Bits of History #6

Entering the WTO

– While global attention was focused on the unfolding of the War on Terror, China signed its WTO accession protocol on November 11, 2001, officially becoming a member on December 11 of the same year. The United States was the main sponsor of China’s entry. The stated objective of this support, openly articulated by U.S. analysts but ultimately unattained, was to rebalance the trade balance between the two countries, which had already produced an $89 billion U.S. trade deficit by 2000. If one considers the accession process from China’s initial application to the General Agreement on Tariffs and Trade (GATT) in 1986, it took fifteen years for China to join the U.S.-led international trade system.

Negotiations focused not only on more than four thousand product categories, but also on access to China’s services markets, particularly banking, insurance, and telecommunications, by the United States and other Western economies. The effects of accession were immediate. China’s trade with the rest of the world surged dramatically, especially with the United States. Between 2001 and 2004, Chinese exports to the U.S. increased by 92%, while U.S. exports to China grew by 81%. By the end of 2004, 60% of foreign direct investment in China came from Hong Kong, Japan, South Korea, Taiwan, and Singapore. Asian economies became increasingly integrated through a complementary production system based in China and an integrated transport network dominated by major international shipping and logistics firms.

In 2005, China became the world’s third-largest trading power, after the United States and Germany. Already at that time, more than 50% of Chinese exports consisted of goods produced by foreign-owned firms operating in China. Clearly, measures of China’s trade were (and still are) based on the geographical origin of export rather than the nationality of the firm, its ownership structure, or the foreign capital invested in production. Trade balance accounting systems have not adapted to the structural changes brought about by the large-scale offshoring of Western manufacturing.

That same year, the U.S.-China trade deficit reached unprecedented levels for any bilateral relationship. The imbalance was generally attributed to two factors: (1) job losses in the United States caused by production offshoring, and (2) China’s restrictions on imports. However, some analysts argued that trade deficits are not inherently problematic for a country that issues a global reserve currency like the U.S. dollar.

China’s trade surplus enabled it to purchase a substantial share of U.S. public debt. This remains a highly debated issue in both countries, as each portrays itself as dependent on the other. On one hand, the U.S. economy is said to rely on the continuous inflow of foreign capital; on the other, shaped by memories of the 1997 Asian financial crisis, Chinese policymakers have viewed large holdings of U.S. Treasury securities as a form of protection against crises that Washington has the power to trigger.

In any case, after the 2008 financial crisis, caused by the U.S. housing bubble and strongly felt in China through a sharp decline in exports the following year, a political-economic theory gained traction: the United States should reduce its deficit and rein in spending, while surplus countries should curb exports and allow their currencies to appreciate.

Meanwhile, the Obama administration responded with a set of initiatives that can be summarized as the combination of the ‘Pivot to Asia’ and the Trans-Pacific Partnership (TPP). The latter, designed as a complement to the Transatlantic Trade and Investment Partnership (TTIP), was widely presented as an effort to create a barrier-free economic space across the Pacific, with an implicit anti-China dimension, and was even dubbed the new Marshall Plan. Yet the U.S. Congressional report on trade with China released in December 2015 explicitly stated that one of Washington’s long-term objectives was China’s eventual inclusion in the agreement.

While the United States, Japan, and ten other countries (Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam) were negotiating the TPP, China was intensifying bilateral trade relations through free trade agreements. Between 2011 and 2012, these efforts led to substantial increases in trade flows: up 83% with Hong Kong, 70% with Taiwan, 42.9% with ASEAN countries, and 98.9% with South Africa.

During the same period, the European Union’s embargo and U.S. banking sanctions against Iran, testing new frontiers of economic warfare, also affected China, which lost access to 21% of its Iranian oil supplies, one of its main energy sources. In 2010, China had instead employed a more traditional form of economic coercion by reducing production and export quotas for rare earth elements. At the time, China controlled 93% of global rare earth supply. Given this near-monopoly and their use in multiple strategic sectors, rare earths represented one of China’s key economic leverage points.

Japan suffered the most immediate consequences, responding with a 3% depreciation of the yen against the renminbi and filing a complaint at the WTO alongside the European Union and the United States. It was eventually decided, following a WTO ruling that deemed China’s quota system incompatible with its obligations, that the quota policy would be dismantled by 2015.

Despite recurring frictions, throughout the 2000s China and the United States expanded cooperation not only in trade but also in other areas. In 2011, the Agreement on Cooperation in Science and Technology was renewed, involving public institutions, private firms, and universities in joint research on innovative technologies across fields ranging from energy and agriculture to pharmaceuticals. From just three joint research projects completed in 1979, collaboration had expanded to 20,371 projects by 2012.

A few references

Cheng, H.-S. (2001). Comments on Xianquan Xu’s Chapter, in Shuxun Chen e Charles Wolf Jr (eds.), China, the United States, and the Global Economy, Rand Corporation.

Interview conducted by Andrew Spannaus with Jamie Shea (NATO Deputy Assistant Secretary General for Emerging Security Challenges), Alla NATO la vediamo così [This is how we see it at NATO]. February 11, 2015, www.transatlantico.info

Morrison, W. M. (2015, December 15). China-U.S. Trade Issues, U.S. Congressional Research Service.

Rajendran, G. (2013). Financial Blockades: reserve currencies as instruments of coercion, in Alan Wheatley, The Power of Currencies and Currencies of Power, Routledge, pp. 87-100.

Suttmeier, R. P. (2014, September 11). Trends in U.S.-China Science and Technology Cooperation: Collaborative Knowledge Production for the Twenty-First Century? Research Report Prepared on Behalf of the U.S.-China Economic and Security Review Commission.