Talking trade reform in China

Lauren Hilgers

Henry Paulsen was in Beijing this week, discussing the U.S.’s usual range of demands for China—currency reform, access to China’s domestic market and product safety. China is giving as good as it gets, complaining about U.S. protectionism and looking for some recognition for the economic reforms they have made thus far.

China has long gone to great lengths to attract foreign investment, and has been acutely aware of its economic position internationally since Deng Xiaoping’s Reform and Opening hit its stride. The country applied for contracting party status of the GATT (General Agreement on Tariffs and Trade), in 1986 and was positioning itself for a spot among WTO countries long before it was accepted in 2001.

China’s ascension to the WTO has been unique, in part because of the strict non-market organization of its economy up until the 1980s, and in part because of its weak legal system. These concerns led, in 1999, to the largest accession package in WTO history. In addition to normal WTO requirements, including requirements to eliminate price controls and opening the country to international trade franchises, China agreed to a number of “WTO-plus” demands that focus, in part, on transparency and the rule of law. The theory goes that, while China’s legal system was still undeveloped, early contact with the practices of other WTO countries would help shape the country’s development.

China has also been the first to implement the required reforms on a phase-in basis—coastal areas began implementation of WTO reforms earlier than rural provinces farther inland. Some provinces started reform only this year. The package also allows other countries to treat China as a non-market economy when considering anti-dumping taxes for 15 years after the country’s ascension in 2001. It’s a long haul, and while China has shown commitment to regulatory and legal changes, it will not take any steps it sees as jeopardizing the last twenty years of growth or challenging the grip of party rule. Those threats lie both in the full opening of the market economy and in a fully independent judiciary.

The impact that WTO commitments have had on the quality of China’s legal system are hard to quantify. You can look at the more than 2000 laws that have been promulgated that directly correspond to WTO requirements. In the past year alone, the country has released legislation overhauling mergers and acquisitions, bankruptcy, corporate income tax, monopolies and property laws, to name a few.

Transparency has been pursued specifically through the publication and administration of trade-related laws and regulations with sources and legislation readily available to the public. China has made attempts at following the letter of the WTO regulations, but has had some trouble completing the process, partly due to an array of local regulations that have been difficult to integrate. Under the country’s earlier system, China relied on a series of administrative decrees and “normative documents” that are not otherwise included the legal framework and are still used at a local level.

Attempts at drafting clear, consistent legislation have also been made. The National People’s Congress has created specialized committees involved in peculiar areas of law and both the NPC and the Standing Committee have worked to increase the number of officials that are better trained and more specialized. Public comment on draft legislation continues to be limited, although there have been some recent exceptions, particularly in China’s larger coastal cities.

The reach of reform also stalls in industries that China deems too strategic and sensitive to be opened to foreign investment. Earlier this year, China named seven key sectors that it intends to hold close, including oil and petrochemicals, telecommunications, power generation and distribution, armaments, coal, aviation and shipping. It is unlikely any legislation will be passed too soon requiring the State to loosen their grip in these areas.

While reform seems frustratingly slow, however, an acquaintance of mine, a financial analyst focusing on China, recently made the point that the stakes are much higher here than in countries with fully-developed regulatory and financial systems. From the perspective of China’s leaders, the scope of the changes being made requires that there be no trial-and-error, each new regulation and step toward opening the economy must succeed, or could challenge both previous economic achievements and their own authority.
Posted 12:03 AM by Lauren Hilgers [link]