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Trade

China’s new Foreign Investment Law sticks to the script

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A pedestrian walks past the Shanghai Free Trade Zone(the Shanghai FTZ) in Shanghai, China, 23 March 2019 (Photos:Reuters).

Author: Atharva Deshmukh, LSE and Pranav Bafna, ILS Law College Pune

The old Chinese saying to cross the river by feeling the stones offers insight into China’s approach to foreign investment and the global economic system. Ever since the high tide of foreign investors hit China in the late 1980s, China has frequently ‘felt the stones’ of globalisation, adjusting its balance through its regulatory infrastructure, most recently changed with its new Foreign Investment Law.

 

 

The late 1990s were dominated by negotiations over China’s accession to the World Trade Organization (WTO). The Chinese Communist Party’s (CCP) authority became subject to international legal scrutiny. The reformist faction of the CCP led by Jiang Zemin and Zhu Rongji saw the WTO as an opportunity for future reform and rallied to attract foreign investors, carefully retaining Deng Xiaoping’s vision of ‘socialism with Chinese characteristics’.

Chinese regulations evolved in response to this new political reality. The ‘Three Represents doctrine’ finally recognised the ‘productive forces’ of the market. The foundations of a modern commercial legal system were laid down through commercial statutes pertaining to contracts, companies, civil procedures and securities.

These reforms kicked off a legendary era of high growth. Real GDP growth rates were north of 10 per cent for five years. Between 2002 and 2007, exports grew at 30 per cent annually. The real estate market was booming fuelled by rising GNI per capita which grew from US$3500 in 2002 to US$6830 in 2007.

Foreign interest in China also surged. Foreign-owned enterprises accounted for 28 per cent of China’s national industrial output prior to the WTO accession. By 2003, this figure had increased to 36 per cent.

From the get-go, China’s primary objective behind attracting foreign direct investment (FDI) was generating employment. China expected its WTO accession would add roughly 10 million jobs to the Chinese economy if growth expanded by 2.9 per cent annually. Until the promulgation of the Labour Contract Law in 2008, there was bearish pressure on labour costs with firms saving 20–30 per cent on their labour bill by omitting social insurance payments.

A relatively unregulated labour market attracted FDI from the global manufacturing sector, accounting for more than 60 per cent of incoming FDI during this period.

China’s desire to attract and retain foreign technology drove the evolution of its market entry legislation. The Chinese government only recognised certain forms of commercial partnerships such as equity joint ventures, contractual joint ventures and wholly-owned foreign enterprises, with joint ventures (JVs) quickly becoming the mode of choice. These partnerships allowed investors to hedge their risk while benefitting from essential local expertise. By 2006, 49 per cent of foreign investors entered China through JVs.

The geographic spread of FDI has also changed over time. China’s coastal regions, home to its pioneering Special Economic Zones (SEZs), were the first and greatest benefactors of FDI. By 2011, SEZs in coastal areas accounted for 22 per cent of China’s GDP, 45 per cent of FDI and had generated 30 million jobs.

All these achievements adhered to China’s broader political vision — to attract foreign capital by offering lower production costs, and in doing so expand employment and access to technology.

Chinese leaders solidified their belief in the relative superiority of the ‘Chinese model’ by 2008. In 2012, Xi Jinping took over Chinese leadership from Hu Jintao. Xi Jinping has two political streaks: the reformist and the nationalist. The reformist accords great value to higher rates of innovation and technological progress. The nationalist is geared towards restoring China’s lost glory — his ‘Xi Jinping thoughttouts the ‘great rejuvenation’ of China’s economic might and military prowess.

China’s sprawling metropolises became a reflection of China’s progress after 2008. They housed a burgeoning middle class with rapidly rising incomes. Consumer goods sales grew from under US$2 trillion in 2008 to roughly US$5 trillion by 2019. Urban discretionary spending increased by 9 per cent between 2010–2014.

FDI consequently pivoted toward domestic demand as China’s comparative advantage became less entwined with lower production costs. This transformed the sectoral composition of foreign investment as manufacturing declined as a share of FDI, while technology, IT services, aerospace, transportation and…

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Trade

Fixing fragmentation in the settlement of international trade disputes

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Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.

Fragmentation in Global Trade

Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.

Challenges with WTO Dispute Settlement

The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.

The Path Forward for Global Trade

Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.

Source : Fixing fragmentation in the settlement of international trade disputes

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WTO ministerial trading in low expectations and high stakes

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The WTO’s 13th Ministerial Conference is set to focus on e-commerce transparency, investment facilitation, and admitting new members. However, progress may be hindered by disputes, especially regarding fisheries subsidies.

The World Trade Organisation’s 13th Ministerial Conference

The World Trade Organisation’s (WTO) 13th Ministerial Conference is set to take place in Abu Dhabi on 26–29 February, with expectations of deals on electronic commerce transparency, investment facilitation for development, and the admission of Timor Leste and the Comoros as WTO members. Despite these positive developments, the expectations are relatively modest compared to promises made at the 12th Ministerial Conference, which included addressing fisheries subsidies and restoring a fully functioning dispute settlement mechanism by 2024.

Challenges in Dispute Settlement and Agricultural Trade Reform

However, challenges remain, especially in the deadlock of dispute settlement since December 2019 due to a US veto on the appointment of Appellate Body judges. Progress in restoring the dispute settlement mechanism has stalled, and discord continues regarding India’s grain stockholding policy as a potential illegal subsidy. Restoring a fully functioning dispute settlement mechanism hinges on addressing US concerns about perceived bias against trade remedies in relation to China’s state subsidies.

Geopolitical Tensions and the Future of Trade Relations

The likelihood of reaching agreements amid geopolitical tensions between Western democracies and China appears slim, with issues surrounding subsidies and global supply chains causing rifts in trade relations. As nations focus on self-reliance within the global value chain, opportunities for trading face obstacles. Advocacy for open markets and addressing protectionist sentiments remains crucial for fostering resilience to external shocks and promoting economic growth.

Source : WTO ministerial trading in low expectations and high stakes

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Trade

Getting Vietnam’s economic growth back on track

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Vietnam’s economy grew 8% in 2022 but slowed in 2023 due to falling exports and delays in public investments. The economy’s future depends on structural reforms and reducing dependency on foreign investment.

Vietnam’s Economic Roller Coaster

After emerging from COVID-19 with an 8 per cent annual growth rate, Vietnam’s economy took a downturn in the first half of 2023. The drop was attributed to falling exports due to monetary tightening in developed countries and a slow post-pandemic recovery in China.

Trade Performance and Monetary Policy

Exports were down 12 per cent on-year, with the industrial production index showing negative growth early in 2023 but ended with an increase of approximately 1 per cent for the year. Monetary policy was loosened throughout the year, with bank credit growing by 13.5 per cent overall and 1.7 per cent in the last 20 days of 2023.

Challenges and Prospects

Vietnam’s economy suffered from delayed public investments, electricity shortages, and a declining domestic private sector in the last two years. Looking ahead to 2024, economic growth is expected to be in the range of 5.5–6 per cent, but the country faces uncertainties due to geopolitical tensions and global economic conditions.

Source : Getting Vietnam’s economic growth back on track

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