Filling the Glass Half Full: The WTO and Structural Reform in China

Here I aim to consider whether the Chinese government is capable of delivering on China's WTO commitments given the peculiar structure of the Chinese communist party and its relation to the Chinese government. This inquiry is crucial since if the current party/government structure inherently frustrates the fulfilment of China's WTO commitments, then any foreign pressure, cajoling, or any legislative or rule of law promotion efforts on the part of the Chinese may have only minimal effect in the absence of comprehensive reform of the Chinese government structure.

Party Rule

Few would challenge the assertion that the underlying principle of the Chinese government is rule by the communist party. But, despite the fact that communist party rule is a defining feature of the Chinese government, few people have satisfactorily analyzed what party rule means, i.e., the nature of the party and how it functions in and rules over China. Implicitly, the party does not rule China by law since the party does not issue laws, rules and regulations, and the party is itself above the law and the courts.

The party rules by setting "policy" and inculcating such policy through its countrywide political apparatus. By means of political study sessions and various methods for "educating" the people as to what is expected of them, the party gets its policy goals across to society. State ministries and government departments, in turn, are supposed to implement party policy by promulgating (and then, hopefully enforcing) laws, regulations and notices. In short, the party rules China by endeavouring to build a consensus for its policies via propaganda. The party's fundamental function is that of a propaganda apparatus.⁵

That the party's chief task is to set policy and inculcate policy via propaganda is highly significant with respect to China's practical implementation of its WTO commitments. Essentially, this line of reasoning suggests that China's WTO commitments (which foreign observers perceive as legal commitments whose successful implementation depends on good faith and adequate legislation and legal infrastructure) are, in the context of party rule, actually policy commitments whose successful implementation depends on successful propaganda or education efforts by the party apparatus.

In other words, by focusing on issues of good faith, Chinese cultural values, and the volume of laws and regulations repealed or revised or the number of judges trained, foreign observers may be missing the point in respect of China's ability to comply with its WTO obligations. It may be more useful to think of China's WTO commitments not as legal commitments, but rather as party policy to be inculcated via the propaganda apparatus. If the party propaganda apparatus is weak or ineffective, then China's administrative bureaucracy and courts are unlikely to tow the party line in meeting China's WTO commitments (or even be aware of what the specifics of the commitments entail) regardless of the party's good faith or rule of law efforts. Viewed from this perspective, China's WTO commitments as a matter of party policy are like any other party policy promulgated from Beijing. And like any other party policy promulgated from Beijing, we may draw some conclusions about the likelihood of China's success in meeting its WTO commitments from the party's success or failure in imposing other policies on state government ministries and departments and local level governments. Hence, it is important to understand the implications of China's rule-by-propaganda party system, and of the Chinese state government structure on the party's ability to impose its policies.

Rule by Propaganda

Politicians find propaganda to be a useful tool for controlling people. Propaganda is effective because it appeals to people's emotions, principally fear and hate, rather than to their reason. A problem with propaganda, however, is that since it relies upon tapping into people's emotions it is inherently limited in the range of emotional strings available for politicians to pull. This recognition is significant since unless a particular party policy finds emotional resonance with the people, it is likely to be rejected in favour of a different party line that strikes a more harmonious emotional chord with the masses. It seems that this has been the fate of China's good faith attempt to implement its WTO commitments through the party propaganda apparatus.

One peculiar aspect of Chinese culture is the profound attachment that Chinese people have to an idea of the uniqueness of Chinese civilization. As many readers are aware, the Chinese characters for China (中国) literally mean the "middle kingdom". Throughout Chinese history, and in fact up until the Open Door policy in 1979, successive Chinese governments have gone to great lengths to isolate Chinese civilization from the rest of the world. The separateness of Chinese civilization is exemplified in the Chinese term for foreigner (外国人), which literally means "outside person".

At a practical level, this notion of the separateness of Chinese civilization has resulted in the development of different legal regimes for domestic and foreign enterprises in China. And it has also undermined the party's ability to implement its WTO commitments as party policy. The underlying goal of China's economic and national development is the perfection of Chinese civilization, not the creation of a diverse, pluralistic society and open economy. Only insofar as foreign participation in the economy furthers national goals is it encouraged. As a result, being a propaganda apparatus, it is simply untenable for the party to become a champion of foreign investors since such a position is a contradiction of the baggage of its own political traditions and the party ideology. Thus, the party's call to faithfully carry out China's WTO obligations was inevitably followed by the party's countervailing exhortation to assiduously study WTO law in order to protect China's interests. As a result, devising WTO countermeasures to thwart foreign penetration of the Chinese market is perceived in China as a virtual moral imperative.

Another problem is that even if the party's call to faithfully implement China's WTO obligations resonated with, and was understood by, the Chinese people, it may conflict with the institutional interests of China's bureaucracies and local governments. This consideration is important since certain features of the Chinese government structure ironically seem to invite non-compliance with party policies.

Chinese Government Structure

The Chinese government is characterized by a lack of horizontal and vertical integration. Chinese critics refer to this as the "vertical/horizontal contradiction" (tiaokuaer maodun). The Chinese government consists generally of four layers emanating from the central government in Beijing at the apex down to the provincial, municipal, township and village levels. The state administrative bureaucracies in Beijing have subsidiary branches (paichu jigou) at subordinate layers extending down to the local level. As such, it appears that the Chinese government structure is vertically integrated since the subordinate state authorities are responsible to superior state organs.

But at the same time, at the provincial level and below, each layer of government is horizontally integrated to the extent that personnel appointments and funding are generally under the control of local governments. Supervision among horizontally integrated bureaucracies is generally autonomous from higher levels of government.

The implications of this lack of systematic and comprehensive vertical and horizontal integration on the party's ability to carry out its policies are profound. Among vertically integrated departments, effective implementation depends upon a conflict of interest between superior authorities and their subsidiary departments. In the absence of a conflict of interest, there is no reason for superior departments to assert their will upon recalcitrant subordinate organs. Li Changping in his book Wo Xiang Zongli Shuo Shihua, describes supervision among vertically integrated bureaucracies as "the father supervising the son".⁶ With regard to implementation of China's WTO commitments, there is no real conflict of interest between the national-level ministries and departments in Beijing and their respective branches at the local level; both seem to have an interest in protecting themselves. Notwithstanding the party's commitment to meet China's WTO obligations, China's ministries (which are often affiliated with state-owned enterprises) and subsidiary branches generally have a mutual interest in devising WTO countermeasures to thwart foreign competition.

China's government structure is also horizontally integrated at the local government level and, generally speaking, local government organs are not subject to supervision by bodies further up the Chinese government hierarchy. Horizontally integrated local governments are inherently given to local protectionism with supervision at this level Li describing as "big brother supervising little brother". Thus, with regard to China's WTO commitments, even if the party's policy to faithfully implement China's WTO obligations was acceptable to central government ministries in Beijing and these ministries were willing to assert their authority vis-a-vis subordinate departments, because of the peculiarities of horizontal integration, Beijing would encounter entrenched protectionist interests at the local level.

Another characteristic of China's government structure that confounds the party's ability to realize its policies is the fact that information is monopolized within China's government system. Because bureaucracies control the production and dissemination of information subordinate authorities can relatively easily deceive superior organs by issuing false or misleading reports or statistics. As a result, as Li Changping writes: "It is difficult for the superior authorities to deceive subordinate authorities, but it is very easy for subordinate authorities to deceive superior authorities".⁷ This has been a well-recognized aspect of China's travails in releasing believable statistics on economic growth, industrial production and other key economic data.

Finally, it is ironic that, to a certain extent, China's legislative process militates against implementation of party policy. Since the state administrative bureaucracies generally draft the regulations that are intended to implement party policy, protectionist government departments are afforded considerable latitude to frustrate party policy in the drafting process. And even if regulations reflect the party's will, the state administrative bureaucracies have considerable freedom to neglect the enforcement of laws and regulations.

WTO Countermeasures

The implementation of China's WTO commitments as party "policy" does not bode well for foreign investors seeking access to the Chinese market. Unfortunately, we are already seeing foreign investors' expectations frustrated in a variety of areas. Below is a limited discussion of some of the areas in which foreign investor's expectations are being frustrated.

The Approval System

Notwithstanding China's market opening commitments, the fact that a particular market sector is open to foreign investment does not necessarily mean that the Chinese government will approve a particular foreign investor's investment project. China's approval system continues to allow the government wide discretion to reject projects or investments out of hand, and to pit foreign investors against their competitors in courting Chinese government approval.

Non-tariff Barriers

China has employed a variety of non-tariff barriers to limit foreign access to the Chinese market. For example, China has imposed "unreasonably high capital requirements to establish branches in a variety of services, including banking, insurance, logistics, and telecom services".⁸

A Lack of New Regulations

China is obliged to open up various sectors by December 11 2003. Unfortunately, the lack of new regulations delineating approval requirements and procedures, in effect, render such commitments nugatory. Examples include auto financing and foreign investment in the retailing sector.

Banking

As part of the terms of its WTO accession, China agreed to phase in the elimination of geographic restrictions on foreign banks establishing banks and bank branches across China. Upon accession, licences were to be issued with no economic means tests or quantitative limits on licences. Within two years of accession, foreign financial institutions in China are to be permitted to provide renminbi businesses to Chinese enterprises as well as foreign-invested enterprises.

However, when the relevant implementing regulations were finally promulgated, it became clear that the extent of market access that foreign banks would be given would be less than that which the WTO accession agreement led them to believe. Specific measures limiting foreign bank access to the Chinese market include a one-year mandatory waiting period between foreign bank branch establishment applications. This restriction effectively limits foreign banks to one branch application per year.

Insurance

Similarly, foreign insurers were promised that there would be no economic means tests or quantitative limits on the number of licences issued. However, in practice, the China Insurance Regulatory Commission has been relatively slow in issuing new licenses thereby limiting market access. Moreover, the CIRC has stipulated high capitalization costs for foreign insurers seeking to establish branches in China.

Securities

Under the terms of China's WTO accession, foreign securities institutions were promised that the criteria for authorization to deal in China's financial industry are solely prudential (i.e., contain no economic needs tests or quantitative limits on licences). Nevertheless, under the Administration of Securities Investments in China by Qualified Foreign Institutional Investors Tentative Procedures issued November 5 2002 by the China Securities Regulatory Commission, it became apparent that only heavyweight international players would be allowed in the door. Fund management companies, insurance companies and commercial banks are required to have at least US$10 billion in assets under management. Qualified foreign institutional investors may deal in A shares, but may not purchase or trade in government or company bonds.

Tobacco

Under its WTO Protocol of Accession, China is obliged to provide full GATT national treatment in respect of laws, regulations and other measures applying to the internal sale, offering for sale, purchase, transportation, distribution or use of cigarettes.

The term "national treatment" means that foreign cigarettes are to receive no less favourable treatment than domestic cigarettes.

The Chinese tobacco market is, of course, of great interest to international tobacco companies; it is estimated that one-third of all of the world's smokers are in the PRC. Under the terms of China's WTO accession agreement, tariff rates on imported cigarettes are to drop progressively from 60% to just 10%. Foreign cigarettes are competitively positioned in the Chinese market and are expected to take an even larger share of the Chinese market as tariff rates progressively fall.

In recognition of this eventuality, China's State Tobacco Monopoly Bureau (STMA) is contemplating imposing various health-related technical standards and various non-tariff barriers in order to blunt foreign penetration into the Chinese tobacco market. One suggestion is to set maximum levels of certain chemicals contained in tobacco smoke that are not currently recognized under international norms. At present, there are international standards for tar, nicotine and phosphorus; however, cigarette smoke contains more than 5,000 different substances. The STMA is contemplating setting standards for some of these substances as well in order to limit the sale of foreign cigarettes in China.⁹

In addition, notwithstanding China's obligation to accord foreign cigarette imports national treatment under GATT and eliminate restrictions on all "points of sale" in China, China appears determined to limit foreign cigarette sales in China by maintaining monopoly control over distribution.

The foregoing are just a few examples of the frustrations that foreigners are encountering with China's efforts to implement its WTO commitments. These frustrations are, perhaps, best summarized in the following letter written in reply to the Council's presentation on China's WTO compliance efforts in September 2001:

"If one asks what positive difference WTO membership has meant to foreign business, it would be difficult to point to anything that the Chinese would not have done on their own, except maybe for some tariff reductions; companies that were doing reasonably well prior to WTO accession continue to advance, while companies that faced daunting barriers continue to beat their heads against the wall.

[China has] feverishly written new regulations and trained thousands of people, and hailed all that as progress toward transparency and rule of law. But in reality there has been little, if any, evidence of the structural change that WTO was meant to trigger. Indeed, I would argue that thus far the Chinese have been busily hijacking WTO rulemaking to further obstruct foreign participation in key sectors, while maximizing the access of their own companies to more liberal foreign markets[such as the United States]. I still think the top leadership embraces not only the letter, but the intent, of WTO, but the leadership has not demonstrated a firm grip. Yes, there's a big transition taking place[but there are also] many entrenched interests that we knew opposed WTO. But they can't make excuses