Monday, March 21, 2011

China and the WTO: A Marriage Doomed to Fail?

Last week the World Trade Organization, in particular China's membership in the global trade body, came under scrutiny from the anti-trade left and, surprisingly, the (mostly) pro-trade right.  The former's response was totally expected as the logical extension of anti-traders' longstanding "strategy" of seizing on some new headline as ex post justification for their opposition to trade liberalization.  Ian Fletcher (among others) acted the part perfectly as he melodramatically bemoaned the horrible decision of the WTO's Appellate Body in the US-China AD/CVD dispute (upon which I've already commented):
The World Trade Organization has a long history of anti-American actions. They've just handed us another one, and in the process handed a big freebie to Chinese state capitalism.
Fortunately, the obvious bias and error of Fletcher's "arguments" is made evident by simply citing, you know, the actual record of WTO disputes between the US and China since the latter joined the organization about a decade ago.  First, there's the small fact that the Appellate Body actually sided with the United States in two of the four claims raised in that case.  Then, there's the broader data refuting Fletcher's silly allegations. According to the WTO, the US and China have been involved in 17 formal disputes there, with the the United States the complainant in ten of those cases.  Four of those ten are still pending, and the United States has prevailed (through a formal dispute settlement ruling or a mutually agreed solution that resulted from required consultations) in - wait for it - all six cases.  For those of you who aren't math majors, that's a 100% success rate.  So much for the WTO's obvious anti-Americanism, eh?

And let's also not forget the dramatic benefits that China's WTO Membership bestowed upon American exporters (a metric that even a mercantilist like Fletcher can support).  Cafe Hayek's Don Boudreax, citing Doug Irwin's great book, summarizes those benefits quite succinctly (emphasis mine):
While it’s true that China – like nearly every other nation on earth – has in place a plethora of growth-inhibiting mercantilist policies, the overwhelming economic story in China over the past 33 years is the liberalization of its markets – a liberalization that includes dramatic reductions in trade barriers. Here’s economist Douglas Irwin: “In December 1978 China began to end its policy of economic isolation. Under the leadership of Deng Xiaopeng, the government decollectivized agriculture, allowed private entities to trade, and permitted foreign investment…. In 1992 the weighted average tariff [in China] on manufactured goods was over 45 percent. Since China joined the WTO in 2001, the country’s average tariff will eventually fall to less than 7 percent.
Since these data pretty much annihilate Fletcher's claims, let's move on to what struck me as the more surprising China/WTO criticism - the grumbles of discontent coming from free trade supporters on the right.  AEI's Claude Barfield explains:
At this morning’s AEI conference, Reconsidering America’s China Policy: Engaging Party and People, I had an important exchange with Heritage Foundation scholar Derek Scissors. Derek is a keen and acute observer of China’s economy and trade policy. His major theme this morning revolved around a recantation: to wit, that he had originally supported China’s entry into the World Trade Organization (WTO), but now thought this was a mistake. He stated that the problem was that neither he, nor the decision makers at the time, had foreseen the about-face Chinese leaders after 2001 would make on key trade and investment policies. He argued that China’s leaders in the 1990s had been genuinely committed to a more open economy and downsizing the state sector. However, the leadership since then has reversed course and is committed to a new form of state capitalism and inward-looking development that will inevitably bring the PRC into conflict with WTO rules—in areas such as currency, indigenous innovation, climate change, and competition policy.
Barfield, to his credit, ably refutes Scissors' primary concerns but concludes on what I think is a very odd note (again, emphasis mine):
I, in turn, argued that whatever the future problems and conflicts within the WTO, on balance the world (and the United States) was better off with China inside the WTO. In 2001, China was forced to assume obligations well beyond those demanded of any other nation, developed or developing, as the price of WTO membership. By and large, it has fulfilled those obligations. Does it cut corners and attempt to weasel out of it commitments? Yes. But all nations—particularly those with highly paid trade lawyers such as the United States and EU—continually attempt to “reinterpret” loosely-worded WTO rules (check out U.S. positions on cotton subsidies and sketchy dumping cases). Though it initially reacted with fury at WTO cases against it, China over the past several years had skillfully defended itself at the WTO. Indeed it has just won a major case on anti-dumping and subsidy rules against the United States.

The bottom line is that the issues Derek worries about in general were not, and still are not, WTO obligations. When the GATT/WTO was founded in the 1940s and 1950s, state capitalism was the norm throughout much of Europe; and trade rules for the most part did not, and do not, cover many of these misguided economic policies. During the recent crisis, state intervention increased rather substantially (viz, Government Motors), even while traditional protection barely ticked up. 
In future years, backing the state out of its new role will be a major challenge for the world trading system. And here, Derek makes a point that is worth pondering. When pressed, it was clear that what really concerned him was that China was now so large, and with such outsized influence, that if it kept to the present inward turn, it would destroy the WTO, whatever the niceties of legal obligations. Here I agree, but that is a challenge for future negotiations and does not reverse the reality (in my view) that the world trading system was better off by accepting Chinese membership. Or putting it another way, that also speaks to Derek’s fears—without China as a member could we any longer call it the World Trade Organization?
Clearly the answer to Barfield's final question is a big, fat "no" - omitting the world's largest exporter and second-largest economy from an organization dedicated to liberalizing and harmonizing global trade would instantly de-legitimize the body (although one could rightly question whether China would have ever gained this impressive status without (a) the the trade and economic liberalization brought about by its WTO accession, and (b) the protections that WTO rules have provided China's exports of goods and services).  But should we really be concerned that if China continues its nettlesome trade and economic policies "it would destroy the WTO, whatever the niceties of legal obligations"?

Color me extremely skeptical.

Granted, I wasn't at this discussion, so maybe I'm misinterpreting Scissors' and Barfield's concerns.  But I see several flaws with the idea that China's relatively-isolated fits of protectionism will eventually destroy the WTO.  First, there is the question of whether China would allow this to happen.  Clearly, China sees a lot of value in WTO membership from both a PR and legal perspective.  On the former, WTO membership and China's participation as a "responsible stakeholder" gives China a lot of global street cred - distinguishing it from "rogue" economic nations like North Korea or Russia (which is just desperate to join for, inter alia, this very reason).  On the latter, China's recent "win" at the WTO's Appellate Body, and the country's increasingly frequent resort to WTO dispute settlement (or threats of bringing a WTO case) makes it clear that China is quite pleased with the global trade body's role as an arbiter of global trade rules and potential check on importing nations' protectionism.  For two examples of this reality, consider how often the Chinese government promised an immediate WTO challenge to any US legislation targeting China's currency practices or to climate change legislation that included "carbon tariffs."  So would China really be willing to let the WTO die just to maintain something like its indigenous innovation policy?  That seems really unlikely to me.

Second, and as Barfield sorta mentions, China has actually proven to be pretty good about (i) complying with adverse WTO dispute settlement rulings by revising the illegal trade measures at issue and (ii) liberalizing its trade and investment regime pursuant to its phased-in WTO accession commitments.  Sure, the Chinese haven't been perfect and often draw the ire of their trading partners, but as Barfield and Boudreaux note above, pretty much nobody has been perfect (see, e.g., US refusal to implement adverse WTO decisions on internet gambling or zeroing or cotton subsidies).  I imagine that China's (often reluctant) compliance is due to the same reasons I already mentioned - a strong desire not to implode a global organization that they highly value.  So, when push comes to shove, China begrudgingly caves on WTO matters just like everybody else, or it pays for its non-compliance through retaliatory sanctions (again, just like everybody else).  Such (totally routine) behavior hardly seems like the actions of a rogue nation destined to implode the WTO.

Third, I'm extremely skeptical that the trade issues that Scissors and Barfield raise - such as currency, indigenous innovation, climate change and competition - are really the WTO-breakers that they (apparently) assume.  Beyond that fact that, as Barfield notes, these issues are not really covered by standard WTO disciplines (and this omission is very much intentional - just ask USTR about EU competition policy sometime), are these really the mission-critical issues that are going to destroy a global trade organization that has (in some form) been around for more than six decades?  Let's look at each quickly:

  • On China's currency, I've repeatedly noted that the issue is quickly resolving itself due to domestic inflationary pressures and, well, lots of nations have meddled with their currencies over the last few years.
  • On indigenous innovation, China's already revising some of the policy's more troublesome aspects, and has agreed to submit a better offer to accede to the WTO's Government Procurement Agreement (which would discipline many other aspects).  This is admittedly a long slog and should certainly be a US negotiating priority, but it is making progress (albeit at at a glacial pace).
  • On climate change, China's reluctance to sign an intensive multilateral climate change agreement and its opposition to carbon tariffs is hardly is isolated to China alone - it's something shared by almost all developing country nations (see, e.g., India's threats to bring a WTO dispute against any national climate change laws that include carbon tariffs).
  • And on competition policy, again, see the United States and the many other (very sane) nations that aren't really down with global harmonization of competition (i.e., anti-trust) disciplines.

Finally, it just doesn't seem that other WTO Members harbor concerns that China's naughtiness is going to end up scuttling the WTO.  Of course, they'd never admit publicly that they had such troubling feelings, but they're still negotiating as if the WTO agreements are going to still be valuable in a few years, and they're still bringing new disputes against China and each other.  I don't know about you, but I wouldn't be wasting my government's finite resources on securing new dispute settlement rulings against China if I thought the body was going anywhere anytime soon, would you?

Now, look, I'm certainly not saying that the WTO is invincible, and as I've already noted, the body's utility as a vehicle for new trade liberalization could (could!) be coming to an end.  And who knows, maybe an issue will arise that will pit WTO Members against each other in such an entrenched and permanent way that it'll effectively destroy the global trade organization.  But in China or any other WTO Member, I've yet to see anything even remotely big enough to do it.

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