U.S. Issues Scathing Review of China’s WTO Non-Compliance

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By Bryce Baschuk

The Trump administration said the U.S. “erred in supporting China’s entry into the World Trade Organization,” according to a Jan. 19 U.S. Trade Representative report on China’s compliance with WTO rules.

The agreements that permitted China to join the WTO in 2001 have “proven to be ineffective in securing China’s embrace of an open, market oriented trade regime,” the report said.

The filing comes amid deteriorating U.S.-Sino trade relations that have failed to reduce America’s $350 billion bilateral trade deficit with China—a key priority for President Donald Trump.

“There can be no serious question about the underlying dynamic,” the report said. China is “not prepared to follow through on significant commitments or to make fundamental changes to its trade and investment regime.”

Market Economy

The USTR report blasted China for failing to convert from an economy that relies on the role of the state into one that is driven by market signals.

“China largely remains a state-led economy” and Chinese trade negotiators are “not interested in moving toward a true market economy,” the report said.

Last year China claimed that its 2001 WTO accession agreement automatically grants it the right to be treated as market economy in anti-dumping investigations after December 2016.

The U.S. and the European Union disagree and are fighting the matter in a crucial WTO dispute case that could blunt America’s ability to impose high duties on cheap Chinese imports.

Dispute System ’Insufficient’

USTR said the WTO’s dispute settlement mechanism is not designed to handle China’s economy because the state-led trade regime “prevails over market forces and pursues policies guided by mercantilism rather than global economic cooperation,” the report said.

The WTO dispute settlement system is “not effective in addressing a trade regime that broadly conflicts with the fundamental underpinnings of the WTO system,” the report said. “No amount of enforcement activities by other WTO members would be sufficient to remedy this type of behavior.”

Last year the Trump administration took an unprecedented step of blocking a process to appoint any new WTO appellate body members until countries agree to reform the organization’s 22-year-old dispute settlement rule book.

The seven-member appellate body, which has the final say in upholding, modifying, or reversing WTO rulings could be reduced to three active members on Sept. 30 and may become completely paralyzed in late 2019 when it would be left with fewer than the three required judges.

Unilateral Trade Threats

The Trump administration signaled its willingness to pursue unilateral trade actions in order to curb Chinese trade abuses, even if they fall outside the bounds of WTO rules.

The U.S. will take “all other steps necessary to rein in harmful state-led, mercantilist policies and practices pursued by China, even when they do not fall squarely within WTO disciplines,” the report said.

“The notion that our problems with China can be solved by bringing more cases at the WTO alone is naive at best,” the report said. “At worst it distracts policymakers from facing the gravity of the challenge presented by China’s non-market policies.”

The warning comes as Trump considers aggressive new trade restrictions aimed at retaliating against abusive Chinese trade behaviors that USTR claims has led to excess capacity in global steel and aluminum markets.

Section 301 Investigation

The report specifically cited the administration’s decision to self-initiate a trade investigation of China’s intellectual property practices under Section 301 of the Trade Act of 1974.

The Gerald Ford-era trade statute empowers the president to levy new tariffs, quotas, import bans, and other trade restrictions against foreign entities that are deemed to impose unfair trade practices that affect U.S. commerce.

Last week Trump said he’s mulling a “very big intellectual property fine” against China in response to U.S. industry complaints about Chinese theft of U.S. intellectual property, during an interview with Reuters.

In response, China’s Ministry of Commerce warned that if Trump triggered unilateral trade restrictions against China it could compromise the international trade framework and spark retaliation from Beijing.

To contact the reporter on this story: Bryce Baschuk in Geneva at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Jerome Ashton in Washington at jashton@bloomberglaw.com

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