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The US-China Fight Over Trade: The Ultimate Test of the WTO Framework
Image Credit: Flickr/ Gage Skidmore

The US-China Fight Over Trade: The Ultimate Test of the WTO Framework

 
 

Last month, President Trump made headlines for openly challenging the World Trade Organization (WTO) in his administration’s annual trade policy report to congress, furthering his promise to counteract “China’s unfair advantage.” At the top of the list of accusations is dumping – particularly steel as well as aluminum and chemical products.

In March, the U.S. Department of Commerce announced two antidumping countervailing duty investigations against China, only 70 days into the new administration. Neither of these has been formally filed with the WTO yet, though they may in the near future. Instead, dominating the newsfeed were rumors of border taxes and other measures outside the WTO framework the Trump administration is considering.

Yet long before Trump entered politics, the United States has been engaged with China in the WTO over dumping cases. The U.S. filed 16 anti-dumping cases against China during the Obama administration alone. But as of December 2016, China launched an ongoing case in the WTO to change anti-dumping investigation protocol. As we consider the possibility of further WTO clashes between the U.S. and China, this case helps shed light on the real stakes involved between these two powers – where victory itself outweighs the dollar value being fought over.

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The pre-Trump dispute

China’s accession to the WTO in 2001 came with a fifteen year window during which China was considered a non-market economy (NME) during anti-dumping investigations. Countries (usually developing countries) that maintain domestic price controls in order to protect and foster local companies are considered NMEs. WTO member nations are at liberty to apply or remove NME status as they choose if the WTO deems the label appropriate.

If an NME is accused of dumping, investigators pick a similar country’s economy to calculate how much the product should fairly cost. It is up to the accusing country’s investigators to pick which economy the accused is compared to. If a market economy is accused of dumping, investigators must compare export prices to production costs in the accused country.

According to Section 15 of the Chinese Accession Protocol to the WTO, the application of non-market economy status towards China was set to expire on December 11, 2016 and that in the interim China would establish market economy conditions making NME status unnecessary.

The United States and the EU argue that China has not yet proven its industries are market driven, thus allowing indirect government support. In turn, China argues that western regulators used China’s NME status to pick unrealistic comparables and are ignoring Section 15 so as to continue justifying dumping accusations, to which they have filed a formal complaint. Most WTO members have already removed China’s NME status in their bilateral relations.

The Trump Administration’s Approach

As of March 31, President Trump signed two executive orders to review trade abuses against the United States, and to put more pressure on collecting antidumping duties from foreign governments. The moves were characterized by commodities trade journal MetalMiner as “formaliz[ing] China’s unfavorable status in trade cases, [meaning] the country’s goods would be eligible for higher U.S. tarrifs.” In other words, the United States will not stop classifying China as a NME.

Despite Trump’s Trade Representative’s office report emphasizing national sovereignty over trade policy, it appears this fight between the United States and China over China’s market status within the WTO is only going to get fiercer in the coming months, with rumors the former will try to use it as a bargaining chip in bilateral talks.

Behind the sound and fury: the real impact WTO anti-dumping penalty has on U.S.-China trade

The reality is that WTO anti-dumping countervailing measures currently have very little effect on U.S. imports. The United States has a domestic Countervailing Duty Law (CVD) it applies in parallel to antidumping duties. CVD have been applied liberally to trade imports from China, to the degree that only 2 percent of U.S.-China trade would be affected were the U.S. to end all WTO anti-dumping duties, a practice shared by the EU.

While the ruckus at the WTO may grab headlines, the actual bilateral trade at stake paints a contrary picture from the one popularly accepted, of a porous U.S. trade border where goods can easily enter.

Greater Implications

The difference between the Trump administration and previous U.S. administrations turns out to not be the use of extra methods outside the WTO framework, but the public rejection of the WTO framework itself. Some critics have said this harkens back to the Reagan Era trade war between the United States and Japan, to which the solution was the use of the WTO as a more or less impartial intermediary. Yet others say that the WTO and Bretton Woods international framework will not survive this fight as the limits of its power are tested by the world’s two largest economies. Should the WTO rule in favor of China, and the United States openly defies the ruling, it remains to be seen if the WTO will be able to effectively enforce punishments against the United States, or if it will cause the institution to lose enough credibility that other countries begin to openly ignore WTO rulings themselves.

The United States has long challenged or circumvented the WTO in the background (from continuing subsidies to U.S. cotton farmers, to refusing to reduce regulations leveled at Mexian tuna), but the new administration is instead bringing matters into the spotlight, while looking for a ‘win’ to bring to home. By unhappy coincidence, China is gearing for its own symbolic victory. There is a long running narrative that China is wrongfully discriminated against and besieged by the so called champions of free markets. China’s state run Economic Daily reported that in 2016, 91 dumping cases were filed against China at the WTO from all countries, a historic high. Whether out of frustration or aspiration to form its own multilaterals, China’s challenge is also a test of whether the WTO dispute settlement is fundamentally biased in favor of Western countries. Not ‘winning’ in the international governmental framework could create an opportunity for China to break from it.

Understanding the implications of China’s market classification reveals two major points: (1) The actual changes at stake in the WTO framework are minimal compared with domestic barriers in place; and (2) the symbolic powers of WTO classification and the international legal framework are enormous, and draw much more attention and political leverage.

Symbols are important, but the pursuit of them can incur inordinate costs. President Trump’s interview with the Wall Street Journal April 12 suggests there is some hope for compromises to be reached with China on trade. But should the United States and China be unable to reach a bilateral understanding, this tug-of-war over WTO market status could reshape the international order in the name of only a tiny sliver of world commerce.

Ann Listerud holds a Masters from UC San Diego’s School of Global Policy and Strategy. She currently works in finance and is based in Tokyo. Follow her on twitter @lianlist

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