The Myth of China's Open Market Reforms and the World Trade Organization

Abstract

In 2018, the Trump Administration claimed for the first time that the United States erred in supporting China’s accession to the World Trade Organization because China has failed to fulfill its commitments to dismantle its state-led economy and adopt open-market oriented reforms. Instead, China has maintained a mercantilist state-led economy in which China provides preferential treatment to its state-owned enterprises and supports their exports while it discriminates against U.S. companies in China and creates barriers to U.S. imports. Frustrated with being unable to effect change through dialogue, the United States is now using punitive trade sanctions against China in disregard of the WTO. China has retaliated in kind, igniting a potential global trade war.

A review of the background of China’s accession to the WTO indicates, however, that China never made any commitments to dismantle the state sector of its economy and is not otherwise legally bound to do so under the WTO. The claim that China agreed to adopt open markets is a myth created by President Bill Clinton due to wishful thinking or political expediency when he sought congressional support for China’s accession to the WTO in 2001. Clinton argued that China’s WTO entry would lead to the adoption of economic freedoms that in turn would lead to political freedoms and greater protection for human rights. Clinton even dangled the possibility China could shed the shackles of communism and embrace democracy. In response to Clinton’s grandiose vision, China remained cautious and made no extravagant promises. China promised only to adopt a hybrid system in which some free markets would operate within an overall state-led economy. Rather than dismantling its state-led economy after its WTO accession, China has incessantly strengthened it. Tightening the state’s grip over the economy serves important goals of the Communist Party, including further entrenching its power, whereas loosening its grip would be tantamount to relinquishing power, a prospect that the Party will never accept. This article argues that the United States must finally reject the Clinton myth and accept that China has no intention of dismantling its state-led economy. Only with this sober realization can the United States deal effectively in the future with China in the WTO, in bilateral trade negotiations outside of the WTO, and beyond.

JEL Classification: K2, K33