The U.S.-China Economic and Security Review Commission (USCC) is holding a hearing on April 14, 2022 looking at the following topic — Challenging Chinaʼs Trade Practices: Promoting Interests of U.S. Workers, Farmers, Producers and Innovators. See U.S.-China Economic and Security Review Commission, Notice of Public Hearing, 87 Fed. Reg. 18,075 (March 29, 2022. I am participating on the fourth panel which looks at China and the WTO. I copy below my written testimony. Before that I provide a summary of my thoughts and some recommendations for U.S. action.
As is broadly recognized, the WTO is struggling to maintain relevance and develop updated rules for international trade that reflect the changing landscape on critical issues. The growth of the WTO in terms of membership and accession applications is notable but has resulted in an organization where progress on multilateral issues is nearly impossible and in any event too slow. China and other Members emulating Chinaʼs state-directed economic model have pushed the organization into a nonsustainable position as the current rules are premised on major Members having market economies. The clash between the economic systems has resulted in increasing tensions as market economies struggle to deal with distortions created by China and others many of which distortions are not addressable by existing WTO rules. With a consensus based system for modifications to existing rules or for the creation of new rules, there are questions about the ability to move forward to address Chinaʼs massive distortions. Similarly, while there are important activities that the WTO can and sometimes does do in the Committee structure, the Committees are not generally eective and a lack of transparency in practices, particularly in areas such as subsidies by China and others, reduces the eectiveness of the Committee function. Dispute settlement, while important, has developed a range of problems that both harm Membersʼ maintenance of existing rights and which complicated the ability of Members to address state- directed economies distortions. This is not to say that there arenʼt important eorts underway within the WTO, oen on a plurilateral vs. multilateral basis, that can be useful in the U.S.-China relationship. Moreover, frequently the ability of the WTO to collect and disseminate of information on important issues such as import and export restrictions introduced during the pandemic and the recent work looking at the trade eects of the Russian invasion of Ukraine is important in helping Members understand current challenges and identify activities that may be useful in improving the global economy.
The Biden Administration has made it clear that it wants to work within multilateral organizations as possible while pursuing domestic tools where needed and making the investments in the country to improve U.S. competitiveness.
So within the WTO, the U.S. should continue to pursue reforms that would make the WTO better able to address the distortions that flow from state-directed economies like China. The work that has been underway with the EU and Japan on industrial subsidies, global excess capacity and state- owned/invested companies is an excellent example, although what can be achieved in the WTO is likely to be far less than what is needed.
Similarly, working to complete the fisheries subsidies negotiations (including the ban on forced labor) is an important multilateral undertaking.
There are a number of plurilateral negotiations that are ongoing (so-called Joint Initiative Statements) that deal with important issues like e-commerce and domestic regulation of services and a number of environmental and other issues. The U.S. is active in some but not all. It should be active in all of the JSIs.
On dispute settlement, there are fundamental reforms needed that I have outlined in earlier posts as well as changes to the trade defense agreements to restore rights. But the U.S., EU, Japan and others could bring a broad based case against China focusing on the many ways in which China has not fulfilled its commitments under the protocol of accession. Such a case would permit an identification of the many failures of China to in fact implement the obligations it undertook in 2001 in joining the WTO. A panel report would help focus the WTO membership on the changes that need to be made by China to have an economic system that is compatible with the WTO or that will address Chinese distortions and can lead to more flexibilities in terms of WTO reform. Depending on the outcome of the challenges to U.S. Section 232 actions on steel and aluminum (national security claims), the U.S. may also need/want to obtain reforms in whether national security claims are reviewable and whether the standards contained within GATT 1994 Art. XXI need updating/revision.
Much of what needs to be done to address Chinaʼs trade practices will be handled through domestic legislation and regulation or through bilateral negotiations with China or through unilateral actions that may not be consistent with WTO requirements.
Getting better enforcement of the Phase I Agreement and pursuing a Phase II Agreement presumably are elements of bilateral talks. Making U.S. trade remedies more eective and less costly can be done through domestic legislation and agency regulations.
Beefing up transparency requirements for foreign owned companies listing on U.S. stock exchanges is important and needs to be fully implemented and enforced.
The U.S.-U.K. agreement on steel and aluminum contains an important requirement that Chinese owned companies in the U.K. in these sectors be audited to determine if there are subsidies provided from China.
Resources to permit aggressive implementation of the ban on forced labor imports from Xinjiang is also within the Congressʼ purview.
Tighter oversight of Chinese investment (direct and indirect) in strategic sectors, as well as addressing investment needs in critical sectors domestically, improving the resiliency of supply chains and getting infrastructure modernized are all important actions – a number of which are already approved by the Congress or being pursued by the Administration.
Written Testimony Submitted to the U.S.-China Economic and Security Commission for April 14 Hearing
Since joining the WTO at the end of 2001, China has risen to become the worldʼs largest exporter and has generally outperformed the world economy becoming the worldʼs second largest economy. China will likely overtake the United States in terms of national GDP in the coming years. So WTO membership has been of enormous benefit to China including through encouraging foreign investment, transfer of technology, improved productivity and quality and higher living standards. Indeed, hundreds of millions of Chinese have been lied out of poverty over the last decades.
When China was admitted to the WTO, the Chinese economy was not yet market oriented nor consistent with a wide range of WTO obligations. The result was a Protocol of Accession and Working Party Report that were the most complicated in terms of additional eorts needed by China and a timeframe for making additional wide ranging modifications to its economic system.
While China adopted many of its obligations at the beginning of WTO membership in 2002 and worked for a number of years to implement further important structural changes, China has moved away from its eorts to reform its economy to be more market driven and has reembraced its state-directed economic model over the last decade or so.
Because of the size of the Chinese economy and the enormity of the governmentʼs involvement and distortions imposed on the functioning of the economy, the distortions caused to trading partners operating on market principles have been massive. These have included massive excess capacity in many industries flowing from state plans and subsidies, restricted market access to foreign products, the of intellectual property and forced technology transfer, and the creation of false market signals in terms of costs of production. There have been many critiques of Chinaʼs WTO membership. My reflections are contained in a recent post.
Even without China, the WTO has struggled since its creation to update global trade rules. The inability to have successful negotiations on a range of topics flows from a variety of reasons including the consensus based decision making, large dierences in views of purpose of and direction for the WTO among Members, and a dispute settlement system that has oen deviated from its limited role encouraging members to file disputes instead of negotiating. The organization has struggled to maintain its relevance in a rapidly changing world. For many market economies, the WTO is not viewed as able to adequately address the distortions created by a state-directed economy the size of Chinaʼs.
From the beginning of Chinaʼs WTO membership, other Members have worked to help China conform its system to the WTO requirements. For example, major trading partners of China, including the U.S., European Union, Japan, Canada, Australia and others spent years working with Chinese agencies to help them bring laws into compliance with WTO obligations and worked bilaterally to resolve problems as they arose. Such activity has not been unusual for WTO Members in the early years of membership to help new Members understand what additional changes are appropriate or to resolve practices of concern bilaterally.
Where China was unable or unwilling to bring practices or laws/regulations into conformity, the U.S., EU and others have brought disputes at the WTO. As of April 8, 2022, China is or has been a respondent in 49 WTO disputes. It has also brought 22 cases against the U.S., EU and others and participated as a third party in 192 disputes. Most of the cases that have brought against China consisted of situations where Chinaʼs actions were facially inconsistent with WTO obligations. Where cases werenʼt resolved through consultations and China lost the dispute, China has typically implemented the loss although in a narrow fashion. China has brought cases to address what it considered to be “discriminatory” provisions of its Protocol of Accession (country specific safeguard; continuation of treatment as a non-market economy aer 15 years) or to attempt to weaken trade remedies of major trading parties like the United States and the EU. Some of these eorts were unsuccessful. However, China has been able to obtain weakening of trade remedy practices with reports by WTO panels and the Appellate Body viewed by the U.S. and others as changing the rights they had under the trade remedy agreements.
As the 2020 USTR report on the WTO Appellate Body made clear, dispute settlement at the WTO has had the unintended consequence of changing the bargain reached in the Uruguay Round for the United States.
Moreover, as articulated by the prior Administration and the present Administration, the current WTO agreements and dispute settlement donʼt adequately address the global distortions caused by the state- directed economy of China and those copying its practices.
There have been efforts by the U.S., EU and Japan to start an evaluation of possible modifications to the Subsidies and Countervailing Measures Agreement to address the massive industrial subsidies, global excess capacity and state-owned, state-invested enterprises that characterize some of the important ongoing distortions created by the Chinese state-directed economy. While China has indicated it would be open to a reexamination of all subsidy practices, it is unclear what agreement could be reached within the WTO. In any event, agreement on any changes will take years to accomplish and will almost certainly be less than what is needed because of the consensus approach to decision making at the WTO. Presumably the first panel today reviewed the efforts at WTO reform on industrial subsidies, excess capacity and state-owned enterprises. Several posts of mine have addressed some aspects of the issue.
China has been viewed by many WTO Members as retaliating against WTO Members who bring disputes or whose trade remedies by bringing disputes themselves or bringing trade remedy cases. They also resort to intimidation through wide ranging and often non-transparent actions to punish trading partners who take positions China strongly disagrees with. Chinaʼs actions against Australia and more recently Lithuania are just two examples. I have looked at both cases in posts in the last several years.
The lack of transparency in the Chinese system permits a wide range of trade distortions to arise (e.g., when state, provincial or local governments ban imports without formal notice or explanation, when technology transfer is required to operate but not included in documents, etc.). Chinaʼs submissions to the WTO in areas such as subsidies have been viewed by the U.S., EU and others as woefully incomplete and have led to counter notifications being made by the U.S.
While China has long been cited as having major human rights problems, in recent years, the trade implications of forced labor and other human rights issues have led to increased activity in an effort to cut o imports into the U.S. of products made from forced labor (in part or total).
The array of inconsistencies with WTO norms are reviewed annually in the USTR Report to Congress on Chinaʼs Compliance with the WTO.
Prior Administrations have engaged both bilaterally with China and through disputes to get China to live up to its commitments under the WTO. The Trump Administration sought to address global excess capacity in steel and aluminum through use of Section 232 of the Trade Expansion Act of 1962, as amended on national security concerns and conducted a section 301 investigation on a range of Chinese practices in, inter alia the intellectual property area which resulted in additional taris being imposed on most goods coming from China. WTO challenges and court challenges in the U.S. have been testing the breadth of the U.S. national security law and the WTO consistency of such actions.
While some observers have called for excluding China from the WTO or forming a separate grouping that excludes China, the WTO has no identified process for removing countries from membership, although the current crisis caused by the Russian Federationʼs invasion of Ukraine has shown the willingness of a number of major economies to remove most favored nation status on a Member for national security reasons.
The Biden Administration has expressed the intention of working with allies to improve the WTO while looking at additional tools to address the distortions caused by the Chinese system. Thus, the Biden Administration will engage bilaterally with China, will focus on strengthening the U.S. economy (e.g., improved infrastructure, more resilient supply chains, more domestic production of key products, improved Buy America), explore new tools to address distortions (e.g., the U.S.-EU efforts on steel and aluminum to address excess capacity), and will work regionally and through the WTO to address issues of importance where possible.
Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, Current Thoughts on Trade.
To read the full commentary from Current Thoughts on Trade, please click here.