This article is written by Vatsal Bhargava and Amitosh Dubey, from Institute of Law, Nirma University, Ahmedabad.
Table of Contents
Introduction
The international community saw China’s entry to the World Trade Organization (WTO) in December 2001 as a landmark for free trade and economic liberalisation. China has made comprehensive promises to reform domestically and develop trade barriers through its strenuous, 15-year accession period. China has been one of the most influential members of the organisation, since joining the WTO. Its economy has been an important component in global supply chains.
China has not entirely fulfilled its WTO membership obligations and the anticipated political liberalization has not actually occurred. Alternatively, China is now aggressively pursuing an authoritarian democratic model based on state power dominance rather than individual rights and economic freedoms.
Tensions have increased between China and its major trading and investment partners. The US government has been most outspoken, accusing China of unfair trade practices, discretionary tariffs, intellectual property theft, and forced technology transfer. EU officials tend to express mostly US views, but the language they use to characterize Chinese trading and investment activities is far more diplomatic.
False promises made while joining WTO and the unfair trade practices
WTO accession arrangement contained rules prohibiting China from linking foreign direct investment or market access to technology transfer. It remains very common for China to force companies to hand over its technology in exchange for the privilege of operating in China.
Theft in Chinese IP is increasing unabated. The IP Commission Report on theft of U.S. IP Reported that in 2013, China accounted for nearly 80 percent of all U.S.-headquartered organizations’ IP breaches, which amounted to an additional $300 billion.
While joining the WTO, China decided to comply with the technical barriers of trade agreement which prohibits WTO members from using certifications and standards as a trade barrier. However, China has made the growth of local technology standards, especially for information and communications technology products, a core element of its industrial development and economic expansion strategy.
Dumping is an unfair trading practice that involves selling of a commodity at a price below its worth and is met by a punitive duty, which is an acceptable measure under multilateral trade agreements.
Manipulation of the currency happens when countries try to unfairly manipulate the exchange rate to gain an undue trading advantage. The US Department of Treasury describes currency manipulation as the country’s deliberate influence on the exchange rate between their currency and the US dollar to gain unfair competitive advantage in international trade.
Allegations on china over the unfair trade practices
The Indian government has detected ample evidence that China is dumping a main drug ciprofloxacin hydrochloride below cost at the Indian market and it is harming the Indian pharmaceutical industry. The government has discovered, after a detailed review, that the amount of ciprofloxacin hydrochloride imported from China has risen dramatically and at a pace that undermines rates in the domestic industry.
In recent years, the media has given special attention to China’s currency manipulation, which started at the same time as China’s entry to the WTO. China has deliberately disregarded the WTO, ultimately endangering the WTO’s ultimate credibility. The US must operate aggressively to raise pressure on China due to the absence of successful multilateral agreements. The only constant element is that China’s currency manipulation is a problem and it calls for a solution.
Manipulation of the currency has serious consequences on the global market. Currency manipulation across the globe is likely to be responsible for millions of jobs lost in the U.S., and a substantial amount of jobs lost in Europe.
China has used the debt financial instrument to achieve worldwide leverage and achieve tremendous control in the neighbouring countries of India, thus raising the amount of political and security threats that the nation faces. China lends billions of dollars to developing countries in the form of concessional loans, mainly for their large-scale infrastructure projects. Emerging economies are also tempted by China’s promise of low-cost loans for ambitious infra-projects, requiring substantial investment. Such developed economies, which are predominantly low- or middle-income countries, are struggling to keep up with the repayments, and then Beijing has an excuse to seek concessions or incentives in return for debt relief.
Many of India’s neighbours have fallen as victims to China’s debt trap, and ceded to China’s $8 tn initiative – One Belt One Road Initiative (OBOR) that aims to boost connectivity between Asian, African and European countries
Sri Lanka had been required to hand over ownership of the Hambantota port project to China for 99 years, after finding itself under huge debt owing to Beijing. China will occupy the highly profitable port of Mombasa in Kenya. Beijing lent large sums for the construction of Kenya’s rail network, which the African country is struggling to repay. Not just this, the Nairobi inland container depot is under threat of a Chinese invasion as well.
International companies work through joint ventures in order to operate in other industries in China. The joint ventures work with foreign and local firms, but would not permit the global corporations to have a controlling stake in the partnership. Such partnerships would force foreign companies to share their vital private technologies with local, domestic companies-firms with whom they can eventually compete in the free market. China Imposes forced technology transfer over the companies operating in its markets.
Debt traps are situations that make repaying the loan difficult, or impossible, for the borrower. A country could be a victim of a debt trap if it is trapped in the system of investing or repaying the loan repayments due to the failure to meet the regular instalments on the amount borrowed.
China has used the debt financial instrument to achieve worldwide leverage and achieve tremendous control in the neighbouring countries of India, thus raising the amount of political and security threats that the nation faces. China lends billions of dollars to developing countries in the form of concessional loans, mainly for their large-scale infrastructure projects. Emerging economies are also tempted by China’s promise of low-cost loans for ambitious infra-projects, requiring substantial investment. Such developed economies, which are predominantly low- or middle-income countries, are struggling to keep up with the repayments, and then Beijing has an excuse to seek concessions or incentives in return for debt relief.
The example of the auto industry can be understood where the mixture of foreign ownership limits and high tariffs pushes foreign automakers to serve the Chinese automotive market (one of the biggest in the world) through joint ventures. Within these terms, European automakers have argued that they are being forced to hand critical technologies over to joint venture partners that could eventually compete with them in China and other markets.
Violation of international laws by china
First, according to the Indian reports it was found that China has increased its export of (ciprofloxacin hydrochloride) medicine in India. And also, it has simultaneously increased the selling of medicine in Indian market at less than the normal value of the product, which adversely affected the Indian Pharmaceuticals Industry.
As per Article VI of The General Agreement on Tariff and Trade (GATT), which states that if, either of the party in International trade is doing dumping of its products in other party’s country which causes or threatens material injury to an established industry in that country, such activity is to be condemned.” So, According to said article this activity of China can be condemned and it can be held liable.
Second, the US stated that foreign patent holders are denied their right to enforce patent rights and are deprived of protecting their Intellectual property rights. Also, mandatory adverse contract terms are imposed by China that is less favourable for imported foreign technology. It is in violation of Article 28(1) (a) and Article 28 (2).
As per Article 28(1) (a) of The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Act), which states that, “A patent shall confer on its owner the following exclusive rights, Where the subject matter of a patent is a product, to prevent third parties not having the owner’s consent from the acts of, using, offering for sale, selling, or importing for these purposes that product, and Article 28(2) of TRIPS Act, which states that, Patent owners shall also have the right to assign, or transfer by succession, the patent and to conclude licensing contracts.
What are the possible solutions with the countries?
China has not refrained itself from performing such practices, whereas it is just increasing its area and taking more and more countries under its claws. Such practices not only affect the economy of countries but also left those countries with no other option than being dependent completely on China and acting as its puppet. It is necessary for the countries to take steps against China.
Firstly, Countries might work on increasing their internal production and decrease dependency of imports from China; rather approach other alternatives for imports. This will mainly be helpful in protecting domestic companies from unfair trade practices, such as dumping.
Secondly, the countries may avoid financial help from China, because when countries fail to repay the loan, they fall into the debt trap of China, and in return have to give something in exchange.
Thirdly, forming a team with our friend nations who are disappointed with China almost as much as we are. Further, creating agreements in which signatories agree to free trade and investment regimes, regulation and protection of intellectual property rights and judicial redress mechanisms that are robust enough. More notably, signatories should pledge not to trade or participate with state-owned firms.
Can trade war be a solution to it?
US to counter these unfair trade practices decided to impose tariffs of hundreds of billions on the Chinese Products and further decided to increase the production of goods within the country. Tariff policy also aimed to encourage the American citizens to buy the local products rather than buying Chinese. Contrary to this, China also imposed the same kind of tariffs on American products. This can be referred to by the data, “The US has imposed tariffs on more than $360bn (£268bn) of Chinese goods, and China has retaliated with tariffs on more than $110bn of US products.”
Now being the world’s two biggest economies with high exports and imports, these two countries were not severely affected by this trade war. However, for an instance if it was India at the place of USA, its economy would have been severely affected because many sectors in India are highly dependent for imports such as smartphones, telecom equipment, pharma, electric appliances, medical equipment, auto components, solar power, textiles and accessories for many other Indian finished products.[ii] Not only India but there is several other countries which could face same. So, starting a trade against China cannot be a solution until and unless the country’s economy is strong, however making allies against it can be helpful.
Conclusion
Due to fears regarding unfair trade practices, companies operating in businesses are subjected to increased import competition from China and they have seen a decline in investment in research and development. Unrestricted funding for lower-risk Chinese firms has affected innovation, as well as equal competition and the business acumen. The global cost of innovation therefore rises. Unfair and mercantilism-based innovation exchange may decrease profitability by generating more market overcapacity and lower prices for competitive products than what market forces will generate.
In India, people tend to purchase cheap Chinese decorative lights in anticipation of the Diwali season, violating the quality guidelines set by the Bureau of Indian Standards (BIS), as domestic products are costly and lack attractiveness. For its better finish, low cost and range, people favour Chinese products. Customers see goods from both Indian and Chinese productions but mostly end up opting for Chinese products.
Conclusively, for tackling this major issue of the unfair trade practice the government should spread awareness amongst the citizens as a first step. There should be an increasing demand in industrial countries for fair trade rather than free trade. Unfair trading practices, such as late payment of perishable commodities, last minute cancellations of orders, pre-emptive or retroactive alterations to supply agreements and misuse of confidential data should be restricted.
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