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Protectionism and rule of law impede China’s free trade ambitions

Image credit: Remko Tanis (Flickr: Creative Commons)

Free trade between China and foreign countries must, by definition, be an open, two-way process. Chinese firms regularly allege discrimination by regulators in Western countries, yet China ranks 124 out of 136 for Foreign Market Access in the World Economic Forum’s Enabling Trade Index, and has the most restrictive inbound foreign investment rules of any G20 economy.

In January, the State Council promised that it would ease restrictions on foreign companies doing business in China. In March, it removed license requirements for foreign and joint-venture lenders in China that engaged in treasury bond underwriting, custody and advisory services, and certain kinds of foreign acquisitions and capital financing. In June, it removed 27 industries from its negative list for foreign investment in free trade zones.

Foreign business is not so convinced. The reforms are slow, the bureaucracy even slower, and foreign companies still believe they receive poor treatment in China. The 2017 European Union Chamber of Commerce in China Report talked of the lack of a level playing field in China, with cumbersome regulations and vaguely-worded laws that were often subject to arbitrary interpretation. Similarly, 80% of respondents to this year’s US Chamber of Commerce in China survey stated that they felt ‘unwelcome’ in China, with most saying they had little confidence in China’s vow to open its markets.

Critics point to Xi pledging to advance the rule of law in the Third Plenum, and when reforms were further ‘comprehensively deepened’ throughout the Fourth, Fifth and Sixth Plenums. But for whom was Xi strengthening the rule of law? Political discourse shows the aim is to build trust with the Chinese people, not to build trust with foreign companies. At a CPC Central Committee meeting in 2014, Xi said that strengthening the rule of law was to ‘realise the Chinese dream of great rejuvenation of the Chinese nation’. As Zheng Yongnian and Shan Wei of the East Asian Institute at the National University of Singapore note:

'The "rule of law" (法治) is often used interchangeably with the "rule by law" or ‘ruling the country according to law’ (依法治国). In this sense, law is, "Conceived and operates as an instrument with which to uphold the Socialist political order and perpetuate Party domination” and is “used to carry out and consolidate institutional, primarily economic, changes according to predetermined policy"’.

It’s also worth asking as to whom the rule of law applies. The answer: not the party. Xi’s focus on intra-party supervision puts the onus on members of the party, and particularly the CCDI, to deal with corruption and associated sentencing—a role which in other governments would fall to the independent judiciary or other third parties like ICAC. This is important because party members are often held to very different standards than foreign companies in corruption cases.

This is not to mention the unfair competition foreign firms will face in China from the China 2025 initiative (中国制造). The plan aims to upgrade Chinese industry to that of a highly industrialised nation through intelligent manufacturing and intense industry reform, but at the same time serves to promote protectionist trade policy. By 2020, it aims to increase the domestically produced content of core components and materials to 40%; by 2025 this will raise to 70%.

It cuts foreign firms out of a value chain they previously occupied, decisively engineers competitive advantages for local enterprise, and advocates providing preferential access to capital for Chinese firms in China and abroad. The US Chamber of Commerce report “China 2025: Global Ambitions but Local Protections” details the risks for the global and US economy of funnelling huge amounts of capital into specific industries, warning that it raises the likelihood of market inefficiencies and global over-capacities. According to a Mercator Institute for Chinese Studies (MERICS) report on the matter, countries that rely heavily on industrial production—the Czech Republic, Germany, Italy, Hungary, Japan and South Korea—will largely bear the brunt of this industrial policy.

China’s window dressing of the rule of law and promotion of protectionist trade plans like China 2025 preclude an open and fair host environment for foreign business. Without the existence of this environment, China cannot be said to be promoting free trade.

Jacinta Keast was the January-June 2017 China Fellow at Young Australians in International Affairs.

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