Japanese academic: China’s free trade facade

In recent years, the US has distanced itself from multilateral agreements and the free trade system, leaning toward protectionism. In contrast, China has portrayed itself in the international community as a defender of multilateralism and free trade. For example, at the 2021 Davos Forum, Chinese President Xi Jinping expressed support for economic globalisation and called for trade and investment liberalisation.

However, the trade policies and diplomatic tactics actually adopted by China are markedly different. Particularly noteworthy are the lack of transparency in government subsidy policies, excessive support for state-owned enterprises, failure to fulfill notification obligations under World Trade Organisation (WTO) rules and the use of import restrictions that verge on economic coercion.

Since 2018, China has imposed import restrictions on Australian wine, beef, barley and other goods, citing Australia’s call for an investigation into the origins of Covid-19. In addition, China has taken retaliatory measures against Lithuania for strengthening ties with Taiwan. These actions were nominally justified as measures to “protect health” and “safeguard national security”, but are widely seen by the international community as exploiting WTO rules through sophistry.

When China joined the WTO in 2001, it pledged to ensure transparency in its trade regime, implement uniform application of laws, and introduce a judicial review system. According to Articles VI and X of the General Agreement on Tariffs and Trade (GATT), all trade-related measures are to be made public and applied equally to domestic and foreign enterprises.

However, reality falls far short of these ideals. Regulations and notices issued by local governments in China are often not made public, making it difficult for businesses to respond promptly to policy changes. Moreover, China has not fully complied with its subsidy notification obligations under Article 25 of the WTO Agreement on Subsidies and Countervailing Measures, and the implementation of the system lacks transparency. This approach undermines the most fundamental principles of free trade: predictability and trust in rules.

China’s subsidy policies and state-owned enterprise (SOE) system severely distort market competition. In strategic sectors such as steel, aluminium, semiconductors, shipbuilding and electric vehicles (EVs), state-led subsidies allow inefficient companies to survive, resulting in chronic overcapacity. Particularly in neighbouring countries, Chinese products have been accused of being dumped at unfairly low prices.

Moreover, Chinese SOEs do not operate based on commercial assessment, but act under the guidance of government policies. Article XVII of the GATT stipulates that state trading enterprises must act “in accordance with commercial considerations” and must not discriminate against foreign enterprises. However, since this article was drafted in 1947, its language is overly abstract and lacks both deterrent force and transparency.

In contrast, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU–Japan Economic Partnership Agreement (EPA) contain clear provisions regarding state-owned enterprises, including the requirements of “non-discriminatory treatment” and acting “based on commercial considerations”.

Under these rules, SOEs are prohibited from receiving preferential treatment or conducting transactions under conditions that disadvantage foreign businesses, thus ensuring a level playing field. By comparison, China’s current practices fall far short of meeting the fair competition standards required by the CPTPP.

Under the WTO’s dispute settlement mechanism, China has repeatedly been the subject of complaints, particularly in cases involving subsidies to state-owned enterprises, anti-dumping measures and export restrictions.

There have been numerous disputes with countries such as Japan, the US and the European Union (EU). For example, China imposed higher tariffs and made dumping determinations on Japanese chemical and steel products, prompting Japan to file a case. The WTO found China’s measures to be problematic.

In addition, China’s restrictions on the export of scarce resources are also likely to violate relevant WTO agreements. Such actions not only contravene the fundamental principles of free trade but also limit the economic options available to other countries.

In response to these issues, Japan has taken the lead in shaping effective rules through agreements such as the EPA and the CPTPP, particularly in areas like ensuring transparency in subsidies and regulating the behaviour of state-owned enterprises. These agreements are more specific than WTO rules, and if China hopes to earn the trust of the international trading order in the future, it will need to adopt such standards.

The foundation of free trade is fair competition among all market participants under the same rules. However, China’s current systems and practices are at odds with the core principles of the WTO, making it unfit to be called a “flag-bearer of free trade”. It would be more accurate to describe China as a player that arbitrarily interprets rules to suit its own needs while failing to act in good faith — a reality that is drawing increasing concern from the international community.

If China truly intends to establish itself as a flag-bearer in a free trade system and multilateral framework, it must begin by sincerely fulfilling its obligations under WTO agreements — including making its subsidy policies transparent, submitting truthful notifications, and ensuring that state-owned enterprises operate independently on a commercial basis.

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