China, America and the WTO
Image Credit: US Department of Treasury

China, America and the WTO

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Growing tensions in U.S.-China trade relations generated by the rapid expansion of Chinese exports to the U.S. have led both countries to frequently resort to the World Trade Organization (WTO)’s dispute settlement mechanism (DSM).  Noticeably, both Washington and Beijing seem to be more frequently using the DSM to target issues of critical concern to their respective domestic constituencies.  While the U.S.’ WTO trade disputes against China tend to target Chinese industrial policy and challenge the dominance of state-owned enterprises (SOEs), cases involving antidumping duties (ADs) and countervailing duties (CVDs) have taken up a disproportionate share of China’s WTO disputes against the United States. 

Since its WTO accession, China has been the target of 29 WTO disputes initiated by its trading partners, with the United States accounting for the lion’s share of these cases. The Chinese measures being challenged by the United States include semiconductors, auto parts, intellectual property rights, trading rights and distribution services for certain products, grants and loans and, more recently, wind power equipment, renewable energy, and access to resources. Many of these cases involve the Chinese government supporting domestic enterprises through tariffs, subsidies, grants, refunds, and exemptions from taxes that either provided an unfair advantage to Chinese exporters, or restricted foreign market access in China.

Washington's focus on Chinese industrial policy and the Chinese government’s continued support for domestic enterprises needs to be viewed against Beijing’s continued heavy involvement in the economy. Indeed, while economic reforms and WTO entry have streghtened the influence of free markets in China, the Chinese government has increased its reliance on industrial policy during the past decade. The 2008 global financial crisis, which led to a substantial contraction in China’s export markets, further reinforced the role of government stimulus spending, especially stimulus spending in the state sector, in ensuring the country’s sustained growth.  As a liberal international economic institution, it is no surprise that the U.S. is using the WTO to target China’s state-centric model of development.

If current trends continue the U.S. and other WTO members will continue to use the DSM to challenge China’s industrial policy and SOEs. These disputes will in turn raise important systemic issues for the organization regarding the impact of the state sector on trade flows and the ability of existing rules to cope with the challenges posed by large transitional economies such as China.

At the same time the DSM has become the primary venue for Washington to address its concerns with China's industrial policy, Beijing has more frequently turned to the DSM to challenge U.S. measures against China.  Since it became a WTO member, China has only initiated 11 cases at the WTO. However, the bulk of these cases involve antidumping (AD), countervailing duties (CVD), and safeguard measures.  The large percentage of such cases in China’s WTO complaints in turn needs to be viewed in light of the fact that China has become the leading target of antidumping and countervailing investigations worldwide over the past two decades, and that these measures of contingent protection are particularly damaging, have a strong chance of success, and have become the main instruments for addressing U.S. trade concerns with China outside of the multilateral framework.  It is then not surprising that Beijing has turned to the DSM to address the perceived unfairness in the use of such instruments and to challenge the nonmarket economy (NME) designation, which was considered to have at least partly contributed to the rising tide of AD and CVD measures against China. And even if China does not win a particular case, it is possible that the simple action of initiating a WTO dispute may exert a deterrent effect on other WTO members by curtailing their antidumping filings against China.

Domestic politics also figure prominently in Beijing and Washington’s decisions to launch trade disputes, and play an important role in influencing the bargaining processes that follow trade disputes being launched.  Indeed, the significant expansion of bilateral trade relations in the past decades has provided opportunities for Chinese leaders to identify and threaten retaliation against U.S. business groups with sufficient political clout and access to decision-makers in order to enlist their help in removing alleged protectionist measures. Examples of China exploiting divisions within the American business community include: China restricting poultry imported from the United States in the aftermath of U.S. tire tariffs against China, Beijing’s decision to launch investigations into U.S. clean-energy projects in response to U.S. trade restrictions on Chinese solar panels, and China's threats to impose tariffs against American automotive exports to China in the poultry case. 

All this suggests that the WTO DSM has become the primary means for handling politically salient issues for both countries.  If this is the case, the growing utilization of the DSM in the past decade may have helped to channel the tensions surrounding the bilateral trade relationship and prevented intense interest group pressure from impairing overall U.S.-China trade relations. In the absence of the DSM, it is possible that major bilateral trade disputes resulting from China’s ever-growing trade surplus with the U.S. and allegations of the undervaluation of the Chinese currency could have generated far more acrimony and tensions in bilateral economic relations.

Ka Zeng is Professor of Political Science at University of Arkansas and co-author, most recently, of: Greening China: The Benefits of Trade and Foreign Direct Investment. This piece is adapted from her article, “High Stakes: U.S.-China Trade Disputes under the World Trade Organization (WTO),” which appears in the latest issue of International Relations of the Asia-Pacific.

Comments
8
Peter S O
February 13, 2013 at 16:02

I wonder what will happen to China when the oil price rises to a level that makes Chinese exports uncompetitive, assuming we will still have a local industry.  The oil price has to go up as it is a deminishing resource that is in ever greater demand.  There are coal (also a diminishing reasource) to oil plants in South Africa and the oil made with that process in significantly more expensive but plastic land China relies on oil for its exports and may need to adopt such measures.  China may have the upper hand in trade now but if the US puts together a foriegn policy that is applicable to the current situation then China may have a problem in the not to distant future.  It would seem that China is reluctant or has not had the need to militarily protect their trade and economy.  The US and Europe are willing to protect their economies using force ( eg Iraq, Libya etc).  

vic
February 12, 2013 at 11:37

The other problem is that in the US, a large portion of the population cannot get into high-tech industries because of lack of skills.  Should a portion of the US population be forever locked into the low-end of society?  When we start splitting work world-wide, the statistical reality sinks in; the normal distribution curve applies to the populations of all countries.

Derek
February 10, 2013 at 10:44

The fact is that peace of any kind comes with hard compromises.  If you seek peace, you must be willing to seek avenues and methods of redress that doesn't cause escalation.  China is a much more rational actor than its critics believe.  As interdependent as it is in the world economy.

 

The United States would be unwilling to treat China as a rogue state as such an act is an act of undeclared war.  You don't call sanctions on Iran and North Korea the same only because they are incapable of striking back and retaliating.  The same is not true for China as the country holds far more leverage.  To think the US should dictate matters on China through coercion is absurd given the historical context.  The amount of resentment and bitter hatred will linger on for many generations.  Not a good recipe for lasting peace, if your aim is for peaceful co-existence. 

Any talk of short-term sacrifice to damage another party is just for personal gratification and not a true discussion on resolving issues.

 

Lastly, the United States government is not run by nationalists that see the world order as a zero-sum game, unlike what many wish to believe.  They are beholden to special interests, powerful business lobbies, and interest groups that can successfully pressure the government on anything that may impact their profits and goals.  That's why for any talk of retaliation or war-mongering, it is simply a smokescreen to placate elements of society while business continues on as usual.

Leonard R.
February 8, 2013 at 11:31

The US should deal with China from a position of strength. China is waging cyber war & economic war against the US. The US should fight back.  It should not rely DSM's in some European tribunal. It should retaliate in kind. 
 
Putin did not hesitate to sink a Chinese 'fishing boat' and kill Chinese 'fishermen' when they trespassed into Russian territory. That is the proper way to deal with Beijing. Putin understands 'strength'. He understands negotiating with Chinese is the rhetorical equivalent of knee-deep mud. Don't do it. Just walk away from that stinking mud hole unil it dries up. 
 
 

Nevis07
February 8, 2013 at 04:49

I have to agree with Leondard.  The crisis is already here, it's really just a matter of dealing with a slow economic death for the US or a sharp trade war with China.  Either way it will be painful but as things currently stand, China is simply sapping the US's wealth.  Read Clyde Prestowitz's blog in Foreign Policy on this.  Every time the US wins a trade case against China in the WTO, they simply implement a new merchantilist policy to take the old policy's place.  The US has a choice to make  – either we allow China to follow the WTO rules in name only (and consequently ensure economic demise) or we put a policy in place that is equal in protection for our own industries.  Yes it would be painful up front, but I'd prefer to deal with those issues head on rather than by slow economic suffocation.

Caesar
February 7, 2013 at 22:31

because it makes him feel better. We always feel better if we think we know the solution to a problem. The problem being that the US is uncompetitive. 
Tension grows when one who has been accustom to being on top is replaced by another who simply works harder.
The WTO is playing by the rules setup by the US. The US is being beaten by its own rules. I think instead of changing the rules one should work harder for less. Afford what you can pay for. Dont' borrow too much. live within your means. This is the REAL rebalance in asia.

applesauce
February 7, 2013 at 18:31

how would breaking trade relations, and thus ignite a major international crisis, with china help the two countries reach an understanding? because make no mistake, what  you are suggesting will ignite said crisis.

Leonard R.
February 7, 2013 at 12:19

This article is neutral and objective for the most part. I disagree with her conclusion that the DSM has had a beneficial effect though – far from it. The DSM has only postponed the inevitable. And the longer the status quo continues, the more damage to the US accrues. 
 
The US should give notice that it is opting-out of the WTO, with regards to China. It should move Chinese goods over into the same column of the tariff schedule as North Korea and Iran. The sooner that happens, the sooner the US & China can reach a mutually beneficial understanding on trade. Until it happens – tensions will only grow worse. The DSM's of the WTO are ineffectual. 

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