Why the US Should Respond Honestly to China's WTO Complaint
Comments by Steve Charnovitz
Federal Register m0n-2px7-nq3f
3 September 2024
China has properly lodged a lawsuit (DS623) against the United States (US) at the World Trade Organization (WTO) regarding the domestic content conditions of US subsidies granted in 2022 in US Public Law 117-169. Such unfair, discriminatory regulations are a blatant violation of the law of the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). SCM Article 3.1(b) prohibits "subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods." During the Biden-Harris Administration, the US has increased its reliance on nonmarket economic nationalism to the detriment of the US economy and the broader interests of all WTO Members.
Environmental instruments need not be, and should not be, protectionist. In 1992, Rio Declaration reiterated the norm that governments should use economic instruments "without distorting international trade and investment" (Principle 16). For the climate regime, the United Nations Framework Convention on Climate Change (UNFCCC) articulated the climate law principle that "Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade" (Article 3.5). Thus, the discriminatory US measures detailed in China's complaint are anathema to both world trade law and global climate law.
Although subsidies can be appropriate policies to lessen climate change, subsidies are much less likely to reduce emissions than first-based policies of carbon taxes. Unilateral subsidies are also inferior policies because climate change is a global problem that necessitates multilateral solutions. Without effective transborder environmental solutions, trade disputes can ensue.
The US overcapacity in dollars allows the US to engage in excessive subsidization. Most other countries with their budget constraints cannot afford to bestow subsidies on the same scale that the US does. Yet because the effectiveness of any US climate measure depends on the measures being taken by the rest of the world, the US overreliance on subsidization sets a bad example for other countries, particularly developing countries. This dysfunction could be corrected in part by more generous US government funding of climate investments in developing countries, but those US programs are pathetically small.
Whatever unilateral US climate subsidies could accomplish will be further diminished when US subsidies are conditioned on import substitution policies. Such a beggar-thy-neighbor scheme raises the costs of clean energy domestically while making it more difficult for many other countries to grow their clean energy input sectors through exports. Supply chain resiliency — even for the largest economies — is more likely achievable through economic integration than through dogmas of autarky.
Although the Office of the US Trade Representative (USTR) has falsely claimed that China's lawsuit "seeks to undermine US efforts to address the global climate crisis...", the truth is that the protectionist US efforts in dispute make it harder for the US and other countries to address the global climate crisis. China seeks to challenge the lack of cooperation by the US to use nondiscriminatory measures in addressing the worsening global climate crisis. China is right to seek to hold the US accountable to respect both international trade law and international climate law. China recognizes that the effectiveness of US climate efforts (and indeed the efforts of all countries) is impeded by unjustified US trade discrimination. While WTO law does not prohibit a government from lavishing financial benefits on politically favored beneficiaries, WTO law does prohibit granting subsidies in a manner that externalizes costs on other countries.
In lodging this WTO case against the US, China seeks to encourage US policymakers to respect the rule-based international order. China (but not the US) appears to understand that governments need not violate international trade law to achieve multilateral environmental objectives. Thus, China's cause of action against the US functions as a public good in the international legal system. China's bold lawsuit should be applauded by everyone who supports the transnational rule of law
With China's overdue litigation against the US now going forward, the Biden-Harris Administration should stop undermining the WTO judicial system by blocking the appointment of WTO appellators. If the US is unwilling to stop despoiling the Appellate Body —even though the lack of effective judicial review continues to imbalance the WTO — USTR should pledge to the WTO Dispute Settlement Body that the US will (join China to) support immediate adoption of the panel report. During its time in office, the Biden-Harris Administration has shown bad faith in appealing four (!) WTO cases that the US has properly lost knowing full well that the appeal cannot be heard because of the US sabotage of the WTO appellate tribunal (see DS 539, 544, 552, 556, 562, 564, 597).
Because China's SCM Art. 3.1 claim against the US is correct in WTO law, the US should not engage in facetious (and time-wasting) defenses as USTR frequently does. Since the SCM Agreement does not contain an environmental exception, USTR should not assert an environmental defense which, in any event, would be unjustified because the UNFCCC makes clear that discriminatory trade measures must not be used. Since the SCM Agreement does not contain a national security exception, the US should not assert a national security defense as the US did unsuccessfully in the Steel and Aluminum Products case. (That bogus US claim was rightly dismissed by the WTO panel.) Since the SCM Agreement does not provide for reverse SCM Article 29 defenses, the US should not assert that it needs to discriminate against China because the US is in the process of transformation from a market, free enterprise economy into a centrally planned economy.
Because China is acting responsibly to uphold the multilateral trading system and to challenge US illegality in a peaceful way, the US should cooperate by facilitating the rapid response mechanism envisioned in the DSU for the adjudication of trade complaints. Let the panel do its job to call out the US for engaging in a cadence of protectionism that flagrantly violates WTO law.
If the US stopped treating China unfairly in trade — including for example, cancelling the WTO-illegal US Sections 301 and 232 tariffs — China might become more willing to act cooperatively to address the most pressing global problems.
