False Promises: The Yawning Gap Between China’s WTO Commitments and Practices

When China entered the World Trade Organization (WTO) in December 2001, pundits and policymakers alike enthusiastically hailed it as a seminal moment that heralded China’s embrace of market-based economic principles and commitments to the core tenets guiding liberalized trade and globalization. Unfortunately, after almost 15 years of Chinese membership in the WTO, it is becoming increasingly clear that the vision of China embracing a rules-governed, market-based global trade system has yet to materialize.

To the contrary, China’s economic and trade policies increasingly contravene fundamental principles of global trade, including national treatment, non-discrimination, and rules-governed, market-based trade in accordance with the theory of comparative advantage. And, if anything, China’s aggressive embrace of innovation mercantilism―policies such as forced technology transfer, export and production subsidies, or currency manipulation that seek to advantage domestic enterprises at the expense of foreign competitors―have only grown stronger in recent years, as China seeks absolute advantage across a wide range of advanced-technology industries. China’s continued flouting of WTO principles poses a serious threat to the global innovation system―not to mention the U.S. and EU economies and the health of their advanced industries.

ITIF’s report examines this wide gap between China’s WTO commitments and practices, explores how so many of the original proponents of China’s WTO membership got it so wrong, and explains how only a policy of “constructive confrontation” will prove adequate in addressing China’s increasingly innovation mercantilist trade practices.

The report documents promises China made in joining the WTO and then failed to fully deliver on, including:

• Refraining from requiring technology transfer as a condition of market access;
• Joining the Government Procurement Agreement;
• Requiring state-owned enterprises to make purchases based on commercial considerations;
• Giving foreign banks national treatment;
• Opening the telecommunications market to foreign producers;
• Liberalizing foreign film distribution;
• Substantially reducing export subsidies;
• Significantly reducing intellectual property theft and violations; and
• Abiding by the Technical Barriers to Trade Agreement and not manipulating technology standards.

The report then assesses the options available to confront China’s increasingly rampant innovation mercantilism, noting that efforts to date have been mostly ineffectual. The initial approach counseled giving China time to transition to a market economy and to adopt core tenets of the prevailing “Washington Consensus” wisdom that calls for countries to embrace policies of fiscal discipline, openness to trade, liberalization of inward foreign direct investment, and the privatization of state enterprises, among others. But Chinese officials know how to make China a market-oriented, rather than mercantilist, economy; they just do not want China to be one. With that realization increasingly dawning, policymakers in the United States and the European Union have increasingly shifted to a “harangue and implore” strategy consisting of dialogue, exchange, and technical assistance; yet this approach plays into China’s hands and has produced few real results. With other options such as “resigned defeat” and “retreat to isolationism,” the only real choice is a strategy of “constructive confrontation,” backed with true resolve, and which emphasizes a results-oriented trade strategy pursued with a whole-of-government approach―an approach that needs to be whole-heartedly embraced on both sides of the Atlantic.

The report concludes by offering a number of policy recommendations to implement a “constructive confrontation” trade policy with China:

• An Office of Globalization Strategy should be created within the United States’ Trade Representative’s Office (USTR), charged with thinking systemically about the design of U.S. trade policy in the context of globalization and U.S. competitiveness.
• The White House should establish a new National Industrial Intelligence Council charged with creating a better process and structure to understand the long-term implications of other nations’ economic development strategies.
• The U.S. government should increase funding to enable English-language translations of key Chinese industrial strategy publications, including every document guiding development of China’s seven so-called strategic and emerging industries (SEIs).
• Congress should bolster USTR’s trade enforcement capacity, including passing legislation that would create a Chief Trade Enforcement Officer and a Trade Enforcement Working Group within USTR, thus institutionalizing the function of trade enforcement in the agency. Such legislation should further establish a chief manufacturing negotiator position at USTR to protect the interests of American manufacturers in trade negotiations.
• To empower multinational companies to better resist Chinese forced technology transfer requirements, Congress should pass legislation allowing firms to ask the Department of Justice for an exemption to coordinate actions regarding technology transfer and investment in other nations.
• Congress should, at a minimum, update the charter of the Committee on Foreign Investment in the United States (CFIUS) to address the realities of modern-age state capitalism, including allowing reviewers more than 30 calendar days to approve transactions or move them to a second-stage investigation and transferring the chairmanship of CFIUS from the Treasury Department to the Department of Commerce.
• Congress could move beyond reforming the relatively narrow CFIUS process to create a more comprehensive foreign investment review process (as nations such as Australia, Canada, and the United Kingdom have done) that would go beyond a mere national security screen to further differentiate between foreign direct investment (FDI) that operates according to market-driven principles and FDI that operates according to state-directed, mercantilist principles.
• Congress should enact legislation that requires Chinese entities licensing technology in the United States to have to do so on the same terms that China requires U.S. entities to license their technology in China.
• The United States and Europe should cut off scientific and other cooperation with China, until such time as its use of technology mercantilist practices abates.
• U.S. and European Union (EU) governments need to ensure that any Bilateral Trade and Investment (BIT) treaties signed with China contain strong and enforceable provisions against forced technology transfer or forced localization of research and development activity.
• Congress and the administration should step up investigation and prosecution of IP theft, impose more severe sanctions against foreign companies that misappropriate American IP, including denying such firms access to the U.S. banking system, and emphasize the quick and comprehensive sequestration of imported goods using stolen or pirated IP, thus adopting these and other recommendations from the IP Commission Report on the Theft of American Intellectual Property.
• The United States and Europe should better coordinate with like-minded nations in confronting aggressive Chinese mercantilism, starting with successfully completing the trade pacts currently being pursued in the Asia-Pacific region through the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (T-TIP) with European Union nations.