I understand that Geneva has been hot these days, but yesterday, the hottest place in town was nowhere but inside Centre William Rappard, where the US and China engaged in a white-hot debate on the Chinese economic system at the General Council meeting. Firing the first shot by calling China "the most protectionist, mercantilist economy in the world”, US Ambassador Dennis Shea argued that “change is necessary if the WTO is to remain relevant to the international trading system”.
Amb. Shea's "gunpowder-smelling" remarks led to a lengthy retort from the Chinese ambassador Zhang Xiangchen, who dissected his oral statement and written submission entitled " China’s Trade-Disruptive Economic Model" like an impatient professor trashing a poorly-researched term paper, as he enumerated the problems with their logical flaws, inconsistencies, and even the sloppy footnotes.
Interestingly, notwithstanding their numerous differences, the two ambassadors do seem to share something in common. Despite his keen interest to see "change", Amb. Shea made clear that “the WTO itself does not currently provide the tools needed to bring about that change”. Similarly, Amb. Zhang regarded these issues as "beyond the realm of the WTO and beyond our capacities". In other words, both seem to subscribe to the view, which has become rather fashionable lately, that the existing WTO rules are inadequate in dealing with China.
In a recent paper co-authored with Weihuan Zhou and Xue Bai, we rebutted this view by arguing that, to the contrary, we do not necessarily need new rules to tackle the problems created by China’s SOEs. Our main argument is summarized in the conclusions, which we reproduce below:
"As a matter of fact, the WTO’s existing rules on subsidies, coupled with the China-specific obligations relating to SOEs, competition and subsidies, actually do provide sufficient defense against the encroachment of Chinese SOEs beyond its own shores. Unfortunately, for too long, these rules on SOEs and subsidies remain largely unused, due to three common misconceptions regarding the utility of these provisions. In this paper, we have set the record straight by addressing each of the three misconceptions. The first misconception is that subsidy-CV actions are impossible without sufficient information about the subsidies programs in China. Our response is that the open-ended language “special difficulties” in Section 15(b) of the Accession Protocol does provide wide leeway to IAs in applying subsidy-CV measures against China, especially in cases where the information is lacking, insufficient, or otherwise difficult to obtain. The second misconception is that the AB’s narrow interpretation of “public body” as one with government authority has rendered it very difficult for IAs to find SOEs as “public bodies”. Again, we argue that this is no longer the case with China’s designation of certain SOEs as exercising key governmental functions and its push to install Party committees in SOEs and to enhance their roles in the decision-making of these SOEs. These moves have made it much easier to find the exercise of government authority by the SOEs and the control of the government in these firms. The third misconception is that CV actions are ineffective in practice. However, as we discussed earlier, CV measures tend to provide higher protection compared to AD measures. Moreover, with the expiration of the NME Methodology, the current set of inflated AD rates can no longer sustain. This leaves CV measures the only meaningful option."
Thus, we conclude that "the real problem is not the lack of sufficient rules to deal with China’s state capitalism, but the lack of utilization of these additional rules."
Those interested in perusing the paper may download it on SSRN (with the full argument on the SCM & CVD issues made in pp. 53 onwards). Any comment or criticism would be greatly appreciated (of course, we hope you'd be more lenient than Amb. Zhang).
