based case against China in the WTO. Congress should take this advice. So, too, should the Biden administration. But this case should be based on specific Chinese violations of its WTO obligations, and not on the mistaken belief that the Chinese economic system as a whole is “incompatible” with the WTO. That would not be a winning legal argument in WTO dispute settlement.

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