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Trump's chances of ending China's developing country status 'virtually nil'

President Donald Trump's ability to strip China of its developing country status at the World Trade Organization is "virtually nil" because it would require the cooperation of other countries that benefit from the current system, a former U.S. trade representative official said.

Currently, countries can declare themselves developing nations at the WTO. This status grants certain benefits, including weaker commitments to free trade and greater protection against trade rule infractions. That favorable treatment has drawn the ire of Trump, who has directed the Office of the U.S. Trade Representative to explore changing the process for obtaining developing country status.

"There is virtually no prospect of multilateral changes to the existing system," Mark Linscott, a former assistant U.S. trade representative for South and Central Asian affairs and for the WTO, said in an interview. "It's a consensus organization. To even begin a discussion or move from that to a negotiation on these kinds of issues would require some form of consensus or it's not going to happen."

Linscott noted that China is now a much richer country than it was when it became a member of the WTO in 2001. It has the second-largest GDP in the world behind only the U.S. and has been the largest global exporter of goods since 2009. China is home to 120 of the world's 500 largest companies by revenue. And its foreign direct investment — roughly $1.5 trillion outbound and $2.9 trillion inbound — exceeds that of nearly all 36 countries in the Organisation for Economic Co-operation and Development.

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Questionable claims

Some of the top trading allies of the U.S. also are self-designated developing countries with dubious claims to the title. South Korea, for example, is unlikely to back any change to the system that benefits it.

The U.S. demand that self-designation be replaced with objective criteria for assessing status is perfectly reasonable but difficult to make happen, said Simon Lester, the associate director of the Cato Institute's Herbert A. Stiefel Center for Trade Policy Studies. "The answer has to be to work with the rest of the WTO membership. We're not working with them now. But given that, I don't see how to make the developing country issue work."

On July 26, Trump directed the U.S. trade representative to explore methods to amend the WTO process to "prevent self-described developing countries from availing themselves of flexibilities ... that are not justified by appropriate economic and other indicators." Earlier, Trump tweeted that "the WTO is broken when the world's richest countries claim to be developing countries to avoid WTO rules and get special treatment. No more!"

Trump told supporters Aug. 13 at a petrochemicals complex in Monaca, Pa., that the U.S. "will leave [the WTO], if we have to," saying the trade body has been "screwing" the U.S. for years.

Chinese resistance

China has promised to resist any changes.

Commentary published by state-run Xinhua News Agency said the moves "will certainly be opposed by all parties, and it is impossible that it will succeed." Beijing has received public support from other WTO developing nations to maintain the status quo, including India, Venezuela and South Africa.

"The Trump administration's approach is certainly driving other countries closer to China, and they're now seeing us as the bigger threat to the trading system," Lester said.

A way forward might be found in the world of indexes. The WTO's self-designation system compares with rules-based systems employed by the likes of S&P Global Inc. and MSCI Inc., which add and remove countries from indexes tracking developed, emerging and frontier markets.

To qualify as a developed market according to MSCI's criteria, a country must have the following: gross national income per capita 25% above the World Bank high-income threshold for three consecutive years; five companies with a market capitalization above $3.102 billion, a floated market cap above $1.551 billion and an annual trade volume of 20%; and a number of measures of market accessibility, including unrestricted availability of investment instruments and very high openness to foreign ownership.

Using that benchmark, China is not a developed market. China-A shares were only added to the MSCI Emerging Markets Index in a limited way in May 2018.

WTO definition

The WTO acknowledges that it has no definition for a developing country, instead allowing countries to declare themselves as such. An option does exist for other member countries to challenge the use of developing country benefits by a self-designating member.

At this point, the WTO inquiry would seem to only further fuel the fire in the contentious trade war that has entrenched the world's two largest economies.

The latest round of talks ended with little demonstrable progress, and the Trump administration has since threatened to impose tariffs on $300 billion of Chinese imports. China responded by allowing its currency to weaken and instructed companies to end imports of U.S. agricultural goods.

Doug Barry, a spokesman for the U.S.-China Business Council, a coalition of 200 companies doing business with China, said the council "strongly supports the WTO and applauds its work in spreading the benefits of trade to the world." However, he acknowledged that reviewing the developing country standing could be warranted.

"These issues are best addressed by the members themselves, supported by the principle that all members should be treated fairly and abide by their obligations," Barry said. "It's reasonable to review from time to time a special status conferred on any member, consistent with WTO rules."