Could the US-China trade conflict be dealt with within the WTO framework?

The United States and China engaged in a high-level trade negotiation in Beijing on May 3 and 4. The two sides exchanged views but did not reach any agreement on specific issues. The FT has now published the

prepared by the US in advance of the negotiation.  The Framework, titled “Balancing the Trade Relationship between the United States of America and the People’s Republic of China”, contains a list of specific negotiation positions under eight section headings. Here is a quick analysis on the extent to which the US positions can be dealt with within the existing WTO framework.

1. Specific targets of trade deficit reduction–China to reduce US bilateral trade deficits by $200 billion by the end of 2020 as compared to 2018. The US trade deficit is a structural problem. Even if China were willing to accommodate, it would not be possible without resorting to voluntary export restrictions (VERs), which would violate the Safeguard Agreement.
   
   
2. IP and technology transfer. The key components include: (i) China ceases providing government subsidies and support that “can contribute” to the excess capacity in industries targeted by the “Made in China 2025” program. (ii) China will eliminate “policies and practices with respect to technology transfer” by Jan. 1, 2019. (iii) China to cease government-sponsored or tolerated cyber intrusions and thefts. (iv) China to withdraw its WTO complaint on US Section 301 (DS543) and not to retaliate against the US by any trade means in response to possible US restrictions on China imports and investment.
   
   On (i) government subsidies to technology sectors covered by the “China 2025” program, the US should be able to get remedies under the SCM Agreement and certain subsidy provisions under China’s accession protocol (more below). To the extent no violation can be found, US may seek non-violation remedies. On (ii), China already made a WTO-plus commitment under its accession protocol not to require technology transfer. For unknown reasons, the US has decided not to enforce this obligation within the WTO, and instead has resorted to Section 301. If a lack of hard evidence is the reason due to non-transparency in the Chinese system, the US should tackle the non-transparency problem head-on, especially in light of China’s WTO-plus obligations on transparency. On (iii) cyber theft, it is largely beyond the reach of WTO, but China should be able to agree on this issue in principle. On (iv) US 301 action and China’s counter-301 action, to the extent these are trade measures, they are clearly within the WTO jurisdiction.

3. China will not oppose or retaliate against US restrictions on China’s investment in the United States. This issue is largely beyond the current WTO framework.

4. Removing specific investment restrictions in China. With respect to investment in services, China can always unilaterally lower barriers under GATS Mode 3, provided they are multilateralized through MFN. With respect to investment in manufacturing, the US can enforce the several WTO-plus provisions on investment under China’s accession protocol, including national treatment. But most of the market access issues are beyond the reach of existing WTO rules.

5. Reduction of tariff and non-tariff barriers. (i) China to reduce tariffs on all products in non-critical sectors to the same levels of US tariffs by July 1, 2020. (ii) China to remove specified nontariff barriers. (iii) China to recognize that US may impose import restrictions on products in critical sectors, especially those under the “China 2025” program. All of these items are within the WTO framework. China may agree to unilaterally reduce tariffs, provided that the reduction is multilatealized through MFN.

6. Services. China to commit specified ways to improve US access to the Chinese market. These are within the scope of GATS, subject to MFN.

7. Agricultural products. China to improve US access to the Chinese market. Clearly within the WTO, subject to MFN.

8. China to withdraw its WTO complaints against the US and EU on the “nonmarket economy” status (DS515 and DS516), and refrain from challenging the treatment of China as a nonmarket economy. This issue is clearly within the WTO framework. Many may not have realized that even if the US and EU lose these two cases, they can still effectively treat China as an NME in trade remedies, thanks to the provision of Section 15(b) of the China accession protocol:
   
   "(b) In proceedings under Parts II, III and V of the SCM Agreement, when addressing subsidies described in Articles 14(a), 14(b) 14(c) and 14(d), relevant provisions of the SCM Agreement shall apply; however, if there are special difficulties in that application, the importing WTO Member may then use methodologies for identifying and measuring the subsidy benefit which take into account the possibility that prevailing terms and conditions in China may not always be available as appropriate benchmarks. In applying such methodologies, where practicable, the importing WTO Member should adjust such prevailing terms and conditions before considering the use of terms and conditions prevailing outside China."
   
   Considering that the US and EU complaints are primarily directed at China’s industrial policies, subsidy disciplines are the more appropriate place to register their complaints than antidumping rules. Most importantly, unlike the NME provision in the antidumping context, Section 15(b) has no built-in expiration date. While it is understandable why China does not wish to call attention to Section 15(b), it is puzzling why the US and EU have not availed themselves of it.

In sum, it appears that a majority of the US concerns could be addressed within the WTO framework. It is unfortunate that the US is not prepared to fully utilize the existing WTO rules, especially the special provisions of China’s accession protocol regarding technology transfer and subsidies, to address those concerns.