China in the World Trading System: A Response to Chad, and Some Comments on Froman-Greer

This may be a mistake, because I'll be trying to cover too much ground, but I'm going to use this post to (1) respond to Chad and (2) comment on an exchange between current U.S. Trade Rep. Jamieson Greer and former U.S. Trade Rep. Mike Froman at a recent CFR event. The issues are similar, and I hope it sort of works to lump them all together. We'll see how it goes!

The response to Chad

First up, Chad made some good points in his post. He notes that "[i]n terms of facts about use of WTO dispute settlement against China, the empirical reality from the data is that it turns out the US did most of the heavy lifting." I think my main response here is to say, yes, the U.S. brought a fair number of complaints and was reasonably successful. So, given that success, why not bring complaints against a broader set of non-market policies and practices as well? For example, how about some SCM Agreement Article 5 adverse effects complaints?

Chad also asks: "What prevented the EU, Japan and other countries from bringing disputes against China?" Here, he means complaints on the big systemic issues, because there were some complaints against China on narrower issues. I agree that these complaints could and should be brought by any WTO Member, and it's not just the responsibility of the U.S. here.

One thing to note is that when it comes to taking action against Chinese subsidies, many people seem to think the strong response is domestic countervailing duties. So, instead of bringing SCM Agreement adverse effects complaints, they want to use CVDs. To me, though, the decision to go with the CVD approach reflects a misjudgment about what constitutes a "strong" response. I'm not aware of CVDs leading to the withdrawal of subsidies, so if that's what you are hoping for (and you should be!), I don't think CVDs are the answer. But that's often where we have ended up.

Chad then talks about "contributing factors from the data and from our conversations with policymakers behind WHY there was insufficient willingness to challenge China" at the WTO, including this:

Worry that a government wouldn't win a case against China even if companies turned over information. China's system is non-market. How does one even define a subsidy in China? (The public body ruling seemed to suggest Chinese SOEs were not providing subsidies? Hmmm...) Showing evidence might mean an even heavier lift than in a case against a market economy if you have to use third country benchmarks to make your case due to Chinese data (on prices and quantities) being so whacky, again because of its system. 

On the point about the Appellate Body's public body ruling, I'm not sure it suggests that Chinese SOEs were not providing subsidies. Here, I would distinguish between situations where WTO panels and the Appellate Body are evaluating complaints against domestic trade remedies, on the one hand, and situations where they are evaluating WTO complaints against subsidies, on the other. In the former, its the trade remedy agencies that are "on trial," as their reasoning in the investigation is scrutinized through WTO dispute settlement; in the latter, it is the governments doing the subsidizing that are going to be subject to this scrutiny. The upshot is that I think you might do better challenging Chinese subsidies as part of a WTO complaint than you would in defending your agency's countervailing duties that were imposed in reaction to those subsidies. I sometimes hear people talk about "bias" in WTO dispute settlement, and I'm generally skeptical that this bias exists, but I can imagine that, in some instances, there is a bit of skepticism from the WTO "judiciary" towards the measures being challenged, as governments usually don't bring a complaint unless they are convinced of the merits of the case (I can think of some exceptions though!). As a result, both the Chinese subsidies and the CVDs against Chinese subsidies will face a tough review by panels and the Appellate Body (now the MPIA).

The Froman-Greer conversation

Now to Froman and Greer. At the CFR event, these two had an interesting exchange about what past and present U.S. administrations wanted to get from China on trade:

Greer: [The Trump-Xi meeting] was a good meeting. We got what we came for, and then when we got back, [people said] "oh, well, you didn't get anything." It's like, first they didn't want us to give anything away, and we came back with the stability and the things we were looking for, and now people said, "You didn't get anything." I want to know, what did people want? They wanted them to say, "We're done being communist, and we're not going to subsidize"?

Froman: Well, it's an interesting question, because traditionally, rightly or wrongly, administrations would go to Beijing and try and convince the Chinese leadership to move away from excess capacity, export-led growth, and move more towards domestic demand, consumer-led, more of a social safety net. All the things that China knows it needs to do to have a more sustainable economic path, but refuses to do. Are those issues no longer on the agenda?

Greer: Well, how effective was that? ...

Froman: Yeah, that's a good question. Not fully effective,

Greer: ... I guess my point here is we have tried that for a long time.

Froman: So we're giving up on that?

Greer: I would say mostly. I would say when it comes to managed trade, for example, [agriculture], so we've said, listen, we need to be able to export $17 billion worth of [agriculture], separate and on top of soybeans. In order to do that, you have to have some things adjusted that are in their regulatory system, they have certain things, registrations, and a variety of non-tariff barriers that they do have to change those to facilitate that. But listen, in the first term we went to them, and we started negotiating a deal, and you'll all probably recall who were around at the time, there was a broader deal in the offing. There was a broader deal made that would have gotten at some of these things, industrial subsidies, etc. and it went all the way to the top in China, and it came back red-lined in a way where it's very clear that they were not going to change some of these things, that some of these things we've been asking them for decades are in fact part and parcel of their political system, right? We think of them as part of their economic system, [but] it's part of their political system, right? ...

We've just come to terms with the fact that there's not going to be some giant comprehensive reform of the way the Chinese political system works, including all these economic elements of it, but we can have some managed trade, we can maybe have some reform around the edges of that managed trade in the interest of stability and continued economic peace between our countries.

I found this exchange to be useful because I think it helps illustrate several points on which, in my view, the conversations about China conflate some issues that should be separated, and overlook how existing trade rules could provide solutions.

Let me first note that this exchange takes me back to my original questions for Chad, where I talked about U.S. priorities and how issues with China have been approached in the past. While it's true that U.S. trade officials have made demands of China like those noted in the Froman-Greer exchange, my sense is that these U.S. demands were never a top priority in U.S. foreign policy, and that they were pursued in ways that were not likely to be effective. That's a big part of how we got to the current situation.

Now let me turn to the conflation. As I see it, there are the issues that Froman talks about ("excess capacity, export-led growth, and move more towards domestic demand, consumer-led, more of a social safety net"), on the one hand, and there are non-market policies and practices such as industrial subsidies, on the other. Importantly, it needs to be recognized that these are very different categories of issues. While there is some connection between excess capacity/export-led growth and industrial subsidies, they are nonetheless separate. To me, subsidies are an identifiable measure that it makes sense to complain about in the trade context. By contrast, excess capacity is vague and hard to define in terms of a government action. It's better to focus trade complaints on actual government measures rather than on production levels.

And then "domestic demand, consumer-led, more of a social safety net" is something else entirely. Now we are getting into broader economic policy and individual consumer preferences.

Unfortunately, people sometimes blur all of these distinctions, and I think that makes the policy discussion less clear.

Let's move now to the issue of subsidies, which I think is the right place to focus. I'm not sure what Greer had in mind with the industrial subsidies demands that he says the Chinese leadership "red-lined" during the first Trump administration. I don't know what those demands called for exactly, so it's hard to evaluate this argument. But it's worth pointing out that the Chinese government had already agreed to significant subsidies disciplines when it joined the WTO. As my discussion with Chad makes clear, though, there has been only limited enforcement here, and that seems like a big missed opportunity. Would additional subsidies obligations, beyond those in the WTO, have helped? Maybe, but it depends on the precise obligations and whether there was an effective enforcement mechanism (I always said the Phase One enforcement mechanism wasn't effective, and as far as I know it has never been used, which I think supports my view).

Ultimately, I think that if you want China to rein in its industrial subsidies, you need to say that directly in the form of a WTO complaint, and not bring issues such as the social safety net into the discussion. Making demands about domestic economic policies and individual consumer choices is very different than demanding compliance with the subsidies obligations that China took on when it joined the WTO.

Froman and Greer talked about the efforts of past U.S. administrations to persuade China on these issues. These efforts by the U.S. may not have worked, but that may be because the method of persuasion was the wrong one. On the subsidies, as I said above, either you bring WTO complaints on industrial subsidies or you don't. If there's no formal complaint, the accused country probably figures it has some flexibility in responding. And then on issues such as the social safety net, telling China what we think they should do seems about as effective as other countries telling the U.S. what fiscal policy it should adopt.

So, while it is true that these issues have been raised in the past, and those efforts did not turn out to be effective, it's important to think about how the issues were raised, both in terms of identifying the specific problem at issue and the way the demands were presented. This could help guide us on these issues going forward.