Blog | April 21, 2017

Symbolic Victories: How the U.S.-China Fight Over Trade Will Test the Limits of the WTO Framework

BY: ANN LISTERUD

Last month, President Trump made headlines for openly challenging the 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, only 70 days into the new administration, the U.S. Department of Commerce announced two antidumping countervailing duty investigations against China. Neither of these has been formally filed with the WTO yet, though they may be 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.

Long before Trump entered politics, the U.S. has engaged 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 a 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 sheds light on the stakes involved—where victory itself outweighs the fought over dollar value.

The pre-Trump Dispute

China’s accession to the WTO in 2001 came with a fifteen-year window with China deemed a non-market economy (NME) during anti-dumping investigations. Countries that maintain domestic price controls to protect and foster local companies are considered NMEs. WTO members are at liberty to apply or remove NME status as they choose to qualifying countries.

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 in the interim, China would establish market economy conditions making NME status unnecessary.

The U.S. and EU argue that China has not sufficiently opened its economy. In turn, China argues that western regulators used China’s NME status to pick unrealistic benchmarks (if an NME is accused of dumping, investigators pick a similar country’s economy to calculate how much the product should fairly cost) and are ignoring Section 15, to which they have filed a formal complaint. Most WTO members have already removed China’s NME status.

The Trump Administration’s Approach

As of March 31, President Trump signed two executive orders 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. tariffs.” In other words, the U.S. 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 U.S. 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 little effect on U.S. imports. The U.S. has a domestic Countervailing Duty Law (CVD) applied in parallel to antidumping duties. The CVD has been applied liberally to trade imports from China, to the degree that only two percent of U.S.-China trade would be affected were the U.S. to end all WTO anti-dumping duties.

While the ruckus at the WTO may grab headlines, the actual percentage 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 Trump and previous U.S. administrations is not the use of extra methods outside the WTO framework, but public rejection of the WTO framework itself. To some, this harkens back to the Reagan Era trade war between the U.S. and Japan, during which the WTO became an important impartial intermediary. Yet, others say that the WTO and Bretton Woods international framework will not survive with the world’s two largest economies testing its limits. Should the WTO rule in favor of China and the U.S. openly defy the ruling, it remains to be seen if the WTO will be able to effectively enforce punishments against the U.S., or if it will cause the institution to lose enough credibility that other countries openly ignore WTO rulings themselves.

The U.S. 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 Mexican tuna), but the new administration is 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. China’s state run Economic Daily reported that in 2016, 27 countries and regions filed 91 dumping cases against China at the WTO, a historic high. This fits the long-running narrative of China wrongfully discriminated against by the so-called champions of free trade. Whether out of frustration or hegemonic aspirations, China’s challenge tests the WTO’s perceived bias toward 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 WTO based changes at stake are minimal compared with domestic barriers in place; and (2) the symbolic significance 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 on April 12 suggests there is hope for compromises with China on trade. But should the U.S. and China be unable to reach a bilateral understanding, this tug-of-war over WTO market status could reshape the international order for 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.

The views expressed in this post reflect those of the author and not that of the EastWest Institute.