Trade
China’s new Foreign Investment Law sticks to the script
Author: Atharva Deshmukh, LSE and Pranav Bafna, ILS Law College Pune
The old Chinese saying to cross the river by feeling the stones offers insight into China’s approach to foreign investment and the global economic system. Ever since the high tide of foreign investors hit China in the late 1980s, China has frequently ‘felt the stones’ of globalisation, adjusting its balance through its regulatory infrastructure, most recently changed with its new Foreign Investment Law.
The late 1990s were dominated by negotiations over China’s accession to the World Trade Organization (WTO). The Chinese Communist Party’s (CCP) authority became subject to international legal scrutiny. The reformist faction of the CCP led by Jiang Zemin and Zhu Rongji saw the WTO as an opportunity for future reform and rallied to attract foreign investors, carefully retaining Deng Xiaoping’s vision of ‘socialism with Chinese characteristics’.
Chinese regulations evolved in response to this new political reality. The ‘Three Represents doctrine’ finally recognised the ‘productive forces’ of the market. The foundations of a modern commercial legal system were laid down through commercial statutes pertaining to contracts, companies, civil procedures and securities.
These reforms kicked off a legendary era of high growth. Real GDP growth rates were north of 10 per cent for five years. Between 2002 and 2007, exports grew at 30 per cent annually. The real estate market was booming fuelled by rising GNI per capita which grew from US$3500 in 2002 to US$6830 in 2007.
Foreign interest in China also surged. Foreign-owned enterprises accounted for 28 per cent of China’s national industrial output prior to the WTO accession. By 2003, this figure had increased to 36 per cent.
From the get-go, China’s primary objective behind attracting foreign direct investment (FDI) was generating employment. China expected its WTO accession would add roughly 10 million jobs to the Chinese economy if growth expanded by 2.9 per cent annually. Until the promulgation of the Labour Contract Law in 2008, there was bearish pressure on labour costs with firms saving 20–30 per cent on their labour bill by omitting social insurance payments.
A relatively unregulated labour market attracted FDI from the global manufacturing sector, accounting for more than 60 per cent of incoming FDI during this period.
China’s desire to attract and retain foreign technology drove the evolution of its market entry legislation. The Chinese government only recognised certain forms of commercial partnerships such as equity joint ventures, contractual joint ventures and wholly-owned foreign enterprises, with joint ventures (JVs) quickly becoming the mode of choice. These partnerships allowed investors to hedge their risk while benefitting from essential local expertise. By 2006, 49 per cent of foreign investors entered China through JVs.
The geographic spread of FDI has also changed over time. China’s coastal regions, home to its pioneering Special Economic Zones (SEZs), were the first and greatest benefactors of FDI. By 2011, SEZs in coastal areas accounted for 22 per cent of China’s GDP, 45 per cent of FDI and had generated 30 million jobs.
All these achievements adhered to China’s broader political vision — to attract foreign capital by offering lower production costs, and in doing so expand employment and access to technology.
Chinese leaders solidified their belief in the relative superiority of the ‘Chinese model’ by 2008. In 2012, Xi Jinping took over Chinese leadership from Hu Jintao. Xi Jinping has two political streaks: the reformist and the nationalist. The reformist accords great value to higher rates of innovation and technological progress. The nationalist is geared towards restoring China’s lost glory — his ‘Xi Jinping thought’ touts the ‘great rejuvenation’ of China’s economic might and military prowess.
China’s sprawling metropolises became a reflection of China’s progress after 2008. They housed a burgeoning middle class with rapidly rising incomes. Consumer goods sales grew from under US$2 trillion in 2008 to roughly US$5 trillion by 2019. Urban discretionary spending increased by 9 per cent between 2010–2014.
FDI consequently pivoted toward domestic demand as China’s comparative advantage became less entwined with lower production costs. This transformed the sectoral composition of foreign investment as manufacturing declined as a share of FDI, while technology, IT services, aerospace, transportation and…
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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