From a short term perspective, China should be reasonably pleased with the outcome of the World Trade Organization's Ministerial Meeting in Hong Kong in December. However, it needs to worry deeply about the miniscule underlying progress in the Doha Round negotiations at a time when global trade imbalances may be reaching a tipping point.
The good news for China could be summed up as follows:
The talks did not actually break down, as they might easily have done in the manner of the Cancun and Seattle ministerial meetings. Much of the credit needs to go to the new WTO Secretary General Pascal Lamy, whose stamina and grasp of his brief enabled a little movement despite the rigid position of the major players, notably the Europeans.
China's own role was extremely discreet. It left all the running from the major developing countries (the Group of 20) point of view to Brazil, India, Indonesia and South Africa. They in turn managed to maintain an impressive degree of unity and bring the poorest countries – whose interests are often very different from those of the major developing nations – with them. In doing so they showed a commitment to multilateral trade negotiations that may have been lacking in the past. This surely suited China which has been so successful in taking advantage of the WTO system – even before it was formally a member – but is regarded with fear by other developing countries which may be unable to compete with it in a more liberal trading world.
The Hong Kong hosts, headed by Commerce Secretary John Tsang Chun-wah, also performed creditably. The meeting was a huge disruption for business in the SAR due to closure of roads, but the general organization of the meeting, and the management of sometimes violent demonstrators, reflected well on the city and its separate status.
The main focus of the anti-WTO demonstrations were the violent Korean farmers. Although they got plenty of attention, they were also a reminder that their protection of very high cost rice, garlic etc from Chinese, Thai and other Asian competition is symptomatic of the divides between rich and poor nations, and the obstacle to global trade liberalization presented by rich country farmers. The Koreans were doing outside the meeting what the Europeans were doing inside – trying to halt freer trade in farm products.
But looking further ahead at whether the Doha Round can take the necessary steps forward, China has good reason to be concerned. Agriculture remains the key obstacle to progress on other issues. It actually matters little for China, which is both an importer and exporter of farm products and whose farm prices are generally not out of line with world prices – or where world prices would be but for the distortions created by European and US export subsidies.
China cannot afford politically to break ranks with its G20 partners for many of whom agriculture is far more important. Yet without some further breakthroughs on this, the prospects for progress on industrial products and services are small. While Europe has finally agreed to end export subsidies by 2013, the issue of farm product tariffs and domestic price support in both the EU and US remain huge obstacles to forward momentum in other areas.
As it is, the main beneficiaries of this so-called Development Round of trade negotiations are the least developed countries (LDCs). These nations will – with a few exceptions – get duty free access for industrial products to most of the developed world. This could actually marginally hurt China as it would be faced with tariff discrimination in low end products such as garments from the likes of Bangladesh.
The lack of Doha Round progress might not matter too much under other circumstances. After all, previous trade negotiating rounds have been extended far beyond their original deadlines before enough compromises have been reached to make a broad advance possible.
However, this time two black clouds loom in the distance. Firstly, US Presidential "fast-track" negotiating authority ends next year and looks unlikely to be renewed. Hence a deal must be concluded within 2006. Secondly, global trade imbalances are on an unprecedented scale. The surpluses of oil exporters have now been added to those of East Asian industrial exporters. The US current account deficit could hit 7% of GDP. While global growth remains satisfactory, and liquidity high, this may be sustainable, but a downturn could quickly lead to trade frictions which not only prevent Doha progress but reverse past progress towards freer trade.
Nor are regional trade pacts any substitute for multilateralism – least of all for China. Modern production systems, in which China plays a key role, rely not just on low, non-discriminatory tariffs, but on simple rules of origin. Bilateral and regional trade agreements have rules of origin which frustrate global manufacturing systems.
For now at least, China's best hope is to act as a behind-the-scenes influence both on the G20 and on the EU and US, encouraging them to be more accommodating than they were in Hong Kong. China for its part can help by continuing to negotiate difficult issues like textiles rather than standing its ground on WTO principles.
China now knows it has more to gain from Doha progress and more to lose from a breakdown of multilateralism than almost any of the major players. The biggest issue perhaps now is whether India and Brazil are gaining faith in the merits of multilateral open trade faster than the EU and US are losing theirs.