Introduction
After a fifteen-year process, China gained accession to the WTO on 11 December 2001, a step that would lead to massive legal and policy reforms in the following decade. While the liberalization of the Chinese economy was a process unilaterally undertaken years beforehand, accession to the WTO formalized Chinese intentions both domestically and internationally. Domestically it would result in policy changes that would otherwise have been politically impossible; internationally it would signal to the global community that China is committed to fair trade practices and economic development, spiking foreign direct investment in China.
But despite China’s efforts to reform its economy, it has gained attention in the international community as a nation interested in fulfilling only those obligations that directly benefit China. In 1995 the dispute resolution system was established as part of the World Treaty Organization. Though in principle it had been created by the General Agreement on Tariffs and Trade (GATT), it lacked many of the concrete guidelines that make the Dispute Settlement Body successful. Since then, the DSB has “become the most effective system ever to adjudicate and implement global trade rules.”
Since China’s entrance into the WTO, it has been the respondent in twenty cases in the dispute resolution system, with all but one brought by the United States. After agreeing to the Protocol for Accession, China was given three years to implement many of the necessary changes and five years to come into complete conformity with WTO commitments. Section 421 of the U.S.-China Relations Act of 2000 requires the United States Trade Representative to report annually to Congress on compliance by the People’s Republic of China “with commitments made in connection with its accession to the World Trade Organization, including both multilateral commitments and any bilateral commitments made to the United States.” The United States filed its first request for consultations with the dispute resolution system in 2004, and has filed between three and five requests each year after 2005. Comparably, the United States has been the respondent in 29 cases within the same time, and over 100 cases since 1995.
While the number of trade disputes notified to the WTO in which China is the respondent does not suggest that it is paying lip service to its legal obligations any more than it would suggest that the United States is, there are several factors that set China apart. The most evident factor is its economic system. While China regards itself as a market economy and has asked the international economy, in particular the World Trade Organization and the United States, to be treated as such, the U.S. has repeatedly refused to refer to it as anything other than a non-market economy.
The western view that China remains a command economy is reinforced by what the U.S.-China Economic and Security Review Commission observes as a “disturbing trend away from the evolution toward a full market system and instead sees steps backward to greater government control.” Thus, because China is a major player in the international trade system, the number of trade disputes, in and of itself, does not constitute an issue of great concern given the comparable number of U.S. trade disputes.
The nature of the disputes and China’s unwillingness, almost a decade after accession to the WTO, to conform to its obligations does constitute a matter where closer inspection is needed. This paper will first address the major issues plaguing U.S.-Sino relations, then examine the Chinese economy, and finally offer a couple of perspectives for interpreting China’s actions about trade policy.
Intellectual Property Rights
The People’s Republic of China has taken slow, labored steps toward increasing their protection of intellectual property rights, and thereby conforming to the regulations required by their entry into the World Trade Organization. Though they have been taken to the WTO numerous times for deficiencies in their enforcement of copyrights and trademarks, among other infractions, China continues to allow broad violations to intellectual property rights, hurting many multinational corporations.
In April of 2007 the United States brought a dispute before the WTO, with Argentina, Brazil, Canada, the EC, Japan, Korea, Mexico and Chinese Taipei as third parties, over the failure of China to protect international property rights. Two years later China agreed to conform to the ruling of the Dispute Settlement Body and implement DSB recommendations by 20 March 2010. The disputed status is still listed by the WTO as having been implemented by the respondent, despite the fact that there has been little verification of its implementation. China notified the WTO that it had changed all necessary legislative procedures to be in compliance with the recommendations and rulings of the DSB on 19 March 2010.
This included the Standing Committee of the 11th National People’s Congress amending the Chinese Copyright Law, and the State Council revising the regulations for Customs Protection of Intellectual Property Rights. The United States has not yet confirmed these claims in front of the DSB to change that status to ‘settled.’
In fact, as recently as November 24th, 2010, the U.S. trade representative, Ambassador Ron Kirk has publicly criticized China for its failure to comply with WTO-required intellectual property regimes. Unnikrishnan (2010) reported in the Wall Street Journal that “the overall level of intellectual property theft in China remains unacceptable,” but did also cite positive steps taken by China in 2009. That year saw the largest number of criminal prosecutions for software piracy in Chinese history.
However, in a country where software piracy has taken on the form of organized crime syndicates, some of whom produce in excess of $2 billion worth of pirated software, this new effort did hardly anything to stem the rise in intellectual property rights violations. This is evidenced by the growth in piracy in China in 2009: “China saw the largest increase in the commercial value of pirated software of any country; it grew from $900m in 2008 to $7.6b by last year.”
Dan Slane, chairman of the U.S.-China Economic and Security Review Commission commented on China’s unwillingness to crack down on intellectual property theft, stating that “under the guise of fostering ‘indigenous innovation’ in its economy, the government of China appears determined to exclude foreigners from bidding on government contracts at the central, provincial, and local levels.” But piracy does not only affect the Chinese domestic market for software.
Pirated software gets exported, resulting in an international piracy problem. Treasury Secretary Timothy Geithner, in his testimony before the Senate Banking, Housing, and Urban Affairs and House Ways and Means Committees on U.S.-China economic relations stated that “the share of IPR-infringing product seizures just at the U.S. border that was of Chinese origin was nearly 80 percent in 2009.”
Agriculture
While U.S. exports to China of agricultural commodities remain strong, the Chinese market remains the least transparent and predictable in the world. Prior to Chinese entry to the World Trade Organization U.S. negotiators predicted highly profitable bilateral trading agreements with China, and these, in large part, have come to fruition. In 2009 China was “the largest market for U.S. soybeans…importing over $9 billion.” The WTO Agreement on Agriculture contains three main points that member countries’ policies must adhere to market access, domestic support and export subsidies.
However, agricultural commodity trading is one of the most fickle markets in the world, especially in the United States, where farmers rely on the futures market and derivatives in order to raise capital to continue farming. In the United States farmers sell their crops ‘forward,’ or as a futures crop to grain elevators. These agribusinesses will then sell the contracts on the Chicago Board of Trade in order to lock in prices and hedge their investments to gain collateral that banks want for the loans. Agribusinesses need the collateral for the loans they use to buy futures contracts of the farmers in the first place. The farmers use the money from the Agribusiness’ purchase of their futures contract to finance their spring crop. Thus, the farmer’s investment is based on his future output against the future demand for his product.
Additionally, as commodities become more profitable, and especially as oil has begun to sag, futures speculators have shifted to ‘soft commodities’ such as corn and wheat. Recently this has become a problem because the artificial demand that is created from a speculator purchase of a futures contract for trading increases prices. Scott H. Irwin, Philip Garcia, and Darrel L. Good explain that theoretically the markets have a self-check on convergence because if cash prices are higher than futures prices, then futures contracts would be bought and investors would stand by for delivery.
Alternatively if futures markets had high prices, investors would buy from the cash markets increasing the demand and causing the prices to level out. Recently, however, the Chicago Board of Trade market prices have disconnected from the cash market and crops like soft red winter wheat, which is considered the global benchmark for wheat prices, have been trading at two to three times the cash prices on the market. The result is a lack of convergence between the futures market and the cash market which means that elevators can no longer get a stable hedge for collateral against bank loans.
In recent years China has delayed or halted shipments while sanitary and phytosanitary measures “with what seem to be questionable scientific bases and a generally opaque regulatory regime frequently bedevil traders in agricultural commodities, who require as much predictability and transparency as possible in order to preserve margins and reduce the already substantial risks involved in agricultural trade.”
Thus while there has been an increase in U.S. exports of agricultural commodities to China, the primary cause of the growth has been the increased demand. China still employs a variety of non-tariff barriers that give preferential treatment to domestic agricultural products. While the United States is sensitive to these barriers to trade, specifically noting them in the U.S. Trade Representatives annual report since 2007, it appears to be satisfied with the export increase, relegating any disagreements to bilateral negotiations, rather than the WTO. For instance, in 2009 China instated a ban on pork, pork products and live swine from the United States.
The United States was able to ease the Chinese concern over the transmission of the H1N1 virus via U.S. pork, but China was still hesitant to lift the ban. The scenario played out similarly to the ban on U.S. beef and beef products, which stayed in effect for up to two years after U.S. beef had been declared safe for international trade under international scientific guidelines.
Trading Rights
The issue of trading rights concerns only the right to import goods into China and export goods from China, and are not directly concerned with sales within the country. In addition to its inability to conform to WTO regulations on intellectual property rights, China has also been persistent in its refusal to allow certain imports copyrighted material and has established notable trade barriers to prevent foreign products such as books, newspapers, journals, films and music from being equally traded within China.
The United States first took China to the DSB over this issue in April 2007, with Australia, the European Union, Japan, the Republic of Korea and Chinese Taipei as third parties. At issue were two complaints that were specifically cited by the United States regarding China’s importation policies for audiovisual home entertainment products and copyrighted material. China’s policy for allowing the specified material into the country was found to be inconsistent with the agreements it entered into when joining the WTO. Chinese law specifically denied foreign investment in the “publication, distribution and import of books, newspapers, and magazines.”
Additionally, many of the materials were only allowed to be imported and distributed with subscription services that were managed by the state. Therefore, the state limited the ability of foreign companies to export, and either foreign or domestic companies in China to import audiovisual products and publications without either being a state-owned entity, or otherwise going through state subscription services.
In section 5 of the Protocol to the Accession of the People’s Republic of China to the World Trade Organization China agreed to provisions that would remove restrictions on trading rights. They state:
“China shall progressively liberalize the availability and scope of the right to trade, so that, within three years after accession, all enterprises in China shall have the right to trade in all goods throughout the customs territory of China…. Such right to trade shall be the right to import and export goods. Except as otherwise provided for in this Protocol, all foreign individuals and enterprises, including those not invested or registered in China, shall be accorded treatment no less favorable than that accorded to enterprises in China concerning the right to trade.”
This has two implications for trade rights in China. First, “trading rights may be granted to all legal persons. These include both domestic Chinese enterprises, foreign-invested enterprises in China, as well as foreign enterprises which are not invested or registered in China.” Second, except for those goods that are covered by trading exceptions, the right to trade applies to all goods. The goods that were given exceptions were largely natural resources, but even these limitations were to phase out within three years after China accedes to the WTO.
The WTO panel ruled in 2009, two years after the filing of the initial grievance, that Chinese law violated the provisions agreed upon with China’s accession to the WTO. Specifically it found that China could not force American media producers to route their business through Chinese-state-owned companies, nor could it prevent U.S. companies from offering audiovisual products directly to consumers. After the ruling China appealed the decision, whereupon the Appellate body upheld the DSB panel’s findings and reasserted that the recommendations included in the original decision be carried out. China had 14 months from that point, as agreed upon with the United States, to carry out those recommendations. The 14 month period expires on 19 March 2011.
Steel
In the consultation phase since 15 September 2010, the United States submitted a report to the WTO concerning China’s countervailing duties and anti-dumping duties on grain-oriented flat-rolled electrical steel. On 7 May, 2010, the European Union filed the first dispute in the DSB with China as the respondent, in which the United States was not the complainant. It similarly was over provisional anti-dumping duties on certain iron and steel fasteners from the EU.
The Agreement on Subsidies and Countervailing Measures defines and governs the use of subsidies and countervailing measures by member countries of the WTO. Under the agreement a subsidy requires three elements: it must be
- a financial contribution;
- by a government of a member country;
- which confers a benefit.
Article 3 of the SCM Agreement defines only two categories of prohibited subsidies: export subsidies and local content subsidies. The first is a subsidy, which is conditioned on the product being exported and is given to place preference on exported commodities. The second is a subsidy that gives preference to the use of domestic goods over foreign imported goods. These are the only two types of subsidy that can be said, categorically, to influence trade and thereby adversely affect other member nations. The use of other types of subsidy to influence trade can be difficult to prove, and may not be the intended result of the subsidy in the first place.
The SCM Agreement does recognize that since only these two types of subsidies can be said to always influence trade, there may be other instances where domestic subsidies may alter international trade and hurt other member countries. In these instances, other countries have the right to institute countervailing duties to help balance out the effect of the subsidy. For instance in a recent case where China took the U.S. to the WTO over duties on imports of steel pipes, tires and woven sacks the DSB panel agreed that the duties were inconsistent with the obligations of the U.S., but that the subsidies could be justified in order to counteract the subsidies being implemented in China.
It is very difficult to establish the uses and origins of the subsidies that are going to the Chinese steel industry. For one, many of the subsidies go to coking coal, thermal coal, electricity and natural gas, which are used in the production of steel. For another, China is notoriously secretive about its internal subsidy structure for steel. Though they are required to report each year to the WTO, “China had failed to make any of its required subsidy notifications since becoming a member of the WTO, despite repeated requests by the United States and other WTO member countries that China does so.”
Chinese steel production has become a hotbed issue in the United States. With American steel producers having a harder time and Chinese production continuing to grow, many domestic producers have taken aim at China and are pressuring Congress and Obama to take tougher action against the Chinese. China is on pace “to produce over 600 million MT of crude steel, with a 47% share of global production.” China is also the world’s biggest consumer of steel.
If consultations with China over its steel subsidies do not result in a bilateral agreement, a DSB panel will hear arguments from both sides over the case. On the face the U.S. doesn’t seem to have much of a case. China is the world’s largest consumer of steel, the subsidies are not directly aimed at influencing trade and are not prohibited by the SCM Agreement. However, it will certainly win that China has violated its obligations by not disclosing all of the subsidies given to the steel industry. Moreover, it may win some sway with the judges given a couple of facts about China’s domestic market for steel.
First, China is now facing “a falling domestic demand growth rate for steel.” Second, China must import large amounts of iron ore to produce steel, and is therefore not a low-cost producer. Also taking into account China’s new “go abroad” strategy which “is encouraging SOEs such as Anshan Steel to invest, with government support, in American and other third country steel facilities,” there may be a case that China is more focused on the political implications of being the global steel provider than the market forces, which are clearly not in favor of Chinese steel.
International Law
The dispute resolution panel has repeatedly ruled in favor of the United States in cases where China is the respondent, even in cases where China has appealed the decision. From the perspective of international law, it appears fairly evident that China has refused to fulfill its legal obligations within the World Trade Organization. Two of its more blatant violations make this clear.
In terms of intellectual property rights it has already been established that the Chinese government is not doing enough to curb what has become a haven for software piracy. China has attempted to increase enforcement of its intellectual property rights laws, cooperating with the European Union to improve its system. However, the multi-billion dollar black market for these goods drives producers across the country. Much like drug cartels, the market has caused the formation of organized crime syndicates. And while an increase in law enforcement my help slows down criminals, the exponential increase in production from 2008 to 2009 would suggest that an even bigger effort is needed on the part of the Chinese government.
The second instance is China’s industrial policies. While the case of steel subsidies may have questionable legal backing, the industrial policies in place in China are much more cut and dry. The U.S. Trade Representative Report to Congress reported that in 2009 “China continued to deploy export quotas, export license fees, minimum export prices, export duties and other export restraints on a number of raw material inputs where it holds the advantage of being on the world’s leading producers.”
These policies offer substantial artificial advantages to a wide group of Chinese producers. And, like the case of steel subsidies, other countries have a difficult time making a case against China because of the lack of data. Each of these trade-distorting policies constitutes a violation of international law and would indicate that China feels little impetus to adhere to its legal obligation.
Since Mao Tse-Tung, the United States has identified China as a command economy—one dominated by state-owned enterprises and a government that freely intervenes in the market. Though China now sees itself as a market economy, its quick recovery from the global recession with a gross domestic product continuing its trend of rapid growth, “combined with comprehensive industrial policies…has helped China capture market share from its competitors and add to its foreign currency reserves.” As the world’s largest exporter as well as the largest exporter to the United States China’s leaders are now touting their economic model as superior. This would indicate that there is the motivation for China to ignore its legal obligations if doing so would continue to grow the economy.
Another factor that lends credence to the argument of motivation is China’s currency manipulation, a growing tension-spot between the U.S. and China. It has grown to high enough levels, in fact, that the U.S. House of Representatives passed and bill in September 2010 aimed at targeting imports from China and other countries that are accused of currency manipulation. And because the WTO has very few resources for dealing with currency manipulation, even to affect trade, China can keep its currency undervalued with no legal recourse.
International Politics
Evaluating China’s actions through the lens of international politics however, paints a starkly different view. The aptest framework to evaluate international politics is political realism. This is true for a couple of reasons. First, political realism has become one of the most popular philosophies for statesmen and diplomats. It has been supported and applied by some of the most influential people in the world, including Henry Kissinger, Zbigniew Brzezinski and Brent Scowcroft. Second, it is evident that China adheres to a realist philosophy, at least to some extent.
Realist philosophy makes some assumptions that are implicit in the concept of realist international relations theory, namely that
- states are rational actors,
- there is an anarchic international system,
- states are unified actors,
- states focus on power and security goals and
- power is a zero-sum game.
This theory
“can provide a theoretical justification for the decisions of the policy-makers. [It] can develop a coherent system of thought by whose standards the actual conduct of foreign policy may be judged…[and] can perform the function of intellectual conscience which reminds the policy-makers of the sound principles of foreign policy and points out their failure to comply with them.” (Morgenthau, 1962d, p 75)
According to realists, the “survival and security of a nation constitute the minimum of the necessary element. The necessary element of the national interest can be determined in a concrete situation, for it ‘encompasses the integrity of the nation’s territory, of its political institutions and of its culture.’” Thus, states have an obligation first and foremost to protect their citizens and provide for their wellbeing.
For China, this would mean that an unfavorable action is one that is not in the best interest of its citizens. Given the opinion of the Chinese leadership that their model of economic growth is superior, it would make sense that they would delay altering their policies for as long as possible, especially if those policies favor the Chinese economy, regardless of their international impact.
If this is the case, why would China enter the WTO in the first place? If the policies and practices that most benefit the Chinese economy are ruled unacceptable in the international community, it would seem to make more sense to remain outside the jurisdiction of the DSB, where China would retain full control of its sovereignty and not be faced with an international board that can dictate domestic policies.
The answer to this question is in a cost-benefit analysis. China simply gains more by being party to the WTO and giving up a small amount of sovereignty than remaining independent. Upon accession to the WTO China saw a massive increase in foreign direct investment, as well as trade growth. Being under the jurisdiction of the WTO signaled to foreign businesses stability. It meant an opening of markets both to Chinese domestic producers who would experience fewer barriers to exports and to foreign producers who would have an easier time exporting to China. Given the Chinese leadership’s trend toward export-driven growth, accession to the WTO would make this goal more attainable.
The international politics framework is a bit of a straw man, however. Whether China is shirking off its obligations is a legal question and a political analysis is not the best fit to answer that question. More specifically, it answers the behavioral question of why China would act in a certain way, and not if the number and form of the disputes indicate that China is paying lip service to its legal obligations.
This does not mean that evaluating the question from a political standpoint should be discounted as irrelevant. As mentioned before, the number of the disputes alone is not sufficient to provide a reasoned analysis for China’s overall trade policy. Moreover, the question implies some analysis of motivation. In evaluating the motivation for China’s actions, it is possible to get to the root of the question. If China’s motivation is to act only in the best interest of its citizens, as the political framework would suggest, then it would make sense that China would be ignoring its legal obligations.
Conclusion
While it has been noted that the United States has been the respondent in a comparable number of cases before the dispute resolution board, the question of China paying lip service to its legal obligations can be resolved independently. Thus, while U.S. trade policy may be considered a benchmark for adherence to WTO obligations, the assumption that the U.S. fulfills its own legal obligations is not specifically addressed in this paper. Consequently, the resolution of the question at hand—that of Chinese legal obligations—is not predicated upon U.S. nonfeasance.
China is becoming a major player in the international system gaining power and influence enough to begin challenging U.S. supremacy on the global stage. China’s influence stretches from South America for oil negotiations with Venezuela to Africa for arms deals with Sudan. But China is not just allying with small countries, the Shanghai Cooperation Organization, “which Moscow and Beijing have managed to render as a vehicle to limit Washington ’s influence in their common near-abroad” recently conducted a military exercise that included 6,500 troops and over 100 aircraft.
Clear signals that China is not only concerned with their own economic growth as President Jintao claims. With its fast-growing economy, China has quickly become a major regional power in the uni-multipolar system, where the U.S. is the sole superpower, but there are tiers of major and secondary regional powers competing below the superpower.
While the number of cases before the dispute settlement board with China as the respondent may not, in and of itself, give conclusive evidence that China is purposefully not adhering to its legal obligations under the WTO, the rest of the evidence does. China is the world’s largest exporter. Something that goes along with that title is the assumption that other countries will not always be happy with China’s export policies. As such, it may get taken to the WTO more often than countries with smaller export schedules. This, however, is not evidenced enough that China is not adhering to its legal obligations.
On the other hand, the fact that China has been brought to the WTO over issues that it has been in negotiations with the United States over for almost a decade. Added to the fact that many of the policies that China institutes currently are not technically illegal and are not punishable by the WTO, but are never the less trade-distorting, does suggest that there is the motivation for China not to follow through with its obligations. Upon considering the political aspect of the situation it would seem to make sense that China would be paying lip service to its obligations under the WTO.
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