CHINA (PRC FIRMS): An Introduction to International Trade/WTO: Respondent (PRC Firms)

An Overview of International Trade Practice in China

Introduction 

2020 has been an eventful year for the China international trade practice, the lasting Sino-US trade disputes, the pandemic, the US presidential election, the signing of the Regional Economic and Comprehensive Partnership Agreement (RECP) amongst 15 Asia Pacific nations, and the conclusion of the EU-China Comprehensive Investment Agreement to name a few. Those events will have a profound and lasting impact on international trade and the international business climate in the coming years.

Trade Disputes between the United States and China 

The Sino-US trade dispute started under the Trump administration and its “America first” strategy brought obstacles to the trade between the world’s two biggest economies. Trump adopted many controversial trade measures and actions to serve his domestic political interests, taking less into account the impact on its economic ties with other economies, China included. Many exports from China to the United States were subject to unprecedented special 301 duty, with some rates levied on them raised to as high as 25%. Such unprecedented duties cover a broad range of Chinese-origin products with an estimated total import volume of 370 billion US dollars.

Beside this, Chinese companies continue to be regular targets of US antidumping and countervailing investigations. These investigations have, during the past four years, resulted in high anti-dumping and countervailing duty rates. This is mainly because China is still considered by the United States as a “non-market economy” even after China’s access into WTO for more than 15 years.

Another challenge faced by both American and Chinese exporters is the increasingly intensified import and export control measures imposed on high technology sectors such as products, services and technologies relating to 5G and artificial intelligence.

COVID-19 in fact deescalated the Sino-US trade dispute and raised awareness of the importance of being interconnected between the two economies. The newly elected US president Biden, while he may continue some of the policies introduced by his predecessor, will adopt a general trade agenda with more certainty and greater respect for the rule of law through bilateral and multilateral engagement, which will benefit the world’s multilateral trading system.

The Pandemic  

COVID-19 has had an unprecedented impact on the world, particularly on the sphere of international trade. Initially trade orders on products from China plummeted in the first few months following the outbreak, but soon after, when Europe and the US were at the centre of the coronavirus pandemic, sourcing demands for Chinese medical and healthcare equipment, such as PPEs, increased drastically. Due to the high-in-demand international transportation at the time, it was once reported that it was difficult to book a container in Chinese ports.

The shortage of essential healthcare products during the emergency period prompted governments to review their policies on worldwide trade and industry transferring, taking the perspectives of not only the protection of domestic employment and business profit, but national security as well. On one hand, the importance of establishing domestic key industries and reducing dependence on imports appeared still to prevail in some countries; on the other hand, the critical need by all countries to access a strong integrated global production/supply chain and its safe operation became readily apparent. People around the globe have been more and more commercially connected even though they seem to be geographically “isolated”.

China’s State-owned Enterprise 

China is unique for its history and cultural tradition, as well as its social and economic systems, where state-owned enterprises (or state-owned economy elements) play an important role. “Market economy” countries have designed special treatment for China’s state-owned companies involved in trade dispute cases, such as “country-wide rate” and “third country surrogate value” for normal value calculation in antidumping investigation, and “third country bench-mark” in countervailing investigation. This special treatment could lead to some unreasonable and unpredictable results on products by Chinese state-owned enterprises, for example, a staggeringly high antidumping rate of more than 100% or even 200%, while identical products of other countries at similar prices receive a levy of less than 10%. With that contrast, it would be difficult to interpret such decisions on Chinese imports as “fair” ones.

Although trade ministers in the European Union, the United States and Japan have expressed several times concerns over China’s “state-owned enterprises”, the fact is that China’s domestic state-owned enterprises have developed with the country’s overall robust growth. 92 Chinese state-owned enterprises were listed in the Fortune 500 in 2020, an example to showcase their significance in the economy. They are already deeply involved in the world’s trade and investment, so how to understand the role of such state-owned enterprises in the world trade system and establish a fair and predictable rule-based system for trade and investment, would become a more pressing issue to discuss in the international trade practice.

Long-arm Jurisdiction and Counteractions 

On January 9, 2021, the Ministry of Commerce of China (MOFCOM) released the “Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures” (the Rules), blocking the application of foreign laws and measures which unjustifiably prohibit or restrict commercial activities between Chinese parties and parties from another country. The measures took effect immediately. The Rules impose a reporting obligation on Chinese parties who are affected by extra-territorial application of foreign laws or measures. A new “work mechanism” led by the MOFCOM can issue a “prohibition order” barring recognition, enforcement of, and compliance with such relevant foreign laws and measures in China and by Chinese parties. The Rules is one of the latest regulative developments, including legislations promulgated in 2019 and 2020, all aiming at counteracting extra-territorial actions by foreign governments.

WTO and Regional Trade and Investment Agreements

The World Trade Organization, which was established thanks to the successful Doha Round negotiations, has not made substantial progress over several years when international trade has continued its rapid growth. WTO’s rules and operation are faced with severe challenges. The insufficient number of judges of WTO’s Dispute Settlement Board, which was largely caused by interference by the United States, has paralysed its function as the global trade coordinator and final settlement agency. The Biden Administration has already stated that it believes that the WTO is very important, and thus the Dispute Settlement Board should see a return to its full functionality in the next six months.

Regional trade and investment agreements on the other hand have attracted participation of various trading partners: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came into effect for eleven countries in December 2018, and China and South Korea also expressed their interest in joining the CPTPP. The Regional Comprehensive Economic Partnership (RCEP) was signed in 2020 by the ten ASEAN countries, China, Japan, South Korea, Australia, and New Zealand, which has made the said area the largest free trade area. EU and China concluded negotiations for a Comprehensive Agreement on Investment (CAI) at the end of 2020, which is another milestone agreement having impact on global investment and trade.

As we step into the third decade of the 21st century, questions on the future of the international trade landscape such as “where the world will be for trade and investment?” and “will there be more conflicts or more cooperation?” remain unanswered. Maybe both. Whatever the answer is, it’s the trading rules that lay the basis for any business activity. Making comprehensive and detailed rules and ensuring their effective operation and enforcement are to the benefits of all countries and all people.