The rise of China and fall of WTO

In December 2001, China became the 143rd member of World Trade Organization (WTO). The 25th anniversary of this landmark moment marks an interesting paradox. Ideally, the WTO should have emerged stronger as China’s stunning rise as an export-driven economic powerhouse and globalisation can be attributed to it. However, what we are seeing is a near collapse of the organisation.

There have been two phases of globalisation in the last two centuries. The first phase was from 1875 till World War-I in 1914. In The Economic Consequences of the Peace, John Maynard Keynes quoted how a Londoner “could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep”. WW-I was followed by the Great Depression and World War-II, disrupting globalisation for next 30 years.

To restore peace and globalisation, in 1944, a group of leaders led by Keynes assembled in Bretton Woods. Amidst many things they decided to set up three global institutions. The World Bank (for the reconstruction of Europe) and International Monetary Fund (for financial stability) started right away in 1945. The third, the International Trade Organisation, could not start due to deep inequalities among countries. Instead, the members signed on a General Agreement on Trade and Tariffs (GATT) to streamline trade issues.

From 1945 onwards, the second wave of globalisation started, albeit at a slow pace as capital flows were restricted. The pace picked up from 1971 onwards when the Bretton Woods agreement broke down, leading to ease of global capital flows. The end of the Cold War and the disintegration of the Soviet Union pushed the world economy towards globalisation.

On January 1, 1995, the WTO was finally established after many deliberations. Until then, countries formed bilateral trade agreements, which were limited to large economies. The WTO was built on the principles of multilateral trade, under which countries had to treat all trading partners as equal. It put special emphasis on protecting small and developing economies, which were given training and longer periods to comply with WTO agreements.

The Chinese story starts in 1978, when the country started to reform its moribund economy by liberalising its markets, privatising state-owned enterprises, and inviting foreign investments. It had an interesting political economy structure—while the politics was highly centralised, the economics was much more decentralised, with provincial governors and city mayors having autonomy. The Chinese leadership believed joining GATT/WTO would force the economic policy actors to adhere to the reform agenda and benchmark against best global practices. It was expected to be a win-win as both China and the rest of the world would get access to each other’s markets.

China drastically overhauled the economic system by lowering tariffs, producing quality goods, and strengthening its IP regime. It ran campaigns educating people and trained officials to join the WTO.

Finally after 15 years of constant effort, China became a member in 2001. China’s staggering rise as the largest exporter in the world exceeded all expectations. Its share in the world’s merchandise trade has doubled from 6% in 2003 to 13% in 2024. Within trade, China’s share in world exports and imports is 15% and 11% respectively. China is the biggest producer and exporter of many goods — textiles, iron and steel, office equipment, etc. China’s GDP has also surged from $1.6 trillion in 2003 to the second-largest ($18.7 trillion) in 2024.

While China surpassed expectations on growth, it lagged in compliance. It reduced tariffs and non-tariff barriers but continued to aggressively deploy industrial policy to push its exports by providing cheap credit, subsidies, and non-financial support. There have been violations of IP rights and allegations of keeping its exchange rate undervalued. WTO member countries have filed several disputes against China. The global shocks of 2008 crisis, Covid-19, and wars have led to rising protectionism. China has faced a slowdown in growth due to the same factors and has turned protectionist as well.

China’s rise has also fuelled a trade war between it and the US. The US has a large trade deficit, the highest with China. In both his presidential terms, Donald Trump has raised tariffs on Chinese exports (and other nations), followed by retaliation from China. The trade war is threatening to undo the progress made after WWII. China has also taken other steps to challenge US hegemony, such as the Belt and Road Initiative, trade invoicing in renminbi, and providing aid to developing countries.

It believes most global institutions are US-governed and is creating its own ecosystem. The US-China gridlock in turn has fuelled geopolitical uncertainty. Countries are back to signing bilateral and regional trade agreements, undoing years of progress towards multilateral trade.

Though it has just been 25 years of China’s WTO membership, it seems as if a century has passed. The period has seen seismic shifts that could be expected to span 100 years. The US, once a supporter of China joining the organisation, is now deserting the organisation. The WTO itself has been reduced to a mere bystander watching the collapse of multilateral trade.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.