China and the United States in the World Trade Organization

Introduction

Over the last three decades, economic ties between the US and China have expanded substantially. Between 1979 and 2013, trade between the two countries rose from $2 Billion to $562 Billion. Today, China is the US’s “second-largest trade partner, its third-largest export market, and its biggest source of imports”[1]. Over the same period, the two enjoyed good diplomatic relations that came to be known as Chimerica[2]. In recent times, however, a period that coincides with China’s apparent rise in the context of the global economy, the diplomatic relations has gone sour, why many commentators say China is growing bigheaded in the face of it is newly acquired status.

It is against the same backdrop that one can see that, despite growing commercial ties between the two countries, the bilateral economic relationship between them has been getting more and more complex and characterized by tension. The US, for instance, has questioned China’s mixed record in the implementation of WTO obligations. US policymakers argue that China’s behavior in relation to WTO obligations has to do with the fact that it has not completely transited to a free market economy. Indeed, over the past three decades, China has “significantly liberalized its economic and trade regimes… and it continues to maintain a number of state-directed policies that appear to distort trade and investment flow”[3]. China has continued to use its industrial policies to its selfish advantage, particularly to promote the government-favored industries and protect them from external competition. Moreover, China has held onto its policies to ensure its currency remains undervalued. Although there is some validity to these claims, at the bottom of it all, the tensions between the two countries stem from selfish trade goals ad ambitions. WTO has had to preside over disputes between the two countries[4].

This paper examines the US-China trade interests and conflicts within the context of WTO organization, as well as their implications on the future of the organizations.

Rising Tensions between the China and the US in the WTO

Unlike the US, China is relatively young in the WTO formally acceding to the organization in 2001 as its 143rd member. As a condition to enter WTO, China promised to commit to the organization’s obligations. For example, it promised: liberalization of the financial services market; to reduce its agricultural and industrial subsidies; continue the process of privatizing state-owned enterprises; as well as improve its enforcement of the rights on intellectual properties[5]. Is it is the nature of multilateral trade agreements, these commitments on the part of China were meant to be of implicit advantages to its fellow WTO members? Moreover, this would serve to complement unilateral goals to promote reforms for a market-oriented domestic economy.

However, since its entry into WTO in 2001, “China has been an extremely quiet member”[6] both in terms of abiding by some of the obligations of the WTO and in terms of being part of bilateral trade disputes. As already discussed above, the US has criticized China’s behavior in relation to WTO’s obligations. In fact, some have blamed some of the US’s economic woes directly on China. For example, many US policymakers are of the view that China’s policies (such as the state involvement in the economy including its protectionist policies, as well as those related to the value of its currency) have harmed the US’s economic interests and led to job losses. Of US the policymakers’ major concerns, of even greater concern is the size US trade deficit with China, which has been significantly higher than it is with its other trading partners and groups. Between 1990 and 2008, just under two decades, US’s the deficit rose from $10 billion to $266 billion. In 2009, it dropped to $277 billion. This has been attributed to the effects of the then-prevailing global economic downturn. After that, however, the deficit has continued to rise annually. By 2013, the deficit had reached $318 billion. To some, this deficit reveals that the trade relationship between the two powers is unfair unbalanced and harmful to the US’s economy. Others believe that it is a “reflection of global supply chains because a significant level of US imports from China come from foreign-invested multi-national companies there, which use China as the final point of assembly for many of their products”[7].

By 2009, WTO’s formal dispute resolution had processed 135 cases between various members. China had only answered one case against the US in 2004 by 2006, the year that marked the beginning of an onslaught of cases[8].

Since 2006, China and the US have exchanged blows in WTO’s dispute-processing chambers in Geneva. The US, for instance, has brought several formal disputes against China to the WTO. China has also responded by initiating cases of its own against the US. According to Bown[9], the US’s initiation of cases against China follows in the legacy of Bush Jr. In 2006, Washington yielded to political pressure from the Congress and initiated the strategy to use WTO’s judicial forum to manage its bilateral trade issues against China. In 2006 March, the US together with Canada and the European Union (EU) launched the first dispute against China, challenging its discriminatory treatment of imported Auto Parts. The following year in February, the US together with Mexico launched another dispute with China, this time challenging its system of domestic subsidies (that is, subsidizing its domestic industries). In April the same year, the US again initiated two other complementary disputes having to do with China’s treatment of the US’s imported books, movies, and music. Particularly, this had to do with China’s “failure to enforce American intellectual property rights protection and its creation of regulatory hurdles that impede Hollywood film studios and other media and publishing companies from distributing these products within China”[10]. A year later, in March 2008, the flurry of US-led disputes against Beijing continued. This time, together with Canada and EC, the US initiated a case challenging China’s regulation of foreign firms that sought to provide domestic market consumers with financial information services (such as Dow Jones, Bloomberg, and Thomson Reuters)[11].

In most cases, the Chinese government responded with public denunciation. This flurry of US-led cases against China is attributed to Bush’s buckling under political pressure in the face of a Congress that sustained anti-China notion, citing the increasingly huge bilateral trade deficit, China’s substandard labor, and environmental regulations, and undervalued currency[12].

This tense situation had been building for a while now, owing to a number of events that only made things worse. For example, in 2005, the US Congress had rebuffed the attempts of CNOOC (a Chinese firm) from acquiring the US firm Unocal saying it was a matter of national security. In 2007, China made a number of product recalls and the US banned a number of China’s exporters on claims of harmful chemicals, such as diethylene glycol and melamine (found in toothpaste and pet food) and lead paint (in children’s toys), among others[13]. In 2008, new points of contention arose between the two powers. For example, there were conflicts over the “growing financial clout of sovereign wealth funds and accumulation of foreign exchange reserves “[14]. Moreover, in the same year, the US threatened to impose new border taxes as part of its response to what it saw as China’s refusal to commit to multilateral commitments to combat global climate change by reducing carbon emission[15].

The danger for many observers is that these tensions have been simmering at a time when the two countries were enjoying fairly good diplomatic relations, as well as fairly good economic times for the US. With the global financial crisis and the global recession that followed now largely blamed on the US, many say the relations between the two countries have grown even worse and are likely to be even worse in the face of the US economic woes. According to Bown[16], history shows a bad domestic economy as an incentive for politicians to close down imports in a desperate and misguided strategy to save jobs.

The global economy is fragile, which poses risks to the balance of liberal systems of international trade. It is therefore the belief of many that the two powers and other members in dispute are likely to resort t other dispute resolution strategies besides the WTO dispute settlement mechanism (DSM) as these give too much way for political whims, which might pose an even bigger risk.

Indeed, domestic politics has a lot- perhaps more than other aspects considered valid grounds for complaint- to do with the disputes between the two countries, influencing the bargaining processes that accompany the initiated trade disputes[17]. However, without a common DSM, there is likely to be more chaos. Working outside a shared system like the DS has proved disruptive and problematic before. Chinese leaders, thanks to significantly expanded bilateral trade relations over the past decades, have access to decision-makers and sufficient political power to identify and threaten to retaliate against US businesses. Zeng[18] observes that China has exploited the political divisions between the parties in the US business community. For example, in response to the US’s tire tariffs against it, China restricted poultry imports from the US. Secondly, when the US placed trade restrictions against solar panels from China, China responded by launching investigations on US’s clean-energy projects. Thirdly, in the face of conflicts over poultry, China further threatened to impose tariffs against US automotive exports.

These whimsical reactions put at risk all that is at stake (in terms of politics, market access, and legal precedent) for both countries. Secondly, because the process of settling these disputes lasts for years, both countries can use the appeals as political cover. For example, just by continuing with the disputes initiated by the Bush administration, the Obama administration is shielded from the intense protectionist threats of Congress. Most importantly, the DSM may prompt China to make tangible changes that other strategies of negotiations would not have them make. China, on its part, appreciates the long-term nature of the DSM processes since quick resolutions would make them the target of new disputes.

What Now for the US, China and WTO: the Implications

Many are questioning the implications of these conflicts on the two powers, as well as the future of WTO. One thing that many observers agree on is that there is a potential for these disputes escalates to bigger problems. As harmless as these disputes may initially look, sometimes seen as merely strategic argumentation and legal maneuvering, they can turn to political threats and battles. They can also grow into “legally-sanctioned implementation of actual retaliation, and media-fed worries for an all-out trade war”[19]. To prevent any such outcome, WTO’s DSM must successfully handle these disputes. Unfortunately, it is not certain how successful the DSM can diffuse the growing tensions between the two competing powers. The success of WTO DSM, therefore, depends on whether China and the US have faith and long-term commitment to the WTO system, as well as its dispute settlement mechanism, and act with practical political understanding. On the part of WTO, the successful resolutions of these conflicts involve dealing with not just foreseeable pitfalls but also anticipate unforeseeable challenges (arrived at through the assessment and evaluation of the past political environments of the more-or-less the same circumstance, as well as the elements of the current political environment that have the potential to influence the relations)[20].

Based on history, it is probable that the US will win in a good number of these legal disputes it has initiated against China[21]. For example, the DSM ruled that China unfairly and wrongly placed barriers (tariffs) on poultry exports from the US[22]. China, finding that the intransigent political forces within it are being an obstacle to the pace of its domestic reforms, may be forced to undertake reforms because it finds it effective “to use one industry’s realized economic costs (due to foreign retaliation) of failing to reform as ammunition in its fight for scaling back domestic subsidies”[23]. Moreover, China may improve the enforcement of intellectual property as well as increase competition benefits obtained through access to additional import markets for auto parts firms and other foreign industries.

So far, as already stated above, the WTO DSM seems the best option. Particularly, the appeal of the WTO DSM has to do with the fact that it primarily focuses on both parties. In other words, while the goal is to provide a resolution, there is the goal t provide a win-win economic outcome for both parties to ease the tensions, such as calling for Chinese market access for US exporters, which initiates the reforms that will boost China’s economic growth[24].

As stated already, whether the WTO SM will be successful n the face of increasing tensions and bad blood between China and the US remains to be seen. The implications of success can only be discussed in the long term. One can however guess that it will have a positive impact. Both parties could have more faith in the system. Moreover, other parties would also have faith in the WTO DSM and use the platform in settling the disputes between them. On the other, if the DSM is successful, then one can guess that the implications will be bad for the two powers, the WTO and the world at large. Indeed, this puts the WTO in a precarious place as everyone is watching. Yet, the failure of such a dispute settlement process would not be entirely blamable of it. On its part, the WTO DSM could mismanage the process of dispute resolution. On the parts of the US and China, one or both could overreact ad act recklessly, leading to stalemates. In such a case, both sides (and other WTO members) could become disenfranchised in the rule-based system of trading. Ultimately, this could greatly influence the WTO in many ways. Besides, for the WTO to gain the faith of its members, it needs both the US and China, and it must be able to keep them at relative peace- at least within the context of the WTO.

Conclusion

As this paper demonstrates, there are valid grounds for the claims that the DSM is an effective platform for resolving trade disputes between the WTO member-states. Indeed, the platform has effectively arbitrated trade disputes between the US and the European Community for over a decade now. Whether it will be as successful in addressing the trade disputes between the US and China and avoiding bigger political problems in the near future remains to be seen. It is very important that his goal is achieved if the current rule-based system is to remain credible. So far, everything seems okay. The WTO’s institutional framework continues to provide a suitable platform for settling trade disputes transparently in a way that helps avoid spillover and an all-out trade war. US-China disputes pose the biggest challenge yet.

The economic downturn following the recent financial crisis and the global recession that followed has certainly set in motion responses that may test the DSM and ultimately the stability of WTO. How the DSM handles the disputes between the US and China will be the ultimate test on the resilience of the rule-based international trade system that is WTO and the effectiveness of its dispute settlement mechanism.

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[1] Wayne Morrison. China-U.S. Trade Issues (Congressional Research Service, 2014), i.

[2] Yuezhi Zhao. “The Life and Times of “Chimerica”: Global Press Discourses on U.S.- China Economic Integration, Financial Crisis and the Power Shifts.” International Journal of Communication, 8 (2014): 419-444

[3] Scott Kennedy. “China’s Porous Protectionism: the Changing Political Economy of Trade Policy.” Political Science Quarterly, 120, no.3 (2005): 407-432

[4] Ka Zeng. China, America and the WTO, The Diplomat, Feb. 07, 2013. < http://thediplomat.com/2013/02/china-america-and-the-wto/> (accessed April 8, 2014)

[5] Chad Bown. “U.S.-China Trade Conflicts and the Future of the WTO.” The Fletcher Forum of World Affairs, 33, no.1 (2010): 27-48

[6] Ibid 33

[7] Stuart Malawer. “Chinese Investment and State Economic Development.” New York Law Journal  (2011): 1-7

[8] Stuart Malawer. “U.S.-China Litigation in the World Trade Organization.” New York Law Journal, 250, no.31 (2013): 1-5

[9] Ibid 3

[10] Chad P. Bown, Meredith A. Crowley, Daisuke Nakajima & Rachel McCulloch. “The U.S. Trade Deficit: Made in China?” Economic Perspectives, 29, no.4 (2005): 2-18

[11] Ibid, 13.

[12] Ibid, 13.

[13] Ibid, 16.

[14] Thomas L. Brewer. U.S. Climate Change Policy and International Trade Policy Intersections: Issues Needing Innovation for a Rapidly Expanding Agenda, Paper Prepared for a Seminar of the Center for Business and Public Policy, Georgetown University (February 12, 2008)

[15] Ben Lockwood & John Whalley. Carbon Motivated Border Tax Adjustments: Old Wine in Green Bottles? NBER Working Paper No. 14025(May 2008)

[16] Bown et al., 15.

[17] Zeng, 1.

[18] Ibid, 1.

[19] Bown, 31.

[20] Robert Z. Lawrence. Crimes and Punishments? Retaliation under the WTO (Washington, DC: Institute of International Economics, 2003)

[21] Bown, 38.

[22] Ian Talley. “U.S. Wins Trade Case Against China.” The Wall Street Journal (2013)

[23] Bown, 38.

[24] Chad P. Bown & Joost Pauwelyn, eds., The Law, Economics, and Politics of WTO Trade Sanctions (Cambridge, UK: Cambridge University, 2010).