Chinese Economic Nationalism:

The Effect of Interests and Institutions1

Scott Kennedy
Director, Research Center for Chinese Politics & Business
Associate Professor, Departments of Political Science and East Asian Languages & Cultures
Indiana University

Background Paper for the National Committee on US-China Relations conference “China, the United States
and the Emerging Global Agenda,” July 13-15, 2008 at the Wye River Conference Center

Introduction
In 2001 observers were divided about the consequences of China’s forthcoming accession to the
World Trade Organization (WTO). At one end of the spectrum, some expected that the long and
specific list of commitments China made would cement its liberalization. By contrast, others
predicted that China would violate most of its pledges. Much of the recent commentary in
Washington, DC, and Brussels suggests that China has largely not lived up to its commitments and
is vigorously pursuing a path of economic nationalism. Variously cited are a host of mercantilist
tactics, including: aggressive use of antidumping and safeguard measures, manipulation of its
exchange rate, provision of subsidies to SOEs, condoning violation of intellectual property rights
(IPR), explicit or implicit demands of technology transfer in exchange for market access, blocking
foreign industry from government procurement, adoption of unique technical standards, and
discriminatory implementation of health and safety standards. There are also worries that the
recently adopted Labor Contract Law and Anti-Monopoly Law will be unfairly targeted at
multinationals operating in China.2 Underlying these observations is the more fundamental worry
that China is an anti-status quo power who threatens not only the position of the world’s leading
countries but also the liberal international order upon which global prosperity is based. Several
Japan specialists who highlighted that country’s distinctive system of capitalism in the 1980s claim
history is repeating itself, only worse because of China’s enormous size.3 It is not an exaggeration
1
The author wishes to thank Wang Qun for research assistance. Despite many empirical claims, the paper
contains few footnotes. The views in this paper are based on interviews with direct involvement in trade and
investment affairs in China as well as primary and secondary written sources. For more information, feel free
to contact the author. Please do not cite or quote without the author’s permission.
2
For a report that emphasized backsliding, see US Chamber of Commerce, “China’s WTO Implementation
and Other Issues of Importance to American Business in the US-China Commercial Relationship,”
September 2006. For a consciously balanced overview, see World Trade Organization Secretariat, “Trade
Policy Review: China,” WT/TPR/S/199, April 16, 2008.
3
Two examples are Clyde Prestowitz and Eamonn Fingleton. See the latter’s In the Jaws of the Dragon:
America’s Fate in the Coming Era of Chinese Hegemony (New York: Thomas Dunne Books, 2008). In the
minority among Japan specialists are James Fallows and Ezra Vogel, who highlight various differences. See
James Fallows, “China Makes, the World Takes,” The Atlantic Monthly, vol. 300 no, 1 (July/August 2007),
pp. 48-72; and Vogel’s foreword to Saadia M. Pekkanen and Kellee S. Tsai, eds., Japan and China in the
World Political Economy (London: Routledge, 2005).
© 2008 NCUSCR • 71 West 23rd Street, Suite 1901 • New York, NY 10010-4102 • (212) 645-9677 • www.ncuscr.org
to conclude that if the vote for China’s Permanent Normal Trade Relations (PNTR) were held today
in Congress, as opposed to 1999, pro-PNTR supporters would not carry the day.
Neither extreme is right, but by and large the optimists seem closer to the truth, however, not
necessarily for the reasons they envisioned. China has adopted a variety of explicit and implicit
trade and investment barriers since joining the WTO, but the country is much more open in 2008
than it was in 2000, let alone 1992 or 1978. Ironically, recent Chinese protectionism has been
abetted by existing global rules that condone such practices as well as by the lack of definitive rules
in some areas. At the same time, it has been the quiet pressure of pro-liberal domestic industry
interests that tame many of these protectionist impulses. Foreign industry and government
complaints matter, but they often do not win unless a powerful domestic Chinese constituency joins
the battle on their side, forming “transnational political alliances.”4

Table 1: Types of Governance Regimes

Intended Beneficiary of the Regime

Producers Consumers
Exist and - Trade Remedies - Health and Safety Standards
Global Have Teeth - Technical Standards - Labor Rights
Governance - Intellectual Property Rights - Credit Risk Management
Norms and
Rules Weak or - Government Procurement - Competition Policy
Non-Existent - Foreign Exchange Valuation - Global Climate Change
- Sovereign Wealth and Hedge
Funds

Put another way, this paper suggests that the variation in China’s compliance at home and its
participation in global economic governance is largely affected by the extent to which a certain area
of regulation divides Chinese interests and the extent to which there exists global norms and rules
with clear compliance requirements (see Table 1). For the most part, Chinese industry often
disagrees among itself about how to behave within “producer-oriented regimes,” that is, where rules
are designed specifically to aid companies in their efforts to counter competitors and become more
profitable. Those conflicts moderate protectionist impulses. By contrast, “consumer-oriented
regimes,” which are designed to protect consumers or investors by constraining the behavior of
industry, are typically less well developed and not implemented as originally intended in China. In
addition, a declining number of American concerns are about blatant Chinese violations of their
WTO commitments, violation of IPR being the chief exception. An increasing number of
disagreements take place within the parameters of the agreements, where violations are not blatant
but instead revolve around how the Chinese interpret the statutes to their advantage. In such areas,
the Chinese are behaving like conventional members of the international community. And still other

4
“Transnational Political Alliances: An Exploration with Evidence from China,” Business & Society, Vol.
46, No. 2 (June 2007), pp. 174-200.
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areas of discord are on issues where there are no internationally agreed upon rules or principles (or
as with government procurement, its trading partners have not required China to abide by these
rules). Combining these two factors, we see that for most producer-oriented regimes where global
rules are well developed, conflicts between China and its trading partners, including the US, are
most likely to remain moderate, whereas there is likely to be more intense and sustained conflict on
issues oriented toward consumer interests, particularly when no global consensus of how to address
the area exists.

The main body of the paper reviews Chinese efforts at protectionism in several of these conceptual
areas, with a focus on trade remedies, standards, and competition policy. It then considers the
implications of these findings for how to view China’s place in the global economic architecture
and how the United States could most fruitfully address economic tensions with the PRC in the
years ahead.

Trade Remedies
One of the first steps China took to promote its “rights” – as opposed to meet its obligations – in the
global trading system was to develop its own anti-dumping (AD) regulations, whereby domestic
Chinese producers could petition the Ministry of Commerce to investigate whether foreign
exporters unfairly injured their interests by dumping goods on the Chinese market, in which case
the Mofcom would be to institute AD tariffs against the foreigners, thereby securing the market for
those domestic producers. Long the most targeted dumper by other countries, China decided to
utilize this tool itself. By 2003 China had become the third most common initiator of AD cases.
Through June 2008, Chinese companies had launched investigations into cases of 50 products
involving 154 countries. Chinese law firms have emerged that are the international trade equivalent
of “ambulance chasers,” imploring domestic firms to bring cases at the slightest hint of import
expansion.

Despite China’s rapid rise into the top ranks of AD initiators, many of the cases have not turned out
as expected. Of the 48 product cases which have reached final verdict, by my count, only 21 (44%)
were decided fully in favor of the Chinese applicants. In 19 cases (40%), there was a split decision
where some foreign firms were penalized but others received either no penalty or only a minor
tariff. And in 8 cases (16%), Mofcom found entirely on behalf of the foreign respondents. Chinese
applicants’ “success rate” at home is just slightly higher than in the United States and EU, and the
average AD duty China charges is substantially lower. Why this mediocre record of protectionism?
It is partly because of loud complaining by foreign governments. But more important are the
complaints of Chinese downstream producers who need these imports. When they make their voices
heard, arguing against AD duties, they often win. When Baogang and other steel makers asked
Mofcom to block Japanese and South Korean steel, they were rebuffed because equally substantial
auto and home appliance makers counter-lobbied that they needed to import higher quality steel to
remain competitive internationally. When the producers of the chemical additive lysine tried to
block foreign imports, animal feed producer Hope Group and the Ministry of Agriculture
successfully countered that raising lysine tariffs would lead to higher costs for farmers, a
constituency already being squeezed by high industry prices and local officials.

Chinese involvement in trade remedy cases adjudicated directly by the WTO have been more
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pedestrian. Instead of filling the WTO with cases, as either a complainant or respondent, Chinese
activity has been entirely underwhelming. China has brought just 2 cases, both against the US. The
first, in which China joined with several other countries, concerned the Bush Administration’s 2002
invocation of steel safeguards, which the US roundly lost. And in a still undecided case, in
September 2007 China challenged a US antidumping verdict against Chinese coated free sheet
paper. China has been the respondent in just 6 WTO dispute resolution cases, all of which have
involved the US (and some times other members). In the 2 completed cases (value-added tax rebate
for semiconductors and illegal subsidies), China expeditiously modified domestic regulations upon
seeing that it would likely lose a formal judgement. In the auto parts case, China lost the initial
ruling in February 2008, but is waiting for the final verdict before deciding how to respond. Three
other cases (charging inadequate penalties for IPR violations, obstacles to distribution of foreign
publications, and barriers to distribution of foreign-based financial information services) are still
pending, but if China loses, there is nothing in its record to indicate it will not comply with the
decisions.

To put China’s involvement in WTO dispute resolution in perspective, consider a list of other
countries and the number of cases in which they have been either a complainant or respondent:
Brazil (23, 14), European Union (78, 62), India (17, 19), Japan (13, 15), South Korea (13, 13), and
the United States (90, 99). In addition, the United States has on occasion balked at modifying US
law in the face of a negative WTO ruling.5 The number of cases against China may be lower than
expected because potential complainants worry about retribution from the PRC; yet even a doubling
or tripling of cases would not be unexpected given China’s extraordinary role in global trade and
investment.

Standards
Chinese adoption and use of standards has varied by the type of standards in a manner consistent
with the overall thesis of this paper. Here I will distinguish between basic standards that support
manufacturing, including electrical systems, machinery parts, and measurement systems (aka
metrology). In all of these areas China’s government and industry have been models of good
behavior. With a consensus that Chinese factories need to be able to plug into, literally, global
manufacturing networks, adoption of global standards has been rapid and widespread.

There has been more contention with technical standards that can be used as competitive tools,
which is particularly the case in information and communications technologies (ICT). Consistent
with the central government’s goal of fostering “independent innovation” so that Chinese industry
can move up the value-added chain of production networks, China has issued distinctive standards
for a range of technologies: third-generation cellular telephony (TD-SCDMA), wireless local area
networks (WAPI), video players (EVD, HVD, and HDV), audio-visual coding (AVS), and home
networking (IGRS and ITopHome). And China has attempted to have several of these standards
adopted by global standards bodies such as the International Organization for Standardization
(ISO), the International Electrotechnical Commission (IEC), the International Telecommunications

5
A classic example is the Byrd Amendment, adopted in 2000, which stated that the receipts for AD tariffs
would go to the American firms lodging the cases rather than to the US treasury. The WTO found in 2002
the regulation patently illegal, but it took the US until October 2007 to repeal it.
© 2008 NCUSCR • 71 West 23rd Street, Suite 1901 • New York, NY 10010-4102 • (212) 645-9677 • www.ncuscr.org
Union (ITU), and industry-based standards consortia.

Yet despite the prospect of technical standards becoming a major barrier to foreign industry, to date
China’s record of success is relatively slim. It has been able to mandate some domestic standards,
such as the 3G standard TD-SCDMA and WAPI, the Chinese alternative to Wi-Fi. Yet government
policy on behalf of these and other Chinese technologies has not guaranteed their commercial
success. Large segments of Chinese industry are integrated into business alliances that are based on
non-Chinese standards. These companies have balked or dragged their feet when faced with
government demands. China Mobile long resisted creating a TD-SCDMA network because its
existing networks were only compatible with a European standard (GSM and its 3G alternative,
WCDMA). China Mobile is now building a TD-SCDMA network, but it is hoping for a license to
create a WCDMA network and another based on WiMAX. Similarly, in April 2004 Vice Premier
Wu Yi conceded to American demands to suspend mandatory implementation of WAPI. Yet one
reason she felt comfortable doing so is that the great majority of China’s major ICT firms were
already committed to Wi-Fi. Being forced to adopt the unproven WAPI would have been disastrous,
and they voiced their concerns.

The only Chinese standards that have faired well are those where the Chinese promoters have build
broad coalitions composed of both Chinese and foreign industry partners who could cooperate on
commercializing the product. Lenovo and Haier have both attracted wide support for their
respective home networking standards, and each has a reasonable chance of being adopted
internationally because of their more “techno globalist” postures.

The area of standards where China has had more success in discriminating against foreign business
interests has been in health and safety standards and conformity assessment. China has developed a
“Compulsory Product Certification System” as well as a “China Compulsory Certification” (CCC)
mark that designate products are safe for use. Most products sold in China require the CCC mark,
and in most instances a producer is required to have a Chinese organization perform the testing and
certification. America’s Underwriter Laboratories (UL) is not allowed to directly test and accredit
products for sale in China. The US-China Business Council, UL, and others report that these rules
have been widely used to the detriment of foreign interests. Similar stories are heard with regard to
sanitary and phytosanitary standards (SPS). As suggested above, it appears Chinese industry has
more domestic political leeway to abuse health and safety standard rules because the level of
opposition from within Chinese industry to doing so is relatively limited, and consumer and safety
groups do not have the kind of political influence that industry does. Despite equally clear rules,
there is a difference across types of standards because of the varied mix of interests involved.

Competition Policy
An area where American concern is justifiable based on the perspective adopted here is
competition policy. China has a young regulatory structure to prevent abuse of monopoly position,
production and price cartels, restrictive trade agreements, and mergers and acquisitions that
substantially reduce competition. Starting in the early 1990s, China created a patchwork of rules,
led by the Law Countering Unfair Competition (1993), the Price Law (1998), and the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (2006). These laws were
weakly enforced. China began drafting the Anti-Monopoly Law in 1994; it was issued in August
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2007 and is scheduled to be implemented as of August 1, 2008. The final version is substantially
improved over earlier drafts and generally follows European Union norms of competition policy.

Nevertheless, there are at least 3 aspects of the law that are of particular concern to the foreign
business community. First, although the law forbids “administrative monopolies, “ it also says
that SOEs are allowed to maintain dominance in certain sectors deemed vital to the economy and
national security, although these sectors are not named as long as they do not abuse their
position. Second, it specifies that owners of dominant IPR cannot abuse their position, without
clarifying what “abuse” means, and subjects such firms to additional regulation on the terms by
which they license their IPR as well as lawsuits. And third, the AML requires that foreign
acquisitions of Chinese companies pass both a standard anti-monopoly review and a national
security review. This last element supercedes the 2006 regulation, but the AML does not clearly
specify what constitutes “national security,” nor does it identify the agency that will carry out the
reviews and how the negative decisions could be appealed.

There are worries that these and other aspects of the AML could be abused to protect SOEs and
discriminate against foreign companies who have a large market share or attempt to acquire a
Chinese competitor. Some potential foreign acquisitions have already been blocked, headlined
by the Carlyle Group’s unsuccessful purchase of the Xugong Group. There are also signs that
China is preparing to follow the EU and others in bringing cases against Microsoft and Intel.

There are two prominent reasons why China has a weak competition policy that is highly
vulnerable to discriminatory application which then results in a substantial conflict with the US
and others over these rules. First, China’s leading producers do not have a strong interest in
unbiased and aggressive implementation of the AML and related statutes. Conversely, Chinese
consumers have a strong interest in fair competition, but as with health and safety standards, they
are not influential advocates for their cause except when they take drastic action.

Second, there is no global regime governing competition policy. The WTO only indirectly
addresses questions of competition in its agreements, an intentional gap advocated by the US and
EU because they did not want their domestic competition laws to be subject to WTO disciplines,
nor did they want to provide WTO legitimacy to other countries’ competition authorities.
Relatedly, the US has a national security review process for foreign acquisitions of American
firms, most recently updated in the Foreign Investment and National Security Act of 2007
(FINSA). It grants the Committee on Foreign Investment in the United States (CFIUS) the right
to screen acquisitions which could harm US national security, for example, by placing a foreign
government in control of a US firm or moving critical infrastructure into foreign control. In lieu
of a global regime, the US and EU have encouraged countries to directly adopt their antitrust
principles and rules, and have created the International Competition Network as a talk shop for
countries’ competition authorities. The intentional absence of uniform rules and compliance
mechanisms and highly discretionary laws in the US and EU removes substantial pressure from
China to behave fairly. Hence, competition policy is one area where US-China frictions may
expand.

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Implications
The above analysis suggests that China does not have a free market, nor is it completely open to
trade and investment. Nevertheless, China increasingly behaves likes a conventional member of
the international community. Rather than ignore regulations altogether, Chinese government
officials and business leaders are learning how to use the rules to their advantage. At the same
time, there are cross-cutting interests in China that limit the extent mercantilist policies can be
implemented wholeheartedly, particularly for producer-oriented regimes. There is greater
opportunity for China to abuse consumer-oriented regimes, but this is a story still largely
unwritten given the young age of these regulatory systems.

The view of China as a relatively conventional participant in global governance is inconsistent

with the notion that China has pursued a unique development model. Alternatively called the
China Model or the Beijing Consensus, some claim China has violated the standard principles a
country should adopt to develop, and relatedly, it opposes the “Washington Consensus” of free
markets and their supporting institutions, including the WTO. In fact, China increasingly plays
within the rules of the capitalist game, not outside them. Though not addressed here, China’s
participation in WTO processes and meetings has not been out of the ordinary. Although it could
do more to push forward the Doha Round, to its credit, it has not been the advocate for
confrontation with the US and EU that India and Brazil have been.

In light of these findings, several principles should guide US economic policy toward China over
the next decade:

• First, where Chinese violations of its commitments are blatant, there is no reason why
the US should not use its own laws and the WTO dispute resolution system to protect its
interests. However, I expect the proportion of issues that fall into this category to fall
over time.

• Second, the US needs to be prepared to engage China in areas where interpretation of

right and wrong are less clear because existing rules are ambiguous. The US can be most
effective when it finds Chinese industry interests which share its perspective. Relatedly,
having China be more committed to consumer-oriented regimes such as safety standards
and the environment will require the political empowerment of those very consumers, a
process which can most effectively be promoted gradually.

• Third, although China has essentially adopted an assimilationist posture toward most
elements of global economic governance, the US should not be satisfied with that
convergence. There are aspects of existing rules where changes may be in the world’s
bests interests. The status quo should not be protected at all costs. For example, global
anti-dumping rules are largely a disingenuous concoction by commercial lawyers and do
not squarely address discriminatory trade practices. The WTO’s IPR rules, embodied
primarily in TRIPS, may overly protect the rights of inventors at the expense of the
public interest, particularly in developing countries. “Open skies agreements” are

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anything but open and hamper competition and good service. Groups within and outside
the US should encourage the two countries to consider revising these and other
arrangements.

• Fourth, there are several areas of economic life where there are no common rules or
where existing rules have no teeth or suffer from inadequate legitimacy. We have already
mentioned competition policy, but this situation also applies to foreign exchange regimes,
sovereign wealth funds, and certain aspects of environmental protection. These areas are
not a complete blank slate, but the lack of pre-existing hard and fast international rules
provides an opportunity for China to be invited to “get in on the ground floor” and be a
rule maker, not a rule taker, from the very start. Whereas neo-realists suggest the status
quo power’s goal is to protect the world it designed and the emerging power’s goal is to
revise those rules in its own interests, in reality, much of the world’s governing system is
still waiting to be built. It can be a world in which both the US and China have
ownership. Although there will inevitably be disagreements, engaging in building a new
system for global governance will be a central opportunity for cooperation between the
two countries and their peoples in the years ahead.

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