China, the WTO and the fairy tale of Little Red Riding Hood

• When China joined the WTO in 2001, its economic weight was comparable to that of France. WTO commitments were made by a communist and essentially poor China, which was allowed to enter the free market. Today Beijing weighs more than the entire eurozone.

• More than two decades later, Xi Jinping's China has grown richer, moved from classical communism to hard totalitarianism, constantly threatens the international order by extorting consensus from states, and, most importantly, stopped complying with conventional free trade rules.

• China met many of its obligations at the outset of WTO membership and has worked for several years to implement further major structural changes. However, over the past decade, with the advent of Xi Jinping, Beijing has abandoned its economic reform efforts and quickly re-embraced the statist economic model. Xi Jinping is increasingly the classic wolf in grandmother's clothing.

When China joined the WTO in 2001, its economic weight was comparable to that of France. Today, it weighs more than the entire euro zone. Since joining the WTO to date, Beijing has also become the world's largest exporter.

According to data provided by Chinese institutions, its share in the global economy has risen from 11.4 percent in 2012, to more than 18 percent in 2021, and its status as the world's second largest economy has strengthened over the past decade. In recent years, the Chinese economy's contribution to global economic growth has remained around 30 percent, making it the world's largest growth engine.

GettyIMages

However, since joining the WTO, China has exploited relatively cheap labor, large economies of scale, industrial policies and manufacturing capabilities of neighboring countries to become a power in exporting goods and services in a growing range of sectors, often limiting access to its market to some foreign products.

Its size as a trading power, together with its protectionist policies, has also contributed to increased tensions in trade relations with the United States and the European Union (EU).

China met many of its obligations at the outset of WTO membership and worked for several years to implement further major structural changes.

However, over the past decade, with the advent of Xi Jinping, Beijing has abandoned efforts to reform the economy and has quickly re-embraced the statist economic model.

The fundamental problem posed by China in the WTO (and thus in global trade) is its gigantic state-directed economic system, which is fundamentally at odds with market economies.

The right column shows the Chinese economic malpractices we have ranked.

Former WTO deputy director-general Alan Wolff has argued on several occasions that “a fundamental principle of the WTO is the need for convergence of the economic systems of its members; the coexistence of different systems is not governed by WTO agreements and is not compatible with its rules.”

Indeed, for many market economies, the WTO is currently considered unable to adequately address the global distortions created by a state economy the size of China's.

For years, China's “trade regime” has been generating compliance problems with WTO rules, and too often members of the Organization have had to resort to the dispute settlement mechanism for political and practical issues created by Xi Jinping's China.

Because of the size of the Chinese economy, the enormity of government involvement and the resulting alterations to the functioning of the global economy, the distortions caused to trading partners operating on free market principles have been gigantic.

Among other things, these distortions have resulted in an advantage for Beijing, in part because of massive government plans and subsidies, huge and aggressive penetration force in many foreign sectors, limits on domestic market access to foreign products, intellectual property theft and forced technology transfers.

China has always claimed to be pursuing “economic reform,” but this differs from the kind of change a country should aim for if it embraced open and market-oriented principles.

For Beijing, “economic reform” means both the fine-tuning of the government's and CCP's management of the economy and the strengthening of the state sector, particularly state-owned enterprises and large conglomerates.

Meanwhile, as the state's role in economic administration has increased since Xi Jinping's rise to power, the depth and breadth of concerns of both WTO members and foreign companies doing business in China or international markets have grown.

Compared with the industrial policies of other WTO members, China's industrial plans are fundamentally different and in several ways go far beyond traditional approaches.

First, adherence to the goals of China's industrial plans is effectively mandatory. Chinese companies have little discretion in their implementation, even when market forces would dictate different business behaviors.

Second, the financial support the state provides to domestic industries, based on industrial plans, is significantly larger than in other countries and is not limited to research and development (R&D) funding. The state also provides massive financial support for the operations of domestic industries, which ends up distorting the market. This support often leads to excessive production in China, which results in dumping in foreign markets.

Third, Beijing actively seeks to help its domestic producers through a myriad of additional policies and practices that prevent, disadvantage and harm foreign competition.

One result of China's “non-market” economic system is the creation of excess capacity, that is, capacity that would not have been created if market forces had worked properly.

For example, severe overcapacity in the future, which will result in oversupply, leading to loss of jobs and production in global market economies, will occur due to the Made in China 2025 industrial plan. With that plan, the Chinese government is seeking to create dominant companies in 10 industries, including advanced information technology, robotics and automated machine tools, aircraft components, ships and marine engineering equipment, advanced railway equipment, electrical generation and transmission equipment, agricultural machinery, pharmaceutical materials and products, and medical devices.

In fact, since the new leaders assumed power in China in 2013, the role of the state in the economy, played by the government and the CCP, has grown greatly.

Since then, China's main goal has been global hegemony: to make Beijing the world's leading power in trade and military.

Indeed, the recent macroeconomic project of “dual circulation” enshrines China's ambition to become self-sufficient in resources and technology in the long term, in developing domestic and external demand, through the Belt and Road Initiative (BRI) third markets, the countries of the Global South (BRICS) and those of Central Asia (SCO).

The project follows the Belt and Road (BRI) foreign policy project launched in 2013 and the Made in China 2025 industrial policy project.

Dual circulation was also crowned as a central part of China's economic planning in the 14th Five-Year Economic Plan in March 2021.

Beijing has always wanted, planned and sought an absolute advantage over the United States and the European Union, as well as autarky in its supply chains. However, China's macroeconomic project is also intended as a response to the policies introduced by the first Trump Administration since 2017 to contain China's technological rise, then continued by the Biden Administration and now again by Trump. In this view, as we shall see, the decoupling of technology and supply chains is only the effect: global advantage is the cause.

The Chinese leadership has, therefore, begun to rely on this strategy to sustain the country's growth. This means tending to isolate the domestic market from the rest of the world, removing all bottlenecks, both in terms of natural resources and technology, so as to vertically integrate its production and achieve self-sufficiency, which should be met by Beijing's huge market. One of the relevant consequences for the world will be, in the short to medium term, that China will no longer need to import high-end inputs, with the obvious negative consequences for major technology exporters such as Germany, Japan, South Korea and the United States. It will also tend to increase external demand, in the context of Western restraint, in favor of the BRI.

The overall goal of this program, namely self-sufficiency, has important sectoral implications.

In sum, the dual circulation strategy is a crucial policy that clearly reflects the Chinese leadership's vision of the world and its place in it. Beijing is striving to become a fully integrated market, without needing help from the rest of the world, while still benefiting from export markets.