5 - The WTO and the Rule of Law in China

Summary

The development of the rule of law in China is a matter of critical importance to its social and economic development. It is also critical to its trading partners, which agreed to China’s accession to the WTO based in part on its commitment to fully implement the rule of law. Under the current leadership, however, China has halted its progress toward the goal established by the prior leadership and enshrined in its WTO commitments. The failure to follow through on its commitment to the rule of law and the reductions in market access generated by the current leadership’s efforts to reassert control of the state sector of China’s economy, have raised serious questions regarding China’s compliance with its WTO commitments. The WTO dispute settlement procedures establish a means for holding China to its commitments. In particular, those procedures allow for complaints not only for outright violations of a member’s commitments but also actions a member takes that “nullify or impair” (i.e., undercut) the benefits its trading partners reasonably expected would accrue from previous commitments. The chapter outlines the basis on which China’s trading partners might pursue such a claim.

I Introduction

Jonathan Spence’s classic study, To Change China, offers a cautionary tale of Western efforts to reshape the Middle Kingdom.¹ Spence recounts the story of a Jesuit missionary, Adam Schall, predicting a solar eclipse in the late summer of 1644 and requesting Chongzhen, the last emperor of the Ming dynasty, to have the Board of Rites test Schall’s prediction.

Chongzhen issued the decree, which called for both Schall and the imperial scientific advisers to make their predictions and test them against the actual eclipse. In the event, only Schall accurately predicted its timing and phases. Schall‘s success led to his being retained by the emperor as an adviser, where Schall integrated himself deeply into Chinese culture.

But Schall’s mission to convert the Chinese to Catholicism failed. In the end, China changed Schall and his fellow Jesuits, rather than the Jesuits changing China.

Critics of China’s accession to the World Trade Organization (“WTO”) suggest a similar fate has befallen the institution. In their view, rather than changing China, the WTO has been “swallowed” whole by what is now the world’s largest trading nation.² Some go further, accusing proponents of China’s accession of “hubris” in assuming China’s accession would “inevitably” lead the People’s Republic to “embrace democracy and capitalism.”³

Those arguments do not withstand serious scrutiny.⁴ Concrete commercial considerations, rather than hubris or misguided beliefs, guided the negotiators and the political debate over China’s accession.⁵ To the extent the reforms China undertook to join WTO expanded the degrees of freedom individual Chinese citizens could exercise, that consequence was incidental to the WTO members’ negotiating objectives.⁶

Yet, nearly two decades after its accession, there is little doubt China finds itself in “an increasingly tense standoff with the U.S. and Europe that threatens to undermine the WTO’s authority as an arbiter of global trade.”⁷ And, there is one respect in which the critics are right. China has not, in fact, met the expectations of WTO members that agreed to its accession, either with respect to economic reform or progress toward the rule of law.

Having served as the Majority Chief Trade Counsel to U.S. Senate Finance Committee during the final negotiations over the protocol of accession, I can personally attest to the attention given to the economic and legal reforms under way in China at the time. The members of the Finance Committee paid particularly close attention to China’s progress toward the rule of law.⁸ More generally, the reforms proved instrumental in persuading policy makers to agree to China’s accession.⁹

Moving from the U.S. Congress to serve as the Under Secretary of Commerce for International Trade in the George W. Bush administration in 2001, I was part of the U.S. delegation to the WTO ministerial meeting in Doha where China finally acceded to the WTO. As Under Secretary, I became deeply involved in ensuring China’s compliance with its WTO obligations.¹⁰ China’s progress on economic and legal reform remained a significant part of both the administration’s agenda and Congressional oversight throughout my tenure.¹¹

Those experiences highlighted for me the difference between China’s WTO accession and the Jesuits’ experience in Imperial China. The WTO did not seek to change China. Rather, China pursued accession of its own volition, with President Jiang Zemin and Premier Zhu Rongji using WTO accession as “a lever for promoting domestic economic reform.”¹² Following in the footsteps of Deng Xiaoping, they aimed to lift the dead hand of Mao’s mercurial one-man rule and end the anarchy and economic disarray left behind by the Cultural Revolution.

Leaving the Mao era behind required fundamental changes in the way China operated. In that, Jiang and Zhu succeeded. Their efforts led to a retreat by the state from the market, “a major downsizing and restructuring of state-owned companies … and a significant opening of the economy to external competition, paving the way for China’s entry into the World Trade Organization.”¹³

Jiang and Zhu’s reforms extended to China’s legal regime as well. According to Chinese state media, the two leaders viewed WTO accession as a means of “cleaning up of laws, regulations, and policies” and establishing an “impartial, efficient judicial system.”¹⁴

In that, Jiang and Zhu’s reforms formed the backdrop of China’s efforts to accede to the WTO. Their reforms, including the changes to China’s legal regime, played an instrumental role in convincing WTO members to accept the resulting protocol. The reforms shaped WTO members’ expectations of the of the benefits that would accrue from China’s accession and its agreement to abide by the WTO rules.

Since then, however, Xi Jinping has set China on a fundamentally different course – one that departs sharply from the path Deng Xiaoping charted and reverses many of the reforms Jiang and Zhu introduced. It is fair to describe Xi’s approach as retrenchment, both economically and institutionally. Xi’s reinflation of the state-owned sector not only diminished the scope for free and open competition in China’s market, but it also expanded the scope for “guanxi” – the age-old Chinese use of connections with the powerful to advance one’s economic interests and the local favoritism it entails. As has been widely reported, commercial success in Xi’s China depends less on price or quality than it does on political access and a willingness to embrace the Communist Party’s line.

In parallel, Xi has reneged on Jiang and Zhu’s commitment to expanding the reach of the rule of law. Rather than openly abandoning Jiang and Zhu’s stated goal, Xi has simply redefined the rule of law to suit his and the Party’s purpose.¹⁵ Under the rubric of a “socialist rule of law with Chinese characteristics,” Xi has stripped away any pretense of progress toward the rule of law in favor of a vision of unchallengeable central authority demanding obedience from “a law-abiding population.”¹⁶

Xi’s expansion of the state-owned sector has had its own ramifications for the reach of the rule of law. Just as economic reform and downsizing the state-owned sector created the need for stronger legal institutions and legal reform to govern relations between enterprises and consumers in private markets, re-inflating the state-owned sector has expanded that part of the market that has remained resolutely outside the scope of law in China throughout the reform.¹⁷ Under Xi, the distinction between state-owned and private enterprises has, moreover, become increasingly blurred.¹⁸

The changes Xi wrought, including his retrogression of the rule of law, have significant implications for China’s ability to comply with its WTO obligations. As will be discussed in greater detail below, the WTO represents a contract among its members – one that reflects a balance of advantages achieved through negotiation. The acid test is not in compliance with the “letter of the law” alone. The issue is whether the expectations of the parties with respect to the benefits derived from negotiation have been met.

China, in my view, has failed to satisfy that standard. it would do well to recommit itself both to economic reform and progress toward the rule of law in its own interest as well as in the interests of WTO compliance. The following discussion explains why.

The discussion is divided into two parts. The first puts the Chinese legal system and its progress toward the rule of law in a historical context, including the post-Mao reforms and Xi Jinping’s more recent retrenchment. The second part explains why China’s progress on economic reform and the rule of law matters in terms of WTO compliance.

II China’s Legal Regime and the Impact of Xi’s Reforms

China’s legal culture derives from two competing traditions – the precepts of Confucius and the “legalist” imperative introduced at the outset of the Qin dynasty.¹⁹ Confucius aimed to create a harmonious society through norms and ritual practices.²⁰ The norms he advocated were designed to ensure proper conduct, rather than obedience to rules.²¹ They wove a web of reciprocal obligations designed to bind the Chinese together in service to their families, their community and, ultimately, the state.²² Under those circumstances, the ruler could rule by virtue, rather than law and enforcement.²³

The legalist imperative, associated with the Qin dynasty and the first emperor’s adviser, Shang Yang, started from the opposite premise. In the legalists’ view, a “well-ordered society [could] be maintained only through a set of formal, publicly promulgated rules.” The ruler’s duty was to establish and enforce the law “with uniformity, certainty, celerity, and severity.”²⁴ The legalists viewed the law as a system of rewards and punishments designed to control the citizenry.²⁵

Although Confucianism became the organizing principle of succeeding Chinese dynasties beginning with Han’s ouster of the Qin,²⁶ legalism did not disappear.²⁷ With Confucianism, it continues to shape China’s legal culture today. The resulting legal system retains a mixture of the two traditions.²⁸

Hu Jintao’s notion of a “harmonious society,” first put forward in a speech before the Central Party School in February 2005, plainly draws on Confucian thought.²⁹ Hu called for a society built on the ideas of “democracy, the rule of law, fairness, justice, sincerity, trustworthiness, amity, full vitality, stability, orderliness, and harmony between mankind and nature.” With the notable exceptions of democracy and the rule of law, Hu’s speech otherwise runs the gamut of traditional Confucian values.

The recent crackdown on the tech sector in China, on the other hand, has the hallmarks of legalism. The means are legalist – the elements of the crackdown include, inter alia, “scrutinizing the initial public offerings of major internet companies, proposing broad new rules to limit overseas public listings, and introducing sweeping data security laws” as a means of bringing China’s tech sector to heel.³⁰ The intent is legalist as well – the government aims “to rein in Chinese technology firms and shore up its political power over private enterprises” more generally.³¹

Beyond Confucian principles and the legalist tradition, the legal regime reflects the advent of the Chinese Communist Party (CCP) and its 1949 victory in China’s civil war. Early in Mao’s rule, legal developments “followed the Marxist view that law should serve as an ideological instrument of politics.”³² But, even that limited concept of law gave way amidst the anarchy of the Cultural Revolution and Mao’s praise of “lawlessness.”³³ The Cultural Revolution’s cruelty and chaos resulted in “a deep ‘crisis of faith’ among the people,” who “openly questioned the benefits conferred on them by a rigid, aloof, and seemingly insensitive Communist Party.”³⁴

In response, the post-Mao Chinese leadership invoked the rule of law to mark a departure from Mao’s mercurial one-man rule and the institutional and economic disarray that followed the Cultural Revolution he led. As Yuhua Wang of Harvard puts it –

The post-Mao leadership believed that installing a reliable legal system in which there are constitutional checks on individual power would prevent political disasters such as the Cultural Revolution from happening again. More systematic legal reforms, in which building a professional, efficient, and fair legal system was the essential goal, started in the 1990s as market reforms deepened.³⁵

The process of reform began with Deng Xiaoping’s speech to the Third Plenum of the Eleventh Central Committee Congress in December 1978.³⁶ The Plenum’s response included a mandate to overhaul China’s legal system.³⁷ Peng Zhen, a close associate of Deng Xiaoping installed as chairman of the National People’s Congress Legislative Affairs Commission, seized the opportunity of his first public appearance since being purged by Mao in 1966, to “denounce[ ] the legal anarchism spawned by the Gang of Four and strongly asserted the need to restore socialist legality and the rule of law.”³⁸

That view was reflected in one of the signal pieces of legislation passed by the NPC in 1979 – a new code of criminal procedure that declared “the law is equally applicable to all citizens” and affirmed “no special privilege whatever is permissible before the law.”³⁹ That said, the broad statement of principle was limited by other language reducing the scope of judicial due process and permitting arbitrary government action in a variety of instances.⁴⁰

Further signaling a shift from the Mao era, China adopted an entirely new constitution in 1982 that incorporated basic elements of the rule of law. Article 5 of the constitution provided “No organization or individual may enjoy the privilege of being above the Constitution and the law.”⁴¹ Like the 1979 criminal procedure law, however, the protections afforded by Article 5 were limited by caveats tucked elsewhere in the constitution, including a broad escape clause stating the “exercise by citizens … of their freedoms and rights may not infringe upon the interests of the state, of society, and of the collective, or upon the lawful freedoms and rights of other citizens.”⁴²

China did, nonetheless, introduce a means of challenging agencies’ administrative decisions as part of its Administrative Litigation Law (“ALL”), which was enacted in 1989, three years into the negotiations on China’s eventual accession to the WTO.⁴³ In the ensuing decade, Chinese citizens made active use of the new rules to challenge agency action. According to Vice-Chief Justice Li Guoguang of the Supreme People’s Court, Chinese courts heard nearly 600,000 cases involving judicial review of agency action in that timeframe, with the plaintiff’s prevailing in 40 percent of those decisions.⁴⁴

The process of legal reform continued throughout the 1990s as the WTO accession negotiations ground toward their conclusion. In 1996, President Jiang Zemin reinforced the commitment made in Article 5 of the constitution, promising the Party and the state would rule in accordance with the rule of law.⁴⁵ Jiang’s promise was later codified as part of China’s constitution in 1999 as the accession negotiations approached their end.⁴⁶

Premier Zhu Rongji similarly emphasized the need for progress toward the rule of law in statements contemporaneous with the negotiations over China’s accession. In remarks during a 1992 high-level inspection tour of Guangdong, Zhu indicated China had yet to “guide[ ] all economic activities onto the path of rule of law,” leaving too much room for arbitrary “interference with enterprises.”⁴⁷ Similarly, in the area of finance, Zhu emphasized in 1995 the need for the impartial application of the law in terms of financial oversight, warning, “If finance doesn’t get on track and recognize the rule of law, there won’t be any order in the entire national economy.”⁴⁸

Thus, just like China’s reform of state-owned enterprises and its shift toward a greater reliance on markets to organize economic activity, progress toward the rule was significant, if incomplete. China had created what Professor Randall Peerenboom refers to as a “thin” version of the rule of law.⁴⁹

By the time of the final negotiation of China’s protocol of accession late in the 1990s, the direction of both economic and legal reform was evident to China’s interlocutors in the WTO and persisted through China’s accession in 2001. Jiang and Zhu’s successors, President Hu Jintao and Premier Wen Jiabao, continued the reform effort in the years following China’s WTO accession.

The continuing overhaul of China’s legal regime took a substantial step forward in 2004 with the national people’s Congress approval of thirteen amendments to the constitution.⁵⁰ Those amendments made general commitments to human rights and private property, although they did not limit the government’s ability to repress speech or public protests deemed inimical to national security.⁵¹

The “partial withdrawal” by the party allowed “the development of a ‘rule of law with Chinese characteristics,’” as Jiang had promised.⁵² As one commentator notes, “it is no exaggeration to state that, across the span of more than a century, Chinese citizens had not enjoyed such a degree of legal protection and security,” despite the caveat that the state might intervene where its “core interests” were at stake.⁵³

Reforms in the legal regime led Chinese citizens to make use of the courts to enforce their rights. While they were often disappointed, the outcomes galvanized social protests, which not infrequently led to significant concessions on the government’s part.⁵⁴ These “mass incidents” led to revised legal and regulatory decisions and further amendments to the law itself.⁵⁵

What that suggests is progress toward the rule of law continued well into the Hu and Wen era in the years immediately following China’s accession to the WTO. But the process of reform overall began to slow as conservative forces within the CCP sought to limit further change. That period coincided with the rise of the so-called “princeling generation” (the sons and daughters of the early leaders of the CCP) to leadership positions within the party and the Chinese economy.⁵⁶ In addition to jockeying for leadership positions in the Party hierarchy and state-owned enterprises, the princelings, unsurprisingly, resisted reform that diminished their privilege and position.⁵⁷

While styling himself as a reformer, Xi Jinping has proved as resistant to further reform as any of the other princelings. In sharp contrast to Deng, Jiang, and Zhu, Xi pursued retrenchment, rather than reform, with the state playing an increasing, rather than diminishing, role in the economy and the lives of Chinese citizens.⁵⁸ Under Xi, China has witnessed greater state intervention in the economy and the consolidation and reinforcement of state-owned enterprises relative to the private sector.⁵⁹ In terms of economic policy, the China of today is not the China that joined the WTO two decades ago.

The same holds true in terms of China’s legal regime. As noted at the outset, Xi has pursued a vision of “socialist rule of law with Chinese characteristics” fundamentally inconsistent with Jiang Zemin’s 1997 vision.⁶⁰ Toward that end, the Central Committee of the CCP recently adopted a five-year plan to establish the rule of law in China consistent with “Xi Jinping Thought.”⁶¹

The overall theme of the plan reinforces Elizabeth Economy’s impression of Xi and China’s “neo-Maoist moment.”⁶² The plan summarizes Xi’s thoughts on the rule of law as “[s]trengthening the CPC’s centralized and unified leadership, ‘scientific legislation’, strict law enforcement, fair trials, a law-abiding population.”⁶³ Xi plainly “appreciates the legitimating power of law,” regularly promising “law-based governance,” even while strengthening the CCP’s “absolute” control over the legal regime.⁶⁴ Notably absent are concepts like an independent judiciary or the principle of separation of powers, which China’s leadership regards as “erroneous western thought.”⁶⁵

From the perspective of western legal tradition, Xi’s formulation misstates the rule of law, which entails “meaningful restraints on the state and individual members of the ruling elite.”⁶⁶ To those familiar with China’s long legal tradition, the summary will nonetheless sound familiar – it represents rule by law, rather than the rule of law.

With that in mind, we turn to the WTO implications of Xi’s “counter-reformation.”

III The WTO’s Role and the Concept of Nullification and Impairment

At a distance of twenty years, it is easy to forget how significant China’s concessions actually were. To join the WTO, China assumed the obligations of more than twenty existing multilateral agreements; reduced tariffs substantially on industrial and agricultural goods; liberalized its service sector significantly; consented to the creation of special safeguard mechanisms for the benefit of industries in other WTO member countries; and undertook systemic reforms designed to promote transparency, predictability, and fairness in commercial dealings.⁶⁷

Critics of China’s WTO accession rarely acknowledge the extraordinary effort the Chinese government undertook to ensure compliance with China’s protocol of accession and the underlying WTO rules.⁶⁸ In addition to the substantive changes to China’s legal regime necessary to comply with the WTO rules and China’s protocol of accession, China also agreed to make a series of significant systemic reforms that bear directly on its commitment to the rule of law.⁶⁹ Those changes, as implemented, imposed limits on the Chinese government as a matter of domestic, as well as international, law.⁷⁰

Just as important, however, China’s economic reforms expanded the contestability of its market, and Jiang and Zhu’s commitment to expanding the rule of law promised greater certainty of market access, ensuring the bargain reached at the WTO negotiating table, rather than intervention or favoritism by the Chinese government, would determine market outcomes. In the absence of those reforms, China’s WTO trading partners would have asked for stronger explicit guarantees as part of the protocol of accession.

Why does this matter? Is easy to think of the WTO as an institution – the sturdy Centre William Rappard overlooking Lac Leman in Geneva. But, by its nature, WTO represents a contract among the signatories. China’s protocol of accession offers a concrete example.

As is true of contracts in domestic law, the WTO agreements contain specific binding commitments, violation of which create legal consequences. But, again like domestic contract law, a cause of action also lies when a WTO member’s actions frustrate the purpose of the contract, even though they may not violate a specific WTO rule or trade liberalizing commitment.⁷¹

In that, the WTO is about expectations – in this instance, the expectations of market access that would reasonably accrue from China’s protocol of accession. For that reason, the acid test of China’s compliance with its WTO obligations lies not just in its adherence to the letter of WTO law, but whether its policies and practices afford the market access its WTO trading partners reasonably expected would accrue from China’s accession. In so far as it relates to the rule of law, China’s compliance depends on the extent to which it –

fosters a broader respect for the rule of law within China, a far lesser role for the state and the Communist Party in the operation of the Chinese economy, and the steady erosion of the system of guanxi – the connections that dominate both China’s politics and its commerce.⁷²

Seen in that light, Xi Jinping’s retrenchment in economic reform and his pursuit of a “socialist rule of law with Chinese characteristics” has significant implications for China’s WTO compliance. Explaining how and why requires an understanding of the concept of nullification and impairment embodied in Article XXIII of the General Agreement on Tariffs and Trade 1994 as interpreted by subsequent dispute settlement panels and the WTO Appellate Body.

The WTO rules allow for two types of claims in dispute settlement. One cause of action lies in clear violations of the rules.⁷³ The other allows for a claim of “nullification and impairment” when a member’s actions frustrate the bargain the parties reached through negotiation regardless of whether the actions violate specific WTO rules or commitments.⁷⁴

In the relevant part, Article XXIII provides –

1. 1. If any contracting party should consider that any benefit accruing to it directly or indirectly under this agreement is being nullified or impaired or that the attainment of any objective of the agreement is being impeded as the result of …

   1. b. the application by another contracting party of any measure, whether or not it conflicts with the provisions of this agreement …

the contracting party may, with a view to the satisfactory adjustment of the matter, make written representations or proposals to the other contracting party or parties which it considers to be concerned.⁷⁵

The purpose of Article XXIII:1(b) is “to protect the balance of concessions under GATT by providing a means to redress government actions not otherwise regulated by GATT rules that nonetheless nullify or impair a Member’s legitimate expectations of benefits from tariff negotiations.”⁷⁶ In that, Article XXIII does no more than vindicate the core principle of international treaty law – pacta sunt servanda – the obligation to implement a treaty in “good faith.”⁷⁷

Drawn from to work of the League of Nations on international trade in the 1920s and bilateral trade agreements of the 1930s,⁷⁸ the provision of “non-violation nullification and impairment” formed a part of the originally suggested charter of the International Trade Organization and, ultimately, Article XXIII of the GATT 1947.⁷⁹ The clause satisfied the recognized need for a “more general provision which would address itself to any other government action that produced an adverse effect on the balance of commercial opportunity.”⁸⁰

As explained by Frieder Roessler, former Director of the GATT’s Legal Affairs Division, and his colleague at the Advisory Centre on WTO Law, Petina Gappah –

The possibility of bringing complaints relating to perfectly legal measures was introduced into the GATT because its founders realized that the intended effect of a tariff negotiation could be easily frustrated by measures that the GATT did not regulate … As the GATT did not contain any substantive commitments on such internal measures, a procedure for the adjustment of tariff concessions following the introduction of such measures was required. The purpose of Article XXIII:1(b) was to provide such a procedure.⁸¹

Although non-violation nullification impairment disputes have proved rare, the decisions in those cases have featured prominently in GATT and WTO jurisprudence. The first non-violation dispute, a Chilean action raising concerns with respect to Australian subsidies affecting ammonium sulfate, arose shortly after the GATT’s inception and established the basic elements of a non-violation cause of action.⁸²

Australia had granted war-time subsidies to local distributors for the purchase of fertilizers, including sodium nitrate fertilizers exported by Chile. The subsidies remained in force when, in 1947 as part of the negotiations leading to the launch of the GATT, Australia granted a tariff concession to Chile affording Chilean exports duty-free treatment. When Australia subsequently removed the subsidy on Chilean fertilizer, while leaving the subsidy to competing products in place, it created a competitive advantage for suppliers of the competing goods.

The panel report found in favor of Chile, explaining nullification or impairment existed “when the action of the Australian government … resulted in upsetting competitive relationship” between Chile’s exports and the competing fertilizers, an action which “could not reasonably have been anticipated but the Chilean government, taking into consideration all pertinent circumstances and the provisions of the General Agreement” at the time it was negotiated.⁸³

The panel based its decision on the need to maintain the balance of advantages achieved at the negotiating table.⁸⁴ Professor Robert Hudec explained the panel’s rationale in the following terms –

The purpose of the nullification impairment remedy is to preserve the balance of the original exchange of values. If some new commercial disadvantage measure can be foreseen, at the time of negotiations, the country receiving concessions is able to discount the possibility in advance by paying a lesser value for the concessions affected. If that is so, then the actual occurrence of the foreseen disadvantage will not upset the balance, for it will already have been taken into account. Conversely, if the new commercial disadvantage cannot be anticipated, the country receiving the concessions is more likely to pay full value and thus suffer an imbalance when the commercial advantage is later reduced.⁸⁵

Subsequent litigation under both the GATT and WTO followed the same logic. In the EEC – Oilseeds dispute, the United States complained European Economic Community (“EEC”) subsidies afforded producers and processors of oilseeds nullified or impaired tariff concessions previously granted American oilseed exports by the EEC as part of the 1960 Dillon Round of GATT negotiations.⁸⁶ The panel endorsed the rule established in the Australian ammonium sulfate dispute, affirming that nullification or impairment resulted when benefits reasonably expected to accrue from previous negotiations were undercut by unforeseen actions or measures of another party.⁸⁷ Following up on its earlier decision, the Oilseeds panel also held that complainants in non-violation cases need not demonstrate an actual impact on levels of trade to prove their case, finding “the subsidies concerned had impaired the tariff concessions because they upset the competitive relationship between domestic and imported oilseeds, not because of any effect on trade flows.”⁸⁸

The panel report in Japan – Film, the first non-violation complaint under the WTO dispute settlement rules, similarly found nullification and impairment occurred when unforeseen actions by one WTO member designed to “strengthen the competitiveness of certain distribution or industrial sectors through non-financial assistance” undermine benefits reasonably expected to accrue from prior negotiations.⁸⁹ The United States had complained that a series of actions by the Japanese government nullified or impaired the benefits of tariff concessions previously granted on black and white and color photographic film and paper.⁹⁰ Those actions included the creation of an exclusive distribution sector, restrictions on the growth of large stores, and restrictions on the use of sales promotions.⁹¹ While the panel found the United States failed to satisfy its burden of proof, it emphasized that non-trade measures such as those raised by the United States could nullify or impair benefits the United States reasonably expected to accrue from previous negotiations.⁹²

The logic established in the panel decisions cited above applies with equal force to Xi Jinping’s retrenchment from economic reform and his abandonment of progress toward the rule of law. China made its initial request to accede to the GATT in 1986, in the midst of Deng Xiaoping’s push for economic reform and barely four years after the introduction of China’s new constitution in 1982.⁹³ The negotiations took place against the backdrop of Deng’s reforms and those of his successors, Jiang Zemin and Zhu Rongji, including Jiang’s pronouncement at the 14th National Congress of the Communist Party identifying a “socialist market economy” as the goal of China’s reforms.⁹⁴

The negotiations, furthermore, did not conclude until a decade after significant changes were made in China’s legal regime, such as the introduction of judicial review of agency action. Reinforcing those reforms, China agreed in the final protocol of accession to ensure the impartial administration of justice.⁹⁵ It agreed, as well, to introduce a judicial review of “all administrative actions relating to the implementation of laws, regulations, judicial decisions and administrative review rulings of general application” under certain aspects of its trade laws and include the opportunity for appeal to the Chinese courts.⁹⁶

With that as context, China’s WTO trading partners had reason to expect that China would continue on the path toward economic and legal reform. They could not reasonably have foreseen Xi’s resurrection of Mao-like one-man rule or his appeal to a mix of Marx, Mao, and Confucianism in lieu of the rule of law. His consolidation and reinforcement of state-owned enterprises have fundamentally altered the basis of competition in a number of industries relative to the conditions that prevailed at the time of accession. The inability of the government under Xi to curtail government violations of private property rights has made doing business far more uncertain. Xi’s actions (or inaction) have made significant parts of the Chinese market less contestable than China’s trading partners could have foreseen at the time of China’s accession. And Xi’s efforts to erode even the thin version of the rule of law that previously prevailed has cast a pall of uncertainty over access to the Chinese market.

To make the argument more concrete, consider the economic effect of the increasing subsidies that both the national and local governments in China have bestowed on select industries and enterprises during Xi’s tenure. Subsidies are usually decried as a benefit to China’s exporters that distorts trade and injures industries in the importing country. But those same subsidies are the equivalent of tariffs in terms of the protection they afford local Chinese companies in their home market. The increased subsidies offered under Xi’s aegis undercut China’s tariff bindings – the most basic commitment China made as a part of its accession.

Xi’s abandonment of reform and retrogression in terms of the rule of law can, as a consequence, quite fairly be said to have nullified or impaired China’s trading partners’ reasonable expectation of market access. Indeed, it is highly likely the WTO membership would have rejected China’s request for accession in the absence of the reforms Xi has unwound. At a minimum, China’s trading partners would have bargained for more in the way of rules guaranteeing market access, ensuring it is determined by price and quality, rather than guanxi and connections to the Zhongnanhai in Beijing.

China cannot, moreover, claim it failed to appreciate its obligation to maintain the contestability of its market. Not only is the claim of nullification and impairment plainly set out in Article XXIII, but the negotiation of China’s protocol of accession took place against the backdrop of high-profile litigation over the issue between the United States and the European Union and the United States and Japan.⁹⁷ The legal standard of “reasonable expectations of market access” played a core role in both of those high-profile cases.⁹⁸

In sum, thinking in terms of nullification and impairment casts the question of China’s compliance in an entirely different light. The question becomes whether the Chinese market is more contestable today than it was when China acceded to the WTO. Considering the changes President Xi has made to the Chinese economy over the past ten years, the answer is clearly no – Xi’s retrenchment on economic and legal reform has led to a far less open and contestable market and less certain market access.

IV Conclusion

I am under no illusion that General Secretary Xi or the rest of the current Chinese leadership would currently be inclined to return to the path of reform. But political currents do change. Should Xi and the CCP leadership confront growing demands in China for a new era of reform, the prospect of facing a WTO dispute settlement case that asserted Xi’s retrenchment had nullified and impaired the benefits China’s trading partners reasonably expected would accrue from China’s accession could offer the Chinese leadership a reason to pursue reform once again.

As a matter of trade diplomacy, the wise thing for China’s trading partners to do would be to lay the groundwork – developing the legal and economic basis for a claim of non-violation nullification and impairment – to discuss with their Chinese counterparts. As a part of that process, China’s trading partners should make clear what their expectations are in terms of solution (i.e., what it would take on China’s part to ameliorate the injury caused by its measures or, alternatively, the “compensation” in terms of trade concessions they believe are due).

China’s trading partners should make clear their preference for reform, rather than concessions, while recognizing Xi and his generation are unlikely to take that path, at least initially. But China confronts challenges of its own that only economic and legal reform can fundamentally address. The aim of China’s trading partners should be to open the door China’s leaders must eventually walk through. While making China’s own challenges more tractable, returning to the path of reform would go some considerable distance toward addressing the concerns raised by China’s trading partners. That alone would serve China’s foreign policy interests by removing an already boiling pot from the stove.