How to tame China’s rogue state capitalism

How to tame China’s rogue state capitalism

Hopes that the resumption of trade talks between the US and China will lift the shadow of uncertainty hanging over the world economy miss something fundamental. Restoring global value chains, rebalancing US-China trade and increasing protection for intellectual property are, of course, desirable objectives. But there is a more significant issue at stake: loopholes in global trade rules on subsidies and the absence of any agreed restraints on state-owned enterprises.

China’s “Made in China 2025” programme is designed to turn the country into a “leading manufacturing power” in 10 key industrial sectors by 2049. This is state support for industry on an unprecedented scale.

Western companies and governments do not have access to basic facts about Made in China 2025 because that information is buried in unpublished government budgets and shielded as “state secrets”. Although existing global trade rules on subsidies permit challenges to such programmes, the latter will fail in the absence of evidence.

Similarly, too little is known about the 100,000 SOEs that produce one-third of China’s gross domestic product and provide one-fifth of all its jobs. How much government funding do they receive? How extensive is government ownership? What positions are occupied by government officials?

Beyond domestic support, China’s trade policies shelter SOEs from foreign competition. For example, Chinese makers of electric vehicles must use batteries made in China rather than import them from Japan or South Korea. Meanwhile, foreign brands have a small presence in the Chinese EV market, with a share of about 5 per cent.

Because SOEs are relative newcomers to the global economy, there are few trade rules to restrain them. Nevertheless the major developed economies still have substantial leverage and are exploring ways to use it.

For instance, the trade ministers of the US, EU and Japan share profound concerns about China’s model of state capitalism. They and their staffs have met six times since December 2017 to discuss a joint effort to strengthen subsidy rules and establish new rules governing SOEs. However, US president Donald Trump’s insistence on negotiating his own deal with China means their efforts have so far attracted little political support in Washington.

This “trilateral” group is discussing incentives to encourage China, and other World Trade Organization members, to comply with the existing rule that all countries must disclose full details about their subsidies. They are also considering possible penalties for nondisclosure.

A recent ruling by the WTO has strengthened the trade ministers’ attempts to establish that an SOE is a “public body” if it is majority-owned by its government, a position China has resisted. WTO rules define a “subsidy” as a financial contribution made by “a public body”.

Another issue is China’s use of forced technology transfer. Here, the trade ministers’ group is considering a range of measures, including limits on Chinese laws which force foreign companies to enter joint ventures.

The WTO operates on a consensus basis, which means that a single member can block reforms. So China will have to be persuaded that it should go along with the measures being proposed. In the past, it has done so when a large number of countries has supported new measures. It is a good sign, therefore, that the trilateral group is expanding to include Australia, New Zealand, Canada and Mexico.

It is unlikely that the US-China trade talks will address subsidies and SOEs. So the deliberations of the trilateral group are our best hope of taming China’s rogue state capitalism. The Trump administration should get behind them.

The writer, who practised international trade law, is a senior fellow at the Center for Study of the Presidency and Congress

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