China Mfn Status Globalization Impact Analysis

One of the most important economies in the world today is that of China. With a population of nearly one and half billion people, and a GDP growth rate of nearly 10% annually since 1978, China represents a significant player on the world’s stage.[footnoteRef:2] China was given permanent MFN status by the US in 2000, which “paved the way for China’s accession to the World Trade Organization.”[footnoteRef:3] The effect was two-fold, according to US Sen. Tom Cotton: it led to the offshoring of 2 million US jobs and to a surge of foreign investment in China that made the latter into one of the most powerful nations in the world today.[footnoteRef:4] The questions this paper poses are: What changes have been effected in globalization since China was granted MFN status in 2001, and what changes can be expected now that China has been de-facto removed from this status as a result of the US and 32 countries, including the European Union, the UK, Canada, Turkey, Ukraine, and Liechtenstein ceasing to apply this status to China?  In other words, does the MFN standard convey any meaning in today’s globalized world for China, as the state is still a major attractor of foreign investment and a major foreign investor around the world? This paper will address the question of whether the most-favored-nation standard (MFN) is a relevant factor in understanding China from a globalization standpoint. [2: World Bank, ‘In China’ ] [3: Tom Cotton, ‘Bill to End China’s Permanent MFN Status’ ] [4: Cotton [n2]]

What is the MFN Standard?

China’s MFN status is in peril as a result of its enormous growth.[footnoteRef:5] The EU has cancelled China’s preferential trade treatment, which had provided a “universal, non-discriminatory and non-reciprocal preferential tariff for exports of manufactured and semi-manufactured products from developed countries (beneficial countries) to developing countries (beneficiary countries).”[footnoteRef:6] Reductions in the tariff rate and exemptions based on MFN status are also include in preferential trade treatment, which means China is no longer receiving a discounted rate on its exports to the EU. Because China still insists that it is a developing country while being the second largest economy in the world and the largest in terms of inward and outward FDI, the EU has taken this step to rectify what it sees as an unfair and untenable situation. [5: Epoch Times, ‘CCP Confirms’ (2021) ] [6: Epoch Times [n4]]

The UN admits that the MFN standard is a relative standard.[footnoteRef:7] The standard is governed by the Ejusdem Generis principle, requires a legitimate basis of comparison, relates to discrimination on grounds of nationality, requires a finding of less favorable treatment, is intended to operate without prejudice to the freedom of contract, works differently from the MFN clause in the trade context, and must be interpreted in the light of general principles of treaty interpretation, according to the UN.[footnoteRef:8] The standard is relative in the sense that comparable treatment to other states is expected; however, as the UN points out, “national treatment (NT) is the essential treatment standard that States grant to ensure equal competitive opportunities behind the border of the host State to foreign investors.”[footnoteRef:9] The MFN standard is used only in international investment agreements (IIAs) as a secondary standard of treatment: it has generally preceded in time the granting of NT by host States and comes as an additional guarantee of equality and non discrimination.”[footnoteRef:10] This legal wrinkle was smoothed out in prior bilateral investment treaties by the fact that they “would generally not contain NT commitments and countries would grant MFN treatment to ensure that once NT would be granted under another treaty, it would apply also to the investors covered under earlier treaties.”[footnoteRef:11] However, with Maffezini v. Spain, the MFN treatment standard was asked to be applied directly to investor-State dispute settlements (ISDS). The UN notes that “the decision on jurisdiction in Maffezini v. Spain highlighted a possible application of MFN treatment to ISDS provisions and gave raise to a strong debate that has so far not found a conclusion.”[footnoteRef:12] The goal of the case was to apply the MFN standard to find provisions from other treaties that would allow for a more favorable set of terms. The problem that has arisen is this: there is now “the possibility for claimants to pick from third treaties allegedly more favourable provisions relating to protection standards or ISDS and thereby derogate from or modify provisions of the basic treaty. Such application of MFN treatment has been designated in certain arbitral awards and by some commentators as ‘treaty shopping’.”[footnoteRef:13] For countries disputing the fairness of treaty application in investment negotiation and dispute resolution, this problem is all the more pronounced—but is it anymore particularly relevant in the era of globalization when it comes to China’s dominance? [7: UN, ‘Most-Favored Nation Treatment’ (2010) UNCTAD Series on Issues in International Investment Agreements II ] [8: UN [n6] 1] [9: UN [n6] 1] [10: UN [n6] 1] [11: UN [n6] 1] [12: UN [n6] 3] [13: UN [n6] 5.]

The UN explains that “the MFN treatment provision is a relative standard, which means that it implies a comparative test. Conversely, absolute standards require treatment no matter how other investors are treated by the host State.”[footnoteRef:14] If MFN treatment is going to be denied China, how then does the MFN standard hold up in the globalized context? The nature of relationships has shifted to such an extent that comparable terms, or equal terms of trade and investment are no longer wanted with regards to states seeking to work with China. There is hesitancy all around. China has become too large and influential to be deemed by other states as one deserving of the same exemptions as smaller states seeking to gain an equal footing in the global marketplace. [14: UN [n6] 23]

The UN then adds that “the MFN treatment clause requires that the host State does not discriminate – de jure or de facto – on the basis of nationality.”[footnoteRef:15] Yet by seeking to deny the MFN standard to China, the Western world, including the US and the EU, have essentially stated that they will discriminate on the basis of nationality with respect to China in the coming years. Therefore, the relevance of MFN has to be questioned. The era of globalization has brought about such a fundamental change in China’s abilities as a new superpower that the entire framework in which MFN was once applied has hit the wall of national self-interest. The UN states that “both MFN treatment and NT are designed to prevent discrimination for reasons of or on the grounds of nationality. In order to establish a violation of MFN treatment, the difference in the treatment must be based on or caused by the nationality of the foreign investor.”[footnoteRef:16] By removing China’s MFN status, the Western world is as much as revoking its right to be free from discriminatory negotiations. The paradigm of free trade has buckled under the pressure of a growing hegemony that threatens the economic superiority of the West. That is why Sen. Cotton has sought to permanently remove China’s MFN status and why the EU has already removed China’s preferential treatment status. [15: UN [n6] 26] [16: UN [n6] 27]

Since receiving MFN status and joining the WTO in 2001, China has been thoroughly integrated into economic globalization.[footnoteRef:17] China is currently the largest trading nation in the world and is on the receiving end of almost more FDI than any other state. China has clearly benefitted as a result of its MFN status and the immense amount of inward and outward flows of FDI in the 21st century. However, as Blanchard points out, the MFN standard is merely the beginning of a process of global economic engagement, and management of that process is still necessary for a state to benefit from it.[footnoteRef:18] Blanchard’s assessment corresponds with that of Ghosh et al., who note that MFN’s value “to individual countries depends critically on the relevant model solution concept used to evaluate it.”[footnoteRef:19] Ghosh et al. find three frameworks useful for assessing the value of MFN: the traditional competitive equilibrium framework, which benefits small countries by giving them access to the global economy; the non-cooperative Nash equilibrium framework, in which MFN restrains retaliatory actions to be non-discriminatory; and the cooperative bargaining framework, whereby MFN impacts bargaining.[footnoteRef:20] Their findings suggest that MFN mostly benefits smaller countries in terms of bargaining. [17: JM Blanchard, ‘China and the Impact of Economic Globalization: A Complex Tale of Gains and Losses Viewed through the Lenses of FDI’ (2022) Globalization Impacts 87.] [18: Blanchard [n4] 88.] [19: M Ghosh et al., ‘The Value of MFN Treatment,’ (1998) National Bureau of Econ Research WP 6461 ] [20: Ghosh [n6]]

But what happens when a country as large as China loses its MFN status? China entered the WTO as a developing country, but today its status as “developing” is the subject of much debate.[footnoteRef:21] China has benefitted from the “developing” status because, as Singh notes, “certain WTO agreements give developing countries special rights through ‘special and differential treatment’ (S&DT) provisions, which can grant developing countries longer timeframes to implement the agreements and even commitments to raise trading opportunities for such countries.”[footnoteRef:22] Yet, China’s per capita income has risen to the level of an upper-middle income nation. Since joining the WTO, has become the world’s largest merchandise exporter, the largest destination for inward FDI among developing nations, the largest investor for outward FDI among developing nations, the second largest merchandise importer, and the third largest commercial services importer.[footnoteRef:23] China may be a “developing nation” in its own eyes, but by being the largest investor of outward FDI the world over, it cannot be seen as anything but a developed nation in the eyes of other states. [21: K Singh,’At WTO: China a ‘Developing’ Country’ (2022) Indian Express ] [22: Singh [n8]] [23: WTO, ‘China in the WTO’ ]

The goal of the US in giving China MFN status was to ensure that it adhered to WTO rules and safeguarded IP rights while lowering tariffs and encouraging a more democratic model of government. However, China’s accession led to an increase in globalization, as consumers could obtain goods more cheaply from China, foreign corporations sought to profit from the belief that they could gain better access to cheap labor and bigger markets in China; the former proved true enough but questions remain about the latter. Job losses accelerated in the West as Chinese labor market competition increased, but the US along with Canada and the EU have filed dozens of disputes with the WTO over China’s reluctance to open its country to foreign goods. The concern of IP theft has prompted numerous states in the West to object to China’s handling of FDI, and many states view China as a threat to national security for this reason.[footnoteRef:24] [24: E Jensen, ‘Balancing Security and Growth: Defining National Security Review of Foreign Investment in China (2010) 19 PAC. RIM. L. & POL’Y J. 161, 164]

Hester testified before the US Congress on the eve of China being given MFN status that “the WTO seeks to promote open and fair international trade through increased transparency (public openness), rules, and commitments to reduce barriers on foreign goods and services, and provide a binding system for resolving disputes.”[footnoteRef:25] China accepted these rules as part of accession to the WTO; however, states like the US and those in the EU object that China’s government is too opaque and demanding of MNEs that seek to do business in China as it favors joint venture relationships over FDI. Corporations are still eager to enter China, nonetheless, so as to bolster their supply chains or to be more horizontally and vertically integrated. One outcome for China has been that its “transformation into the factory of the world has increased China’s dependence on or exposure to foreign supply chains (which powered its export activities), markets, and natural resources and technologies.”[footnoteRef:26] As the factory of the world, China has been able to pressure MNEs to accept joint ventures that they otherwise would have rejected and to establish headquarters in regions of the country that were less than ideal.[footnoteRef:27] [25: J Hecker, ‘China Trade’ (1998) US General Accounting Office ] [26: Blanchard [n4] 94.] [27: Blanchard [n4] 95.]

Where China stands apart, however, is with outward FDI: it has provided an easier way for states to gain access to foreign exchange, increased regulatory investment thresholds to make it is easier for states, and has decentralized the approval system.[footnoteRef:28] On top of this, China gives loans, trade financing, and risk insurance that necessitate borrowers use Chinese suppliers and contractors.[footnoteRef:29] China is reshaping the global economic order in its own image by building out the Belt and Road Initiative and taking on the unipolar order promoted by the US. Along with Russia, China seeks to promote a multipolar world order, in which it is on an equal footing of power with other superpowers around the world. And yet China still regards itself as a developing nation. In the sense that it is developing its own position of dominance on the global economy, this may be true. But in the sense that it is on the same footing as a country like Bangladesh or India, it is simply not the reality. [28: Blanchard [n4] 95.] [29: Blanchard [n4] 96.]

MFN Status Matter?

Therefore, does China’s MFN status matter much at this point? It has already obtained the economic boost it desired through two decades of WTO membership. This membership has enabled China to increase its stature and position in the world through foreign investment. Whereas the US was formerly in favor cooperation with China, today it sees China as a competitor and a threat to its own unipolar stronghold. It points to matters of national security, and targets Chinese companies directly over fears of national security risks.[footnoteRef:30] [30: S Saha, ‘CFIUS Now Made in China’ (2012) Nw. J. Int\\\\\\\'l L. & Bus., 33, 199.]

But China has become so integrated into the global economy that to deny it MFN status may not be of any concern at this point. It still is the state that foreign MNEs seek to penetrate, and it is the state that offers the most loans on the most favorable terms. For this reason, it has been able to develop its strength and influence around the world. If other countries like the US want to follow in Sen. Cotton’s example and challenge China by removing its MFN status, it stands to reason that the global economy will splinter into many pieces. Globalization has so completely integrated all aspects of the modern economy that to attempt to remove the world’s manufacturer from the trade table would be like attempting to renovate a house in which everyone is still living with no plans for getting out.

Globalization has enabled the integration of powers and processes to such a degree that the unwinding of them would be impossible to consider without a tremendous reset of the entire global economic system.[footnoteRef:31] The Great Reset has been much in the news of late, thanks to the World Economic Forum’s Klaus Schwab, but justifying such a reset on the stance that one’s global hegemony is threatened by the rise of a “developing” nation can be a difficult sell; thus, critics of China tend to rely on moral arguments. One of the issues raised by Sen. Cotton is that China relies upon slave labor for some of its industrial activity. In the interests of fairness, free trade, and self-interest, politics always guides the legal process. [31: D Autor et al. ‘The China Shock’ (2018) Ann Rev Ec 8 205.]