Trade data released this week reveal a surge in China’s exports and trade surplus in May, while American exports fell and the gaping U.S. trade deficit widened.  The increasing imbalance in U.S.-China trade was the backdrop for a June 9 hearing at the U.S. – China Economic and Security Review Commission entitled, “Evaluating China’s Past and Future Role in the World Trade Organization.”  Terence P. Stewart, Managing Partner of Stewart and Stewart, provided testimony to the Commission, supported by a comprehensive statement for the record, on the future of U.S.-China trade relations at the WTO.

 

In his testimony, Mr. Stewart acknowledged that China has made important progress in liberalizing its economy since it joined the WTO in 2001.  However, many obstacles to more open and balanced trade with the country remain.  Indeed, as U.S. officials have noted, it appears that China has actually been backsliding in recent years.  China has maintained assertive industrial policies and pervasive government interventions in a range of sectors, and since 2008 China has introduced new restrictions on market access and foreign investment and tightened government control over the value of its currency.

 

Over the long term, future relations between the U.S. and China at the WTO will depend not only upon whether China returns to a more market-oriented trade and investment policy, but also whether China accepts responsibility for rebalancing global trade by emphasizing greater demand-led growth at home instead of relying on export-led growth and whether China picks up the mantle of WTO leadership that its growing share of global trade necessitates.  Yet a serious refocus on domestic growth and engagement in leading the WTO out of its current impasse appear far off at the current time.  Therefore, while continuing to pursue these vital long-term goals, the United States should use the tools available at the WTO to engage China in resolving some of the frictions in the country’s trade relationship.

 

Mr. Stewart identified several areas in which the U.S. should consider invoking the WTO’s dispute settlement process if issues cannot be satisfactorily resolved with China through informal negotiations.  First, China imposes export taxes on 329 categories of goods – nearly four times as many categories as it is permitted to apply such taxes to under its WTO obligations. These taxes make exports of vital inputs more expensive, artificially lowering input prices within China and encouraging shifts of downstream production to China.  While the U.S., EU, and Mexico have challenged a handful of these restraints, a much broader case is justified.   Second, the U.S. should challenge any instance in which China conditions foreign investment approval on export performance, a direct violation of the country’s WTO commitments.  Third, USTR has identified a number of non-tariff barriers to U.S. agricultural exports – including biotechnology, animal feeds, beef, pork, poultry, apples, potatoes, and strawberries – which may be inconsistent with China’s WTO obligations.  Fourth, in the aircraft industry China imposes technology transfer requirements and provides support programs which may be challengeable at the WTO.  Finally, various concerns have been raised in a variety of other sectors regarding China’s compliance with the intellectual property protections and technology transfer obligations of the WTO. 

 

Finally, Mr. Stewart provided a roadmap of more systematic steps the U.S. can take to improve the U.S.-China trade relationship at the WTO, including through reform of the WTO dispute settlement process, advocacy in the Doha Round’s Rules negotiations, and vigorous enforcement of U.S. trade remedy laws (including against the subsidy provided by China’s undervaluation of its currency) and defense of those trade laws at the WTO.  The WTO is not a panacea for every problem in the U.S.-China trade relationship.  However, it remains a vitally important forum for addressing the distortions to our trade relationship that result from China’s internal industrial policies and its mercantilist approach to foreign investment and trade.  By engaging China at the WTO, the U.S. can help resolve some of these problems for U.S. companies and workers, while helping China become a responsible partner in creating a more balanced and sustainable global economy.