Former China central bank governor on WTO reform
Zhou Xiaochuan: Resolving New International Trade Issues Through Reform
This newsletter features the translation of a speech by Zhou Xiaochuan, the former governor of the People’s Bank of China. The speech was made on May 27, 2019, but was recently published on Dec. 1, 2021, by the 《中国金融》 China Finance, a magazine under the central bank, at the occasion of the 20th anniversary of China’s accession to the World Trade Organization (WTO).
It’s not long but your Pekingnologist isn’t 100% sure on every translated sentence, so the Chinese original is retained for accuracy check.
Zhou Xiaochuan: Resolving New International Trade Issues Through Reform
The forum on WTO reform was co-organized by Boao Forum for Asia Academy and Caixin in Tokyo, Japan on May 27, 2019. People present at the forum included 周小川 Zhou Xiaochuan, vice chairman of the Boao Forum for Asia, 胡晓炼 Hu Xiaolian, chairman of Export-Import Bank of China, 李波 Li Bo, then the vice-president of All-China Federation of Returned Overseas Chinese, 尾池厚之 Atsuyuki Oike, then Japan's former deputy Trans-Pacific Partnership Agreement (TPP) negotiator, 堀井昭成 Akinari Horii, former Assistant Governor of the Bank of Japan, and a dozen well-known Chinese and Japanese scholars, such as 杨国华 Yang Guohua, Mr. 今野 Konno, Mr. 小手川 Kotegawa, and Mr. 石川 Ishikawa. 《中国金融》 China Finance hereby (Dec. 1, 2021) publishes Zhou Xiaochuan's keynote speech at this meeting, at the occasion of the 20th anniversary of China’s accession to the World Trade Organization (WTO).
I’m very glad to see all of you, especially our honored Japanese guests, so interested and take part in discussing WTO reforms.
When I was the Governor of the People's Bank of China, I attended many G20 meetings. Its first summit debuted in 2008. Before the 2008 summit, there were only ministerial meetings. The 2008 meeting revolved around how to cope with the global financial crisis, and heads of states or governments all expressed their hope to make progress and reach conclusions on the Doha Round negotiations which started as early as 2001. In fact, numerous difficulties blocked progress, and there isn’t much optimism even until now. Not only that, but some new trade issues have also emerged to become key agendas of G20 summits. At the 2018 Argentina summit, there are many other important issues, but heads of state or government paid attention to trade issues, especially trade talks between leaders of China and the United States.
We all know that the members of WTO are concerned about whether the WTO could continue to perform effectively, what are those major problems, and how to reform them. People hope that the leaders of the G20 could reach some initial consensus to advance the reform at the Osaka G20 summit this June. However, the prospect is not promising, due to existing difficulties and short of time. For instance, the Appellate Body, one of WTO's most important disputes settlement mechanisms, will stop working normally by the end of this year. There are also disagreements on several other items. In face of the challenges and difficulties, it’s in fact very difficult for WTO to function properly.
In the meantime, new international trade issues, including those concerning digital trade, have also emerged in recent years. Apparently, it’s not optimistic to establish new rules for resolving these issues based on existing protocols. Therefore, we urgently hoped that guests here today can work together to figure out some ways to facilitate the talks at the upcoming Osaka summit. It is hoped that Japan, as the host of the summit, could play a leading role in this regard.
In 2018, I participated in some research and discussions on WTO reform. Mr. Li Bo will later introduce several research projects he headed in China. The same year, some Canadian and European Union (EU), and German think tanks issued several relevant papers. China should also strengthen research on this subject as well. The progress of TPP promoted by Asian-Pacific nations, and the Regional Comprehensive Economic Partnership (RCEP) led by the Association of Southeast Asian Nations (ASEAN) demonstrate that there is a basis in Asia to push forward WTO reform.
Canadian, EU, and German papers have offered many proposals, the overwhelming majority of which are very positive. Looking at them from the outside, some are critical of China, such as those about the transparency of government subsidies, state-owned enterprises (SOEs), regulation of cyberspace, transfer of technology, and intellectual property protection, but China has been clear about its own attitude to those issues and indeed is leveraging these external forces to accelerate domestic reform. In fact, we have prepared for reforms in several aspects, especially in opening the financial market to the outside world. And we have the determination to push forward, in areas such as the transfer of technology and intellectual property protection, to reach the standard that can be accepted internationally.
Meanwhile, we feel that there are still certain difficulties in resolving some issues, and more discussions are needed to enhance consensus, especially those concerning SOE reform and governance of cyberspace. Generally speaking, I think what is happening in China today is a bit similar to Japan in the old days. When facing pressure internationally, Japan usually could turn those pressure into motivations for opening up. China can advance its reforms in a similar way too.
It is essential for us to grab the opportunity of the upcoming G20 summit to press ahead with WTO reform, and in the meantime get ready to confront many challenges. If the reform does not go smoothly, WTO may lose part or even the majority of its functions in a certain period of time, and multilateralism could probably gain more ground in the absence of an agreed international trade system. In this case, countries in favor of free trade will take the initiative to practice plurilateralism and advance by themselves, and then wait and see if the world follows.
We should be mentally prepared for such possibilities. In my understanding, the Chinese government’s standpoint is it will try its best to promote a well-functioned WTO by pushing for consensus on the WTO reform and its implementation. Meanwhile, we should also be prepared that WTO reform could meet some difficulties, and when that happens, how can we facilitate free trade and trade investment, and how should we advance regional agreements first and use them as an alternative to multilateralism.
The heated discussions today have pointed out many issues and brought many new ideas. We can further study those issues afterward, and I would like to share a few of my personal views on the following aspects.
I. On the formulation and improvement of WTO's rules.
I agree with Mr. Konno that the current situation is very unsatisfactory. Maybe we should look back and consider whether things have become better after WTO replaced General Agreement on Tariffs and Trade (GATT). No matter what, the Tokyo Round and Uruguay Round negotiations during the time of GATT went well; the WTO's Doha Round ended up with nothing.
II. On subsidies that Mr. Oike and Mr. Li Bo talked about.
As Mr. Oike pointed out, in China, many subsidies are provided by local governments. In other words, the central government is not willing to offer such subsidies and cannot afford the money. However, because China’s central government gives a lot of money to local governments, local governments have the money to move forward on something. However, if it wants, the central government is able to change the situation, such as employing budget review and approval mechanisms to ensure better and more efficient spending of local governments.
Of course, this also involves the central government. For instance, the Ministry of Science and Technology (MST) makes a budget for technological research and development every year. As Mr. Kotegawa mentioned, it is not a good thing if there are no such budgets, because that would show a country’s neglect of its technological development, which is not good. Therefore, the budget is a must-have.
Traditionally, this budget is allocated to basic research institutes like the Chinese Academy of Sciences. Some in the industrial sector would also apply for the subsidy, and they could get some, though in a very small amount. Some people worry that some fast-growing companies like Huawei can thus get the government’s support. Such worries are unnecessary since those companies barely receive any research funds from the MST.
To summarize, by changing the MST's budget policy, including stopping allocating funds to the science and technology sector that can make a profit on their own in the market, this subsidy issue can be solved.
On the one hand, whatever policy the Chinese government takes, the good thing is that China’s technology can still continue to advance, which is not bad. On the other hand, it is normal for some people to have certain concerns. It is a part of international competition.
III. On the developing country treatment, namely, the "special and differential treatment (S&DT)" provisions in the WTO
I agree with Mr. Li Bo's opinion that China has not/does not/would not [NOT SURE OF THE TRANSLATION HERE] actually benefit much from the S&DT. However, there is one thing worth noting here: China, which used to be a poor country a few decades ago, should speak for other poor and developing countries. This is the political standing of China. This does not mean that China will continue to pursue special and differential treatment, though we would not refuse the treatment where we qualify. There are controversies among WTO members on this, but I do not think they are particularly difficult to resolve.
IV. On SOEs
Let me propose something immature. I have observed that in both the WTO and the TPP, the definitions for SOEs are not accurate enough. In many WTO documents, they are mentioned as public bodies. If all the SOEs are public bodies, then all their activities are government activities? That would unnecessarily expand the scope here. I think we should make more specific definitions here.
How? I have noticed that the EU and some countries distinguish SOEs on first whether they listen to the administrative orders of the government and secondly whether they take the initiative in carrying out governmental policies. By this, most Chinese SOEs are not public bodies because they no longer operate that way. Many of the SOEs that play an important role in the Chinese economy are publicly listed companies. Their corporate governance would not allow them to do so.
Then, can we find another definition? I have discussed this topic with some European experts and we reached a certain consensus. SOEs in many EU states take up over 20 percent [UNCLEAR OF WHAT, maybe GDP] and in China, SOES take up over 30 percent [UNCLEAR OF WHAT, likely GDP] respectively. If the companies can achieve competitive neutrality by OECD rules, it would be plausible that they not be counted as public bodies. This definition can help solve a lot of problems on SOEs. For the rest of the SOEs in China, if they still retain market-distortion activities, it would be relatively easy to resolve that via reforms, or define them as government bodies via some other measures.
V. On the exceptions outside the scope of market opening
It was also discussed here. In general, the scope of the market opening is formed based on national security or ideology. But in practice, the criteria vary including based on religion. For instance, people are worried that terrorist activities by ISIS may infiltrate other countries and regions by taking advantage of the opening of the service sector, or via the digital and internet systems. Therefore, I do not think it is easy to formulate specific standards for exceptions outside the scope of market opening.
However, the formulation of rules could leave room for different countries to try out on their own, since it is not possible to keep those exceptions under control completely anyways.
VI. On digital trade
Mr. Ishikawa talked about the theoretical prospect of digital trade and pointed out that our discussion is not in-depth enough at the moment. I think that’s not abnormal. Ever since World War II, the international trade system has developed in a dynamic fashion. In the beginning, the United States and about twenty other countries signed the GATT, and then the Soviet Union and socialist countries in East Europe established Council for Mutual Economic Assistance or CMEA. So the trading systems that different countries participated in were different. The systems have moved forward in the competition. Digital trade has attracted many countries' attention, and we shall study the tax issues thoroughly.
实际上目前美国和欧洲在数字产品的征税上存在很大的问题，中国也在关注和研究这个问题。首先是国内数字贸易应该如何收税；其次是数字贸易涉及跨境的时候，有的问题说的是数据可不可以正常贸易，实际上背后说的是该不该收税、税收归谁这样的问题。我觉得这些都是非常有意义的问题。Taxation on digital products is a big issue between the United States and Europe. China is also studying it. First, how to tax domestic digital trade. Secondly, when digital trade crosses borders, some issues relate to whether data can be traded normally, in fact, the issues could be about whether taxation should happen and who gets the taxation. I think all of them are very meaningful questions.
Those are my responses to questions on WTO reform. I think, the discussions in this forum are very productive and have produced many insightful views, and I hope such exchanges and researches can continue. If we can seize the opportunity to solve some issues and send our solutions to relevant decision-making bodies, it will not only draw decision-makers’ attention before the G20 Osaka summit but can also provide a reference for WTO reform in the future.
Again, please note the speech was made on May 27, 2019, but was recently published on Dec. 1, 2021, by the 《中国金融》 China Finance magazine.