The accession protocol to the World Trade Organization (WTO) that the People’s Republic of China (PRC) negotiated applied multilateral rules on subsidies with special flexibility. This pragmatic arrangement allowed China to maintain essential aspects of its former industrialization model, which, together with guaranteed access to markets, only further bolstered its export success. Concretely, it allowed China to maintain its special economic zones, temporary import of intermediate goods and industrial policy, despite WTO bans on these subsidies. When China joined the WTO, exports took off and industrial growth continued without interruption, to such an extent that the specialization profile of these exports began to upgrade.

INTRODUCTION

Export subsidies on manufactured goods have played a major role in the industrialization of developing countries, especially in Southeast Asia after the Second World War. For developed countries that import these manufactures, subsidies were preferable to tariffs and non-tariff barriers because they constituted a step towards making global trade more free, by setting export companies in developing countries on the path to producing competitive manufactured goods. For some developing and transitioning countries, such as the "Asian tigers," and the People's Republic of China (PRC) before it joined the World Trade Organization, this policy of promoting the exportation of manufactures instead of protecting against their importation was instrumental in the success of outward-oriented industrialization projects.

Although these subsidies were initially welcomed, the fact that they were so effective in promoting manufactured exports made them a problem for importing countries, whose evolving position is reflected in the trend towards export restrictions outlined in the General Agreement on Tariffs and Trade (GATT), which were further tightened following the end of the Uruguay Round when it became the WTO. This multilateral shift in the attitude towards export subsidies affected the PRC because the conditions of its accession not only required the country to accept stricter rules in this regard, applicable only to new members, but also additional rules applicable exclusively to China. Thus emerges the doubt as to whether these changes related to export subsidies that the PRC has had to implement have negatively impacted its export performance.

The literature on the impact of membership in the GATT/WTO on the export performance of its new members is inconclusive. Some authors deny that there is any relationship at all between membership and increases in the total volume of international trade.¹ Others have found that the impact is different for developed and developing countries; imports increase for the former and exports increase for the latter. In this way, although the total volume of international trade may increase, the impact varies depending on how developed the countries involved are, and this is the aspect this paper is interested in exploring. Likewise, authors have found that the impact varies even among developing countries; that is, among those that joined the GATT before the new rules were adopted, there is no verifiable increase in imports, because they still enjoyed the special and different treatment given to developing countries that did not require them to radically open their domestic markets. However, for developing countries that have joined with the new rules, imports did indeed rise, quickly and significantly, due to the fact that they did not enjoy this special treatment.² In light of the fact that the PRC is in this second category, we have even more reason to believe that its membership in the WTO could have a negative impact on its trade balance.

Insofar as export subsidies have previously contributed to the success of the outward-oriented industrialization model in East Asia, the fact that multilateral trade bodies have banned these subsidies should reduce the manufactured exports of developing countries. Based on the classical Bhagwati theory, for example, the conviction that subsidies on production constitute the best policy to offset the domestic distortions that prevented producers in developing countries from competing in the global market has become widespread.³ From there it arises that banning export subsidies and limiting the use of domestic subsidies will necessarily produce the effect of acting as a disincentive to exporting in developing countries that accept the new WTO rules – and even more so for the accession protocol of the PRC, because it imposes even stricter ad hoc rules. It is worthwhile to keep in mind that not all theoretical schools of thought view this issue the same. The opposite perspective asserts that the stricter the rules on subsidies, the more international trade there will be,⁴ because these rules constitute mechanisms that allow governments to justify eliminating inefficient subsidies and, in the specific case of the national government of the PRC, do away with subsidies for state enterprises that operate with losses, in turn obliging provincial and local governments to do the same,⁵ although it should be noted that this perspective is more concerned with increasing total international trade, and not trade for developing countries.

Between these theoretical extremes, we share the view that subsidies have a positive effect on exports in terms of the amount of manufactured exports and the trade balance, but to demonstrate this, we offer new evidence related with the specific type of subsidy that is decisive in promoting these manufactured exports, namely temporary imports for re-export, a portion of which can still be used while others cannot. By the WTO definition, the banned portion constitutes a subsidy, while the other portion does not, despite having the effect of promoting manufactured exports. We provide empirical evidence that demonstrates that the impact of joining the WTO under these conditions has been positive for the manufactured exports of the PRC, instead of negative, but not because all export subsidies have been eliminated, but rather because the major subsidies have been preserved. The hypothesis, therefore, is that there is indeed a direct relationship between maintaining this temporary import for re-export regime and the increase in manufactured exports of the PRC following its accession to the WTO, despite the fact that a series of other export and general production subsidies were eliminated. Without the import tariff exemptions that the PRC usually enjoys, through a variety of customs mechanisms grouped under the category of temporary imports, it would be impossible to produce these manufactured goods for export. And, given that they are essential to the globalized production of manufactured goods, the WTO restricts the use of various types of subsidies, but continues to allow this mechanism in particular, despite the earlier tendency to ban them in the GATT. The PRC negotiated the permission to continue implementing other strategic subsidies on production and the export of high-technology manufactures to initiate industrial scaling that would eventually allow it to eliminate these subsidies and fully liberalize its economy.

To demonstrate this, the first section examines the terms under which the rules on subsidies were introduced in the GATT and how these were toughened during successive Rounds until export subsidies were finally banned by the WTO. It also looks at the significant exception made to these rules for the temporary import of intermediate goods in spite of the ban on the temporary import of capital goods. The second section analyzes the conditions under which the WTO negotiated the accession of the PRC with regard to export subsidies and rules against subsidies on the rest of production. The third section delves into the real impact of this specific manufacturing subsidy policy on manufactured imports from the PRC, considering the percentage of total exports of the country that depend on the temporary importation of intermediate goods and the relationship between this set of customs mechanisms and the ordinary trade in which the country engages. The final section reflects on what these new multilateral regulations have meant, both for the manufactured exports of the PRC and their implications for the country’s future industrial development policies.

1. THE GATT AND WTO RULES ON EXPORT SUBSIDIES

The only requirement that the 1947 GATT agreement imposed on its signatories with regard to export subsidies was that countries had to notify them and if another member considered that these subsidies were harmful, the subsidizing country was required to engage in a consultation with the petitioner, although there would be no consequences if the choice were made not to restrict them. This began to change when the GATT was revised in 1955, and began to assert that export subsidies could be detrimental not only to some members but also to the very objectives of the body; consequently, the sale of non-primary products at prices below domestic market prices was banned. This anti-dumping provision was included in the text of the GATT,⁶ although it was not enforced until November 14, 1962, and even then only by the 17 countries that signed that Declaration of 1960, the outcome of a special working group on the topic.⁷ The Tokyo Round gave rise to another Agreement on Subsidies that entered into force on January 1, 1980. Although more countries signed on, the ban on export subsidies for non-primary goods was drafted under the same terms: it continued to be voluntary and less-developed countries still received special treatment. What it added was a small provision on compensatory measures that signatories could employ to penalize members that violated the Agreement. It was not until the Uruguay Round in 1995 that the ban was extended to all export subsidies for any type of product and all members (including developing countries and economies in transition, with exceptions and minimal transition periods for the poorest that had not participated in the previous Agreement). These changes were laid out in the Agreement on Subsidies and Countervailing Measures (ASCM), which had been part of the GATT since 1994 and then became a crucial element of the WTO.⁸

According to this ASCM, any financial contribution or other form of support from a government to a company to the benefit of the company constitutes a subsidy, regardless of whether this contribution is indirect or through tax exemptions, the granting of goods and services beyond the general infrastructure or even through the purchase of goods.⁹ However, these subsidies are only under the jurisdiction of the WTO when the subsidizing authority limits them to certain groups of companies or certain branches of production, that is, when they are “specific,”¹⁰ although these too are divided into prohibited, actionable and non-actionable.

Prohibited subsidies are those that are not permitted under any circumstance and whose use shall always give rise to countervailing measures; contingent on the export of a certain percentage of what is produced or the use of national inputs.¹¹ Actionable subsidies are those that can give rise to countervailing measures if any member files suit for damages and if the subsidizing member cannot demonstrate the absence of unfavorable effects.¹² And non-actionable subsidies are those that were permitted, because they fulfilled some other desirable function such as promoting research or regional development or protecting the environment,¹³ although they stopped having effect on January 1, 2000. In this way, the original view of export subsidies has been transformed from once being considered an acceptable policy, because they promoted industrial development and made international trade more free, to now being prohibited for distorting international trade, and the prevailing view is that actionable subsidies are harmful unless proved otherwise, while non-actionable subsidies have been ruled out. Even so, one practice that would seem to constitute an export subsidy, namely "temporary importation,” has survived this series of WTO reforms, at least in part, and this is extremely relevant to the PRC and other underdeveloped countries and economies in transition, because this is what will allow them to join global production networks through a variation on the outward-oriented development model implemented in East Asia years earlier. This is why this paper examines temporary importation in greater detail.

Temporary imports are not technically imports because the capital goods (machinery and equipment) and intermediate goods (industrial inputs) imported under this regime do not technically enter the customs territory of the country, although they do enter physically. Their entry is contingent upon being “re-exported” later on, so tariffs are not charged and no other import controls are applied. For the temporary importation of machinery and equipment, maximum time periods for how long they can remain are generally imposed, as well as depreciation schemes to indicate the degree to which they were consumed in the productive process, so that they do not have to be re-exported, while industrial inputs must always be re-exported, incorporated in the final exported good. Temporary importation may be considered a sort of subsidy because the ASCM asserts that subsidies exist when "government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)”.¹⁴ Moreover, they would even seem to constitute prohibited subsidies, because the tariff exemption on importation is contingent on the exportation of the final product in which the goods are incorporated. However, a footnote in the section of the ASCM that prohibits them stipulates that “the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy….¹⁵ This breaks with the previous trend of restricting them. In fact, the temporary importation of machinery and equipment is still prohibited,¹⁶ and the temporary importation of industrial inputs was also prohibited in the original text of the North American Free Trade Agreement (NAFTA).¹⁷

The ASCM justifies the decision to prohibit the temporary importation of machinery and equipment while simultaneously permitting industrial inputs with the following analogy. In summary, it claims that in the same way that countries offer Value Added Tax (VAT) exemptions for the purchase of domestic inputs used in the production of exported goods, it can also offer exemptions on the temporary importation of production inputs used in the production of goods for exportation. In other words, both mechanisms exempt the producers of goods for export from paying indirect taxes chargeable on the purchase of inputs used in production. This does not apply to capital goods because they are not considered to be materially present in the final product.¹⁸ What the ASCM is saying is that it is now equally important to drive international chains of inputs as to drive national chains, a posture that runs contrary to the strategy of some individual members, who promote their national productive chains to increase exports through the increase in indirect exports of national inputs incorporated into final products, something that was tolerated for a long time in the GATT. This new WTO position reflects the needs of the globalized production of goods and services, which, without these exemptions, could not spread to underdeveloped countries that maintain high tariffs and other restrictions on importation. Instead, with these exemptions, the inputs used in production can cross borders as many times as is necessary without accumulating the cost that would represent a series of tariff payments. What we aim to elucidate below is the position of the PRC with respect to these temporary imports during the country’s negotiations for accession to the WTO.

II. ACCESSION OF THE PEOPLE’S REPUBLIC OF CHINA (PRC) TO THE WTO AND ITS COMMITMENTS REGARDING EXPORT SUBSIDIES

The PRC requested “readmission” to the GATT on July 10, 1986, but had to reformulate its application as “admission” on December 7, 1995, a process that was eventually finalized on November 10, 2001. Although the first application had been made when the Agreement on Subsidies was still voluntary, the second was filed after the 1994 GATT reforms, including the ASCM, and the PRC was admitted to the WTO after the non-actionable subsidies were eliminated in 2000. For all of these reasons, the PRC should have had to accept all of these new commitments that would have changed the policy of promoting manufactured exports that had produced such good results over the 22 years since China began to open its economy, a time during which the country was not subject to multilateral rules on export subsidies. This section aims to analyze how the PRC negotiated the application of these new rules in its accession protocol to the WTO, especially for export subsidies, and, in passing, state enterprises, as well. To do so, we must understand the typical practices the country employed before its accession, as well as restrictions on their use that were implemented subsequently.

The principal sources of information on legal commitments celebrated are: the Decision from November 10, 2001¹⁹ that accepted the accession of the PRC to the Marrakesh Agreement and the Report of the Working Party on the Accession of China²⁰ that negotiated the ad hoc rules for this transitioning country to join and “whose commitments…will form an integral part of the Agreement on the WTO.”²¹ During this working party, the PRC representative argued that the country should enjoy the favorable treatment that the WTO offers to developing countries; the other members, however, advocated for a "pragmatic" approach because the PRC is so big, has a high growth rate and its economy is in transition, all of which could affect them. This "pragmatic" approach was understood as the PRC having to take into account the needs of all of the other members in the realms of negotiation most important to them, in exchange for granting certain exceptions in areas to which the PRC was sensitive.²²

Undoubtedly, the issue of export subsidies was of great interest to all other members, especially with regard to special tariff exemption regimes, taxes and other regulations applicable in “special economic zones.” The PRC was interested in negotiating the right to continue with the subsidy policies that were already in place, at least within already-existing zones, including economic and technological development zones, as well as other like zones.²³ Another area of interest to the rest of the members was state enterprises, even though they did not constitute export subsidies, and there was no clear opposition to this demand from the Chinese representative. In regard to the first of these two points, the PRC became obliged to notify any expansion or modification of its special economic zones, including laws and regulations related with them. The PRC was also required to charge all taxes, tariffs, restrictions and other measures corresponding to imports when they passed through the special economic zones into the Chinese customs territory, and to grant preferential treatment within these economic zones on the basis of "non-discrimination" and "national treatment." But the PRC did preserve the right to continue with the subsidies that were considered non-specific within these zones.²⁴ By granting these subsidies in a non-discriminatory fashion, but restricted to exports in special zones, they could be classified as non-specific subsidies. Regarding the second point, all subsidies that the governments (national, provincial and local) granted disproportionately to state-owned enterprises would be defined as specific, and China also became obliged to notify any subsidies granted within its national territory.²⁵

In compliance with this reporting obligation, the PRC communicated the following subsidies to the WTO, setting the year 2000 as the date for their termination: 1) to state enterprises incurring losses due to the fixed price of the products they manufacture or the growing cost of resources, in industries such as coal, oil, the light industry, chemicals, textiles, metallurgy, etc.,²⁶ in addition to the gradual elimination of other subsidies to state enterprises;²⁷ and 2) the priority granting of loans and foreign currency to the automobile industry, contingent upon its export performance, as well as preferential tariffs for automotive companies, contingent upon the percentage of production located in the country. The first measure seems arbitrary because instead of allowing these specific subsidies to be eliminated as the result of potential suits for damages, they were eliminated as a block in advance; by contrast, the second clearly refers to the prohibited specific subsidies because they target specific branches of industry and were tied to export performance or local content.

In other areas, the following was eliminated: 1) multiple customs regimes for different areas of the country, and the national general tariff was extended to state enterprises and institutes;²⁸ 2) the practice of exempting or reducing tariffs on the importation of equipment and materials by foreign-invested companies for various purposes, such as national technological renewal, infrastructure building projects, special economic zones and technological and economic development zones;²⁹ and 3) the tariff and VAT exemptions on technology and equipment imported by foreign and national investors that participated in industrial sectors, for products and technologies promoted by the State.³⁰ The purpose of the first is transparent: charge the same import tariffs and duties to everyone, including state enterprises and institutes, without exception; so too is the third, which fulfills the ASCM decision to prohibit the temporary importation of capital goods, extending the application of tariffs to the importation of all types of technology and equipment. However, the second measure is somewhat confusing because, in addition to equipment, it also exempts or reduces tariffs on the importation of "materials." However, another section explains the permission to defer or exempt tariffs and VAT on materials "imported for the purpose of processing and assembling for overseas clients or manufacturing products for export."³¹ In other words, when the materials are imported temporarily under customs regimes that destine them for re-exportation, they are permitted. This permission does not have to be phased out in the future because it is based on general criteria, applied equally to any type of company and all types of exports, rather than based on specific guidelines, such as those that previously restricted it to companies with foreign investments for specific purposes determined by the State. Thus, this temporary importation is permitted because companies of all types can equally enjoy these exemptions or deferrals of tariff and VAT payments, and because they can be used for any type of processing or assembly that an overseas client requests; however, if the materials are imported definitively, even to special zones, the tariffs or other duties on importation shall not be reduced or exempted.

There are also other subsidies reported for which no termination deadline has been declared. In the special economic zones of Shenzhen, Zhuhai, Shantou, Xiamen and Hainan, a rate of 15% income tax is applied to foreign-invested companies and to 100% foreign companies, rather than the normal 30%. This is also true of high-tech projects that require investments of over 30 million dollars in sectors promoted by the State, such as energy, transportation, telecommunications, software, aviation and aerospace, laser, pharmaceutical industry, medical equipment and new materials. For foreign-invested companies established in older zones of the cities in which these special economic zones are located, the rate is 24%; and foreign investments of over 5 million dollars with an operating period of over 10 years in the services sector are exempt from this income tax in the first year, starting from the first profit-making year, and pay a 50% reduction during the second and third year.³² Preferences in the special area of Pudong in Shanghai are similar to as they were before. The 15% income tax is charged to foreign-invested companies dedicated to productive activities. Those dedicated to building projects for energy and transportation, with over 15 years of operations, shall receive exemptions for a period of five years, starting from the first profit-making year, and shall pay a 50% reduction from the sixth to the tenth year.³³ Likewise, in the numerous economical and technological development zones in the country, foreign-invested companies shall pay 15% income tax, 24% in old areas of the cities where these zones are located and 15% on high-tech projects with foreign investment of over 30 million dollars and a long paying back period, as well as projects in sectors encouraged by the State.³⁴

It is surprising that these subsidies to foreign or foreign-invested companies located in various special zones were allowed to continue to exist; not to mention the subsidies for investments of a certain amount, subsidies for high-tech projects and projects the government wants to encourage, in specific locations – in the same way that it was striking that companies located in special zones can continue to temporarily import materials. Some of the practices that have been permitted seem equally specific as those that were eliminated. The outcome therefore appears, if not arbitrary, at least the result of a negotiation between governments in which each party defined what was of greatest interest to it, despite the fact that the WTO has rules that are supposedly applied to everyone. Some members of the Working Party made similar observations since the beginning of the negotiations – alleging that the subsidies used in special economic zones seemed to be subsidies tied to exports or the use of national content – but the PRC representative countered that although there was currently preferential treatment for foreign-invested companies, the main purpose of those subsidies was to promote regional development and the absorption of foreign direct investment (FDI). It would seem, then, that the elimination of the subsidies permitted due to the concept of regional development was not applied in the case of the accession of the PRC, and was rather replaced by a new criteria of “absorption of foreign direct investment.” But even though the protocol allowed the PRC to maintain these subsidies in special zones, the representative noted that the Chinese government had committed to not setting up any new zones of this type, emphasizing what had been eliminated from the zones, that is, the reduced tariffs previously applied there, such that any product introduced from these zones into the rest of the country would be subject to the highest taxes and tariffs, along with all other restrictions on permanent importation, including temporarily imported inputs introduced to the rest of the territory and incorporated in products manufactured in these zones.³⁵

What is clear in all of this is that these rules were designed ad hoc to satisfy the most pressing needs of the PRC and all other member countries; they are pleased because they will continue to enjoy the privileges granted to their FDI, while simultaneously obliging the PRC to speed up its transformation to a full market economy. The PRC was satisfied because it was allowed to continue what it was already doing to promote manufactured exports through processing and assembly – not necessarily fostering domestic consumption because the standardization of tariffs makes the definite importation of these products from special zones more expensive –; and also because the PRC was allowed to continue encouraging investment for specific sectors, types of producers and geographic areas by charging different tax rates. The fact that the PRC was forced to extend these subsidies to Chinese-capitalized companies, so that they would not be considered “specific,” means that Chinese-capital private enterprises will be included in schemes to promote processing for exportation, with incentives to scale production towards more advanced forms of manufacturing with higher value added locally.³⁶ Based on all of the above, it would be pointless to keep insisting that these subsidies do not comply with the letter of ASCM; the rules that count are those that were negotiated in the protocol. There should be no cases of non-conformity by foreign companies insofar as they continue to benefit from these arrangements, although there may be suits against the exports of other companies whose products contain inputs coming from state enterprises that continue to receive governmental subsidies. What is substantive here is that we have demonstrated that the PRC achieved a series of concessions that could potentially neutralize the hypothetical negative impact on its exports and balance of payments predicted by the various theories reviewed above as a result of joining the WTO without the status of a developing country. With that said, the next step is to measure the impact of accession to the WTO on the manufactured exports of the PRC.

III. EXPORTATION OF MANUFACTURED GOODS FROM THE PRC TO THE WORLD

It is already widely known that the PRC has enjoyed success with its export promotion policy, which began with economic opening in 1979. What this section will explore is the impact of the accession of the PRC to the WTO on the country's manufactured exports. Did the growth rate of these exports fall starting in 2001 with the formal accession? Did imports grow disproportionately to the point of harming the trade balance? Did the country stagnate in its role as an exporter of traditional manufactured goods? Did the export model reproduce the same underdevelopment as before or did it spark development? What must be documented to answer these questions is the volume and breakdown of exports starting in 2002, the first year for which all of the rules negotiated in the WTO accession protocol entered into force. To do so, we shall use data from the official source of the PRC, China Customs, which does not include foreign trade with Hong Kong or Macau, two special entities for the country that continue to function as trade entrepôts for the rest of the world, which is why including data for these two entities would overestimate the amount of exports of the PRC because the majority of them originate in other parts of the world and not in continental China. In addition, we must note that excluding them underestimates the exports of the PRC because some companies in the continental part export through logistics intermediaries domiciled in those entities, but this is the alternative that least distorts the data shown below in Table 1 and in the last table, reporting absolute exports, although it does not affect the other tables that analyze the relative composition of the different types of products.

In Table 1, we can observe that exports started to grow constantly precisely starting in 2002 and did not backtrack at all, in absolute terms, until 2009, with the outbreak of the financial crisis, although they recovered once again in 2010. In this way, after the PRC joined the WTO, there were seven continuous years of extraordinarily high growth rates in the export sector, of between 22% and 35% annually, and similar rates were once again reached in 2010 and 2011. Imports also grew, but always in lower absolute amounts, even starting in 1994, which translated into a moderately positive trade balance until 2004 and major surpluses from that year forward, although they fell in absolute terms between 2009 and 2011.

Table 2 reveals the marked specialization of the PRC in the exportation of manufactured goods, and not in primary goods. We can observe the constant growth of the percentage of “manufactured products,” which began in 82% in the first year of the period and rose to 95% of all exports by the last. Inversely, the exportation of "primary products" went from 18% to as low as 5%. Looking at imports, "primary products" rose from 14% to 35% over the nine-year period in our source, indicating a growing dependence abroad in this sector, while the importation of manufactured products fell from 86% to 65%, indicating the growing domestic supply of manufactures. This justifies focusing this paper on how the PRC has specialized in manufactured exports.

Table 3 specifies the exact breakdown of the manufactured products that characterize PRC exports; it reveals that in the last year of the period, 50% of manufactured exports were in the category of “machinery and transport equipment,” which is surprising because these are capital goods and durable consumer goods, both high-tech. By contrast, only 18% of these “manufactured exports” are what would be called “manufactured goods,” traditional products such as textiles, clothing, yarn, metal products, cork, wood, paper, cardboard and rubber. Of course, the ratio of low-tech to high-tech products was not always like this. Rather, it has evolved over the past 19 years, as exports of “machinery and transport equipment” have risen from only 20% in 1993 as traditional manufactures fell, from 22% in the initial year. The only quantitatively significant category is a miscellaneous category of manufactured goods that also fell from half to one-fourth of total manufactured exports over the time period.

Table 4 analyzes in greater detail the only category of manufactured products whose share increased with respect to the others during the time period and demonstrates that in the last year of the period, three types of high-tech products accounted for three-fourths of exports: 23% were “office and automatic data processing machinery (ADP),” 24% from “telecommunications and sound recording equipment,” and another 24% for “electrical machinery.” What is most striking here is that all of these are capital goods, that is, machinery and equipment. It is also remarkable that despite having the same share in 2011, the specific type of product that grew most rapidly was “office and automatic data processing machinery,” which rose from only 12% at the beginning of the period, while electrical and telecommunications machinery fell proportionately. This points to a new productive paradigm characterized not only by the exportation of capital goods but also one that has been updated for new cutting-edge technologies, which right now is self-programming machinery.

Table 5 explores the specific contribution of this category of machinery and equipment to the trade surplus of the PRC, which actually was not positive until 2004. The large deficits in the early years were surely due to the need to import machinery and equipment to kick off the outward-oriented industrialization process, but they started to fall practically from the beginning and continued to drop over the first six years. However, these deficits started to rise again starting in 1999, producing another five years of negative numbers. One hypothesis to explain this situation would be that the first decrease in the deficit was the result of the growing practice of importing machinery and equipment temporarily, which proliferated with FDI in special zones because, under this temporary model, machinery and equipment were not recorded as an import. The subsequent increase in the deficit would reflect the adjustment to the new WTO rules that prohibited the temporary importation of machinery and equipment, obliging companies to import these items permanently.

Regardless of whether or not this is truly the cause of the deficits, the fact remains that machinery exports began to grow faster than imports starting in 2000, a trend that continued until the 2009 financial crisis. This is therefore an example of how the PRC managed to obtain the large surpluses that tend to be associated with outward-oriented industrialization. The tremendously positive change that took place right when the PRC joined the WTO is extremely relevant to this study because it constitutes an example of how a country can take advantage of the WTO rules, either through the unilateral elimination of taxes on capital goods, which other countries around the world have implemented in response to the prohibition on temporary exports, or simply through access to new markets that WTO membership offers for very competitive products. Although the PRC has yet to recover the same growth rates it had before the crisis, the trade balance in the category of high-tech products has continued to grow, which not only contributes to the country’s overall surplus, but also has led to a new trend towards specialization in the sector of cutting-edge machinery manufactures.

CONCLUSIONS

This paper has demonstrated that even though the ASCM prohibits export subsidies, the accession protocol of the PRC to the WTO includes some exceptions to these rules. One of these exceptions allows the country to maintain the same practices to promote export manufactures in special zones that it used before. These practices resemble the prohibited subsidies. The only difference is that the members of the WTO have expressly decided not to consider them as such. The other exception to the ASCM rules was introduced in this agreement during the stage when the accession of the PRC was under negotiation, allowing member countries to continue using the temporary importation of intermediate goods with an amendment to the wording that had prohibited them; the use of this mechanism in special zones in the PRC was explicitly agreed upon in the protocol. Moreover, with regard to the first of these points, the members allowed all of the special zones that already existed when the PRC joined to continue operating normally and indefinitely thereafter, and that within these zones, the government could continue granting subsidies to foreign companies, joint investments, high-tech enterprises and large companies. Likewise, it could continue to subsidize other activities encouraged by the government in its regional development plans (even though the WTO had already eliminated this type of non-actionable subsidy) and projects to “facilitate the absorption of foreign capital” (even though this rule has not been sanctioned by the WTO).

These practices undoubtedly constitute subsidies because they exempt, defer or reduce taxes and because they are limited to special export zones, they would certainly seem to be export subsidies. However, one reason why they may not be considered as such is that the WTO does not view these zones as export-promoting mechanisms; rather, they are not only for exportation, but also for importation, because after the PRC joined the WTO, it had to standardize all foreign tariffs throughout the entire country instead of continuing with the multiple rates that existed before. With the same tariffs in these zones as in the rest of the country, the industrial inputs imported there could be resold (incorporated into processed goods in the zones) in the rest of the country without incurring higher taxes, making these zones import zones as well. Moreover, the logic behind the decision not to consider these subsidies as prohibited seems to be that by limiting the number of zones to those already in place, the protocol guarantees that any future subsidies exemption outside of the zones would have to be implemented through the generalized lowering of taxes and tariffs or the extension of the benefits to the entire country. Although this will take years to happen, it implies, per se, the eventual elimination of subsidies when that occurs. Even so, there are other doubts regarding the legitimacy of the subsidies that the protocol permits in special zones because they are very similar to what the ASCM defines as specific subsidies, since they are contingent upon specific requirements such as, for example, the type of technology, activity or capital amount in the subsidized company. But the protocol does not consider them specific because it obliges the government to extend them to all companies existing within these zones, regardless of the origin of their capital, even though subsidized companies must fulfill the specific requirements mentioned above. Beyond the theoretical arguments employed, the practical outcome is that all of the special zones can continue operating exactly as they have since before the PRC joined the WTO.

This surprisingly lax enforcement of the rules on subsidies is in contrast with other agreements in the protocol that seem exaggeratedly strict, especially with regard to the subsidies preferentially granted to state enterprises. These subsidies were a priori defined as specific, although this measure was not based on any rule at all. Their elimination was deemed a priority, obliging the PRC to do away with the subsidies it offered to state enterprises before it could join the WTO. This is therefore a two-sided arrangement in which, on the one hand, the PRC was offered the chance to continue its temporary import regime and subsidize the exports it needed to maintain exported manufactures and, on the other, it offered the rest of the members a guarantee that the PRC would have to accelerate its conversion into a market economy. However, it would be too simplistic to view this arrangement merely as a tradeoff between the continuation of export subsidies, on one side, and state enterprise reforms, on the other, because this would not take into account the fact that there are conflicting interests between the two issues. It is known that the global production chains that allow the PRC to export manufactured goods benefit not only this country but also, and especially, some multinational corporations from developed countries. As such, some member countries share the interest of the PRC in continuing these subsidies and maintaining the temporary import of intermediate goods. With regard to the elimination of subsidies to state enterprises, the alignment of perspectives is also unclear. Although evident that the other members are especially interested in abolishing this type of subsidy, we cannot forget that the national government of the PRC was willing to accept this elimination, insofar as it gives the government a pretext to oblige provincial and local governments to rationalize the operations of their enterprises.

Rather, the protocol seems to combine the economic interests that aim to ease the operation of global production chains with the strategic interests of WTO members in expanding their rules to transitioning countries, although to do so, a step backwards was taken in the realm of export subsidies, because this was the only way to guarantee the PRC would join. Thus, in the same way the free trade system spread in the post-Second World War period with the terms of accession for developing countries to the GATT, once again, membership is expanding to transitioning countries, offering them the same as before: permission to subsidize manufactured exports through an outward-oriented model, first, and later inward-oriented as well. We must not underestimate the importance of this inward-orientation because even since the beginning of its economic liberalization, the PRC has sought to combine the promotion of exports with a project to gradually modernize its domestic economy, starting with special zones and subcontracting foreign companies to lay the groundwork for insertion in global production chains, first through foreign-capital companies and second through private Chinese-capital companies. What is important is that this strategy has increased exports.

In light of the theory, the export success documented here is paradoxical because the PRC did not join the WTO with any special or differentiated treatment, such as what the GATT offered to developing countries, so the expected outcome was the opposite. It has also been demonstrated that the accession terms negotiated in the protocol allowed the PRC to continue subsidizing manufactured exports, so the negative impact anticipated without this special treatment did not occur, precisely because equivalent mechanisms were negotiated to avoid it. Thus, the finding that that manufactured exports and the trade surplus grew exactly starting in 2002 – just when the rules negotiated in the WTO accession protocol took full effect – should be kept in mind to update this theory to include the different treatment the PRC was granted through ad hoc exceptions to the WTO subsidy rules negotiated, which have allowed the PRC to continue subsidizing manufactured exports and engage in industrial scaling. Although the PRC had to give up a lot in terms of state enterprise subsidies, it was able to exponentially increase exports thanks to the guaranteed access that membership in the WTO gives to the markets of the other members, without having to strictly comply with the rules on subsidies.

The exports of countries in the final links of global production chains, even when they produce large trade surpluses, tend to be fleeting, because the companies subcontracted in these countries continue to be dependent on the decisions made in other links of the chain. The true success of the PRC is that it liberated itself from this pattern. Its exports fell momentarily only after the financial crisis, but the trade surplus recovered soon after. There has been true industrial scaling for exports, to such an extent that it has transformed the manufacturing specialization of the country from being an exporter of traditional goods to an exporter of capital goods. This scaling positioned countries in the PRC to take advantage of the ASCM prohibition on the temporary import of capital goods, a change that took place during the negotiation of the accession protocol, although it was rumored long before. As such, instead of suffering the consequences of this prohibition – making the import of these goods more expensive due to the tariffs charged or forcing the country to reduce tariffs on imports so as not to harm the production of other consumer goods – the PRC was prepared to substitute the temporary importation of capital goods with local production, as well as to export this type of good to other countries that had not foreseen the opportunity to substitute the temporary importation of machinery and equipment and had to import them permanently.

The key importance of this industrial scaling and the fact that it has taken place progressively over the period studied without a clear connection to the accession date to the WTO means that we must include another element in the theoretical explanation to complement the need for special and differentiated treatment for developing or transitioning countries. Because industrial scaling is the result of a policy to encourage the production of those high-tech capital goods that the government considered strategic and the insistence on the right to continue with these specific subsidies after joining the WTO, it must be included in the theoretical explanation, pointing to the importance of having the right subsidies policy as part of the country’s own development plan. It is not a matter of imitating the same strategy that worked in the PRC; even if another country were the same size and enjoyed the same geopolitical situation, every time period is different, which is why countries must implement their own plans to adjust to their specific circumstances. Rather, it is necessary for countries to develop their own strategies based on a combination of what the international market is asking and national interests, and equally flexible treatment must be given to other countries in the WTO. It is not enough to simply comply with the rules defined by international bodies and the requirements of global production chains, but nor is it viable to rule out this form of production or the WTO, whose logic – as has been demonstrated – can complement national development plans.

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