The Paradox of Paralysis: How the WTO’s Appellate Body Crisis Enables China's 15th Five-Year Plan

Eduarda Kilian is a Social Sciences student at UFF; Gabriel Berg and Julia Lopes are International Relations students at UFRJ.

Introduction

In the new geoeconomic order, the perception of foreign investment as an inherent right has devolved into a contested privilege dictated by national security, and China is leading this movement, based on its 15th Five-Year Plan (FYP) (People’s Republic of China, 15th Five-Year Plan for National Economic and Social Development, 2026). In a system increasingly hostile to commercial trade, the People’s Republic of China (PRC) issues the plan on nationalizing technological sources, such as AI and biomanufacturing. This creates tension between China’s “state-led” policies and WTO market rules, especially considering the Appellate Body (AB) Crisis, explained by Thorstensen & Prado (Thorstensen & Prado, CEBRI-Revista, 2025), meaning any appeal challenging the FYP becomes immediately ineffective, implying diminished authority for international institutions. As of 2024, over twenty disputes remain in legal limbo due to the AB's paralysis (WTO Secretariat, Overview of the State of Play of WTO Disputes, 2024).

Since 2019, the WTO has had its dispute settlement system disabled by consecutive US actions preventing the AB's functionality. The US argues AB resolutions are beyond its original jurisdiction, interfering in national sovereignty and security. Washington bases this argument on cases where the AB overturned its antidumping and countervailing measures, most notably DS379 and DS437.

In DS379 (2011) (WTO, United States – Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, Appellate Body Report, 2011), on a complaint by China, the AB reversed four American tariffs, concluding the US practiced ‘double remedy’ by applying both measures simultaneously, prohibited by Article 19.3 of the SCM Agreement. In DS437 (2014) (WTO, United States – Countervailing Duty Measures on Certain Products from China, Panel Report, 2014) it rejected the US Department of Commerce's 'rebuttable presumption' that majority state-owned enterprises constitute 'public bodies' under the SCM Agreement. The AB reaffirmed its DS379 standard that a 'public body' must possess, exercise, or be vested with governmental authority, requiring case-by-case evidence, not mere presumption based on ownership. For Washington, these decisions represent judicial overreach. The US position is that determining what constitutes a 'public body' and measuring subsidies in non-market economies are matters of national sovereign prerogative, not legal abstraction to be second-guessed by an international tribunal.

The central argument is that the US blockade created a structurally asymmetric outcome: it grants the United States freedom to apply trade remedies without AB revision, while providing China a more substantial advantage: implementing the 15th FYP's subsidies, state-directed investments, and blurred public-private partnerships without any legal constraint. The 15th FYP was launched in 2026 — seven years after the AB's paralysis began. This timing is not coincidental. Beijing has calculated that, without a functioning AB, any WTO challenge would end in a legal void, allowing implementation to proceed while diplomatic negotiations continue.

The paradox is that the legal lacuna the US created to shield itself from WTO constraints now operates to China's advantage. As the line between "public" and "private" in the 15th FYP is often indistinguishable, it risks fragmenting international trade into power-based blocs rather than rule-based systems, creating a void allowing PRC to launch its plan with less apprehension of facing criticism and binding resolutions. Nevertheless, given this institutional gap, it is crucial to enforce the role of the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) in this situation, which works as an alternative to the AB, however, without US participation and ruling, placing other global powers like the EU and China in a unique position to manage tensions, potentially leaving the US on the sidelines of rule-making.

The following sections develop this argument by examining how the 15th FYP operates through formal compliance while maximizing systemic tension, analyzing the plan's subsidies and state-owned enterprise provisions under the SCM Agreement, assessing how the AB crisis affects enforceability, and evaluating the MPIA alternative.

China’s Structural Trajectory in the WTO

To understand why China’s 15th Five-Year Plan creates tensions with WTO rules without explicitly violating them, the nature of the Chinese challenge must be diagnosed. Mark Wu (Wu, Harvard International Law Journal, 2016) offers the framework: China’s economic structure is sui generis, having evolved in a way unforeseen by negotiators of conventional WTO law. Consequently, the Organization effectively handles only disputes where Chinese policies resemble alternative economic structures. Beyond this, the WTO faces two serious challenges: reinterpreting legal concepts to adapt to China’s unforeseen context and deciding whether to expand its rules to encompass issues outside its jurisdiction.

This diagnosis gains depth with Mikheeva and Loginova (Mikheeva & Loginova, BRICS Law Journal, 2017), who examined China’s WTO accession, demonstrating how the country built a legislative framework aimed at “governing in harmony with multilateral institutions,” reforming domestic foreign trade law not as surrender to the liberal order, but as deliberate sovereign integration. Accession in 2001 consolidated a hybrid state capitalism preserving state direction instruments while formally committing to WTO rules.

From this trajectory emerges the 15th FYP’s logic: a document operating within formal limits while systematically pressuring normative architecture. As Wang and Zhou (Wang & Zhou, Journal of Contemporary China, 2022) indicate, China’s WTO compliance is mediated by four political factors explaining when and how Beijing chooses to comply, revealing compliance as calculated and strategic, not automatic. In this sense, the 15th FYP does not break from China’s historical WTO behavior; it represents its most sophisticated form.

Formal Compliance versus Systemic Tension

The central tension introduced by the 15th FYP lies not in direct WTO violations, but in strategic use of loopholes, interpretative flexibilities, and normative grey areas. Weihuan Zhou (Zhou, China’s Implementation of the Rulings of the World Trade Organization, 2019) demonstrates that China has a solid record of implementing WTO rulings, yet maximizes available limitations to preserve national interests while ensuring sufficient compliance to avoid retaliation. This is precisely the plan’s operational logic. On the surface, it commits to GDP growth target and market opening; at deeper levels, it directs state resources through instruments exploiting WTO law’s indeterminacies, including mixed-ownership innovation funds and legally ambiguous public-private partnerships. Zhou and Fang (Zhou & Fang, SSRN Electronic Journal, 2020) argue current WTO rules are not inherently inadequate to discipline China’s subsidies; the problem is political and practical, not strictly legal. This means Beijing calibrates policies deliberately, remaining at the threshold of clear violation, sufficiently ambiguous to withstand panel scrutiny while remaining effective enough for intended industrial outcomes.

Technological Subsidies and State-Owned Enterprises

The most fertile tension between the 15th FYP and WTO rules lies within the SCM Agreement's subsidy regime. The plan mandates R&D expenditures exceeding 7% of GDP, channeled through state development banks, sovereign innovation funds, and mixed-ownership enterprises, structures that Wu (2016) identified as the core of the “China, Inc.” challenge: entities neither fully public nor fully private, escaping traditional SCM categories.

Empirical literature confirms both the effectiveness and paradoxes of this model. Liu et al. (Liu et al., Economic Modelling, 2019) suggest government subsidies promote technological innovation, but excessive subsidies may inhibit this advancement, with more pronounced effects among non-state enterprises. Li et al. (Li et al., Energies, 2022) reach similar conclusions regarding electric vehicles: industrial policies significantly increase innovation quantity, though impact on quality is more limited. Shao and Chen (Shao & Chen, Economic Analysis and Policy, 2022) demonstrate that subsidies, especially for environmental protection and R&D, promote green technological innovation transformation, with heterogeneous effects depending on firm type.

These findings carry direct legal implications: they reveal Chinese technological subsidies are structurally effective as industrial policy instruments, which makes them trade-distortive within the SCM Agreement's meaning. Zhou and Fang (2020) argue existing WTO rules are sufficient to challenge such subsidies, meaning the Appellate Body's paralysis, rather than absent legal norms, shields the 15th FYP from binding contestation. Li, Zheng, Wang, and Chen (2024) argue policy burdens on SOEs significantly enhance innovation capacity, with subsidies and positive media coverage as transmission channels, confirming the hierarchical command structure reproducing the “public body” problem identified in WTO dispute DS437.

Technology Transfer and WTO-Plus Obligations

The second axis of tension between the 15th FYP and WTO rules concerns technology transfer and the WTO-plus obligations assumed in China's accession protocol. Tyagi (Tyagi, Journal of World Trade, 2020) shows that Chinese practices involving forced technology transfer through joint ventures challenged the WTO system, including prompting the European complaint in dispute DS549 (WTO, China — Certain Measures on the Transfer of Technology, Request for consultations WT/DS549/1, 2018), while China’s commitments remain legally ambiguous in critical respects.

This ambiguity is structural and deliberate. Prud’homme et al. (Prud’homme et al., Technological Forecasting and Social Change, 2018), identify seven conditions under which Chinese technology transfer policies successfully acquire frontier foreign technology, concluding that while effective when fully exploited, excessive use may weaken China’s bargaining power and deter technology transfer. The 15th FYP replicates this logic on a broader scale: by requiring foreign firms to participate in R&D partnerships with domestic entities to access China’s AI and biomanufacturing markets, the plan operates within a grey zone between prohibited performance requirements and formally permitted collaboration incentives.

Raslan (Raslan, Utrecht Law Review, 2024) demonstrates that China uses the Belt and Road Initiative as a parallel instrument of technology transfer policy, potentially offering an alternative model to the WTO. From this perspective, the 15th FYP is part of a broader technological accumulation architecture operating simultaneously within and beyond multilateral constraints.

The WTO-plus obligations introduce additional constraints. Shepenko (Shepenko, Moscow Journal of International Law, 2026) demonstrates that the accession protocol imposes limitations beyond general GATT obligations and that any attempt by China to invoke domestic legislation to avoid compliance would violate WTO law. The specific risk identified is the PRC International Relations Law, whose provisions prohibit implementing treaties harming sovereignty, security, and national public interests. Although not yet invoked for non-compliance, the 15th FYP, by framing technological self-sufficiency as a national security imperative, creates the political and discursive context potentially mobilizable for such purposes in the future.

The Application of WTO Rules by Chinese Courts

The tension between the 15th FYP and the WTO system is also manifested at the level of domestic implementation of international trade law. Li and Shi (Li & Shi, Journal of Social Science Studies, 2019) identify a consistent official position among Chinese courts: private parties may not directly invoke WTO agreements before domestic jurisdictions. However, the authors acknowledge that WTO norms exert significant indirect influence through legislative reform, meaning that the Chinese legal system selectively absorbs WTO obligations, incorporating them when convenient and maintaining distance when it is not.

This duality is politically functional. By denying direct effect to WTO rules within the domestic legal order, China reserves to the state the monopoly over the interpretation of its international obligations, a characteristic that Zhang (Zhang, International Trade Regulation in China, 2006) had already identified as a structural feature of China’s foreign trade regulatory system. In the context of the 15th FYP, this architecture means that the plan’s guidelines, even those that create tensions with GATT Article III, the TRIMs Agreement, or the SCM Agreement, are unlikely to be challenged by private actors before Chinese courts. Accountability for WTO compliance therefore remains exclusively at the interstate level, and it is precisely this level that has been rendered dysfunctional by the crisis of the Appellate Body.

The convergence of these five dimensions, China’s structural trajectory as a “rule shaker,” strategic compliance in WTO disputes, technological subsidies and SOEs, WTO-plus obligations and technology transfer, and the filtering role of domestic law, creates a coherent analytical framework: the 15th FYP is not a plan that openly violates WTO rules. It is a plan that strategically inhabits them, exploiting their inherent inadequacy in accommodating Chinese state capitalism, an inadequacy amplified by the institutional paralysis of the AB. As Wu (2016) anticipated, the most likely outcome is one in which China’s rise will further erode the centrality of WTO law in global trade governance, making the 15th FYP not only a challenge to the multilateral order but also an accelerator of its erosion.

The MPIA alternative and its importance

The MPIA, created in 2020, emerged as an emergency solution to the paralysis of the AB. By replicating the AB's structure and introducing experimental reforms, such as strict 90-day deadlines and automatically binding decisions, the MPIA seeks to preserve the stability of the multilateral system.

However, the mechanism faces severe structural limitations. The absence of the United States restricts its jurisdiction, preventing the resolution of disputes such as those involving unilateral measures (e.g., tariff imposition) or pending cases like DS549. Furthermore, design flaws, such as the right to withdraw an appeal at any time, transferring the appeal to the AB, allow parties to place cases in a "legal vacuum" if they anticipate a defeat. The opacity in selecting its ten arbitrators also raises questions about a democratic deficit.

Despite these imperfections, the MPIA is vital for developing countries — which make up 72% of its signatories—as it ensures a rules-based system against unilateralism. For China, the arrangement is a strategic tool: by positioning itself as a "defender of multilateralism," Beijing uses the MPIA as a legal shield to protect the industries promoted by its 15th FYP. The MPIA offers the necessary predictability for China to advance its industrial modernization and "New Quality Productive Forces," consolidating its influence as a central actor in the reconfiguration of global trade governance.

Conclusion

In conclusion, the guidelines of the 15th FYP show that China aims to consolidate its position in international trade by advancing its state-led technology policies. This can be seen as China’s way to strategically exploit normative grey areas to strengthen its technological base, while staying within the boundaries of formal compliance. At the same time, the paralysis of the AB becomes a fundamental opportunity for China, since the country can use this scenario to implement strategic investments in its technological industry, without imminent threat of WTO retaliation. Also, it is a unique window for Beijing to pursue alternatives, such as the MPIA, since it provides a judicial shield for its economic interests but also actively shapes the future architecture of international trade dispute settlements, by positioning China as a defender of multilateralism and creating trade predictability while potentially curtailing Western influence. In this transition, the 15th FYP is both a beneficiary and a driver: it exploits the current vacuum while actively shaping the future architecture of trade dispute settlement, placing China at the center of rule-making and the United States increasingly on the sidelines.