28 June 2019

Financial Times: Two proposals for WTO reform

Concretely, the problem is China’s growing support and use of state-owned enterprises (SOEs) — and state-influenced companies — to develop its economy and compete internationally. Beijing’s support for SOEs and other institutional and policy factors have produced an uneven playing field favouring insiders against foreign-owned companies operating in China. [...]

To address the core problem presented by SOEs, it might be useful to revamp and strengthen WTO provisions for countervailing duties to compensate for subsidies granted to SOEs or specific export industries and products.

The key step here is to formally recognise that China is a non-market economy, allowing importing countries to use alternative methodologies — not reliant on information provided by China — to assess appropriate countervailing duties. This is important, as China has been accused of failing to honour its commitment promptly to notify the WTO of any subsidies to its SOEs.

In addition, the burden of proof could be shifted from the importing countries to China to show that it has not provided unfair subsidies. Finally, if countervailing duties were measured and imposed in accordance with this procedure, China would have to agree not to retaliate.

While this may seem drastic, it should be kept in mind that China’s own accession protocol to the WTO in 2001 accepts the provision of alternative methodologies to calculate countervailing duties. Specifically, Section 15(b) of the protocol states that “ . . . importing WTO members may then use methodologies for identifying and measuring the subsidy benefit which take into account the possibility that prevailing terms and conditions in China may not always be available as appropriate benchmarks”.

Moreover, the fact that China has withdrawn its complaints at the WTO against the US and EU for not granting it market economy status — more than 15 years after its accession — suggests a degree of flexibility in Beijing.

The related problem of an uneven playing field cannot be tackled inside China: it is unlikely that China would commit to changes that would provide a legal and business environment for all companies, domestic and foreign, comparable to that in the west.

Rather, it is probably more practical to think of a way to handicap majority Chinese-owned companies, specially those owned by SOEs, operating in the west — say, with a special tax to offset the advantages they derive from the nature of the Chinese economic system. [...]

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