A Simmering Problem
December 11, 2011 marked the 10th anniversary of China's accession into the World Trade Organization. Since its admission to that august international body, the country has enjoyed one of the best decades in global economic history—its gross domestic product quadrupled and its exports nearly quintupled. Foreigners also seem to have benefited from China's trade liberalization. For example, since 2001, U.S. exports to China have increased by 380 percent, making the Asian giant the largest U.S. export market outside of North America. Moreover, U.S. direct investment in China reaps a healthy return of 13.5 percent compared with a worldwide average of 9.7 percent.[1]
Still, the relationship between the two economic juggernauts cannot exactly be characterized as free trade nirvana, and there is a growing sentiment in the United States that China has not fully lived up to the commitments it made when joining the WTO. This is fueled in no small part by concern over the massive trade surplus China has built up with the United States, its largest trading partner. By deliberately undervaluing its currency, critics charge, China has propped up its export-dependent growth model.
Other bones of contention in the United States over Chinese trade policy include distorting measures such as government subsidies to—and continued control of—China's state-owned enterprises (SOEs), export controls on certain key raw materials, and failure to protect foreigners' intellectual property rights. In such circumstances, it is no surprise that a 2011 poll showed that 61 percent of U.S. citizens believe that the recent Chinese economic expansion is bad for the United States.[2]
As if to accentuate this trade tension, just days after the 10th anniversary of its entry into the WTO, China slapped punitive tariffs of up to an additional 22 percent on large-engine automobiles and sport utility vehicles exported from the United States. The Chinese maintain that the tariffs (i.e., antidumping and countervailing duties) offset illegal subsidies the United States gave to auto manufacturers at the beginning of the financial crisis in 2008. The United States, on the other hand, sees this action as tit-for-tat retaliation against (1) the tariffs the Obama administration placed on surging imports of Chinese tires in 2009—the legitimacy of which were upheld by the WTO last fall; (2) a WTO case the United States recently launched against Chinese import restrictions on U.S. poultry products; and (3) a U.S. subsidies/dumping investigation involving Chinese exports of solar panels. The extent to which trade tension between the two countries has been building is reflected by the fact that the United States has now levied countervailing and antidumping duties against some two dozen Chinese products.[3]
Other critics of the auto tariffs see the move as reflective of the Chinese government's trend of intervening politically to support key industries. That is to say, as auto sales have slumped in China, the government felt compelled to step in to protect a homegrown industry.
To some U.S. trade officials, the auto tariffs substantiate a point made just days before their imposition by the country's ambassador to the WTO, Michael Punke, when he complained of China's use of "intimidation" to get its way on trade issues, noting a "reflexive resort to trade actions in response to legitimate actions taken by the United States or other trading partners."[4] After the tariffs were announced, U.S. Trade Representative (USTR) Ron Kirk echoed the sentiment, saying, "It does seem to be a continuation of a troubling pattern by China of retaliating not just against the U.S., but members of the WTO who exercise our lawful rights."[5]
China's WTO Compliance
As the U.S. rhetoric escalates, the extent of the country's concerns over China's commitments to global trading rules was emphasized in late 2011 in the USTR's 10th annual Report to Congress On China's WTO Compliance.[6] The report states that China has taken a number of impressive steps to implement its WTO commitments, which have deepened the country's integration into the world trading system. The resulting growth of U.S.-China trade has created numerous opportunities for U.S. business interests and access to a wealth of affordable Chinese goods for U.S. consumers.
The report goes on to say that, despite this progress, the overall picture presented by China's WTO membership remains complex, given the country's troubling trend toward state intervention in the economy over the past five years. Increasingly, it stated, trade friction with China can be traced to the nation's pursuit of industrial policies that rely on trade-distorting government actions to promote or protect SOEs and domestic industries. These developments have led many foreign companies doing business there to feel that they are competing not against Chinese firms but with the Chinese state. The central and local Chinese governments combined own more than 100,000 companies and implicitly favor many more. According to the report, in recent years, China seems to be embracing state capitalism more strongly, rather than continuing to move toward the economic reform goals that originally drove its pursuit of WTO membership.
Since 2006, when China is said to have slowed its market liberalization pace, some government policies and practices have increased U.S. concerns that China has not fully embraced the key WTO principles of market access, nondiscrimination, and transparency. Similarly, the report adds that in some instances, Chinese policymakers have shown little appreciation for the carefully negotiated conditions of China's WTO accession that were designed to bring about significantly reduced levels of trade-distorting government policies. Differences in views and approaches between China's central, provisional, and local governments have frustrated economic reform efforts, and the country's difficulties in fully implementing the rule of law are said to have exacerbated this situation.
In 2011, the presence of interventionist policies and practices, coupled with the large role of SOEs in China's economy, continued to generate concern in the United States. The report identifies such major issues as China's indigenous innovation policies, serious problems with intellectual property rights enforcement, and slow movement toward accession to the WTO Government Procurement Agreement, as well as continued market access barriers and discrimination against foreign enterprises in numerous sectors of the economy.
The USTR report states that the United States will keep working with China toward bilateral resolution of identified problems and, where such resolution is not possible, seek WTO remedies.
Conclusion
Clearly, trade tensions between the world's two largest economies clouded Chinese Vice President Xi Jinping's Valentine's Day visit to Washington. Strong rhetoric in this regard takes on a life of its own—particularly in the United States in a presidential election year. The prospect of a full-blown trade war is not beyond the realm of the possible; such an outcome would be disastrous not only for the two countries but also for a fragile global economy.
Footnotes
[1] "China's economy and the WTO: All change," The Economist, December 10, 2011, www.economist.com/node/21541448.
[2] Ibid.
[3] It should be noted, however, that two developments over the past several months have transpired to put a hitch in the United States' use of countervailing duty and antidumping laws against Chinese products. First, in December 2011, the U.S. Court of Appeals for the Federal Circuit, in GPX International Tire Corp. v. United States, 2011-1107-09, rejected a government appeal to a decision of the U.S. Court of International Trade that found that China is not a market economy, and therefore, certain government payments to industry cannot be considered as subsidies subject to countervailing duty law. Second, in early February 2012, the United States agreed to resolve a nine-year-old WTO case by giving up a controversial practice known as "zeroing," which made it easier to determine when a product from a country like China is being dumped (i.e., sold below market value).
[4] Michael Martina, "China says to hit U.S. auto imports with duties," Reuters, December 14, 2011, www.reuters.com/article/2011/12/14/us-hina-us-trade-idUSTRE7BD16G20111214.
[5] Frances Robinson, "U.S. Pledges to Hold China to WTO Rules," The Wall Street Journal, December 16, 2011, http://online.wsj.com/article/SB10001424052970204553904577102393144893480.html.
[6] The USTR's 10th annual Report to Congress On China's WTO Compliance is available at www.ustr.gov/webfm_send/3189.