Trade
The resurrection of state capitalism in China
Authors: Weihuan Zhou, UNSW, Henry Gao, SMU and Xue Bai, UNSW
While state sectors remain significant in the economies of many countries, China’s state-owned enterprises (SOEs) continue to generate the most controversy. Key commentators have noted that Chinese state capitalism has continued to strengthen since the launch of a new stage of SOE reforms in the Third Plenum of the 18th Party Congress in November 2013. This has provoked discussions on the need for revamping the rules of the WTO, which is now a central issue in the ongoing US–China trade war and subsequent negotiations.
As an integral element of China’s economic reforms launched in 1979, SOE reform has come a long way. While many SOEs were on the brink of bankruptcy at the beginning of the reform period, in the years since they have become bigger, stronger and more profitable. Many SOEs are now leading players in key sectors and rank highly not only domestically, but also in the international league tables.
Before the current round of reform began in 2013, a number of achievements were made in previous periods of reform. First, operational autonomy was granted to SOEs from 1979–1986, followed by delegation of authority to managers from 1987–1992. SOE privatisation, corporatisation and modernisation occurred from 1993–2002. The establishment of the State-owned Assets Supervision and Administration Commission (SASAC) in 2003 preserved and expanded state assets and spurred the selection of ‘national champions’ out of the large pool of SOEs, especially in strategic sectors.
By early 2013, both the number and market share of SOEs had shrunk while the private sector had grown at a phenomenal pace. At the same time, however, the national champions became more significant and influential in the economy.
The current round of reform since 2013 appears to be designed with competing objectives in mind:
On the one hand, Chinese leaders made commitments to deepen SOE reform through a host of measures, including better classification of SOEs, further improvement of corporate management and governance, ownership diversification, restructuring and reorganisation. These measures aimed at further integrating SOEs into a competitive market, with only a limited number of them serving government or public functions.
On the other hand, the restructuring and reorganisation boosted the power of many SOEs, which are among some of the world’s largest companies. The mixed ownership reform has been implemented in a way that promotes state capital investment in those private entities in strategic industries, through the backing of giant SOEs emerging from the restructuring and reorganisation. Moreover, the corporate governance reform significantly strengthened the role of the Party in SOEs through the creation of Party committees with major decision-making power in the boards.
This is a reform program heading in a direction that strengthens rather than weakens state capitalism.
Tighter control of SOEs by the Party-state is not necessarily problematic, at least not under the rules of the WTO. However, combined with other factors, such control could and often does result in anti-competitive effects, as SOEs may not behave like private firms but pursue political or public policy goals as directed by the Party-state.
These problems are further exacerbated by China’s unique economic model which treats SOEs as the primary economic agents of the state and the main instrument for implementing industrial and other national policies. Frequently, large SOEs that are already market leaders individually are merged by the state to create behemoth national champions, creating acute antitrust concerns. While China’s Anti-Monopoly Law is supposed to be administered equally between SOEs and private firms, more favourable standards are applied to SOEs, which often receive unconditional clearance by the merger review agency. For example, when assessing the concentration of SOEs, national interests and national industrial policies are also considered, allowing for more leniency in merger reviews.
While SOE mergers are often motivated in the national interest rather than the desire for market dominance, other firms in the same sectors often become collateral damage in such ambitious campaigns and the consequences are well documented. They also raise difficult problems for foreign competition authorities, which have to grapple with issues such as whether Chinese SOEs should be treated as a single entity controlled by the Party-state. In addition to competitive concerns, SOEs…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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