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Butcher, Bill; Ip, Mary --- "Are Chinese Consumers Winners or Losers under WTO Membership?" [2007] MqJlBLaw 4; (2007) 4 Macquarie Journal of Business Law 71

Are Chinese Consumers Winners or Losers under WTO Membership?

BILL BUTCHER^* AND MARY IP^**

I Introduction

After 15 years of negotiations, China re-entered the World Trade Organization (WTO) on 11 December 2001. Both before and immediately after the accession, there was an intensification of scholarly discussion about the ramifications for China deriving from membership of this world economic club. However, most research and analysis was understandably focused on relatively narrow trade issues. Despite the popular recognition of China as a huge potential market, there has been little discussion of the impact of WTO accession on Chinese consumer interests.

While important benefits accrue to Chinese consumers in the form of greater choice and purchasing power, there is also a downside. Membership of the WTO restricts the ability of the Chinese government to protect its consumers, most notably in the areas of health, economics and competition law. China now has overriding obligations to the often conflicting interests of multinationals and the more powerful member states.^[1]

Limitations on national sovereignty of this type are less damaging in developed countries which already have strong consumer protection mechanisms in place but in China, with its underdeveloped consumer protection laws and administration, these restrictions could have deleterious consequences. While developed countries’ consumer protection regimes are robust without breaching WTO obligations, membership does limit some forms of protection that could otherwise be employed in the Chinese environment, such as certain restrictions on the importation of potentially dangerous goods.^[2]

This paper examines the current state of consumer protection law in China with its inadequate legislation, the lack of a truly independent body dedicated to safeguarding consumers’ interests and a general culture of caveat emptor, and evaluates how needed reform could be hampered by WTO-imposed obligations. It reviews the WTO’s record, highlights instances where consumer interests have been adversely affected in other member states, and considers the consequences for China.

II The WTO’s Structure and Operation

1)

Most discussion of the WTO is focused on strictly trade issues. This reflects the WTO’s own philosophy: in 1999 the WTO Working Group on the Interaction Between Trade and Competition Policy stated,

[i]n the case of Article III of the General Agreement on Tariffs and Trade (GATT)^[3] the subject matter which must benefit from national treatment is not the persons of other Members but the products of other Members…While this is apparent on the face of Article III, it has also been emphasised in various panel decisions….In the case of trade in services, the potential beneficiaries of national treatment under the General Agreement on Trade in Services (GATS) are both the services of other Members and the service suppliers of other Members.^[4]

However much it might be anticipated and hoped that consumers will benefit as an outcome of WTO activities, the primary focus is on the trade itself.

As the preamble of its creating Agreement states, the WTO contributes to its recognised objectives through the multilateral trading system. Consequently, the constitution of the WTO is based on the principles of trade rather than rules for people.^[5] This is not something to be condemned in itself but it must raise concerns when the effects of WTO imperatives impinge on major social issues. Illustrations can readily be drawn from numerous WTO/GATT dispute settlement rulings^[6] that have undermined environmental, consumer and health concerns in favour of commercial interests. For example, WTO panels have ruled against the Thai government for its import ban on American cigarettes^[7]; overridden the European Union’s ban on beef laced with artificial hormones;^[8] and allowed the operation of trawling which kills endangered sea turtles.^[9] More recent examples are the abandonment by the Croatian government and the Sri Lankan authorities of a proposal to ban biotech foods after the United States threatened to take WTO action^[10] and a ruling that Japanese quarantine restrictions on apples to protect against introduction of fire blight breached Japan’s WTO obligations.^[11] These cases can all be explained as trade barriers masquerading as environmental and health concerns, but they still reflect the primacy of trade and the diminution of national sovereignty that comes with WTO membership, even where questions of consumer health and safety arise.^[12]

Despite recent improvement in its transparency and accountability, the WTO has been criticised for its secrecy. In accordance with Article IX.1^[13] of the Marrakesh Agreements, the consensus system is used for decision making and if that fails, voting is allowed as an alternative. Nevertheless, without undermining the advantages of the consensus practice^[14], the approach does not assure member states free exercise of their veto right and generates opportunity for manipulation, such as ‘manufacturing consensus’.^[15] Consequently, as Charnovitz points out, WTO negotiations are held behind closed doors, contrary to the usual practice of other international organizations such as the United Nations.^[16] The concealment of the WTO operation is demonstrated by its failure to give feedback from meetings, its lack of formal consultation procedures and the low level of accessibility to its documentation.^[17] Criticism is heightened by the exclusion of non-government organisations (NGOs) from meaningful participation in WTO discussions. Due to the unique practice of a ‘closed-door policy’, NGOs were allowed only to observe WTO activities but not to participate in the organisation’s debate. Even though the number of NGOs present at WTO Ministerial Conferences has lately increased and though they have also taken part in numerous symposia organised by the WTO Secretariat, there is still no direct involvement of NGOs in the work of the WTO. The significant role played by NGOs in international forums should not be neglected. The expansion of the United Nations Guidelines on Consumer Protection (1999) into the area of sustainable consumption, for example, was largely the result of impetus which international consumer groups provided to the United Nations.^[18]

The WTO is dominated by four large trading blocs, namely the United States, the European Union, Japan and Canada. Since these developed countries have similar commercial goals and interests, they can combine their efforts to push through an agenda at the expense of developing countries - despite the fact that the latter make up more than three-quarters of WTO membership.^[19] While there are emerging signs of greater unity and power among less developed countries to influence WTO directions, most recently at the 2005 Hong Kong Ministerial Conference,^[20] lack of financial resources and experienced negotiators necessarily limit their impact in WTO negotiations.^[21] In contrast, developed countries have the capacity to locate large delegations permanently at the WTO Headquarters in Geneva^[22] and receive ample support from their home country when needed. For instance, developed countries can send teams of trade specialists to Geneva to buttress local staff when confronted by complex matters at the WTO.^[23] The WTO does provide technical assistance to developing and least-developed countries (‘LDCs’) but this is directed mostly at helping such countries to adjust to WTO rules and implement their obligations and does little to strengthen their hands in negotiations.

To aggravate this representation imbalance, the WTO is influenced by multinational business corporations, whose interests are reflected throughout WTO regulations and rulings.^[24] Through their governments, these multinationals exert influence on negotiations and dispute settlements to their trading advantage. Illustrations of this power can be seen in numerous agreements and rulings, such as the Thai cigarette and European beef cases referred to above and the United States’ protection of its transnational companies in the long-running dispute with the European Communities over genetically modified organisms.^[25]

China was one of the 23 original signatories to GATT, the predecessor of the WTO. However China has little track record of earlier participation in GATT because of its withdrawal from the system soon after the GATT was signed in 1947.^[26] Consequently, China’s leverage at the WTO is hindered by a lack of expertise and experience. Nevertheless, China is better placed than other developing country members because of the sheer size of its market and its abundant resources.^[27] New agencies have been created within the Ministry of Commerce to monitor three aspects of WTO affairs: complaint procedure compliance, fair trade issues, and implementation of standards at provincial level. WTO training centres have been set up inside universities, such as the WTO Asia-Pacific Region Training Centre for Trade at the University of Peking.^[28] Nonetheless, these measures are still at an early stage and for some years China will not enjoy an equal bargaining position in WTO matters with the more powerful and long-standing members. China’s capacity to negotiate is further limited by the terms of its Protocol of Accession to the WTO. For example, although the WTO Agreement on Textiles and Clothing (‘ATC’) imposing export quotas on textiles and clothing ended on 1 January 2005, China’s exports of such goods remain subject to other transitional restrictions until 2013.^[29] In addition, the economic structure of the dominant trading blocs in the WTO is based on capital markets. Naturally the rules and decisions promoted by those dominant countries tend to meet the requirements of their own financial systems.

WTO agreements reduce government interference and allow market forces to operate. However, an unfettered market economy is not focused on protecting the consumer. The negative impact of a market economy on consumer protection may not pose a significant problem to people in developed countries, where there are well-established institutions to safeguard consumers’ welfare. The Australian Competition and Consumer Commission (ACCC) is an effective watchdog for consumer affairs in Australia for example, with a commission to ensure that consumers ‘are not unfairly taken advantage of in markets that are not competitive’.^[30]

China has no real equivalent of the ACCC. The nearest to a comparable body overseeing consumer interests is the China Consumers’ Association (CCA) which has a very different role. The CCA derives its authority from The Law for the Protection of Consumer Rights and Interests (the National Consumer Law)^[31] which has little to do with competition issues. The activities of the CCA are confined to research, disseminating information, mediating consumer disputes, and advising government on consumer issues.^[32] The CCA takes no part in safeguarding consumers against market malpractice because supervision of market competition is within the jurisdiction of the State Administration for Industry and Commerce.^[33] Moreover, the CCA is a quasi-governmental organization and most senior officials at its local branches are also involved in industry and trade management.^[34] In addition, some local branches rely heavily on monetary contributions from business enterprises because of insufficient government subsidy.^[35] Thus, the potential conflict of interest might render the CCA an inappropriate body for safeguarding consumer protection. Also, the CCA has admitted its unfamiliarity with WTO regulations and has expressed concern about its competency in protecting the post-WTO consumer in China.^[36] As China is progressively integrated into the WTO, but without an effective overseer for consumers’ welfare, how well Chinese consumers’ rights and interests can be safeguarded remains in doubt.

The principal legislation protecting consumer rights^[37] was passed in 1993 and has not been revised since then. The market situation in China has undergone tremendous change in the last decade and WTO membership complicates the market situation further for Chinese consumers. A review of the current consumer law is a prime requirement.^[38] Even such a review would not of itself ensure the rights and interests of consumers. Laws need to be implemented broadly and administered thoroughly before they can achieve their goals, but in China the enforcement mechanism remains weak.^[39] This deficiency is confirmed by Kao and Cheng who state that Chinese consumers’ interests have been jeopardized by the lack of a quality control agency to execute the relevant laws, a circumstance which would be exacerbated with the influx of foreign goods upon WTO entry.^[40]

The WTO boasts a powerful dispute resolution mechanism which makes China more attractive to foreign investors since it gives greater assurance of Chinese compliance with its WTO obligations. Increased foreign investor confidence in doing business with China is naturally positive for Chinese consumers. On the other hand, the dispute settlement procedures could be used by other members, possibly under the urging of multinational corporations, to challenge Chinese consumer protection measures as a disguised form of trade barrier. A further ramification of the WTO dispute resolution mechanism is its capacity to shift many decisions regarding public health and safety, environmental and consumer concerns from the Chinese government to a public forum.^[41] In the absence of any effective device to offset the adverse impact of foreign decision on domestic issues, Chinese consumers’ interests and welfares are at risk.

III WTO Agreements

WTO agreements have also impinged on consumers’ interests in several respects.

According to the 1985 United Nations Guidelines for Consumer Protection,^[42] consumers have the right to information and to safety. The Mandatory Labelling Requirement to provide product details and particulars of the production process is aimed at ensuring this right. Mandatory labelling is also intended to improve consumers’ safety by indicating the origins of any food’s ingredients and in this way a link to the cause of any subsequent health issue.^[43] It is incumbent upon national governments to incorporate the spirit of the UN Guidelines by insisting on labelling for food or agricultural products.^[44]

However, the lack of clarity in WTO legislation restricts governments’ efforts in imposing and enforcing such requirements. This ambiguity may result in government measures on mandatory labelling being challenged as a disguised form of protectionism. A successful challenge would leave consumers without the safeguard of product information.

China requires that all products sold in China have Chinese language labels giving a range of information including name and trade mark, manufacturer’s name and address, country of origin, date of manufacture, ‘use-by’ dates, ingredients and usage instructions.^[45] To date, there have been no complaints that China’s labelling requirements constitute a disguised barrier to entry. Difficulties arise, however, because of low education levels and poverty. The illiteracy rate in 1998 was 16.4% with the majority of illiterates living in the countryside.^[46] Mandatory labelling is of little use to those who cannot read. The arrival of new and unfamiliar foreign goods since WTO entry presents some danger to uneducated consumers.

The ‘single undertaking’ approach taken in the Uruguay Round obliges member countries to agree to abide by the bulk of the multilateral agreements. These include some which undermine consumer rights, most notably the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS). One impact of TRIPS is the price increment in medicines for consumers in developing countries and LDCs. Because of the protection afforded to patents, those countries may be constrained in adapting technologies to produce affordable generic drugs.^[47] While China does not qualify for differential treatment in patent protection for pharmaceutical products under TRIPS, third world characteristics do exist within the country. The uneven economic growth in recent years is a major cause of the division of the nation by wealth. At the end of 2005, almost 200 million Chinese were living below the standard of one US dollar per day^[48].

Patent restriction has also increased the cost of seeds, other biological products and information technologies. As a consequence, some consumers could be denied access to the benefits of scientific progress. Such privatisation of knowledge through the implementation of TRIPS is not only anti-consumer, but also contrary to the WTO objective of promoting sustainable development among member states.

The WTO has been condemned as being responsive primarily to the welfare of transnational business groups with little regard for the rights of vulnerable consumers. The underlying issue of undemocratic operation and structure of the WTO, the absence of outsiders in WTO proceedings, the WTO charter and agreements that subordinate other values to the fortification of trade and the outcomes of numerous disputes all promote the argument that the organisation is not consumer-friendly.

This is exacerbated by the lack of a WTO agreement on competition policy.

IV Competition

Competition stemming from trade liberalization is not always an advantage to consumers. While foreign competition can increase market efficiency and productivity, and make available a greater range of products at a cheaper price and of higher quality, it can also disadvantage consumers.

First, competition is disadvantageous to susceptible business operators in developing countries who are not resourced or equipped for cutting-edge competition with major global companies. When these vulnerable producers are driven out of the market by unequal competition, consumers can be left with restricted choice and suffer from subsequent price rises.^[49] Moreover, when these defeated business operators withdraw from the marketplace, they lay off labourers who are also consumers.

Second, there is no multilateral framework of competition policy in the WTO. Supervision of compliance with national competition rules is dependent upon bilateral or regional co-operation between member countries. Besides, member states have different levels of maturity in their competition laws. Such disparity can be exploited by multinational corporations to engage in unfair trade practices in countries with less regulation and enforcement. In the absence of a global mechanism to implement an overall competition policy, competition law enforcement is compromised. Moreover, it can defeat the very goals of the WTO itself. A Report, which was prepared by the International Consumer Organisation^[50]

entitled Consumers, Multilateral Competition Policy and the WTO, states:

Modern international trade theory tells us that one of the most powerful benefits of international trade is its potential to prevent domestic firms from abusing their positions in this manner (cartelization). Such efforts to open closed markets to competition also need to be supplemented by an active competition policy, to ensure that companies do not simply re-erect private barriers to entry themselves.^[51]

The concept of a WTO agreement on competition policy is of long standing. When the GATT was first under consideration in the 1940s there was a proposal for such an agreement but it was shelved when the attempt to create an International Trade Organisation was abandoned. In 1996 the WTO Working Group on the Interaction Between Trade and Competition Policy was established to examine the issue. Any agreement would entail commitments by member countries to cooperate on international investigation of anticompetitive practices and possibly to guarantee domestic rules and enforcement along the lines of TRIPS. Progress has been slow, largely due to the different interests and attitudes of WTO members. While a number have promoted the notion^[52], others have opposed it. In particular, ‘some Asian countries fear that the interests of business lobbies might prevail over those of consumers: they see an international agreement on competition policy as a way of forcing developing countries to adopt competition laws that would favour the entry of international firms at the expense of local firms.’^[53]

V Sovereignty and the WTO

WTO membership necessarily involves some surrender of national sovereignty. This could be beneficial to Chinese consumers because it would help ensure a market open to foreign goods and competition, with less danger of governmental intervention to protect local producers. It also allows the Chinese government to cite WTO compunction as a justification for removing market distortions that currently support its local industries. While enjoying greater freedom of action than many of its international counterparts, the Chinese government would still not be eager to incur the wrath of its powerful business organisations.

On the other hand, this loss of sovereignty would constrain the Chinese government from enacting measures to protect consumers from unhealthy, dangerous, or otherwise unwelcome foreign goods. The Thai cigarette case mentioned earlier in this paper exemplifies that. In that dispute, the United States objected to Thai restrictions on imports of foreign cigarettes. The European Communities, as a major manufacturer and exporter of cigarettes, made a submission in support of the United States. A submission was also made by the World Health Organisation (‘WHO’). The WHO submission included the following points:

• foreign brands were milder and more readily smoked than Thai tobacco, raising public health concerns because they made smoking much easier for those who might not otherwise smoke, like women and adolescents;
• Thailand had recently passed a law prohibiting cigarette advertising and sponsorship, and forceful warning labels on packages, but multinational tobacco companies had routinely circumvented such restrictions elsewhere through indirect advertising and a range of other techniques;
• while the US brands were lower in tar and nicotine, the US Surgeon-General had concluded that such lowering had little health benefit since smokers tended to respond by increasing their consumption or inhaling more deeply; and
• the experience in Latin America and Asia showed that the opening of closed cigarette markets dominated by a state monopoly (as was the case in Thailand, where promotion was minimal, in the absence of competition) resulted in an increase in smoking.

Having concluded that the measures were an import restriction in contravention of Article XI:1 of the GATT^[54], the panel then considered Article XX(b), which states in part ‘…nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:…(b) necessary to protect human … life or health’. The panel focused on the word ‘necessary’ and referred to the statement of an earlier panel that

a contracting party cannot justify a measure inconsistent with other GATT provisions as ‘necessary’ …if an alternative measure which it could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it. By the same token, in cases where a measure consistent with other GATT provisions is not reasonably available, a contracting party is bound to use, among the measures reasonably available to it, that which entails the least degree of inconsistency with other GATT provisions.^[55]

Essentially, the principal health concerns expressed by Thailand were to reduce the total consumption of cigarettes in Thailand and to protect the public from harmful ingredients in imported cigarettes. The panel took the view that competition between domestic and imported cigarettes would not necessarily lead to an increase in smoking and, referring to Article XX(b), that Thailand’s goal of reducing consumption could be met by higher taxes on cigarettes and strict, non-discriminatory labelling and ingredient disclosure rules. Accordingly the panel recommended that Thailand be requested to remove its import restrictions on foreign cigarettes.

Undeniably, the likely purpose of the Thai restrictions was to protect the local tobacco industry and the decision of the panel cannot be criticised in that regard. However, WTO rulings should be focused on outcomes rather than intent. In its determination that other measures could achieve largely equivalent outcomes, the panel appears to have marginalised the legitimate concerns expressed – even if they were not the motivation for the restrictions - by the Thai government. Moreover, it is a significant intrusion on national sovereignty to effectively require a government to raise taxes in order to achieve its public health goals. Not every government would be willing to do so, and this decision must be viewed as a victory for the international tobacco lobby over the interests of public health and safety.

VI Suggestions

Since its accession to the WTO, China has done much to reduce tariffs and other barriers to entry of foreign goods.^[56] This brings with it benefits to consumers in the form of greater choice, better quality and lower prices. However, more can be done to ensure that Chinese consumers derive maximum benefit from globalisation, while suffering minimal disadvantage.

Reform of China’s consumer protection and competition laws is overdue. A new anti-monopoly law was anticipated in 2006, but further delay is expected due to difficult issues such as the setting up of an independent regulatory body and specifying provisions for dealing with ‘administrative monopoly’^[57]. At present, competition related matters are managed by a number of authorities like the Ministry of Commerce, the National Administrative Bureau for Commerce and Trade, and the National Reform Committee on Economics Development. All of these authorities want to retain their jurisdiction in the new anti-monopoly regime and are likely to become the new regulatory body. A regulatory agent with amalgamated authorities might fail to achieve the goal of independence and consistency in enforcement, which is critical for dealing with administrative monopoly practices.

The WTO is not a consumer protection body and makes no claim to be one. Nonetheless, it must bear some responsibility if the consequences of membership can be detrimental to consumer interests. While the primary obligation for protecting its consumers rests with the Chinese government itself, the WTO can promote the reform process by developing a binding agreement on anti-competitive behaviour. While such an agreement would not overcome the problems exposed in the Thai cigarettes or EU beef disputes, it would act as a counterbalance to the potential loss of protection highlighted in those cases. It would provide the Chinese government with both the motive and the justification for reforming its regulation and enforcement of consumer rights. The WTO is the logical home for such an agreement. It is the only international body with a truly effective enforcement regime, and an agreement on anti-competitive trade practices is a natural step from other trade-related WTO agreements like TRIPS, GATS and the Agreement on Trade-Related Investment Measures (TRIMS). Certainly there are difficulties in achieving consensus but many of the objections could be met by granting concessions of the type routinely provided to developing and least-developed countries, including longer implementation timelines^[58] and the capacity to exempt certain members on economic grounds.^[59]

To best preserve the interests of consumers, as well as trade, particularly in countries like China where the law is underdeveloped, it is desirable that the WTO expedite such obligations among its members.

* Bachelor of Laws (Vic, NZ), Master of Laws (Hons) (Syd). Senior Lecturer, School of Business Law and Taxation, University of New South Wales.

** Bachelor of Arts in Laws (Hons) (N London), Master of Laws (Syd). Associate Lecturer, School of Business Law and Taxation, University of New South Wales; Discipline of Business Law, University of Sydney.

¹ Membership of the WTO necessarily entails some surrender of sovereignty through acceptance of the restrictions imposed under the various agreements.

^[2] This is an area which will be examined later in the paper. While the WTO does not prohibit restrictions on the importation of dangerous products, its dispute resolution system effectively requires proof that the restrictions are not in fact discriminatory trade barriers in disguise. This is a reasonable requirement, particularly in light of the WTO’s charter to address obstacles to international trade, but it has the effect of precluding some restrictions that might benefit domestic consumers. An example is the Thai cigarette case, discussed below.

^[3] This is the principle of National Treatment under the General Agreement on Tariffs and Trade, which requires WTO member states to grant members of other member states treatment no less favourable than that accorded to their own nationals.

^[4] The Fundamental WTO Principles of National Treatment, Most-Favoured-Nation Treatment and Transparency: Background Note by Secretariat, WT/WGTCP/W/114 (1999) [18-19] (Report by the WTO Working Group on the Interaction Between Trade and Competition Policy, 14 April 1999).

^[5] Peter Costantini, What’s wrong with the WTO? (November 2001) <http://www.speakeasy.org/~peterc/wtow/> at 24 January 2006.

^[6] The WTO emphasises consultation as the means for resolving disputes between member countries. If consultations fail, a panel of three (sometimes five) experts considers the evidence and reports to the Dispute Settlement Body, which adopts the report – and its recommendations - unless there is consensus against it. There is also avenue for appeal to a three-member Appellate Body.

^[7] Thailand – Restrictions on Importation of and Internal Taxes on Cigarettes, DS10/R – 37S/200 (1990) (Report by the Panel Adopted on 7 November 1990).

^[8] Clausen Allan, The World Trade Organisation (September 2000) Oxfam Community Aid Abroad <http://www.oxfam.org.au/campaigns/submissions/wto.pdf> at 12 October 2005.

^[9] Andrew Reding, ‘WTO not responsive to the public’, Journal of Commerce Newspaper (New York, USA), 6 December 1999, 9 <www.joc.com> at 24 January 2006.

^[10] Juan Lopez Villar, ‘Setting limits for GMOS, United States uses WTO to intimidate’ (2002) 100 Friends of the Earth International: Link Magazine 1 <http://www.foei.org> at 5 April 2006.

^[11] Japan – Measures Affecting the Importation of Apples, WTO Dispute DS245 (2005) (Report of the Panel Circulated on 2 June 2005).

^[12] Some protection is afforded, but not guaranteed, by Article XX(b) of the GATT, discussed below in the context of the Thai cigarette dispute.

^[13] Article IX.1 of the Marrakesh Agreement states that, ‘The WTO shall continue the practice of decision-making by consensus followed under GATT 1947. Except as otherwise provided, where a decision cannot be arrived at by consensus, the matter at issue shall be decided by voting.’

^[14] For advantages of the consensus system in WTO decision making, see Claus-Dieter Ehlermann and Lothar Ehring, ‘Decision-Making in the World Trade Organisation: Is the consensus practice of the World Trade Organisation adequate for making, revising and implementation rules on international trade?’ (2005) 8(1) Journal of International Economic Law 51.

^[15] For example of ‘Consensus manufacturing’, see Aileen Kwa, ‘Power Politics in the WTO’ (2003) Focus on the Global South <http://www.global.ucsb.edu/classes/global_130_f06/reading/Aileen_Kwa_Power_Politics_in_the WTO_4-6.pdf> at 30 June 2006.