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Party Rules Set China Apart From Global Economy
A truck moves a shipping container at Qingdao Port on January 14, 2019 in Qingdao, Shandong Province of China. (VCG/Getty Images)
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Party Rules Set China Apart From Global Economy

John Lee

Who still believes in Chimerica? The term was introduced more than a decade ago to describe the deepening economic integration between the US and China. It was seen as a symbiotic bilateral economic relationship, conferring enormous benefit to both ­nations and the world: lower costs of production and therefore increased purchasing power for all consumers; creation of new oppor­tunities based on market forces; and enhanced flow of capital, people and ideas across borders.

Many Australians charge the Trump administration with blowing up this international consensus by prosecuting an economic war against China. Some of the administration’s policies are counter-productive and it is therefore fair game. But blame must be allocated accurately and fairly. Political leaders from both sides speak frequently about the importance of the rules-based order. If we genuinely believe in it, then one ought to accept China is primarily responsible for corrupting economic globalisation.

In the theory and practice of globalisation, growing inter­dependence between economies must entail all sides competing according to a comparable set of principles for the system to endure. Beneficial outcomes are most likely when participants have similar commitments to economic liberalisation, significant separation between state and economic actors, and transpar­ency in how trans­actions are ­designed and executed.

In liberal democratic economies, there are significant restrictions on the extent to which gov­ernments can force firms to do their bidding, and institutional limits on the extent to which firms make suboptimal commercial deci­sions to fulfil national objectives set by the ruling party or the ­government.

China has introduced its own script. It is ruled by a Communist Party that refuses to leave the commercial fate of its companies to the gods of competition, competence and chance. On a scale far beyond that of any other economy, Beijing uses state power, laws, regulations and resources to ensure that state-owned enterprises and “national champions” such as Huawei dominate in targeted sectors, domestically and internationally.

Beijing seeks to lock in guaranteed external markets for those entities, including through its Belt and Road Initiative. The Communist Party supports and enables the use of forced intellectual property transfers, or else outright theft, to maximise the chances its preferred firms will dominate. It relies on opaque and even corrupt political deals to create economic footholds for Chinese entities such as occurred in Malaysia, under the previous Najib Razak government, and in the Maldives.

The Trump administration’s discontent with global economic institutions such as the World Trade Organisation stems from this reality. Existing WTO rules are not designed to deal with a Chinese political economy that is neither an old-fashioned command economy nor a market economy as established under existing rules. The complex networks of relationships and connections between the party, state, regulatory entities, administrative entities, businesses and ­individuals are unique to China and unprecedented in scale and density among nations.

How do we legally determine whether an entity is associated with the Communist Party or the Chinese state? According to its company law, even supposedly private Chinese firms must establish committees to ensure firms carry out activities in accordance with the wishes of the party.

The national intelligence law demands that all organisations and individuals support and assist national intelligence work — which is broadly defined in China’s authoritarian political economy. Even so, WTO rules cannot legally decide whether such Chinese entities qualify as an extension of the state. The WTO prohibits certain subsidies provided by governments and their associated entities but cannot rule on whether Chinese firms ought to be considered “associated entities”. This means there can be no adjudication on the cross-subsidisation between Chinese firms that allows them to outspend, outlast and eventually eliminate international competitors.

Most grievances cannot be brought before the WTO because it doesn’t have the jurisdiction or the body of case law to resolve these basic questions. The opacity of the Chinese system makes gathering evidence distinctively difficult. The WTO is largely powerless to deal with the forced transfer or theft of IP on a massive scale. China is unwilling to reform or renegotiate the text of the Marrakesh Agreement, which established the WTO, in a manner that would address these issues.

Indeed, important aspects of the modern Chinese political economy are deliberately organised in a manner that enables Chinese firms to circumvent WTO and other prohibitions.

US President Donald Trump’s economic offen­sive is supported by the Democrats, business groups and most Americans surveyed on the issue, meaning discontent with China will outlast this administration. Nor is it just a disagreement between the US and China. Other major economies, such as the EU and Japan, have expressed identical concerns and are increasing their support for US insistence on free and “fair” trade vis-a-vis China.

Australia has an important choice: help shape and improve important elements of a US-led collective effort to impose carrots and sticks on China to persuade the latter to play by the rules, or sit and wait for a world that is passing and will not return.

Read in The Australian.

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