MFN Status and China's Role in Economic Globalization

Introduction

One of the most important economies in the world today is that of China. With a population of nearly one and a half billion people, and a GDP growth rate of nearly 10% annually since 1978, China represents a significant player on the world stage. China was granted permanent Most-Favoured-Nation (MFN) status by the US in 2000, which "paved the way for China's accession to the World Trade Organization." The effect was two-fold, according to US Senator 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.

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, given that the state is still a major attractor of foreign investment and a major foreign investor around the world? This paper addresses the question of whether the Most-Favoured-Nation standard is a relevant factor in understanding China from a globalization standpoint.

What Is the MFN Standard?

China's MFN status is in peril as a result of its enormous economic growth. 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 to developing countries." Reductions in the tariff rate and exemptions based on MFN status are also included 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.

The UN acknowledges that the MFN standard is a relative standard. According to the UN's UNCTAD series on international investment agreements, 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 light of general principles of treaty interpretation. 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." 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.

This legal nuance was addressed 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." 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 rise to a strong debate that has so far not found a conclusion." 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.'" For countries disputing the fairness of treaty application in investment negotiation and dispute resolution, this problem is all the more pronounced — but is it particularly relevant in the era of globalization when it comes to China's dominance?

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." 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, or equal, terms of trade and investment are no longer desired with regard 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.

The UN further notes that "the MFN treatment clause requires that the host State does not discriminate — de jure or de facto — on the basis of nationality." Yet by seeking to deny China MFN status, the Western world, including the US and the EU, has essentially declared that it will discriminate on the basis of nationality with respect to China in the coming years. Therefore, the relevance of MFN must be questioned. The era of globalization has brought about such a fundamental change in China's capabilities as a rising superpower that the entire framework in which MFN was once applied has collided with 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 treatment must be based on or caused by the nationality of the foreign investor." By removing China's MFN status, the Western world is effectively revoking China's 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 — which is why Senator Cotton has sought to permanently remove China's MFN status and why the EU has already removed China's preferential treatment status.

China and the MFN Standard

Since receiving MFN status and joining the WTO in 2001, China has been thoroughly integrated into economic globalization. China is currently the largest trading nation in the world and is among the largest recipients of FDI of any state. China has clearly benefitted from its MFN status and from the immense volume of inward and outward FDI flows 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. 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."

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. Their findings suggest that MFN mostly benefits smaller countries in terms of bargaining power.

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 "developing" designation is the subject of much debate. China has benefitted from this 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." Yet China's per capita income has risen to the level of an upper-middle income nation. Since joining the WTO, China 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. China may consider itself a "developing nation," but by being the world's largest investor of outward FDI, it cannot reasonably be seen as anything other than a developed nation in the eyes of other states.

The goal of the US in granting China MFN status was to ensure that it adhered to WTO rules and safeguarded intellectual property rights while lowering tariffs and encouraging a more democratic model of government. However, China's accession led to an acceleration of globalization, as consumers could obtain goods more cheaply from China and foreign corporations sought to profit from access to cheap labor and larger markets. The former proved true enough, but questions remain about the latter. Job losses accelerated in the West as Chinese labor market competition intensified, and the US along with Canada and the EU have filed dozens of disputes with the WTO over China's reluctance to open its market to foreign goods. Concerns over IP theft have prompted numerous Western states to object to China's handling of FDI, and many governments view China as a threat to national security for this reason.

Hecker testified before the US Congress on the eve of China being granted MFN status that "the WTO seeks to promote open and fair international trade through increased transparency, rules, and commitments to reduce barriers on foreign goods and services, and provide a binding system for resolving disputes." China accepted these rules as part of its WTO accession; however, states like the US and those in the EU object that China's government is too opaque and too demanding of multinational enterprises (MNEs) that seek to do business there, as it favors joint venture relationships over straightforward FDI. Corporations remain eager to enter China nonetheless, in order to bolster their supply chains or to achieve greater horizontal and vertical integration. 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." As the factory of the world, China has been able to pressure MNEs to accept joint ventures they otherwise would have rejected and to establish operations in regions of the country that were less than ideal.

Where China stands apart, however, is with outward FDI: it has provided an easier way for states to gain access to foreign exchange, raised regulatory investment thresholds to make it easier for partner states, and decentralized the approval system. On top of this, China provides loans, trade financing, and risk insurance that require borrowers to use Chinese suppliers and contractors. China is reshaping the global economic order in its own image through the Belt and Road Initiative and is challenging the unipolar order promoted by the US. Along with Russia, China seeks to promote a multipolar world order in which it holds an equal footing of power with other major nations. And yet China still regards itself as a developing nation. In the sense that it is developing its own position of dominance in the global economy, this may be true — but in the sense that it stands on the same footing as a country like Bangladesh or India, it is simply not the reality.

Conclusion

The MFN standard was applied to trade and investment for the purposes of creating a more equitable environment for all countries and to bring the developing world into the global economy. China entered the WTO in 2001 after receiving MFN status from the US, and China quickly became the world's manufacturer, the largest recipient of FDI, and the largest investor in other states. China's economic and political power has therefore increased beyond what might reasonably be termed that of a developing nation. The EU and the US have sought to remove China's MFN status as a result of the perception that this power poses a threat to their own economic and political self-interest.

At this point, however, the question becomes: does it even matter? It was the West that established the rules for the MFN standard — and now that the balance of power has shifted toward China, China is in a position where it can set new rules for those who wish to deal with it. The legal process is always shaped by the political powers of the time, and today's power base is no longer situated exclusively in the West. It has gone global, and China controls a great deal of it, regardless of whether it receives preferential trading exemptions from the EU or MFN status from the US. These are terms and conditions applied by weakened opponents in a game of global hegemons.

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