More On: China
The World Trade Organization (WTO) welcomed China for the 20th time this week. The Chinese membership negotiations took 15 years to complete and resulted in the most restrictive and comprehensive set of requirements ever agreed to by any WTO member in 2001.
However, many people are now criticizing China's admission to the WTO and its expanded involvement in the global commercial system. There is no more vocal a critic than the United States. In fact, a 2017 report to Congress from the United States Trade Representative stated that “it seems clear that the United States erred in supporting China’s entry into the WTO.” This report was made by the Trump administration; it is unclear whether the Biden administration feels the same way.
However, this viewpoint is incorrect. Overall, China's entrance to the multilateral trading system based on rules has resulted in much more stability, predictability, and transparency in the rest of the world's economic ties with China than existed before to China's accession. The World Trade Organization (WTO) has been instrumental in opening China's market to international goods and services. China and all of its trade partners, including the United States, have reaped significant economic benefits as a result of this opening. Nonetheless, opponents of Chinese trade practices are absolutely correct in claiming that much more needs to be done to rein in many of China's trade practices and assure full compliance with the WTO treaty's responsibilities.
China’s Long & Difficult Accession
China's path to WTO membership was long and winding, with many stops and starts along the way. China was a member of the World Trade Organization's precursor, the General Agreement on Tariffs and Trade (GATT), but it left in 1950 because the Communist Party of China refused to uphold tariff obligations made by the overthrown nationalist government. China did not reapply for membership in the GATT until 1986. Negotiations on Chinese entrance lasted fifteen years, until WTO members eventually agreed on an accession protocol in November 2001 at the Doha Ministerial Conference. As law professor Henry Gao explains, “the price that China had to pay to get into the club seems rather hefty,” including significant commitments on goods and services that matched those made by developed country members. Gao notes that:
For goods, China agreed to reduce its overall tariff level from a basic point of 43% before the accession to 10% by 2005, making it one of the lowest levels in the world. For services, China also made extensive commitments, covering more than 100 out of the total of 160 services sectors enumerated in the Services Sectoral Classification List. Such a level of commitment is on par with that of major developed countries….
When China joined the WTO, it also agreed to regulations that make it simpler for other WTO members to impose trade remedies on China in the case of "market disruptions," as well as classification as a non-market economy, which means harsher antidumping penalties can be imposed on Chinese goods.
As Paul Blustein, the author of Schism: China, America, and the Fracturing of the Global Trading System, writes of China’s WTO accession negotiations: “It’s hard to imagine how the US could have driven a harder bargain on [economic] issues and still gotten a deal. Chinese officials are resentful to this day; they feel China was forced to accept 2nd class citizenship on a [number] of issues.”
Despite this, myths surrounding China’s accession to the WTO persist, the most common claim being that China’s membership was simply rubber stamped by the United States and by other naïve WTO members who failed to anticipate China’s rise to global economic prominence in the first decades of the new century. As our colleague Scott Lincicome has noted elsewhere, this could not be farther from the truth.
Disciplining China at the WTO
China's trade behavior, like that of the other countries, is far from flawless. It is, in fact, far from ideal on a number of levels. However, when China has been found in breach of WTO norms, it has, for the most part, followed through on such judgements, albeit often after a period of dithering. However, the issue with punishing China has traditionally not been a lack of WTO rules that may be used to hold China accountable, but rather a lack of cases launched against China to test existing rules that might be used in this capacity. In China, for example, there is a lot of valid concern about coerced technology transfer; yet, to date, neither the United States nor any other WTO member has submitted a legal claim in WTO dispute settlement accusing China of breaking its promise in its accession agreement not to require the transfer of technology as a condition for market access.
It's vital to remember that the WTO isn't a trade police force. It is a member-driven organization, and its members' policies are assumed to be in line with the rules until proven otherwise through disputes and compliance processes brought by members. In essence, members must file complaints in order for their problems to be addressed.
Cato scholars have detailed four promising areas where legal complaints against China could be successfully pursued at the WTO under the current rules, including forced technology transfer, general intellectual property protection and enforcement, trade secrets protection, and trade‐distorting subsidies. It is hard to declare with certainty that the existing procedures are inadequate as long as the United States and other nations affected by China's actions refrain from bringing similar legal claims against China in WTO dispute settlement. (Of course, the fact that the US has beheaded the WTO's appeals function, a vital aspect of the dispute settlement system that hasn't worked since late 2019 complicates things.)
Of course, new WTO regulations are needed in areas such as subsidies, investment, and other sectors, not least since the global economy has changed considerably since the WTO was formed in 1995 and China joined six years later. WTO countries should start by progressing in existing discussions and doing everything they can to guarantee a successful ministerial meeting as soon as the COVID-19 epidemic allows. High on their checklist should be concluding, at last, the long years of negotiations aimed at prohibiting subsidies for fishing. China is one of the top five global subsidizers of fishing activities, and yet it appears willing to assume strong obligations in this area—the resulting opportunity to wrap up these talks successfully should therefore not be missed. Plurilateral talks are also another way to update WTO rules to address modern trade issues.
In addition, the United States could work with its allies to build a consensus on how to tackle their shared trade problems with China. Recently, the United States resumed talks with the European Union and Japan to strengthen existing rules on industrial subsides at the WTO. This is an important development, not least because it could generate agreement among these three major economies on how to reform subsidy rules that could later feed in to formal discussions at the WTO. Working with our allies also makes practical sense, because it is easier to approach China on needed reform as a group of important trading partners than to attempt to negotiate with China bilaterally.
The Trump administration chose to take a “more aggressive approach” to China, but little has been achieved by its unilateral measures, which were often inconsistent with WTO rules. The Phase One deal with China had no impact on changing China’s behavior on industrial subsidies or on the other commercial matters that are most important to the United States. Yet, the Biden administration seems to have largely embraced the Trumpian approach to China, and it has still done very little to lay out its own strategy. What the last few years have reinforced, however, is that tariffs and unilateralism have simply not worked. With the WTO ministerial conference postponed until next year, the United States has a chance to reflect on these failed approaches and find new ways to engage with our allies to address our common concerns about China’s trade practices.
The United States is not a Model Citizen
The United States must also approach China’s trade practices with a degree of humility, because we, too, have been less than perfect in fulfilling all our WTO obligations. Our record as a member of the WTO is replete with examples of avoiding compliance with the rules. For instance:
- At every meeting of the WTO’s dispute settlement body, two cases are repeatedly brought up where the complainants claim the United States has not yet come into compliance with the rulings. Rulings in these two disputes— US — Hot‐Rolled Steel and US — Section 110(5) Copyright Act were in 2002 and 2001, respectively.
- The ruling in a case brought by Brazil on U.S. subsidies for cotton production was never implemented. Instead, the United States gave a one‐time payment of $300 million to benefit Brazilian cotton producers as an enticement to Brazil to drop the case. Thus, American taxpayers paid twice – once the appropriation for the illegal cotton subsidies and a second time to be able to keep those subsidies in place.
- Other disputes have faced slow implementation. The US — FSC dispute began in 1997, went through appeals, and two separate compliance proceedings. The case was only resolved in 2006 when Congress passed legislation to repeal the provisions at issue.
- And on the contentious case of US — Zeroing, complaining parties had to repeatedly bring cases against the United States on a wide range of varied antidumping measures in order to encourage American implementation. It still took nine years for the United States to comply.
When the US complains about China's non-compliance with WTO regulations, it's worth reflecting on our own actions. Even when the US complies with decisions (particularly on trade remedies), it does so slowly and seldom. Due to these delays, each aggrieved member is forced to return to the WTO, often many times, in order to obtain relief.
And as the United States continues to skirt any real discussions on WTO dispute settlement reform, it is equally hard to take seriously U.S. requests for other countries to “bring your grievances” to the WTO so that institutional reform can begin. At the same time, neither the Trump administration nor, now, the Biden administration has told the other members of the WTO precisely what changes it seeks in the dispute settlement system.
Lastly, there is a certain irony in the United States criticizing China’s mercantilist and discriminatory industrial policies, when, here at home, first the Trump administration, and, now, the Biden administration, has been striving administratively and legislatively to emulate many of the wrongheaded Chinese policies. The scale of growing American protectionism does not yet begin to approach that of China; the American economy remains far more open than the Chinese economy to free and fair competition. But managed trade is managed trade, wherever it may be pursued. It has the same harmful economic consequences, and it poses the same potential for transgressions of international law.
China’s Anniversary Deserves Celebration
Twenty years ago, the United States and other WTO members agreed that a true World Trade Organization could not exist without China. Many of those same nations are now pondering if a WTO with China is possible. "Yes," is without a doubt the answer. However, in order to get to that solution, China must address the concerns of its trading partners about certain of its trade practices. Similarly, and at the same time, China's reservations about certain of its trading partners' trade practices must be addressed. All of these issues should be at the forefront of any future negotiations. These negotiations should be multilateral, and they should be held within the legal framework of the WTO. In the meantime, we should take a moment to observe China’s 20th anniversary as a member of the WTO, and celebrate the fact that China remains an active participant in the rules‐based trading system.