The WTO in Wonderland: China’s Awkward 15th Anniversary

By Scott Kennedy —

Source: Department of Defense's flickr photostream, U.S. Goverment Work.

Source: Department of Defense’s flickr photostream, U.S. Government Work.

An Awkward Anniversary

Today marks the 15th anniversary of China’s accession to the World Trade Organization (WTO). The 5th, in 2006, had a celebratory feel. Although foreign companies still faced market-access challenges, trade and investment with China was expanding rapidly, and the global economy was growing robustly. Sentiment on the 10th anniversary, in 2011, was more anxiety filled. The Doha Round had stalled in the summer of 2008, and the global economy followed suit a couple months later. The WTO helped constrain a protectionist backlash and many countries were on the mend, but commercial tensions between China and others were becoming more severe, the product of China’s indigenous innovation policies as well as slow growth elsewhere.

The mood now is as tense and divided as ever, as the WTO has figuratively followed Alice to Wonderland. China is not holding huge celebrations, but the WTO era has been kind to the Middle Kingdom. Its exports climbed from $266 billion in 2001 to $2.3 trillion in 2015, while inward foreign direct investment (FDI) rose from $46.9 billion to $126.3 billion during the same period (with a cumulative total of $1.2 trillion). There is great angst in China about how to move up the value-added chain to avoid falling into the middle-income trap, but the dominant view is that China is a huge beneficiary of globalization and that the WTO and the multilateral system must be protected. Not surprisingly, China has become a central player in almost every WTO negotiation and is taking on a greater role in its management, as its former ambassador to the WTO, Yi Xiaozhun, is now a deputy director-general.

By contrast, in this upside-down world, the long-dominant view in the United States and other advanced industrialized economies in support of globalization is on the defensive. Critics have won elections on multiple continents. President-elect Donald Trump has roundly criticized the WTO, other existing regional trade agreements, and the Trans-Pacific Partnership (TPP). He has singled out China as a trade scofflaw, and the prospects of a trade war are higher than ever.

Although Trump’s position on China is more extreme and alarmist than most, broader sentiment in the United States and Europe toward China has continued to shift in a more critical direction. Surveys show that foreign investors feel less welcome in China than at any time since the 1970s, and high-tech leaders in the West worry that China is aiming to capture their technology and markets. There are widespread doubts that the WTO is strong enough to push China to liberalize sufficiently to achieve a more level playing field.

In short, the worry in the West is that China is undermining, if not outright breaking, the WTO, and the fear in China is that the West is walking away from the WTO and the liberal international order it constructed.

Dissecting WTO Dispute Data

Both views are understandable, but exaggerations of reality. Rather than relying only on either side’s own subjective opinions, we can learn a lot by examining the record of disputes involving China and others brought before the WTO. Although Geneva is playing a far less central role in negotiating reductions in trade barriers than in the past, the WTO’s dispute settlement system is still quite active. Since 1995, members have lodged 514 cases accusing others of violating their commitments, which are embodied in the WTO’s basic agreements and members’ respective accession protocols. A key factor motivating members to bring cases and for those targeted to respond is that the dispute settlement process is mandatory and binding. Cases move forward regardless of whether those accused respond, and if an accused member loses a case, they are required to change their offending laws and regulations or face the prospect of WTO-approved penalties from the member who brought the case. Moreover, the cases are heard by impartial panels selected by the WTO’s secretariat, and any appeals go before the WTO’s Appellate Body, also composed of eminent experts in international trade law.

A review of the overall dispute data, obtained from the WTO website, shows a more complex picture than China and WTO boosters or alarmists would care to admit. Our bottom-line conclusion: the system is not being overwhelmed, but it is only moderately effective at constraining Chinese industrial policy.

Chart compiled by Freeman Chair in China Studies staff. Source: WTO and IMF data.

China Looks Average, While the European Union and United States Stand Out

The place to begin is summary data of WTO cases involving China and a range of other members. (See Figure 1.) China has been sued 37 times, more than any other developing country (India has only been a defendant 23 times and Brazil 16).[i] However, the two stand-outs as defendants are the European Union (82 cases) and the United States (128). Since complainants win a vast majority of the cases, on first glance, it looks like the European Union and United States are the biggest WTO scofflaws.[ii]

But this snapshot does not tell the full story. A more appropriate yardstick would measure cases relative to a country’s contribution to global trade. One would expect the European Union to face more cases than Mexico, for instance, but that larger number of cases seems less damning knowing that the European Union has accounted for over 34 percent of global trade since 1995; if trade weight matters, the European Union should have faced 176 cases. Using that metric, China’s record seems “average.” It has faced 7.2 percent of cases while accounting for 8.1 percent of global trade. By contrast, the United States has accounted for 11.7 percent of global trade but a whopping 24.9 percent of all cases.

Putting the Data in Its Proper Context

Before we condemn the United States as the most protectionist country on the planet, we need to take four more steps with the data. The first is to look at trends over time. China joined the WTO almost seven years after it was formed, giving the European Union and the United States a head start. Moreover, China was given a grace period by other members during its initial transition and, hence, faced only two cases during its first five years of membership (one on value-added taxes for the semiconductor sector and the other on measures related to auto part imports). Since then, by contrast, cases against China have taken off, with 20 in 2006–2010 and another 16 since then. China was the defendant in almost 24 percent of cases during 2006–2010, while only contributing 8.2 percent to global trade. The figures have improved only slightly in the most recent period, with China facing almost 20 percent of all cases but contributing only 11 percent to world trade. The figures put China’s record on par with that of the United States, neither of which is very flattering. They both stand in sharp relief to the European Union, which faces far fewer cases than its contribution to world trade would predict.

Chart compiled by Freeman Chair in China Studies staff. Source: WTO and IMF data.

The next step is to look at which members are bringing these cases. The comparison of China with the United States and European Union is telling. (See Figure 3.) Over 70 percent of cases against China have been brought by the United States and European Union alone. Only 10 cases have been brought by others, primarily Canada and Mexico, usually in concert with the United States or European Union. By contrast, the United States and European Union are taken to the WTO by a far wider range of countries from across Asia and the Americas. All three major economies have large markets that would attract members to bring cases if they thought it necessary, but smaller members are far less likely to bring cases against China than the European Union or United States. The most likely explanation is the higher difficulty of assembling cases against China given its opaque policy process and limited access to domestic companies’ financial records, as well as the greater fear members have of facing Chinese retaliation that would result in reduced market access or other penalties. As a result, the European Union and United States have assumed a disproportionate burden in seeking to push China to abide by its commitments.

Chart compiled by Freeman Chair in China Studies staff. Source: WTO data.

Chart compiled by Freeman Chair in China Studies staff. Source: WTO and IMF data.

The third element needed to put WTO cases in perspective are their substantive focus. Members’ concerns about the United States, European Union, and China differ dramatically. The large majority of cases against the United States revolve around its fair trade laws (antidumping, countervailing duties, and safeguards). These tools have most often been used to protect the steel, agriculture, fisheries, and textiles industries. These sectors represent a relatively small share of the U.S. economy, and they are regionally concentrated in the Midwest and South. Cases against the European Union follow a similar pattern of focusing on heavy industry and agriculture. China is also often accused of abusing its fair trade rules, but the cases touch on a wider array of sectors, in advanced manufacturing, high-tech, and services where it hopes to gain traction in the face of competition from advanced economies. The United States and European Union are cushioning the blow of international competition for what many consider “sunset” industries, while China is mobilizing industrial policy to move into new areas that will support its economic future.

WTO as a Traffic Cop

The final step needed to better understand dispute data is to consider case verdicts and compliance. As noted above, the large majority of cases go against respondents; the core issue is whether they sufficiently change their behavior in a more open direction. The United States has a mixed record of compliance; it took over a decade to remove cotton subsidies deemed illegal in a case brought by Brazil in 2002, and the United States has still not liberalized regulations regarding online gambling in a case brought by Antigua and Barbuda in 2003. China’s record is technically much better. By my count, the WTO has ruled entirely in the complainants’ favor in 16 of 18 completed cases against China. In each instance, China technically came into compliance, but the real-world outcomes have ranged widely. In some cases, China has genuinely removed the offending measures and greater access was achieved. But just as often the change has come too late to matter much. The two best examples are subsidies for wind power and export limits on rare earth minerals. The other problem is when regulatory changes have not translated into greater market access. The WTO ruled in 2012 that China was illegally protecting electronic payments firm UnionPay, but although China has officially modified its rules to permit foreign competitors to enter the market, Visa, Mastercard, and others are still waiting for the gates to really open.

This limited review of the WTO case data shows why in some respects China is similar to other members, but also ways in which it stands out. Just as speeding laws are meant to reduce, not eliminate speeding, the WTO is supposed to constrain protectionism and keep it within a range that members find reasonably acceptable. There are understandable concerns that the WTO regime is insufficiently robust to manage the challenges posed by one of the world’s largest countries where government intervention is a central component of economic governance. The United States and other members are understandably frustrated in dealing with China. Its extensive industrial policy and the fear that it will retaliate against when sued inhibit members from bringing cases, and gaining meaningful compliance is far from guaranteed.

The Way Forward

The solution, though, is not to give up on multilateralism and the WTO. There is no denying that China’s membership has resulted in it being more open than it otherwise would have been. The dispute resolution process and negotiations over further liberalization have shaped China’s overall trajectory in a more liberal direction. The best way forward is to strengthen and fortify multilateralism, not abandon it.

Here are five suggestions:

  1. The United States and others should continue to file WTO cases against China, but it would be counterproductive to inundate the WTO with cases based on shaky evidence. More effort needs to be taken in collecting evidence before cases are lodged and in monitoring and enforcing compliance once decisions have been reached.
  1. The WTO’s dispute resolution process is faster than many other international adjudicators, but it is still not rapid enough to provide verdicts that are meaningful for the companies and industries that needed relief in the first place. The length of time for consultations and the initial panel need to be reduced. The appellate review is already as fast as can be expected, but in cases where the losing side does not mend it ways, the length of time needed to approve retaliatory sanctions can be shortened.
  1. The Doha Round is dead, but there are offshoots of the round that should and can be concluded, in particular the Trade in Environmental Goods Agreement and the Trade in Services Agreement. Their conclusion would make a huge difference in promoting trade in high-value added areas of the economy that would also support the planet and the needs of consumers.
  1. The WTO needs to reconsider expanding its guiding purpose beyond economic liberalization. Currently, the WTO does allow exceptions to this goal for reasons of national security, the environment, and public health, but it has not squarely faced the issue of jobs and employment. Globalization and automation neatly fit the interests of corporate owners, and while these forces are creating new opportunities for workers, they also cause dislocation. Some countries and sectors are better at adjusting than others, with better programs for education, training, migration, and social services. The WTO needs to be part of the solution to incentivize and support such programs.
  1. Many of China’s industrial policies are not challenged at the WTO because they do not run afoul of WTO rules. The WTO’s rules regarding foreign investment are quite narrow, and there are no explicit rules regarding currency. That does not mean Chinese actions in these and other areas are fair (or unfair), but it is hard to go after practices that aren’t deemed illegal. Rather than blaming the WTO for not covering everything, the gaps in global economic governance need to be filled, either by the WTO or by other institutions. At the top of the agenda should be investment, the digital economy, state-owned enterprises, and currency. These and other gaps in the system are addressed by TPP. Although TPP is not perfect and is opposed in its current form by President-elect Trump, it deserves a second look to see what improvements can be made. And if it cannot go forward, the United States, the European Union, and others would be wise to pursue plurilateral agreements based on TPP’s most important components.

These steps would all strengthen the WTO’s ability to effectively manage disputes and encourage China to move in a more liberal direction. As long as these changes are not made, disagreements between China and its trading partners will be easily politicized, which puts a large burden on reaching bilateral solutions. And when a deal is not struck, the next likely step is for the parties to resort to unilateral measures. There is no denying the benefits of occasionally resorting to such threats, but the United States, China, and the rest of the international community would be better off if we could find systematic solutions where all parties accept and respect the process and, whether win or lose, the outcome.

Dr. Scott Kennedy is deputy director of the Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy at CSIS. Follow him on twitter @KennedyCSIS. He is editor of The Dragon’s Learning Curve: Global Governance and China (Routledge, forthcoming). This post appeared as a CSIS Commentary here.

[i] WTO dispute data is arranged and counted by the complainants, not the respondents. There have been 24 disputes against China, but many have involved multiple countries, hence the WTO’s figure of 37 cases.

[ii] Taiwan, whose official membership name is “Chinese Taipei,” has never been a defendant at the WTO. That is not because Taiwan has never violated its trade commitments or has too small a market for other members to be interested in. Instead, China probably has pressured other members to never sue Taiwan since it could be interpreted as treating Taiwan as a sovereign state in an international body. (That is not technically accurate, since Chinese-Taipei, like Hong Kong, is only recognized as a “customs area,” not a state.) Taiwan has been a complainant in six cases, against the United States, European Union, Canada, Indonesia, and India (twice).

Scott Kennedy

Scott Kennedy

Dr. Scott Kennedy is a senior adviser in the Freeman Chair in China Studies and the director of the Project on Chinese Business and Political Economy at CSIS.

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