THE TTALK QUOTES
On Global Trade & Investment
Published By:
The Global Business Dialogue, Inc.
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No. 5 of 2018
TUESDAY, JANUARY 30, 2018

Click here for last Friday's quote from President Trump in Davos

CHINA AND THE WTO: REFLECTIONS ON A MISTAKE

"It seems clear that the United States erred in supporting China's entry into the WTO on terms that have proven to be ineffective in securing China's embrace of an open market-oriented trade regime."

USTR  


January 2018
CONTEXT
In July 1986, China applied for membership in the GATT, that is, to become a contracting party to the General Agreement on Tariffs and Trade and a member of the GATT, the proto-organization that had grown up around it.  Fifteen years later, that organization had become the World Trade Organization, and in a large hall in Doha, Qatar, the members of the WTO voted to accept China's application.  The People's Republic of China formally became a member of the WTO on December 11, 2001.  All of this and much, much more is contained in the Congressionally mandated 2017 Report To Congress on China's WTO Compliance, which was prepared by USTR and submitted to Congress earlier this month. 

It is a 248-page report plus appendices, and we may never read every word of it.  Today's quote is from the Executive Summary, which contains a number of arresting observations.  They are startling not because they are new but because they are unusually blunt for an official report.  Of the many topics discussed in the report, we would call your attention to six in particular.  Here they are along with some relevant passages from the Executive Summary. 

Linkages: China, The WTO, and the U.S.   The report underscores the fact that U.S. leadership was critical to the long accession process leading to a successful outcome for China. It says:

Throughout these multilateral negotiations, U.S. leadership in working with China was critical to removing obstacles to China's WTO accession and achieving a consensus on appropriate rules commitments.

As for the importance of WTO membership to China, the reports states:

China has used the imprimatur of WTO membership to become a dominant player in international trade.

The Bilateral Deficit.  This issue gets so much attention that it is worth quoting in full the paragraph in the report that introduces it:

Throughout the many years of high-level U.S.-China engagement since China joined the WTO, the U.S.-China trade imbalance has grown exponentially.  While various factors can contribute to a trade imbalance, the size and direction of the U.S.-China trade imbalance evidences a trade relationship that is neither natural nor sustainable.

That passage is followed by numbers that describe the lopsided nature of America's trade in goods with China.  The U.S. deficit with China went from $83 billion in 2001 - already a large number - to $274 billion for the first nine months of 2017. (It is likely to come in around $375 billion for the year.)

China's Industrial Policy.  USTR's perspective is expressed clearly in this passage:

China is determined to maintain the state's leading role in the economy and to continue to pursue industrial policies that promote, guide, and support domestic industries while simultaneously and actively seeking to impede, disadvantage and harm their foreign counterparts, even though this approach is incompatible with the market based approach expressly envisioned by WTO members and contrary to the fundamental principles running throughout the many WTO agreements.

Not surprisingly the report includes discussion of the "Made in China 2025 Industrial Plan," which focuses on ten specific industries where

[The] aim is to replace foreign technology with Chinese technology in the China market through any means possible so as to ready Chinese companies for dominating international markets.

Intellectual Property.  China's focus on intellectual property - patents, trademarks, trade secrets, etc. - and its determination to acquire from the U.S. and others what it does not have itself is, in a sense, a component, a major component, of China's industrial policy. Yet, it is so important, so central, that it more than deserves its own heading.  In August of 2017, for example, USTR initiated an investigation of certain Chinese practices under Section 301 of the Trade Act of 1974.  This passage is illustrative of the practices that the United States is concerned about:

In its initiation notice, USTR identified four categories of reported Chinese government conduct that would be the subject of the inquiry, including ... the use of a variety of tools to require or pressure the transfer of technologies and intellectual property to Chinese companies, depriving U.S. companies of the ability to set market-based terms in licensing negotiations ....

Or, they might have added, to simply keep their technology to themselves, as firms often choose to do when left to their own devices.  Coke hasn't traded away the formula.

China and the WTO Dispute Settlement System.  As we have noted in earlier entries, there is a crisis in the WTO dispute settlement system now.  Against that background, USTR's China report is noteworthy in its comments on China and dispute settlement.  China has been at the center of a number of disputes.  Commenting on that, USTR writes:

It was never envisioned that enforcement would play such a large role for any WTO member.  Indeed, it is simply unrealistic to believe that WTO enforcement actions alone can ever have a significant impact on an economy as large as China's ... unless the Chinese government is truly committed to market-based competition. 

Turning to the nature of the disputes involving China, USTR writes:

The WTO dispute settlement mechanism is narrowly targeted at good faith disputes where one member believes that another member has adopted a measure or taken action that violates a WTO obligation.  It can address this type of problem, but it is not effective in addressing a trade regime that broadly conflicts with the fundamental underpinnings of the WTO system .

China Doesn't Fit in the WTO.  That, it seems to us, is the fundamental argument of USTR 2017 report on China and the WTO.  On the first page of the Executive Summary, USTR writes:

The reality is that the WTO rules were not formulated with a state-led economy in mind.

In the first few years following its accession, China seemed to be making the called for adjustments, adjustments that would set it on the path of a market-oriented economy.  But the leadership changes in 2003 and subsequently have effectively reversed that course.  The result is that what seemed like a good idea in 2001 no longer does.  
COMMENT
We recognize that there are counter-arguments and balancing contexts for most if not all of the USTR concerns highlighted above.  But let us assume for a moment that the USTR experts have nailed it, that they are essentially correct on every point.  Then the question becomes, what can be done about it?  Not much.  That is the answer suggested by the above.  It is a tautology.  If the system is not set up to deal with a member like China, then it will not deal with China. 

And there is something else.  China may be too big to be disciplined. It's huge.  Though its landmass is only slightly larger than that of the United States, its population is well over four times as large.  It is now the number one customer for a large number of countries from Japan to Chile.  It has the world's largest car market.  It's internet usage is tremendous.  And if you are looking at purchasing power parity - a measure frequently used by the IMF and the World Bank - China's is already the world's largest economy.  The WTO is a political institution.  It is hard to imagine it seriously disciplining China or altering its chosen path of development.

That is not to say that others are not concerned.  The number 2 officials at the International Monetary Fund, David Lipton, suggested last week in Davos, for example, that U.S. concerns about the bilateral deficits with China should be taken seriously, if indeed they are driven by "distortive" and "unfair" trade practices.   According to a Wall Street Journal article by Greg Ip, Mr. Lipton went on to say:

"The rest of the world, whose future really depends on openness and integration, had better be open to dealing with those concerns and complaints or else it will be really hard to have a globalization that's durable."

SOURCES & LINKS
A USTR China Report takes you to the USTR's 2017 Report to Congress on WTO  Compliance, which was the source for today's featured quote and most of the rest of this entry.

A Tale of Two Economies takes you to a series of graphs on the World Economic Form Website which compare the United States and China. 

Trade in Goods is a link to a series of tables published by the U.S. Census Bureau, showing U.S.-China trade in goods from 1985 to 2017.

Lipton and America's Deficit with China takes you to the Wall Street Journal article from Davos mentioned above and including the quotes from David Lipton of the IMF.



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