HOW TO BRING GOOD GOVERNANCE TO CHINESE COMPANIES

Susan Aaronson
Monday, July 23, 2007


China is fast becoming the behemoth of the global economy; it already produces one-quarter of global production. But China's market clout is not matched by its governance prowess. The world's political and economic stability is threatened by the Chinese government's failure to implement the rule of law. Modern China has no culture of compliance. Price matters more than quality and bad companies set the norms against which others compete.

China's inadequate governance is everybody's business. Hundreds of people and animals have died; thousands more have been poisoned or made sick by tainted Chinese products. Nations have not responded effectively. Guatemala, Panama, France and the US have beefed up their inspection of Chinese products and halted imports of goods such as tyres, toothpaste, shrimp and toys. Such solutions are politically expedient, but they will not move China towards a culture of compliance.

Meanwhile, Chinese officials have responded inconsistently. On the one hand, the government has acknowledged responsibility for some unsafe food, toys and medicines and co-operated with its trade partners on inspections. At home, it has beefed up plant inspections and warned violators that they will be punished for ignoring Chinese product safety or environmental laws. On the other hand, China has proclaimed that many of the allegations are “protectionist” and must be countered. For example, it blocked the shipment of imported fruits from the US because they contained “excessive amounts of bacteria and moulds”. It also banned imports of Evian water, claiming that it had too much bacteria. Clearly China and many of its trade partners are engaged in an escalating series of tit-for-tat trade disputes. Such disputes will do little to improve China's capacity to enforce product safety or environmental laws.

Trade policymakers must think strategically to address this problem. They will find a mechanism for such action in China's WTO accession agreement. This agreement, signed in 2001, included stringent conditions. First, it required China to ensure effectively to enforce all laws and other measures related to trade. (Product safety standards are examples of regulations pertaining to trade.) Second, it required that China apply WTO rules throughout Chinese territory. Thus, as a condition of accession, China was required to “apply and administer in a uniform, impartial and reasonable manner all its laws, regulations and other measures of the central government as well as local regulations, rules and other measures . . . pertaining to or affecting trade”.

Here is how WTO members might collaborate to use that agreement to hold China to account. Trade officials from affected countries could argue that China's failure to uniformly administer its laws and regulations is distorting trade and, in so doing, China is breaching its accession obligations. These officials might collectively call on China to commence multilateral consultations to settle differences and reassure global consumers that “made in China” is not synonymous with “hazardous to your health”. If talks fail, China and its trade partners might call the WTO director-general to mediate. If unable to find a mutually acceptable solution, complaining countries might formally initiate a trade dispute.

Given the stakes for the Chinese economy, it is unlikely that China would let such a trade dispute go forward. Chinese policymakers do not want the “made in China” label to be the visual equivalent of a danger sign. Chinese officials would probably not only beef up enforcement and penalties, but also try to create a demand for regulation by training business managers about the importance of product safety. Meanwhile, foreign investors will put pressure on their suppliers to test their production, because they now recognise that global consumers may not only reject Chinese-made goods, but may in the future sue those companies that do not ensure product safety.

China may be a behemoth, but it is not a dinosaur. If it is truly a market- oriented economy it will respond to global market pressure to improve its governance. Meanwhile, by collaborating and relying on the international rule of law, China's trade partners will be more likely to ensure that China develops a culture of compliance.

The writer teaches at George Washington University Business School and is the author, with Jamie Zimmerman, of Trade Imbalance: The Struggle to Weigh Human Rights in Trade Policymaking (Cambridge, July 2007)