China’s Commerce Minister: We'll Reform If You Reform Too

Attending the Boao Forum, China’s Minister of Commerce, Chen Deming, talked about China’s plans for further opening up of certain sectors to foreign investment: “Before China further opens up some sectors, we hope to get in return equal opening-up within the WTO, and some developed countries in particular can open corresponding sectors[.]”

You wouldn’t have heard that as recently as five years ago. Chen’s statement says a lot not only about China’s increased confidence on the world stage, but also how difficult ongoing reforms are within the WTO system.

Here’s how it works. Let’s pretend we have two countries, A and B. Country A, a member of the WTO, is developed, while Country B, which wants to gain entry to the WTO, is developing. Furthermore, assume that we can reduce a nation’s economy, with respect to it being open to international trade, to a number — a high number means the nation is quite open.1 Let’s say that Country A is at 80 and Country B is at 15.

Country B wants to join the WTO. It negotiates with all the other member states and agrees that it will open its economy to 50, a significant change in its economy. That’s a big deal, but nations have to give up a lot to join the WTO — they don’t have a great deal of leverage at that point — so Country B really has little choice. Country B joins, and a few years later, its economy is at 50 as it promised.

So far, so good, but both Country A and B still have a lot of trade barriers in place and would like to open things up further (note that concessions made to one WTO member state must be offered to all). They sit down and negotiate, but now things are different. Country A can no longer dictate to Country B as it did when the latter joined WTO, so now if it wants Country B to lower barriers further, it has to reciprocate.2

But this might be difficult for Country A. It’s economy is already quite open (at 80), so it doesn’t have a lot of concessions to give up, whereas Country B (at 50) has a lot more room to manoeuvre.

So when Minister Chen talks about equal reforms, what are we going to see from the other side? The US, for example, is already a very open economy, so there are few remaining areas it will be willing to put on the table; China, on the other hand, has much more room to manoeuvre.

The moral of this story: it’s good to have a lot of bargaining chips.

FYI, don’t expect dramatic sectoral liberalization from China in the near term.
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   1. Several openness indexes actually exist but are unnecessary for this hypothetical.
   2. Assuming, of course, that Country A doesn’t have other types of leverage it can use.

 

This post originally appeared at China Hearsay.

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