Chiina’s WTO Compliance

USTR on January 14, 2021 released its 2020 report to Congress on China’s WTO compliance

The Office of the United States Trade Representative last Thursday, January 14, 2021, released its 2020 Report to Congress on China’s WTO Compliance. As the report notes, it is the 19th report to Congress following China’s accession to the WTO. It is also the last report prepared under the Trump Administration. The report is significantly shorter than prior Trump Administration reports (70 pages vs. 192 pages for 2019 report, 183 pages for 2018 report, and 161 pages for 2017 report) while referencing details on specific U.S. concerns with China from the 2019 report appendix. The link to the report is as follows: https://ustr.gov/sites/default/files/files/reports/2020/2020USTRReportCongressChinaWTOCompliance.pdf.

The report provides an Executive Summary, a section entitled U.S. ASSESSMENT OF CHINA’S WTO MEMBERSHIP with four subsections (China’s WTO Accession, Expectations of WTO Membership,
China’s Record in Terms of Complying With WTO Rules, and China’s Record in Terms of Transitioning to a Market Economy), a section entitled U.S. STRATEGY FOR ADDRESSING TRADE DISTORTIONS CAUSED BY CHINA, a section entitled REVIEW OF TRADE MECHANISMS USED TO ENGAGE CHINA (with subsections on bilateral dialogues, multilateral fora, and enforcement (both U.S. laws and WTO litigation)) and the final section looking at KEY U.S. CONCERNS (five subsections — non-tariff barriers (24 topics), intellectual property rights (5 topics), agriculture (10 topics), services (16 topics) and transparency (4 topics)).

While the Key U.S. Concerns section provides the detail on U.S. concerns on specific topics on goods and services sectors, the section on U.S. Assessment of China’s WTO’s Membership provides a good overview of the fundamental concerns the U.S. has with the compatibility of China’s economic system with the WTO objective of market driven economic outcomes. The section on U.S. strategy for addressing trade distortions caused by China provides a review of the Trump Administration’s efforts in the 2017-2020 period for addressing concerns with the bilateral relationship and China’s practices. The Executive Summary (pages 2-3) gives a reasonable picture of what the problems with China are and the Trump Administration’s response.

“In prior reports, we provided this Administration’s assessment of China’s WTO membership, the unique and very serious challenges that China’s non-market policies and practices pose for the multilateral trading system and the effectiveness of the strategies that had been pursued to address the China problem over the years. We identified the critical need for new and more effective strategies – including taking actions outside the WTO where necessary – to address the challenges presented by China’s state-led, mercantilist approach to the economy and trade. We also described the positive outcomes to date of the Administration’s strategy for engaging China, which led to the signing of an historic trade agreement with China in January 2020. In this year’s report, we review and assess China’s progress in implementing that agreement to date, and we highlight the important issues that remain to be addressed in our trade relationship with China.

“As we previously documented, and as remains true today, China’s record of compliance with the terms of its WTO membership has been poor. China has continued to embrace a state-led, non-market and mercantilist approach to the economy and trade, despite WTO members’ expectations – and China’s own representations – that China would transform its economy and pursue the open, market-oriented policies endorsed by the WTO.

“At the same time, China’s non-market approach has imposed, and continues to impose, substantial costs on WTO members. In our prior reports, we identified and explained the numerous policies and practices pursued by China that harm and disadvantage U.S. companies and workers, often severely. It is clear that the costs associated with China’s unfair and distortive policies and practices have been substantial. For example, China’s non-market economic system and the industrial policies that flow from it have systematically distorted critical sectors of the global economy such as steel, aluminum, solar and fisheries, devastating markets in the United States and other countries. China also continues to block valuable sectors of its economy from foreign competition, particularly services sectors. At the same time, China’s industrial policies are increasingly responsible for displacing companies in new, emerging sectors of the global economy, as the Chinese government and the Chinese Communist Party powerfully intervene on behalf of China’s domestic industries. Companies in economies disciplined by the market cannot effectively compete with both Chinese companies and the Chinese state.

“For nearly two decades, a variety of bilateral and multilateral efforts were pursued by the United States and other WTO members to address the unique challenges presented by China’s WTO membership. However, even though these efforts were persistent, they did not result in meaningful changes in China’s approach to the economy and trade. We previously catalogued the United States’ persistent yet unsuccessful efforts to resolve the many concerns that have arisen in our trade relationship with China. We found that a consistent pattern existed where the United States raised a particular concern, China specifically promised to address that concern, and China’s promise was not fulfilled.

“Faced with these realities, in the 2017 USTR Report to Congress on China’s WTO Compliance, this Administration announced that it would be pursuing a new, more aggressive approach to the United States’ engagement of China. We explained that the Administration would defend U.S. companies and workers from China’s unfair trading practices and would seek to restore balance to the trade relationship between the United States and China. As part of these efforts, the United States would take all appropriate actions to ensure that the costs of China’s non-market economic system are borne by China, not by the United States. The United States also would continue to encourage China to make fundamental structural changes to its approach to the economy and trade consistent with the open, market-oriented approach pursued by other WTO members, which is rooted in the principles of non-discrimination, market access, reciprocity, fairness and transparency. If undertaken by China, these changes would do more than simply ease the growing trade tensions with its trading partners. These changes would also benefit China, by placing its economy on a more sustainable path, and would contribute to the growth of the U.S. economy and the global economy.

“The Administration based this new approach on several assessments. First, WTO membership comes with expectations that an acceding member not only will strictly adhere to WTO rules, but also will support and pursue open, market-oriented policies. Second, China has failed to comply with these expectations. Third, in recent years, China has moved further away from open, market-oriented policies and has more fully embraced a state-led, mercantilist approach to the economy and trade. Finally, China’s market-distorting policies and practices harm and disadvantage its fellow WTO members, even as China reaps enormous benefits from its WTO membership.

“Consistent with this Administration’s more aggressive approach to China, we have been using all available tools – including domestic trade remedies, bilateral negotiations, WTO litigation, and strategic engagement with like-minded trading partners – to respond to the unique and very serious challenges presented by China. But, the goal for the United States remains the same. The United States seeks a trade relationship with China that is fair, reciprocal and balanced.”

“Beginning in January 2020, the United States’ new approach to China began to demonstrate key progress with the signing of an historic trade agreement, known as the Phase One Agreement. This agreement requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. The agreement also includes a commitment by China that it will make substantial additional purchases of U.S. goods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.

“The United States has been closely monitoring China’s progress in implementing its numerous commitments under the Phase One Agreement and has regularly engaged China using the extensive consultation processes established by the agreement to discuss China’s implementation progress and any concerns as they arise. Currently, the evidence indicates that China has been moving forward in good faith with the implementation of its commitments, making substantial progress in many areas.

“Because the Phase One Agreement does not cover all of the United States’ concerns, the United States will need to turn to Phase Two of its trade negotiations with China in order to secure resolutions to important outstanding issues. These discussions should focus on critical issues in areas such as subsidies, excess capacity, state-owned enterprises, state-sponsored cyber-enabled theft of intellectual property, standards, cybersecurity, data localization requirements, restrictions on cross-border data transfers, competition policy and regulatory transparency as well as certain issues in the areas of intellectual property, technology transfer and services market access that were not addressed in the Phase One Agreement.

“Going forward, it is the Administration’s hope that China will continue to take the United States’ concerns seriously and engage with the United States on a productive basis. If China does so and the two sides are able to finalize and implement a comprehensive Phase Two Agreement, it will benefit not only the United States, but also China itself and the rest of the WTO membership. It may also generate a willingness on the part of China to take on similar new disciplines at the WTO.”

The report is embedded below.

2020USTRReportCongressChinaWTOCompliance

For the incoming Biden Administration, there are many important issues relating to China in the trade arena that will be front and center. With an announced intention by the President-elect to have greater cooperation with trading partners, one can expect (a) greater focus on the U.S.-EU-Japan efforts at WTO reform on subsidies, state-owned enterprises and forced technology transfer (with outreach to other Members), (b) outreach to WTO Members to develop approaches to deal with other Chinese distortions, (c) continued efforts to achieve a meaningful e-commerce plurilateral agreement in the ongoing Joint Statement Initiative, and (d) a fisheries subsidies agreement by the time of the 12th Ministerial meeting later this year. On the bilateral front, continued monitoring (and where necessary enforcement) of the Phase 1 Agreement with China should be a priority as well as the start to a Phase 2 negotiation. The USTR under the Trump Administration has devoted significant resources to laying out the challenges posed by the differences in economic systems and pursuing actions to address some of the major distortions. Whether the Biden Administration agrees with all of the individual actions taken in the last four years, it is important that the problems flowing from different economic systems be addressed with all tools that are available and be an important topic in WTO reform talks.

While the Free Trade Agreements that China is party to do not address the problems of differing economic systems (market-oriented vs. state-directed), this issue is fundamental to the U.S. view of making the WTO system function moving forward. Deputy Director-General Alan Wolff has identified in a number of speeches what he believes are key principles undergirding the WTO. Convergence vs. coexistence is how he articulates a core challenge for the organization, and has listed convergence as a core principle. In his recent speech at the January 13 virtual meeting put on by Chatham House on possible issues for reform at the WTO, DDG Wolff said “WTO Members and their Secretariat will have to deal with a number of external problems because there is no choice. Do differing economic systems affect the bargained for conditions for trade? Is the WTO of the future to be about convergence more than coexistence?” WTO, DDG Wolff outlines possible responses to calls for WTO reform, January 13, 2021, https://www.wto.org/english/news_e/news21_e/ddgaw_13jan21_e.htm. China has taken the position that coexistence is all that can be expected, that the WTO is not the forum to look at different economic systems, and has opposed efforts to address the fundamental issue at the WTO. The U.S. has laid out the case for why convergence is a critical aspect of the WTO. While China was moving towards convergence in the early years after its accession to the WTO at the end of 2001, its path for the last decade has been away from convergence. The future of the WTO may very well depend on whether this core divide can be addressed in a manner that permits distortions of any economic system to be addressed and ensures results are based on market conditions and not government fiat.