CSR Blog: China’s “Guerrilla Warfare” Trade Policy and the Emerging WTO Credibility Crisis

By Zhuoran Li

China’s admission to the WTO is one of the most significant events in the 21st century world economy. After engaging in 15 years of onerous negotiation and facing the most rigorous entrance requirements, China joined the WTO in 2001. Beijing used the admission as an external push to accelerate domestic economic reforms. After the admission, China lowered tariffs significantly, improved regulatory transparency, and gradually liberalized the service sector. As a result, the Chinese economy skyrocketed. China became the second-largest economy and the largest trading power. China’s per capita GDP jumped from about $1,000 to over $10,000 in 20 years. However, many controversies have surrounded China since 2001, ranging from whether it has lived up to its WTO commitments to its “guerrilla warfare” practices, which refers to Chinese trade policies that exploit WTO loopholes and gain unfair advantages. Since the US-China trade war broke out, the concerns over China’s trade performance and the role of the WTO as an arbiter of the international trade regime have become more prominent. In 2018, the US Trade Representative argued that the United States had indeed “erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime.” 

However, this statement clearly overlooked the positive impact China has had on the world economy, especially on the United States and on its allies. The real GDP per capita in the United States grew from $46,414 at the end of 2001 to $56,807 at the end of 2020, an increase of 22%, and a large part of this increase is attributed to the growing trade with China. Critics focus on the loss of manufacturing jobs in the United States. However, this trend of outsourcing manufacturing jobs had already started before China joined the WTO. Moreover, the growing trade with China brought a dividend to all Americans in the form of cheaper products. The critics of US-China trade are gaining attention in the United States because people who have been negatively impacted by the trade with China are clustered in certain industries and politically influential in the US electoral system, while people who have benefited from the trade with China have less concentrated political voices. 

At the same time, China’s trading record since it joined the WTO is far from perfect. Between 2009 and 2015, China was involved in 90% of WTO cases brought by the four largest economies (US, China, EU, Japan). What is more worrisome is the nature of these cases. The WTO clearly has trouble applying the WTO Agreement, a gentleman’s pact among developed states, to the Chinese economic system. It is hard to disentangle the complex connections among the government, the Party, state-owned enterprises (SOEs), and private firms. Thus, it is nearly impossible to evaluate the underhanded deals between the Chinese government and firms based on WTO regulations. For example, the current WTO trade regulations fail to determine whether or not favorable loans from Chinese state banks to SOEs are unfair subsidies. For example, the United States was particularly unsatisfied with the WTO when it failed to punish state subsidies on Chinese solar panel producers.  It is beyond the capability of the WTO to regulate China’s capital structure; thus, many developed countries see China as gaining unfair trade advantages by exploiting WTO loopholes.

In addition, China’s behaviors of gaming the WTO system raise concerns from other WTO members. The WTO dispute settlement process resolves trade-related conflicts among its members. After a trade dispute occurs, WTO steps in and a panel of independent trade experts, who investigates the dispute and produces a lengthy report. If a party does not accept the finding of the report, it can appeal the case to the Appellate Body (AB). The AB reviews the case and makes the final and binding decision. After the final decision, the respondent country must change its practice in a given period, or else it will face sanctions. This dispute settlement process has two significant problems. First, this process takes a long time; usually, a case takes five to seven years from initial investigation to conclusion. Second, assessing whether or not the respondent state has truly changed its behavior can be difficult. China exploits these loopholes and adopts a “guerrilla warfare” approach toward other countries in the WTO. China can inflict significant and irreversible damage on another state and achieve its goal before the WTO makes a conclusion. China can also change its explicit violation to an implicit one to avoid sanctions.

In recent years, China has increasingly weaponized trade to achieve its political goals. Norway, Australia, and South Korea all became victims of China’s coercive economic measures. Perhaps the most well-known case was the 2010 rare earth dispute. The tension between China and Japan over the sovereignty of the Senkaku Islands flared up after a Chinese trawler collided with a Japanese Coast Guard patrol ship in the nearby waters in September 2010. The Japanese Coast Guard arrested the skipper of the ship amidst China’s protest. In retaliation, China halted rare earth exports to Japan at its ports. Facing economic pressures from China, Japan eventually released the skipper without charging him. After the event, the United States, Japan, and the European Union (EU) filed a complaint against China to the WTO in 2012 regarding the export restrictions on rare earth. China justified these export restrictions as necessary environmental protection measures. In 2014, the WTO found Chinese practices breaching WTO rules, and China removed the export restrictions in 2015. Despite the victory, it came five years later from China’s retaliatory measure against Japan in 2010. Indeed, China had already achieved its purpose when Japan released the skipper under trade pressures. This event illustrates that can impose coercive economic measures against foreign countries and achieve its desired results before the WTO ruling.

China also has changed its violations from explicit to implicit rather than completely changing its behavior. This practice is especially salient in China’s behavior toward intellectual property rules. In 2007, the United States challenged China’s intellectual property regulatory system in the WTO. One contention of this case centered around China’s counterfeit problem. Chinese customs authorities permitted counterfeit goods to reenter the market once the infringement element has been removed. This rule allowed Chinese factories to produce fake alligator symbols and fake Lacoste shirts separately and assemble them together before selling. The WTO ruled against China in 2009, and China revised its customs regulation in March 2010. The new regulation addressed the counterfeit problem by adding a provision into Article 27 of the customs regulation: “imported goods bearing a counterfeit trademark shall not, except in special circumstances, be permitted to enter the stream of commerce upon merely removing the trademark from the goods.” This new provision, however, only regulates imported counterfeit goods; it does not cover counterfeit goods produced in China. This revised provision certainly has not stopped counterfeit products in China. High-quality counterfeit goods, the so-called “A products,” are still rampant, and have become even more so through social media retailing. Famous foreign brands, such as Canada Goose, Louis Vuitton, and UGG, are among the top victims. Since China joined the WTO in 2001, it has been an active participant. China gradually learned how to follow the international trade laws through its engagement with the WTO. However, the WTO regulations are clearly ineffective in evaluating and regulating the Chinese economic system. China’s “guerilla warfare” approach of gaming the WTO system also raised other members’ concerns over its actions and over the effectiveness of the WTO as an arbitrator of trade disputes. Former US President Donald Trump criticized the WTO as “completely inadequate” when justifying his decision to start the US-China trade war. Trump’s unilateral trade policy received wide condemnations from scholars, business people, and foreign leaders. The WTO also declared the American tariff on China as a violation of WTO rules. However, the frustration over China’s WTO records is not unfounded: China’s trade practices reveal WTO loopholes. The WTO must reform its system before more members become frustrated and lose their confidence in the international trade regime. As the leader of the international free trade system, the United States should work with partners, including China, to reform the WTO rather than using unilateral practices to undermine it.

Zhuoran Li is a first-year M.A. candidate at Johns Hopkins School of Advanced International Studies (SAIS), concentrating in International Relations with a minor in China Studies. His research interests include Chinese politics and economy, East Asian comparative studies, and East Asian national security. Z’s articles are featured in the Diplomat and the National Interest. Z can be reached at zhuoran0322@gmail.com.

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