China’s WTO Betrayal and Global Trade Imbalance 

By Umer Beigh

In the 1990s, as negotiations began for China’s entry into the World Trade Organization (WTO), Western countries—including the US, Russia, and India—did not foresee that imports from China and its growing service sector would create a troubling trade imbalance. Over the years, the widening gap between domestic consumption and production has drawn China to encash the domestic demand of foreign economies to sustain its economic growth, triggering perpetual trade conflict.

Chinese accession to the WTO marked a turning point in global trade dynamics in December 2001. The 15 years of negotiations paved the way for its integration into the liberal economic order. The optimism surrounding it was apparent, the then-US President Bill Clinton described it as “a significant opportunity” that would help “create positive changes in China since the 1970s.”

The conditions of entry required China to reduce tariffs, dismantle trade barriers, and adopt greater transparency in its economic practices. Beijing then agreed that its trading partners could use several unusual mechanisms to restrict the inflow of Chinese products into their markets.

However, as the years passed, the transformative results of China ensured that these laws and regulations were either changed or scrapped. The resulting trade surplus is the outcome of Xi Jinping-led government policies favoring exports, and the global demand for Chinese-manufactured goods.

As per critics, the ongoing Chinese policy of state-led development, funneling subsidies into targeted industries, has proven detrimental to the US and other foreign companies. 

This economic shift has enabled trade imbalances, pushing many countries to face challenges such as currency depreciation, rising national debt, and strained foreign relations: “China by its large-scale market, low-cost factors of production, strong industrial supporting capacity, better infrastructure, preferential foreign investment policies, and other comprehensive advantages, attracted a large number of foreign investments,” research by economist Fan Lyu, finds.

Benefits and Disadvantages 

Trading with China has also reaped benefits by boosting the annual purchase power of the average US household by $2000 up from $1500 in 2007, as per estimates.

Stewart Paterson, a research fellow at the Hinrich Foundation, explains that from a Western perspective, China’s export success also meant that all those products made in China started replacing goods that were previously made in Western countries. This major change gave rise to a loss of jobs and income in those countries.

In his book titled China, Trade and Power: Why the West’s economic engagement has failed, Paterson argues that “from a societal point of view, economic engagement with China has been a disaster. Of course, cheaper manufactured imports are a good thing for the consumer, but this benefit has been netted away by a policy of inaction targeting that pushed up the cost of non-tradable services and asset prices – what good is a cheap washing machine if one cannot afford a home to put it in?” he questioned. 

For many analysts, however, this losing capacity in the manufacturing sector, giving rise to problems in real incomes and increasing inequality arising from the combination of labor market arbitrage and a domestic policy of inaction targeting were all election issues exploited by newly elected President Donald Trump to his political advantage.

Rising Trade Imbalance 

Senior journalist Paul Blustein foresees that the trade imbalance has persisted due to China’s model of state capitalism never fully embracing the open market or private sector. In his book Schism: China, America and the Fracturing of the Global Trading System,  Blustein argues, that the economy of China is dominated by the Chinese Communist Party, which oversees the overall economy through the centralized management of the state-owned enterprises, financial institutes, and key economic planning commission.   

Beijing generally complies by changing its policies in accord with rulings by WTO tribunals, but China’s system has become so opaque and uniquely structured that many of its practices fall beyond the scope of the trade body’s rules and bedrock principles.

Not only the US, but this trade conflict conundrum has also impacted the EU, which has repeatedly sought intervention to balance its economic interests. US officials have accused China of undervaluing its currency yuan and initiating anti-dumping investigations, blaming China for adopting trade policies that are “non-transparent” and “detrimental” to the global market.

In 2023, the US-China trade deficit stood at approximately $447 billion. Between 2005 to 2022, China’s trading with the US increased from $114.269 billion to $404.139 billion, a 253% expansion of the trade surplus, according to China Statistic Bureau.

In 2021, the trade between the EU and China reportedly reached €700 billion, with a major surplus shifting obviously in China’s favor. This imbalance has continued amidst the EU imposing regulations, counteracted the measures that overlooked fair competition and protected intellectual property rights. European countries have accused China of “coercion” and undermining the rule-based global trading system. 

The EU is grappling with a substantial trade deficit with China. In 2023, it reached an estimated €292 billion. Total trade with China amounted to €739 billion, a significant 14% decline from 2022.

US-based economists believe the key contributors to this imbalance have been Chinese currency manipulation practices to keep its exports competitively priced in the global market. 

According to economist Andrew Paterson, the broader implications of this trade imbalance have occurred even after the quintupled size of balance sheets of Western central banks,

Since China’s WTO accession, (it has) struggled to achieve their inflation targets, demonstrates the immense reactionary pressure exerted by China. Prior to 2001, such a balance sheet expansion would have been universally expected to trigger hyperinflation. However, the confluence of trade with China and inflation targeting has inadvertently led to declining real living standards for most people in the West.

The Indian Case

Interestingly, India’s trade relationship with the US stands in stark contrast to its dealings with China. India enjoyed a trade surplus of $35.3 billion with the US. In fiscal year 2024, total merchandise trade reached $120 billion. 

Moreover, in the case of Indo-China economic trading, it reached $85.1 billion, last year. Indian policymakers remain wary of China weaponizing the trade deficit. This January, China blocked imports of machinery inputs, causing delays and setbacks for India’s manufacturing sectors, including electronics, solar panels, and electric vehicles (EVs). To hinder the growth of global companies like Foxconn, BYD, and Lenovo in India, Chinese companies reportedly stopped exporting critical equipment essential for production.

Despite concerted efforts to diversify exports, India’s imports from China have surged dramatically, driven by strong dependencies on crucial sectors like machinery, electronics, and organic chemicals. Last year, exports to China further declined by 9.37%, according to data from the Commerce Ministry.

Data reveals an imbalance pattern: India’s imports from China increased to $65.89 billion, a 9.8% year-on-year increase, while exports declined by 9.37% to $8 billion during the same period. India’s Ministry of Commerce and other officials have expressed concern over this “sustained trade imbalance with China,” which according to them, is posing a major challenge to the Indian economic stability.

The looming challenge is thus perceived to lie deeper, in the ‘problematic ways’ the Chinese economic system has evolved the rulebook of global trade, which is something the negotiators of the WTO had not anticipated.