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2018 | OriginalPaper | Chapter

How China Did not Transform into a Market Economy

Author : Jorge Miranda

Published in: Non-market Economies in the Global Trading System

Publisher: Springer Singapore

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Abstract

China’s remarkable economic performance since the process of economic reforms began in 1978–79 is described by some as involving a transformation into a market economy. This characterization, while appealing, is inaccurate. What China did was to modernize its non-market economy by re-creating markets, abandoning central planning, and introducing some degree of privatization and opening to foreign trade and investment. Because China’s revitalized non-market economy is export-dependent, policies have been engineered to provide Chinese producers with artificial cost advantages consisting of heavily distorted factor, raw material and energy pricing. The Chinese Government also regulates industry conduct {regulation of industry conduct} to prevent “excessive competition” amongst Chinese producers. Finally, to assure that China’s industrial structure is sufficiently concentrated on high-value goods, the Chinese Government nurtures sectors, products and even production processes that it views as strategic or involving “cutting edge” technologies through development programs which result in further cost assistance, the regulation of market entry and scale of production, and even the provision of subsidies. So China has become an economic success story, but a market economy it is not.

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previous chapter China’s Long March to Market Economy Status: An Analysis of China’s WTO Protocol of Accession and Member Practices

next chapter The Termination of the Grandfather Clause in China’s Accession Protocol and the Normal Value Construction After Fifteen Years of Accession

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Essentially, PPP exchange rates allow restating national income free of currency overvaluation/undervaluation which enables appropriate cross-country comparisons of per capita incomes.

See World Bank Group, GDP per capita, https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD. World Bank data on per capita incomes on a PPP basis are available starting 1990.

Own calculations based upon World Bank data.

What to call this later-day non-market economy is the source of controversy. Some use the term “State-driven market economy”. This is an oxymoron, however, as market economies, by definition, cannot be “State-driven”.

J. Black, N. Hashimzade & G. Myles, A Dictionary of Economics 282 (3^rd ed., 2009).

“Inputs and outputs were generally not available on any market but only through the state’s material allocation system”. See Dwight H. Perkins, The Economic Transformation of China 217 (2015); “All products produced by the enterprise are subject to monopoly purchasing and marketing by the state. The enterprise’s equipment and raw materials needed for production are all provided by the state.” See Chen Jiyuan, The Planning System in China’s Industrial Reform 149 (Gene Tidrick and Chen Jiyuan, eds., 1987).

“The kind and amount of the many products the enterprise produced had nothing to do with market demand. Production was determined entirely by orders from the responsible higher authorities.” See Chen Jiyuan, id., at 152; “Annual plans set output targets that enterprises were obligated to try to surpass.” See Perkins, id., at 217; Gene Tidrick, Planning and Supply, in China’s Industrial Reform 178 (1987) (explaining that physical output was one of the targets set by the planning authorities).

“The State Price Bureau sets the price of centrally planned production, whereas a local price bureau normally controls locally allocated output.” See Tidrick, id., at 177.

“Before the state completes and issues production plans to enterprises, the enterprises have to submit requisitions”. See Tang Zongkun, Supply and Marketing, in China’s Industrial Reform 219 (1987).

“For nationally and ministerially controlled goods, supply contracts are usually signed between the producers and users at a national ordering conference held twice a year in accord with the state-allocated quotas.” See id., at 210.

“Planned import volumes were determined by the projected difference between domestic demand and supply for particular goods, with export levels being determined by the planners at levels necessary to finance the planned level of imports.” See Will Martin and Christian Bach, State Trading in China, in Thomas Cottier and Petros Mavroidis, State Trading in the Twenty-First Century 289 (1998).

In reality, the world price would be expressed in a foreign currency and would need to be multiplied times the exchange rate, E, to convert it into local currency.

Perkins notes that while China was a CPE prices not only were administratively-set but they also remained fixed for very long periods of time:

Chinese prices fluctuated in accordance with market conditions in the early 1950s, but with the introduction of central planning and the abolition of the private sector, … output prices were frozen at existing levels. For all but a few products, industrial prices remained frozen at mid-1950s levels for the next quarter century

See Perkins supra note 6, at 238.

The income or revenue that producers receive for the portion of their output that is consumed domestically (Q^D) is equal to Q^D times P^R which is shown by the first rectangle (with the forward sloping lines).

The income or revenue that producers receive for the portion of their output that is sold abroad (Q^S − Q^D) is equal to X times P^W. This is shown by the second rectangle (with the backward sloping lines).

In tabling its proposal, Czechoslovakia contended that

{i}n order to remove the difficulties caused by the application of certain standards relating to the definition of normal value contained in paragraph 1 of Article VI –which difficulties are due to the fact that no comparison of export prices with prices in the domestic market of the exporting country is possible when such domestic prices are not established as a result of fair competition in that market but are fixed by the State- the definition of normal value in paragraph 1 should be amended …

See, Article VI - Proposals by the Czechoslovak Delegation - Revision, GATT Doc. W.9/86/Rev1., (circulated on Dec. 21, 1954), at 1.

It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.

See Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 201 (1994), Interpretative Note 2 to Art. VI:I.

See Accession of Poland – Report of the Working Party, GATT Doc. L/2806 (June 23, 1967), ¶13 [hereinafter Poland Working Party Report]; Accession of Romania – Report of the Working Party, GATT Doc. L/3557 (Aug. 5, 1971), ¶13 [hereinafter Romania Working Party Report]; Accession of Hungary – Report of the Working Party, GATT Doc. L/3889 (July 20, 1973), ¶18 [hereinafter Hungary Working Party Report].

“The Working Party noted that the foreign trade of Poland was conducted mainly by State enterprises and that the Foreign Trade Plan rather than the customs tariff was the effective instrument of Poland’s commercial policy.” Further, “{i}t was agreed that in view of the nature of the foreign trade system of Poland its main concession in the negotiations for its accession to the General Agreement would be commitments relating to an annual increase in the value of imports from contracting parties”. See Poland Working Party Report), ¶¶ 7–8. Similar statements appear in Romania Working Party Report, ¶ 7, and Hungary Working Party Report, ¶ 6(b) in annexed draft protocol.

{i}f any product is imported into the territory of a contracting party from the territory of Poland in such increased quantities or under such conditions as to cause or threaten to cause serious injury to domestic producers in the former territory of like or directly competitive products, the provisions of (b) to (e) of this paragraph should apply

See Poland Working Party Report, supra note 18, ¶ 7 in annexed draft protocol; Romania Working Party Report, supra note 18, ¶ 4(a) in annexed draft protocol; Hungary Working Party Report, supra note 18, ¶ 5(a) in annexed draft protocol.

Protocol on the Accession of the People’s Republic of China, ¶15, WTO Doc. WT/L/432 (Nov. 23, 2001) [hereinafter Chinese Accession Protocol].

Id, ¶16. Interestingly, although the possibility to apply China-specific safeguard measures for 12 years after accession was much maligned in some quarters as “discriminatory” (ignoring that there was ample historical precedent of multilateral trading rules being tailored for acceding non-market economies), such measures actually were rarely applied. This is accountable only in part to self-restraint by Members, however. The author is aware of two cases where China derailed the institution of China-specific safeguard measures on the part of developing countries by threatening to subject such countries to massive trade reprisals.

Jiyuan, supra note 7, at 159.

Jiyuan, supra note 7, at 152.

Perkins, supra note 6, at 228.

Jiyuan, supra note 7, at 173.

Statement by Chinese reformer Chen Yun quoted in Barry Naughton, Growing out of the Plan: Chinese Economic Reform 1978–1993, 120 (1995).

Nevertheless, according to its Protocol of Accession to the WTO, China retained the right to continue channeling imports of tobacco, sugar, grains (including wheat, corn and rice), cotton, vegetable oils, crude oil, refined oil products (including gasoline) and chemical fertilizers through state trading companies. China also retained the right to continue channeling exports of tea, corn, rice, cotton, soybeans, silk, cotton yarn and cotton fabrics, certain minerals, coal, crude oil and refined oil products through state trading companies. See, Chinese Accession Protocol, supra note 21, at ¶ 5, Annex 2A1 and Annex 2A2. According to China’s latest WTO Trade Policy Review, imports of tobacco, sugar, wheat, corn, rice, cotton, crude oil, refined oil products and chemical fertilizers are still subject to state trading. The same applies to exports of tea, corn, rice, cotton, silk, certain minerals, coal, crude oil, and refined oil products. See, WTO Secretariat, Trade Policy Review: China – Report by the Secretariat, WTO Doc. WT/TPR/S/342 (Jun. 15, 2016), Tables 3.17 and 3.18 [hereinafter WTO 2016 China Trade Policy Review].

See Sect. 11 of this Chapter.

Importantly, around half of the privatizations of SOEs took the form of management buy-outs (“MBOs”). As in such transactions share prices were set by management, management in effect paid for SOEs what it wished to pay. See, Jie Gan, James R. Barth, John A. Tatum & Glenn Yago, Privatization in China: Experiences and Lessons, in China’s Emerging Financial Markets: Challenges and Opportunities 585 (2009); “The price of the shares acquired by managers was not set by the market mechanism, but rather decided internally through agreements”. Shanshan Li & Ningxiang Lu, The Influences of WTO Accession on China’s State-Owned Enterprises, 3 J. Bus. & Mgmt., 195 (2015). From a WTO perspective, what this means is that any subsidies previously bestowed were not completely “washed out” by privatization (in view that the new owners did not pay for the companies a sum that would reflect the outstanding benefits accruing from subsidization).

In its WTO Accession Protocol, China committed itself to eliminate price controls on tradable goods and services, except in respect of certain listed goods and services. Interestingly, there was a substantial overlap between the goods subject to state trading and those subject to price controls. See, Chinese Accession Protocol, supra note 21, ¶¶ 9.1, 9.2 & Annex 4. This list included tobacco, salt, pharmaceuticals, grains, cotton, vegetable oils, refined oil products, urea, natural gas, electricity and irrigation water, inter-alia. According to China’s latest WTO Trade Policy Review, tobacco leaves, grains (except for rice and wheat), cotton and urea are no longer subject to price controls but salt, refined oil products, natural gas and electricity, inter-alia, still are. See WTO 2016 China Trade Policy Review, supra note 28, ¶¶ 3.169, 3.170, and Tables 3.15 and 3.16. Nevertheless, as explained in Sect. 6 of this Chapter, the Chinese Government maintains de facto price controls on goods and services unlisted in Annex 4 through multiple means including ad hoc direct regulation and alleged enforcement actions under China’s competition law.

That the Chinese Government manages to provide Chinese producers with “factor prices” and prices of key raw materials and energy lower than elsewhere in the world is not figurative. In Deloitte’s 2016 Global Manufacturing Competitiveness Index, China is ranked as the top performer in terms of cost competitiveness. In fact, in cost competitiveness China received a near perfect score of 96.3 out of 100. See Deloitte, 2016 Global Manufacturing Competitiveness Index (2016), https://www2.deloitte.com/global/en/pages/manufacturing/articles/global-manufacturing-competitiveness-index.html, at 18, Table 6.

As pointed out in Sect. 12, what defines whether China is a market economy or not is not only the extent of intervention in markets for artificially reducing production costs but also the fact that such intervention is combined with policies that control business conduct.

Kenneth A. Reinert & Ramkishen S. Rajan, The Princeton Encyclopedia of the World Economy 198 (2009).

Alan V. Deardoff, Terms of Trade: Glossary of International Economics 217 (2006).

As explained in Sect. 6, the Chinese Government lowers the domestic price of key raw materials below the relevant world prices through export taxation.

In international trade theory, trade is a substitute for migration. Of course, in models of migration, the assumption that labor is immobile between countries is relaxed.

Peter K. Schott, The relative sophistication of Chinese exports, 53 Economic Policy 15 (2008).

Naughton, supra note 27, at 149.

Importantly, the fact that China has foreign exchange holdings of approximately US$ 3 trillion does not make China “capital-abundant” within the meaning of international trade theory because such funds have not been converted into physical capital since they are parked as reserves.

Schott, supra note 38, at 9.

G. M. Caporale, Anamaria Sova & Robert Sova, Trade flows and trade specialization: The case of China, 34 China Economic Rev. 267 (2015).

For instance, in 2016 the deposit interest rate net of the consumer inflation rate was −0.50%. It was also negative in 2010 and 2011 and although positive in 2012–2015, it fluctuated between 0.10 and 0.75%. Importantly, this policy of financial repression is of a structural nature and predates “quantitative easing” by decades. By way of illustration, in 1993, 1994 and 1995 the deposit interest rate net of the consumer inflation rate was −4, −13 and −6%, respectively. See, International Monetary Fund, International Financial Statistics, for data on both China’s deposit interest rate and the consumer inflation rate.

For a detailed inventory of China’s capital controls, see, International Monetary Fund, Exchange Rates and Exchange Rate Restrictions, Annual Report 2016, at 767–781.

International Monetary Fund, The People’s Republic of China: Staff Report for the 2016 Article IV Consultation, at 55.

International Monetary Fund, International Financial Statistics. November 2017 is the more recent month for which data on Chinese deposit interest rates are available at the time of writing (February 2018).

Independent observers concur in that the anchoring of the deposit rate at between 1–2% reflects “window guidance” by the People’s Bank of China. See, Diego Anzoategui et al., Financial Distortions in China: A General Equilibrium Approach 4 (International Monetary Fund, Working Paper No. WP/15/274, 2015).

Grace Zhu & Chao Deng, Data from Wind Info cited in Why Chinese are Diverting Their Consumer Loans to Real Estate, The Wall Street Journal (Oct, 2, 2017), https://www.wsj.com/articles/why-chinese-are-diverting-their-consumer-loans-to-real-estate-1506771000.

Li-Wen Lin and Curtis J. Milhaupt, Bonded to the State: A Network Perspective on China’s Corporate Debt Market 20–24 (Columbia Law & Economics Working Paper No. 543, 2016).

Miles Livingston et al., Are Chinese Credit Ratings Relevant? A Study of the Chinese Bond Market and Credit Rating Industry, 87 J. Banking & Fin. 224 (2018). The ratings AAA, AA+ and AA are the highest that can be obtained and indicate capacities to meet financial obligations ranging from extremely strong to very strong. See Standard & Poor’s, Guide to Credit Rating Essentials, https://www.spratings.com/documents/20184/774196/Guide_to_Credit_Rating_Essentials_Digital.pdf, at 13.

Wojciech Maliszewski et al., Resolving China’s Corporate Debt Problem 15 (International Monetary Fund Working Paper No. WP/16/203, Oct. 2016).

China’s ‘national team’ owns at least 6 per cent of the mainland stock market as a result of the massive state-sponsored rescue effort this year to prop up share prices following the summer equity market crash. One member of the team, China Securities Finance Corp, the main conduit for the injection of government funds, owned 742 different stocks at the end of September, up from only two at the end of June.

See Gabriel Wildau, China’s ‘national team’ owns 6% of stock market, Financial Times (Nov. 25, 2015), https://www.ft.com/content/7515f06c-939d-11e5-9e3e-eb48769cecab.

Hang Seng is a Hong Kong-based commercial bank that has developed a number of indexes for the Chinese financial market. The term “A shares” stands for shares of Chinese companies listed on either of the two stock exchanges in mainland China. The term “H shares” stands for shares of Chinese companies listed on the Hong Kong stock exchange. A shares can only be purchased by Chinese nationals, Chinese institutions, or by foreign investors operating through certain investment vehicles. By contrast, H shares can be purchased by all investors, regardless of nationality. The two kinds of shares carry the same voting and cash flow rights. See, William T. Allen and Han Shen, Assessing China’s Top Down Securities Market in Capitalizing China (Joseph P. H. Fan and Randall Morck, eds., 2012), at 154. The index has a value of 100 when the China-listed A shares trade at parity with the identical Hong-Kong listed H shares. See Hang Sang Indexes, Hang Seng Stock Connect China AH Premium Index (Nov., 2017).

For the values of the Hang Seng index from December 2009 through April 2017, see Inquiry into the status of the People’s Republic of China under the Anti-dumping and Countervailing Duty Laws – Comments on the treatment of the People’s Republic of China as a Non-Market Economy: Submission to the U.S. Department of Commerce by Wiley Rein LLP, March 10, 2017, at 80. The Financial Times reports the values of such index from January through December 2017. See Financial Times, Indices, https://markets.ft.com/data/indices/tearsheet/summary?s=HSCAHPI:HKG.

See Financial Times, Indices: Hang Seng China AH Premium Index, https://markets.ft.com/data/indices/tearsheet/summary?s=HSCAHPI:HKG.

The current hukuo system is related to the access to a variety of public service and welfare programs, such as children education, medicare, housing subsidies, social security coverage, and so on … In current China, most of the public service and welfare benefits are attached to a person’s hukuo status, rather than the physical location.

See Yang Song, What should economists know about the current Chinese hukuo system? 29 China Econ. Rev., 205 (2014); Kam Wing Chan, The Chinese Hukou System at 50, 50 Eurasian Geography & Econ. 209 (2009) (“… the extension of urban social and economic benefits to migrants remains largely nonexistent … ”).

Yiping Huang and Kunyu Tao, Factor Market Distortion and the Current Account Surplus in China, 9:3 Asian Econ. Papers 22 (2010).

Id.

W. Raphael Lam et al., China’s Labor Market in the ‘New Normal’ 11 (International Monetary Fund Working Paper No. WP/15/151, 2015).

Kam Win Chan, Achieving Comprehensive Hukou Reform in China, Paulson Policy Memorandum, Paulson Institute (Dec., 2014), at 3.

Li Zhang and Xianxiang Xu, Land Policy and Urbanization in the People’s Republic of China 5–7 (Asian Development Bank, ADBI Working Papers Series No. 614, Nov., 2016).

Id., at 6.

See supra note 31.

Although coal was not listed in China’s Protocol as a product that would be kept under price controls, it has now become subject to such regime.

China has developed a new coding system for coal prices, with increasing levels of intervention to control prices as they move outside a ‘green’ zone of $70 to $80 a ton. The move follows intense volatility in global coal prices, which gained over 70% in 2016, after sharp Chinese capacity cuts collided with rebounding industrial electricity demand.

See Nathaniel Taplin, As China Extols Open Markets, Price Controls Sprout Back Home, Wall Street Journal (Jan. 25, 2017), https://www.wsj.com/articles/as-china-extols-open-markets-price-controls-sprout-back-home-1485351983.

In August 2014, it was announced that ten Japanese auto parts manufacturers had been fined for alleged collusion in the Chinese market. The fines ranged between 4 and 8% of the companies’ sales revenue in the previous year. See US-China Business Council, Competition Policy and Enforcement in China (Sep., 2014), https://www.uschina.org/sites/default/files/AML%202014%20Report%20FINAL_0.pdf, at 9.

Whether the relevant investigations were conducted while observing due process is open to question, however, because it was reported then that the “authorities have ordered foreign companies not to challenge the investigations, bring lawyers to hearings, or ask for help from their home governments … tactics {that the European Chamber of Commerce in China} described as ‘intimidation’”. See, Rose Yu & Megumi Fujikawa, China Fines Japan Auto-Parts Makers $200 Million, Wall Street Journal (Aug. 20, 2014) https://www.wsj.com/articles/china-fines-japan-auto-parts-makers-200-million-1408530257. Seemingly to prevent similar actions by the Chinese antitrust authorities, BMW, Chrysler and Daimler announced at the time that they would reduce prices of the auto parts they sold in China by between 15 to 20%. See, Melissa Lipman, Toyota, BMW Face Chinese Auto Part Antitrust Probe, Law360 (August 8, 2014), https://www.law360.com/articles/565462/toyota-bmw-face-chinese-auto-part-antitrust-probe.

Since domestic producers would not be able to pass-on the export tax to foreign buyers (because they would price themselves out), they would have to absorb it fully.

The proposition that, in the event of an export tax, domestic prices should fall below the world price proportionally to the export tax rate is also well-established in the literature. See, for instance, Dennis Appleyard et al., International Economics 297–298 (2008); Giancarlo Gandolfo, International Economics I 125–126 (1987); Thomas Greenes, International Economics 177–178 (1984); Robert M. Dunn Jr. & John Mutti, International Economics 151–152 (2000); Bo Sodersten & Geoffrey Reed, International Economics 203–204 (1994); Beth Yarbrough & Robert Yarbrough, The World Economy: Trade and Finance, 199 and 203 (1988).

As explained earlier, in theory comparative advantage derives exclusively from endowments of “factors”, such as capital, labor and land, because (absent export taxation) the price of raw materials would be the same everywhere in the world.

For a graphical presentation of the effects of an export tax in a “small” economy, see, for example, Sodersten and Reed, supra note 67, at 203–204. For a graphical presentation of the effects of an export tax in a “large” country, see, for example, Appleyard et al., supra note 67, at 297–298.

See Chinese Accession Protocol, supra note 21, ¶ 11.3 & Annex 6. In both China — Raw Materials and China-Rare Earths, China was found to be circumventing its WTO commitments as regards export taxation by applying export duties to products not included in Annex 6 of its Protocol. Both findings were unappealed. See Panel Report, China — Measures Related to the Exportation of Various Raw Materials, ¶ 8.2(a), WTO Doc. WT/DS394/R, WT/DS395/R and WT/DS398/R (adopted Feb. 22, 2012) (“The Panel finds that the application of export duties to certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon metal and zinc … is inconsistent with Paragraph 11.3 of China’s Accession Protocol”), and Panel Report, China — Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, ¶ 8.6.a, WTO Doc. WT/DS431/R, WT/DS432/R and WT/DS433/R (adopted Aug. 29, 2014) (“The Panel finds that the export duties that China applies to various forms of rare earths, tungsten, and molybdenum … are inconsistent with Paragraph 11.3 of China’s Accession Protocol”). In both cases, China notified the Dispute Settlement Body that it had come into compliance with WTO rulings by removing all of the challenged export taxes.

Article XI of GATT bans export quotas although it contemplates certain exceptions to this ban. China applies export quotas on a number of products including what is described in China’s notifications as “refined oil”, although it is not clear in such notifications whether “refined oil” would cover naptha which can serve as feedstock for chemical products. If so, producing petrochemicals in China would be cheaper than it would otherwise be. China justifies such export quotas by reference to the exceptions provided in Article XI. See World Trade Organisation, 2016 China Trade Policy Review, supra note 28, at 75, Table 3.11 and Committee on Market Access, Notification Pursuant to the Decision on Notification Procedures for Quantitative Restrictions, WTO Doc. G/MA/QR/N/CH/2 (circulated on Apri. 24, 2015), at 6.

Xu Yan, Reforming Value Added Tax in Mainland China: A Comparison with the EU, 20(1) Revenue L. J. 12–13 (2011).

Id., at 16, fn 87 (“Normally, most taxpayers must pay VAT for VAT goods first and then they can claim VAT refunds from the tax authorities based on the Exported Goods Declaration certified by Customs”).

Chien-Hsun Chen, et al., The effect of export tax rebates on export performance: Theory and Evidence from China, 17 China. Econ. Rev. 228 (2006); Piyush Chandra and Cheryl Long, VAT rebates and export performance in China: Firm-level evidence, 102 J. Public Econ. 15 (2013).

Chandra & Long, id., at 13. (“… a VAT system where exports do not receive complete rebates tends to an act as an export tax and hence reduces trade volume …”); Julien Gourdon et al., Export management and incomplete VAT rebates to exporters: the case of China, 3 (FERDI Working Paper No. 117, 2014) (“ … incomplete export VAT rebates amount to export taxes and lead to lower exports”).

Chandra & Long, supra note 74, at 15 (“ … a VAT of 17% together with a rebate of say 13% {results} in an export tax of 4%”).

World Trade Organization, Report by the Secretariat: China - Trade Policy Review, 43, ¶ 80, WTO Doc. WT/TPR/S/230 (Apr. 26, 2010).

Martin Feldstein and Paul Krugman, International Trade Effects of Value-Added Taxation in Taxation in The Global Economy 271 (Assaf Razin and Joel Slemrod, eds., 1990).

Id., at 270.

As noted above, exports of steel scrap are also subject to a de jure export tax of 40%.

Donald Ruterford, Routledge Dictionary of Economics 468 (3^rd ed., 2015).

World Trade Organization, Report by the Secretariat: China, Trade Policy Review, xiii, ¶ 24, WTO Doc. WT/TPR/S/199 (Apr. 16, 2008).

Michael Chen, The Development of Chinese Gas Pricing: Drivers, Challenges and Implications for Demand (The Oxford Institute for Energy Studies, 89 OIES Paper: NG, July, 2014), at 6.

Boqiang Lin and Zhujun Jiang, Estimates of energy subsidies in China and impact of energy subsidy reform, 33 Energy Economics 277, Table 1 (2011).

Biggins, Lacy, Shapiro & Company, LLC and Tractus Asia Limited, A Comparison of U.S. & China Electricity Costs (2016), http://blsstrategies.com/docs/news/News_181.pdf, at 3 [hereinafter BLS & Co.].

Michael G. Pollitt et al., Reforming the Chinese Electricity Supply Sector: Lessons from International Experience 11 (Energy Policy Research Group at Cambridge University, Working Paper No. 1704, 2017).

Huang and Tao, supra note 57, at 20.

Yiping Huang and Bijun Wang, Cost Distortions and Structural Imbalances in China, 18(4) China & World Econ. 14 (2010).

Yiping Huang, Dissecting the China Puzzle: Asymmetric Liberalization and Cost Distortion, 5(2) Asian Econ. Pol’y Rev. 292 (2010).

Huang and Wang, supra note 88, at 11.

Huang and Tao, supra note 57, at 20.

WTO rules also treat as a “subsidy” the provision of a “financial contribution” by a private party that has been “entrusted or directed” to do so by a government. However, given that the relevant language has been interpreted as requiring evidence of “verbalization” of such entrustment or direction, this factual standard is difficult to satisfy in practice. See Panel Report, United States — Measures Treating Export Restraints as Subsidies, WTO Doc. WT/DS194/R (adopted Aug. 23, 2001), ¶ 8.44 (“we consider that the ordinary meaning of the words ‘entrusts’ and ‘direct’ require an explicit and affirmative action of delegation and command”).

This does not mean that a specific subsidy may not be found to co-exist with a cost distortion arising from a NME regime. This would happen, for example, where, a particular industry receives loans on preferential terms from banks that qualify as “public bodies”, independently of the fact that the non-preferential borrowing rate is lower than it would otherwise be on account of financial repression, as described above.

Surprisingly, the WTO panel that first addressed the alleged “double remedies” problem opined there was a “general proposition that at least some double remedy will likely arise from the concurrent imposition of countervailing duties and anti-dumping duties calculated under an NME methodology”. However, the panel failed to point to any factual basis for this statement. See, Panel Report, United States — Definitive Anti-Dumping Duties and Countervailing Duties on Certain Products from China, ¶ 14.75, WTO Doc. WT/DS379/R (adopted Mar. 25, 2011).

WTO 2016 China Trade Policy Review, supra note 28, ¶ 3.177.

See Markus Taube and Peter in der Heiden, China Steel Inc.- State-owned and state-run? 60 (2010), (“China’s leading steel conglomerates are basically government controlled. Among the top 20 corporations, only {two companies} are not explicitly state-owned on a majority basis”).

See European Commission, On Significant Distortions in the Economy of the People’s Republic of China for Purposes of Trade Defense Investigations, SWD (2017) 483 final/2, 20 December 2017, 404, Table 16 (showing that eight of the ten largest chemical companies are SOEs).

See European Commission, id., at 387–388 (“SOEs account for more than 50% of the total primary aluminum output”).

See THINK!DESK - China Research & Consulting, Analysis of Market-Distortions in the Chinese Non-Ferrous Metals Industry (Apr. 24, 2017), at 121–122 (“ … mass markets and applications are firmly controlled by state-owned companies like Yunnan Copper, Jiangxi Copper and Tongling Nonferrous Metals …”).

100

Own calculations on the basis of data from the International Aluminum Institute. In 2001, China’s share was only 14%.

101

Specifically, CHALCO’s return on assets was 0.46% in 2011, −17.24% in 2012, 2.15% in 2013, −44.65% in 2014, 0.43% in 2015 and 1.03% in 2016. See CHALCO’s Annual reports for 2011–2016. For instance, Aluminium Corporation of China Limited (CHALCO), 2016 Annual Results Announcement, 13 (2016), http://www.chalco.com.cn/chalcoen/rootfiles/2017/03/23/1490229844504018-1490229844506299.pdf.

102

See CHALCO Annual Reports for 2011–2016. See, for instance, id.,at 46.

103

See CHALCO Annual Reports for 2011–2016. See, for instance CHALCO 2016 Annual Report, supra note 101, at 57.

104

See CHALCO Annual Reports for 2011–2016. See, for instance CHALCO 2016 Annual Report, supra note 101, at 12; CHALCO 2015 Annual Report, http://www.chalco.com.cn/zlgfen/rootfiles/2016/04/06/1458177643704277-1459904312981014.pdf, 13.

105

See CHALCO Annual Reports for 2011–2016. See, for instance CHALCO 2016 Annual Report, supra note 101, at 67.

106

See CHALCO Annual Reports for 2011–2016. See, for instance CHALCO 2016 Annual Report, supra note 101, at 39.

107

In re Vitamin C Antitrust Litigation, No. 13-4791 (2d Cir-2016), at 1 (Brief of Amicus Curie by the Ministry of Commerce of the People’s Republic of China), United States District Court Eastern District of New York (Sep. 22, 2006).

Id.

Id., at 3.

Id., at 6.

Id., at 6.

Id., at 6.

Id., at fn 9.

Id., at 1.

In re Vitamin C Antitrust Litigation, Brief of Amicus Curie by the Ministry of Commerce of the People’s Republic of China, United States Court of Appeals for the Second Circuit (Apr. 14, 2014).

116

Silvie Cornot-Gandolphe, China’s Coal Market: Can Beijing Tame ‘King Coal’? 81 (The Oxford Institute for Energy Studies, OIES Paper: CL 1, Dec., 2014). The role of the National Development and Reform Commission in China’s economy is discussed in Sect. 11.

117

The 13^th Five Year Plan for Economic and Social Development of the People’s Republic of China 2016-2020, http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf.

118

THINK!DESK - China Research & Consulting, Assessment of the normative and policy framework governing the Chinese economy and its impact on international competition 32–35, AEGIS EUROPE (Jun. 25, 2016), http://www.euroalliages.com/data/1456161539THINK%21DESK%20study%20on%20MES%20to%20China%20-%20Executive%20summary.pdf [hereinafter Think!Desk Report].

119

Id., at 36–37.

120

The Catalogue of Industries for Guiding Foreign Investment also functions as a foreign investment law because, in addition to designating certain “industries” as “encouraged”, it identifies the industries in which foreign investment is banned and those in which foreign investment is restricted; that is, permitted only in the form of equity or contractual joint-ventures, where foreign interests can be limited to minority positions (including shares not exceeding 20% or 25%). By implication, foreign investment is unrestricted everywhere else. Importantly, the provisions of the sector-specific development policies can override the Catalogue of Industries for Guiding Foreign Investment. For instance, the steel industry is not listed in Catalogue of Industries for Guiding Foreign Investment as restricted or prohibited for foreign investment but Article 23 of the Steel Policy (further discussed in Subsection 11.3) requires majority ownership by Chinese interests.

121

Think!Desk Report, supra note 118, at 42.

122

BLS & Co., supra note 85, at 6.

123

The Steel Policy was published as Order of the National Development and Reform Commission, No. 35.

124

According to data from the World Steel Association, from 2001 through 2016 China’s share in world production of crude steel went up from 18% to 50%. In 1979, at the outset of the reform period, China’s share did not even reach 5%.

125

An excellent account of how China at an earlier point in time came to dominate world markets for steel, glass, paper and auto parts is presented in Usha Haley & George Haley, Subsidies to Chinese Industry: State Capitalism, Business Stratergy and Trade Policy.

126

Jost Wubbeke et al., Made in China 2025: The making of a high-tech superpower and consequences for industrial countries, MERCATOR INSTITUTE FOR CHINA STUDIES 19 (Dec., 2016).

127

Id., at 17.

128

Id., at 21.

129

Eva Dou, China-Backed Fund Plays Big Role in Country’s Chip Push, The Wall Street Journal (July 31, 2017) https://www.wsj.com/articles/china-backed-fund-plays-big-role-in-countrys-chip-push-1501493401.

130

Jane Perlez, Paul Mozur & Jonathan Ansfield, China’s Technology Ambitions Could Upset the World Order, The NY Times (Nov. 7, 2017), https://www.nytimes.com/2017/11/07/business/made-in-china-technology-trade.html.

131

Li Yuan, Beijing Takes Challenge to AI Chip Leaders, The Wall Street Journal (Jan. 5, 2018), https://www.wsj.com/articles/google-and-intel-beware-china-is-gunning-for-dominance-in-ai-chips-1515060224.

132

Trefor Moss, China’s Road to Electric Car Domination is Driven in Part by Batteries, The Wall Street Journal (Oct. 21, 2017), https://www.wsj.com/articles/chinas-road-to-electric-car-domination-is-driven-in-part-by-batteries-1508587203.

133

China Orders 6 Telecoms to Merge Their Assets, The NY Times (May 26, 2008), https://www.nytimes.com/2008/05/26/business/worldbusiness/26telecom.html.

134

Silvie Cornot-Gandolphe, supra note 116, at 56.

135

Lingling Wei, China Economic Plan Calls for Mergers, Public Listings by 2020, The Wall Street Journal Sept. 5, 2015, https://www.wsj.com/articles/china-reform-plan-calls-for-mergers-public-listings-by-2020-1441635645.

136

This is not meant to imply that the Chinese Government always obtains good results from its market interventions. By way of illustration, China has not managed to grow a world-class automobile industry in spite that this sector has been heavily supported for decades. In fact, it appears that, through the Made in China 2025 program, the Chinese Government now seeks to leapfrog conventional automobile technologies and achieve global dominance in electric and self-driven cars instead. Furthermore, even where the Chinese Government obtains good results from its market interventions, such interventions impose significant costs upon competitors which create frictions in the multilateral trading order. Discussing this issue is beyond the scope of this Chapter, however.

137

Again, the demand and supply schedules are completely vertical because they are unresponsive to price, as the diagram depicts a CPE.

138

As in Fig. 2, P^W indicates the world price with no tariff protection.

139

Since P^W is assumed constant, the difference between $ \text{P}^{\text{W}} \left( {1 + t^{\text{m}}_{1} } \right) $, $ \text{P}^{\text{W}} \left( {1 + t^{\text{m}}_{2} } \right) $ and $ \text{P}^{\text{W}} \left( {1 + t^{\text{m}}_{3} } \right) $ has to do exclusively with the level of import duties.

Title: How China Did not Transform into a Market Economy
Author: Jorge Miranda
Publisher: Springer Singapore
Book: Non-market Economies in the Global Trading System
Print ISBN: 978-981-13-1330-1

Electronic ISBN: 978-981-13-1331-8

Copyright Year: 2018
DOI: https://doi.org/10.1007/978-981-13-1331-8_3

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