China's Foreign Trade Policy

The New Constituencies

Ka Zeng

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781135985196
• Edition: 1
• Topic: Business
• Subtopic: International Business
• Index: Business

China's rise as a major trading power has prompted debate about the nature of that country's involvement in the liberal international economic order. China's Foreign Trade Policy sheds light on this complex question by examining the changing domestic forces shaping China's foreign trade relations.

Specifically, this book explores the evolving trade policymaking process in China by looking at:

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• China's WTO accession negotiation

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• China's bilateral trade disputes

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• The development of China's antidumping regime

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• China's emerging trade disputes in the WTO.

In addition, Ka Zeng examines how lobbying patterns in China are becoming more open and pluralistic, with bureaucratic agencies, sectoral interests, regional interests, and even transnational actors increasingly able to influence the process and outcome of China's trade negotiations.

Using case studies of China's trade disputes with its major trading partners, as well as China's participation in the dispute settlement process of the World Trade Organization, to present an in-depth analysis of China's trade relations, this book will appeal to students and scholars of international political economy, Chinese politics and foreign policy, and more generally Asian studies.

1 Introduction

Ka Zeng and Andrew Mertha

In the last two decades China has claimed itself a major center of global trade and manufacturing activities. The Chinese economy has demonstrated unprecedented growth through its national policy of reform and opening up to the outside world following Maoist isolationism and disarray stemming from the Cultural Revolution. But while this has led to tremendous social welfare gains in China and has contributed to global trade in significant ways, Chinese manufacturers have also had to confront their trading partners in the advanced industrialized world over a mounting range of trade disputes. For example, not only were Chinese manufacturers and authorities increasingly presented with antidumping suits initiated by China’s major trading partners, they also have had to respond to Washington’s pressure to revalue the Chinese currency, the RMB, and have clashed head to head with the United States over protective duties on products such as furniture, semiconductors and automobile parts. The tone of US trade relations with China seems to have harkened back to the height of US–Japan trade relations in the 1980s. It is not an exaggeration to say that China will become one of the main rivals of the United States in the area of trade policy and that China is likely to remain a central concern of US trade policy in the years to come. These growing causes of trade friction between China and the US raise important questions both about the sources of these conflicts and the future orientation of US–China trade relations. They also raise questions about the process of trade policy-making in China which, up until now, has remained rather opaque to outside observers.

Existing studies of China’s interactions with its major trading partners have examined how China bargains with the US on the basis of the assumption of a unitary actor. They have also treated Chinese foreign trade policy as a case study of the making of Chinese foreign policy in general or focused on the implications of China’s accession into the World Trade Organization (WTO) for the Chinese economy and society. Relatively little scholarly attention has been devoted to the domestic politics behind China’s behavior in the world trading system.¹ This issue is nevertheless of vital importance as it directly bears on the future of China’s role in regional and global trade relations. It is therefore important to address this lacuna in order to understand how China does and will continue to respond to trade challenges from abroad.

This volume represents a collective effort to unpack the domestic politics of trade policy-making in China and to tackle questions about the emerging forces shaping China’s foreign trade policy. The emphasis on how domestic actors shape China’s behavior in the international trade realm promises to offer a novel perspective on China’s international economic relations. Specifically, this project addresses the following questions:

• What is the domestic political process of trade policy-making in China? Is it changing? If so, in what ways?
• What kind of formal institutional changes have been necessary for a formerly centrally planned economy such as that of China to make such a transition?
• What is the changing pattern of trade policy lobbying in China?
• How did institutional reforms such as decentralization and administrative reorganization affect China’s trade policy-making process and outcomes?
• To what extent does domestic politics in China influence the outcome of China’s bilateral disputes and China’s activities in the rules-based international trading system?

While the processes and changes described in this book are still tentative and ongoing, they nevertheless capture some of the more important dimensions of the making of trade policy in China and provide us with a first cut into this critical issue.

Review of the literature

Existing studies have not explicitly focused on China’s foreign trade policy. As discussed below, studies of Chinese foreign policy tend to pay marginal attention to trade, in particular, to the domestic politics underlying the agenda setting and outcome of trade negotiations and the implementation of trade agreements. Another body of literature discusses the effect of China’s WTO membership on the Chinese economy and society. In addition, while there is a rich literature on the political economy of trade, scholars of China and its trade relations have yet to engage this literature.

In the first place, one strand of the literature focuses on China’s foreign policymaking process or on the impact of China’s integration into the international system on the country’s foreign policy behavior (e.g. Economy and Oksenberg, 1999; Hamrin and Zhao, 1995; Jacobson and Oksenberg, 1990; Johnston and Ross, 1999; Lampton, 2001; Lieberthal, 2004; Lu, 1997). While these works have provided in-depth analysis of foreign policy-making institutions, structures and processes, they have either avoided discussing foreign trade policy or have treated it as a case study of the making of Chinese foreign policy in general. This work fills this gap in the literature and seeks to more systematically investigate the process of decision-making behind China’s bilateral and multilateral trade disputes.

Another strand of the literature (Abbott, 1998; Cass, Williams and Barker, 2003; Panitchpakdi and Clifford, 2002; Alexandroff, Ostry and Gomez, 2003; Lardy, 2002; Drysdale and Song, 2003) focuses on the implications of China’s entry into the world economy for China’s society and economy. These works engage in an assessment of WTO membership in terms of such issues as income disparity, social welfare and industrial development in China. None of these works has specifically addressed the evolution of China’s foreign trade policy in the shadow of WTO membership. The above scholarship therefore differs from this project in terms of its substantive focus.

Finally, there is a substantial body of work² that deals with the political economy of trade policy in open economies. For example, these studies emphasize the importance of such factors as the electoral system, macroeconomic cycles, interest group pressure or geographical concentration on trade policy. They also assess the influence of industry versus class conflicts, the impact of asset specificity on the choice between alternative models and avenues of interest group lobbying on trade policy. In terms of how political institutions aggregate and channel society demand for trade protection, the literature emphasizes the different consequences that electoral systems, party systems or regime type may have on trade policy and how political institutions privilege the interests of certain political actors over others.

Do models of trade policy derived from studies of open economies apply to a transitional economy such as China? How relevant is this body of literature for our understanding of China’s trade policy? This volume seeks to broaden our understanding of the evolving nature of China’s trade relations as that nation adapts to the requirements of the WTO. As relatively little is known about the trade policymaking process in a transitional economy such as China and the applicability of standard models of trade policy to the Chinese context, it is necessary, perhaps even imperative, for us to engage in a more detailed analysis of China’s foreign trade policy process as that country becomes a more active member of the world trading system. The findings yielded by this volume are apt to be tentative, yet they should represent a first step in our understanding of Chinese behavior in the realm of China’s international trade relations.

Themes of this volume

The chapters in this volume point to a number of common and interrelated themes that have been ignored, or, at the very least, under-explored, by the existing literature. First, given the fact that the WTO is understood as being a liberal institution, to what extent has China become more liberal in its trading regime? Second, given the rhetoric in the United States about “the China threat”, to what degree does China actually “threaten” the US, and, by extension, the norms of free trade ostensibly espoused by the WTO? Finally, to what extent are China’s strengths simultaneously its principal weaknesses when it comes to Beijing’s ability to compete in this more liberal trading order?

Internalization of the WTO’s liberal norms

On the first dimension – to what degree China has internalized the liberal norms of the WTO – the answer is complex and in flux. China’s accession into the WTO in 2001 has prompted debate about its behavior in the multilateral trading system. Just as in the area of security affairs, scholars of China’s behavior in the international economic system have asked questions such as whether China is a status quo power or a revisionist power.

In examining the initial years of China’s presence in Geneva, Margaret Pearson (2006), for example, argues that Beijing is far from a revisionist power and has instead been a cooperative player under the WTO’s institutional rubric. Citing China’s support for the trade liberalization agenda of the Doha Round of multilateral trade negotiations and China’s broad adherence to the rules of the organization, Pearson contends that with the exception of Chinese behavior on Taiwan, there is little indication that Beijing is challenging the rules and norms of the WTO. Robert Lawrence (2006) analyzes China’s participation in the WTO (including the terms of its accession, current trade regime, and China’s participation in the Doha Round negotiations and its involvement in the institution’s regular activities) and Chinese initiatives with regard to Free Trade Agreements (FTAs), concluding that China’s trade policies are by and large supportive of a rules-based multilateral trading system.

Revisionist accounts of China’s behavior in the international economic system, however, postulate that China’s membership in the WTO could potentially weaken the rules-based international system. Mallon and Whalley (2004), for example, raise the concern that as China is not yet a full market economy, it could resort to protectionist policy instruments that threaten to substantially increase the number of trade disputes for the WTO’s dispute settlement mechanism (DSM), forcing other members to choose between the undesirable alternatives of neglect, which would promise to undermine the rule of law upon which the WTO operates, and trade retaliation designed to induce Chinese compliance. Related is the concern that following its accession to the WTO, China would seek to expand its influence and to change the rules of the WTO. Critics worry that as a large developing country, China would take up the leadership role in attempts to scale back the limitations faced by developing countries.

One approach to assessing the above debate about China’s commitment to WTO rules and norms is to examine reputational concerns in Beijing’s foreign trade behavior. The institutional changes that have taken place in China’s foreign trade policy may help to shed light on this issue. During the pre-reform era, trade policy was centrally controlled as were other areas of economic policy. The Ministry of Foreign Trade and Economic Cooperation (MOFTEC, previously MOFERT, the Ministry of Foreign Economic Relations and Trade), which has now been transformed into the Ministry of Commerce (MOFCOM), was the primary bureaucratic institution responsible for designing China’s foreign trade and economic aid strategies under the guidelines established by the central leadership. The decision-making process for foreign trade and economic affairs has traditionally followed the “fragmented authoritarian” framework (e.g., Lieberthal, 2004), a framework that has characterized China’s domestic decision-making process in general.

In the “fragmented authoritarianism” framework, emphasis was placed on achieving consensus and narrowing the divergent policy goals of different ministries and agencies. Decisions are made in a top-down manner where the relevant bureaucracies and interests oftentimes engage in extensive bargaining and coordination. While the Standing Committee of the Politburo sets the basic policy orientation and direction, China’s equivalent of the cabinet, the State Council, is charged with policy implementation. In this framework, the spirit and letter of policy are often altered to meet the parochial goals of those functional bureaucracies and local government actors necessary for the policy to be implemented successfully. That is, those agencies necessary to ensure the minimum degree of policy implementation success are able to change the contours of the policy by folding their demands into the policy package. Thus, the policy that is adopted bears little more than a passing resemblance to the original policy goals of the top leadership. Given the centrality of bureaucratic agencies in such a decisionmaking process, societal actors possessed very little ability to influence policy direction. In terms of trade policy-making, MOFTEC enjoyed a higher degree of control over the policy-making process than other bureaucratic actors, as trade and economic relations were considered to be less sensitive politically than most other policy areas.

China’s Communist system has had to expend extra efforts to adapt to the changing international economic environment. In addition to the more subtle changes in China’s policy-making process that would make China’s policymaking process similar to that of a “normal” trading state, a series of formal institutional changes have taken place to make China’s trade policy-making more transparent, streamlined and professional. Importantly, two waves of government restructuring have substantially streamlined the process of trade policy-making in China.

First, in 2001, in anticipation of China’s entry into the WTO, the Department of WTO Affairs was established, the specific mission of which was to handle issues related to China’s WTO membership. In subsequent years more new departments were created. For example, the Bureau of Fair Trade for Imports and Exports, the Industry Injury Investigation Bureau, and the Department of Information Technology and E-Commerce were created to deal with new trade issues such as antidumping, countervailing duties and subsidies, and so on. Second, in 2003, China’s state agencies underwent significant reorganization and a number of new institutions were created. In this government restructuring, the State Economic and Trade Commission (SETC), which used to have control over China’s internal trade, was dismantled. The SETC’s former functions of industrial injury investigation in the trade remedy process and domestic trade policymaking were shifted to the Ministry of Commerce headed first by Lu Fuyuan and then by Bo Xilai, a former governor of Liaoning Province. The government restructuring described above has substantially strengthened the institutional capacity of China’s trade policy-making apparatus.

What do these institutional changes suggest with regard to China’s commitment to WTO rules and norms more generally? China’s concern about reputation also emerges as a theme from the discussions of China’s trade policy. Scott Kennedy, for example, notes that China’s adoption of the regime is motivated by a desire to acquire a trade policy instrument available to most major trading states.³ Like most other developing countries, which perceive that they have been unfairly targeted by the antidumping (AD) actions of their counterparts in the industrialized countries, China started to view AD as “an equal opportunity weapon” and a legitimate right under the WTO system. Prompted by a desire to acquire a policy instrument to defend against unfair trade practices, Chinese business actors have not only started to challenge foreign AD actions against Chinese firms, but have also more actively developed China’s own AD regime. In this sense, concerns about reputation and the legitimate rights of China have influenced the evolution of China’s AD regime.

Similarly, in her study of China’s response to the WTO dispute initiated by the United States against China’s value-added tax (VAT) rebate policy for the semiconductor industry, Wei Liang finds that China’s WTO commitments, especially the WTO-plus rules designed for transition economies, place a significant constraint on Beijing. Concerns that reneging on China’s international legal commitments may be reputation costly in part help to explain why China chose to make concessions to the United States during the bilateral consultations, without escalating to the point of establishing a WTO dispute panel. Hence the norms embedded in the international trade regime have had a constraining effect on Chinese behavior.

A China “threat”?

Are we justified in painting China as a threat?⁴ This answer depends on a number of dimensions by which we define the notion of a “threat” as well as what the potential targets of such a threat actually are. The more “hawkish” interpretation is that China can be seen as being frustrated with the status quo. The PRC was not a founding member of the WTO, and, as Liang argues, this led to Beijing’s temporary suspension of its willingness to join after 1995. This, coupled with China’s traditional suspicion of the international order – by which it was seen as being victimized during its “century of humiliation” – suggests that China is less invested in the status quo than its US, European or Japanese trading partners. One conclusion is that once China is able to leverage the size of its economy and “seduce” its trading partners by holding out the potential of its vast, untapped market, it will engage in rewriting the rules and altering the very norms of the WTO and of international liberal trade more generally.

The more benign view is that China is attempting to update its economic and (to a lesser degree) its political institutions in order to provide a more seamless interface with WTO rules and norms. Once it has done so, according to this view, China will emerge as a formidable competitor. If we invoke neoclassical assumptions to argue that each member of the WTO trade regime is acting in its own self-interest, then the outcome will be a more efficient international trade regime. According to this more “dovish” interpretation, China’s increasing ability to compete will strengthen the existing international trading regime, although it will inevitably force other WTO members to undertake structural change in order to successfully compete in this new liberal trading order.

Obviously, these are ideal types, and it is still early in a process that will take decades to unfold. The evidence presented in this book suggests that a dichotomous account of China’s behavior in the international trading system may not be terribly illuminating. Predictions of Chinese behavior based on a unitary actor assumption without considering domestic politics may be problematic. For those embracing the view that China is by and large a cooperative actor, the non-unitary aspect of China should sound a cautionary note to China’s future role in the world trading system. For those viewing China as a revisionist power seeking to challenge the rules of the organization, the complication of domestic politics may paint an even more bleak picture of Chinese behavior. In either case, the chapters collectively suggest that a simple dichotomous view of China as either a benign or a malignant actor is overly facile. Instead, one has to grapple with the importance of domestic political forces in shaping the future trajectory of China in the world trading system. This section outlines several areas in which domestic politics may complicate the notion that China will be a cooperative player in the world trading system, which, in turn, may provide fodder for both interpretations.

Local government behavior

Andrew Mertha’s study suggests that optimism about China’s cooperative behavior in the international system should be tempered somewhat. As the priority that local governments place on economic development often diverges from the goal of protecting the intellectual property rights (IPR) of foreign actors, local governments could engage in ambiguous and untargeted threats against foreign firms invested in China so as to prevent the latter from raising their concerns about China’s lax IPR enforcement in the US trade policy agenda-setting process. Such threats have in turn prevented US actors from raising their legitimate concerns through trade policy. As local governments pursue economic interests an...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Tables and Figures
• Contributors
• Acknowledgements
• 1 Introduction
• 2 Bureaucratic Politics, Interministerial Coordination and China’s GATT/WTO Accession Negotiations
• 3 Decentralization, Industrial Geography and the Politics of Export Regulation
• 4 Putting Your Mouth where Your Money is
• 5 China’s Porous Protectionism
• 6 China’s WTO Commitment Compliance
• 7 State, Business Interests and China’s Use of Legal Trade Remedies
• 8 The Impact of the World Trade Organization on China’s Trade Policy
• 9 Conclusion