China

“The values of the WTO” — do Members and the final Director-General candidates endorse all of them?

On November 6, Deputy Director-General Alan Wolff presented comments to the UN Chief Executives Board. In a press release, entitled “DDG Wolff shares views with international agency heads on future of multilateral cooperation,” the Secretariat provides a short introduction and then includes DDG Wolff’s comments including an Annex. See WTO, WTO and Other Organizations, DDG Wolff shares views with international agency heads on future of multilateral cooperation, 6 November 2020, https://www.wto.org/english/news_e/news20_e/igo_06nov20_e.htm. The statement by DDG Wolff is worth reading in its entirety and presents information on the effects of the pandemic and the future of multilateralism including reforms needed for the WTO. However, for purposes of this post, I will focus on Annex 1 to his statement, entitled “The Values of the World Trade Organization. The Annex is copied below and generally reflects views DDG Wolff has presented in the past.

Annex I

The Values of the World Trade Organization

“In the current upsurge in criticism of the inadequacies of the collective responses to the pandemic, the WTO is receiving heightened scrutiny, and more urgent calls for WTO reform. It is necessary to understand the values that the multilateral trading system is designed to promote before it can be reformed.

“A serious inquiry into this subject would serve three purposes:

“to know the value of what we have in the current system,

“to determine if the values of the current system enjoy the support of all WTO members, and

“to address the degree to which the WTO is of sufficient continuing relevance as it is at present or whether it needs fundamental change.

“WTO members can make progress toward improving the organization to help it to create a better world through building on the values that are inherent in the system. These include –

Stability and peace — The original mission of the multilateral trading system was to enhance economic growth to achieve stability and support peace; today the WTO fosters integration of conflicted countries into the world economy.

Well-being — At its core, the organization is about the economic advancement of the people whom its members represent. Well-being is defined to include creating jobs and, as we are finding out, it also includes health;

Rule of law — The enforceability of obligations is a key distinguishing feature of the WTO as compared with most other international endeavours;

Openness – The multilateral trading system rests upon the principle that to the extent provided within the bounds of the WTO agreements, markets will be open to international trade and trade is to be as free from distortions as possible;

Equality — Equality among members provides the opportunity for each member to participate in the organization, and its rights and obligations, to the extent of its capabilities;

Sovereignty — Sovereignty is preserved — no decision taken within the WTO is to have an automatic effect on the laws or actions of any member;

Development — Fostering development to allow all members to benefit equally from the rights and undertake equally the obligations of the WTO.

International cooperation — Cooperation is a shared responsibility of membership to enable the organization to function.

Sustainability — There is increasingly an attitude of care among members for stewardship of the planet and its inhabitants.

The primacy of market forces — Commercial considerations are to determine competitive outcomes.

Convergence —The WTO is not simply about coexistence; differences among members affecting trade which deviate from the principles governing the WTO, its core values, are to be progressively overcome.

Reciprocity — Broadly defined reciprocity is required for negotiations to succeed.

Balance — is provided:

“Through each member’s judgment of the costs and benefits of the rights it enjoys and the obligations it has undertaken;

“Through its view of how its costs and benefits compare with those of other members;

“Through a member’s view of its freedom of action in relation to the freedom of action for others, and

“Specifically, through its judgment of whether it has sufficient freedom to act to temper its commitments for trade liberalization (openness) with measures designed to deal with any harms thereby caused.

Trust — International trade would largely cease if trade-restrictive measures that were inconsistent with the rules were as a regular matter put into place and only removed prospectively through lengthy litigation.

Morality — in its absence, it would be hard to fully explain the provision addressing pharmaceutical availability in health emergencies. The 1994 Marrakech Declaration states that the WTO was being created to reflect the widespread desire to operate in a fairer and more open multilateral trading system.

Universality — Membership is open to all who are willing to negotiate entry.”

Many of these “values of the WTO” are not controversial. Two are critical to the direction of the WTO moving forward — the primacy of market forces and convergence. These values are viewed as critical by the United States and as central by the EU, Japan, Brazil and others. China’s economic system is viewed as inconsistent with these values. See, e.g., February 22, 2020, WTO Reform – Addressing The Disconnect Between Market and Non-Market Economies, https://currentthoughtsontrade.com/2020/02/22/wto-reform-addressing-the-disconnect-between-market-and-non-market-economies/; Statement from Brazil, Japan and the United States, Importance of Market-Oriented Conditions to the World Trading System, WT/GC/W/803/Rev. 1 (2 October 2020); CHINA’S TRADE-DISRUPTIVE ECONOMIC MODEL,
COMMUNICATION FROM THE UNITED STATES, 16 July 2018, WT/GC/W/745.

China rejects the claim that its economic system is properly the subject of WTO scrutiny or that it hasn’t engaged in “reform”. Coexistence, not convergence is China’s view of the appropriate value within the WTO. See, e.g., Statement of H.E. Ambassador Zhang Xiangchen of China at the General Council Meeting (Item 7), October 13, 2020, http://wto2.mofcom.gov.cn/article/chinaviewpoins/202010/20201003007644.shtml; CHINA AND THE WORLD TRADE ORGANIZATION, COMMUNICATION FROM CHINA, 19 July 2018, WT/GC/749; General Council, MINUTES OF THE MEETING, 26 July 2018, WT/GC/M/173 (5 October 2018)(pages 29-41). And, of course, while China is the largest economy with an economic system at odds with market-economy conditions, it is not the only one.

Importantly, the candidate found through consultations with the WTO membership to be most likely to attract consensus and hence be recommended by the Chair of the General Council and his facilitators to become the next Director-General of the WTO, Dr. Ngozi Oknojo-Iweala of Nigeria, has taken the view that the WTO’s role is not to exclude any economic system but is rather to determine if different economic systems create distortions in trade that need to be addressed through modifications to the rules. See, e.g., August 19, 2020 [updated August 27], The race to become the next WTO Director-General – where the candidates stand on important issues:  convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 2, comments by the candidates, https://currentthoughtsontrade.com/2020/08/19/the-race-to-become-the-next-wto-director-general-where-the-candidates-stand-on-important-issues-convergence-vs-coexistence-of-different-economic-systems-possible-reform-of-rules-to-addre/; August 17, 2020, The race to become the next WTO Director-General – where the candidates stand on important issues:  convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 1, background on issues, https://currentthoughtsontrade.com/2020/08/17/the-race-to-become-the-next-wto-director-general-where-the-candidates-stand-on-important-issues-convergence-vs-coexistence-of-different-economic-systems-possible-reform-of-rules-to-address-dist/.

Here is what I had written up based on Dr. Okonjo-Iweala’s participation in a WITA webinar on Jly 21 and her answer to specific questions. The webinar can be found at https://www.wita.org/event-videos/conversation-with-wto-dg-candidate-dr-ngozi-okonjo-iweala/.

“Q: On resetting of tariff commitments (comment from USTR Lighthizer as a problem within the WTO based on changing economic development of many countries), would this be in the best interest of the system? 

“A:  This is a critical question and issue.  Renegotiating any agreement would require consensus building that would be very difficult to achieve.  That would certainly be true on bound tariffs. The balance of rights and obligations raised by the United States flows from the concerns about state-led economies and state-owned enterprises and whether such economies belong in the system.  Dr. Okonjo-Iweala stated that the WTO is not there to comment on the economy of any Member.  In her view, the key question is what disciplines does the WTO have around any issue that arises.  Are the disciplines sufficient to address the imbalances in rights and obligations that may arise?  We need to start there.  What are the fundamental issues —  state-owned enterprises (SOEs), public body.  Can we come to agreement on the meaning of the term public body?  Can we tighten subsidy disciplines that already exist or can we negotiate new subsidy or other disciplines to address the concerns that arise from these types of economies? That is the approach all Members should be pursuing. 

“Q: On industrial subsidies, China has signaled that they will oppose tightening disciplines.  The U.S., EU and Japan have been working on a proposal and discussing with some Members.  How can the Director-General help the membership navigate these issues? 

“A:  If Dr. Okonjo-Iweala becomes the next Director-General, she would encourage that proposals from the U.S., EU and Japan be tabled so all Members can see what they are and how acceptable they are to other Members (including China).  Let’s start to work with an actual proposal.  Sometimes countries are not as far away as one might think.  Members need to work on a specific proposal and see what happens.”

Conclusion

The WTO is a different organization in 2020 than it was when it started in 1995 or when its basic structure and agreements were being negotiated during 1986-1994. Major economies have joined and some have economic systems that are significantly different than the traditional economies who led the GATT. The question of how to deal with different economic systems within the global trading system has not been addressed directly although some would argue that the U.S., EU and others have worked hard during accession negotiations to get commitments from acceding countries to engage in reform if the economy is based on state-control or other deviations from a market economy. For an economy like China’s, there were early reforms, some of which have been reversed over time and others which were never in fact implemented.

While evaluation of distortions caused by different economic systems is certainly an approach that can be pursued, it starts from a premise of coexistence of economic systems within the WTO and assumes rules can be formed that will adequately address all distortions created by non-market factors in a given economy. But the “convergence” value and the “primacy of market forces” value are fundametal to a system where the results of competition will be viewed as acceptable by all Members. In a consensus system, the refusal of a major player like China to agree to these values limits the likely options to other Members but clearly endangers the ability of the WTO to fulfil its core functions in ways that are acceptable to all.

That the likely next Director-General has taken a position that is at odds with the two WTO values identified in Annex 1 of DDG Wolff’s presentation from November 6 is understandable in a consensus system where there is obvious disagreement among WTO Members on the particular values. However, if moving forward with reform, the WTO membership and its Director-General fail to get Members to agree on the core values, such failure will ensure the WTO will not be the sole arbitrator of trade matters going forward.

China’s trade restrictive actions against Australia — what they say about China’s compliance with notification requirements and the importance of market-economy conditions in global trade

One of the challenges companies and trading partners of China have faced in having the global rules of trade actually honored by China has been the informal actions of China’s government at the central, provincial and local level which result in clear violations of WTO obligations as well as the fear of retaliation companies trading with China may face if specific examples of non-compliant actions are raised bilaterally or through dispute settlement.

In yesterday’s Global Business Dialogue TTALK entitled “China and Aussie Cotton,” the challenges that Australia’s cotton producers are facing in China are reviewed including apparent verbally communicated requirements to Chinese cotton purchasers not to buy Australian cotton. See Global Business Dialogue TTALK of October 22, 2020, “China and Aussie Cotton,” https://myemail.constantcontact.com/CHINA-AND-AUSTRALIAN-COTTON—-TTALK-FOR-OCTOBER-22.html?soid=1101547782913&aid=L4XRKbnPF_A. The post has links to various sources for the concerns raised in the post.

A good summary paragraph from the TTALK piece follows:

“All of that said, this has been a tense year for China-Australia trade, as China has taken aim at one Australian export after another to signal its displeasure with Australian policies. Australian barley, beef, and wine were hit with import restrictions earlier. Last week it was coal and cotton – what might be called Australia’s black and white exports to China. This time, though, China’s restricted policies were not in black and white. They were instead oral instruction to Chinese buyers of those products not to buy from Australia.”

As the WTO Members consider reforms needed to improve the functioning of the global trading system, the challenges Australian producers are facing in having access to the Chinese market should help inform some of the critical challenges and needs.

Obviously, there are transparency requirements on all WTO Members on actions taken that affect access to a Member’s market. It is unlikely that any of the non-written actions, policies or practices taken by the Chinese government at the central, provincial or local level that affect foreign goods or services or foreign investors are notified to the WTO. If so, this is a major problem in the third leg of the WTO structure – notifications and oversight. While similar problems may exist for other WTO Members, the Australia example is a clear instance where China has discriminated against products of a trading partner without formal notification or justification.

Similarly, the Australian example raises concerns about China using the influence of the state to distort trade outcomes. This is, of course, the core concern of the United States, Japan, Brazil and others that the global trading system is premised on market-economy conditions within WTO Members and that systems like that of China don’t fit well under existing global rules. The state directing companies not to purchase commodities like cotton from foreign suppliers is inconsistent with such market-economy conditions.

For any reform initiative to permit the WTO to ensure conditions of fair trade in the global market, state actors need to sit out the vast majority of trade actions involved in the production, sale, import and export of goods and services. There have been proposals to date to address some of the notification deficiencies that exist, but nothing really focused on informal actions of states. Similarly, the U.S., Japan and the EU have also identified a series of issues (industrial subsidies, forced technology transfer) where the existing rules of the WTO are inadequate to address some of the distortions caused by economic systems like that employed by China. It is unclear that the areas being considered deal with some of the distortions flagged in the Australian case or the issue of threats or acts of retaliation by a WTO Member against companies engaged in trading with the Member or who have invested in the Member. While China is certainly a Member where companies often complain privately about retaliation or threats, China is not alone in that regard.

Without serious reform to address these and other existing problems as well as update the rules to reflect 21st century trading realities, countries will need to increasingly look outside the WTO for tools to address the distortions created.

A new WTO without China? The July 20, 2020 Les Echos opinion piece by Mogens Peter Carl, a former EC Director General for Trade and then Environment

The WTO is an organization in crisis in part because of a system of rules created by market economy countries that doesn’t adequately deal with large economies with different economic systems. China is the largest and most obvious example but by no means the only WTO Member operating economic systems that are not consistent with market economy principles. While China engaged in significant changes to its system in its efforts to join the WTO and had undertaken commitments for further changes that would move China towards a market economy, changes in political leadership led to a reversal in direction, with emphasis on state planning, state-owned and state-invested enterprises to pursue the government’s objectives and massive government subsidies to take over global economic sectors. While China views opposition to its system as a means of trying to hold China back from achieving the economic growth it pursues, many trading partners view China’s approach to global trade and investment as highly disruptive and inconsistent with basic principles of reciprocity and the disciplines of the WTO on market economies.

The Trump Administration has changed the U.S. approach for trying to deal with China by its pursuit of a section 301 investigation and resulting tariffs when it could not get China to change its policies and actions. The U.S.-China Phase 1 Agreement was an effort to find a way to address at least some of the challenging practices and address resulting trade distortions through purchase objectives. Many trading partners have been concerned that the U.S. approach, at least as it involves purchasing objectives, constituted managed trade. A phase two U.S.-China negotiation to deal with remaining major concerns has not started and apparently won’t before the November 2020 U.S. elections.

The European Union and Japan have been working with the United States to put together proposed modifications to existing WTO agreements to deal with some of the aspects of the Chinese economic system (but also relevant to other Members) that cause massive distortions — industrial subsidies, excess capacity, state-owned and state-invested enterprises. China has repeatedly indicated that any efforts to address these issues at the WTO will be blocked by China as such efforts are viewed as aimed at restricting China’s rise.

Earlier this week (July 20), a former EC Director General for Trade, Peter Carl, penned an opinion piece in Les Echos with the provocative title, “A new WTO is needed without China” (literally A new WTO must see the day without China). https://www.lesechos.fr/idees-debats/cercle/opinion-une-nouvelle-omc-doit-voir-le-jour-sans-la-chine-1224748.

Mr. Carl indicates in the opinion piece that “Europe’s trade policy has stagnated for twenty years. It no longer meets the demands of today’s world and the European public attributes the loss of millions of jobs to China.” (all quotes from the opinion piece are informal translations by Google Translate ). The opinion is remarkable as it comes from a former senior EC trade official.

“Our policy is outdated and based on an outdated ideology that is identical to what it was before the arrival of China on the world state, after its accession to the WTO in 2001. Its centralized economy, its powerful industrial policy in all the key sectors, its enormous state subsidies, combined with a government apparatus and a political repression as powerful as those of the ex-USSR, swept large swathes of European and American industry. However, we act as if we were in the heyday of the 1990s, when our main competitors were other market economies, Japan, Korea, the United States. Our inaction resembles the ostrich policy and unilateral pacifism of the 1930s. We know the results. We must therefore protect our liberal economies and our open societies against adversaries. This requires a fundamental review of the trade policy of the European Union and the WTO.”

Mr. Carl calls for a complete reform of the WTO with the EU teaming up with the U.S. and other like-minded Members but recognizes that meaningful reform will be blocked by China. “The solution: withdraw from the WTO and create a new international trade organization without China. Most countries would follow our example. We would return to an open world economic order between market economy countries sharing the same ideas, on the basis of clear and reinforced principles in favor of the free market.” Mr. Carl advocates for the adoption of rules that would deal with “abuses” of the China model including improved subsidy disciplines and “rules against social, environmental dumping and inaction on climate change.” Such new rules are needed to permit the EU to green its economy.

Mr. Carl, addressing concerns that his proposal represents a turn to managed trade, says simply that “This is what we already have, although only China manages it, and we are suffering the consequences.”

That Mr. Carl felt the need to publish such a strongly worded opinion shows the underlying and growing tensions felt by major trading partners from a major economic power with a fundamentally different economic system than that pursued by the historic major players in world trade.

For WTO Members and their businesses and workers, the rising discontent by many with the functioning of the WTO and its ability to achieve meaningful reform should be a wake-up call. The WTO to be relevant must have rules that address the world in the 21st century. The WTO must also be able to have Members assume increased responsibilities as their stage of economic development evolves. Similarly, the WTO must confront whether existing rules can be modified to generate greater coverage of practices by different types of economic systems. If not, the WTO must consider whether it can survive where all Members don’t follow similar economic systems.

Unfortunately, there appears little likelihood that many of these critical reforms will be addressed in the coming years. China has objected to WTO Members trying to modify existing agreements to address distortions caused by China’s economic system. China has also objected to the U.S. effort to have Members consider whether WTO rules require Members to operate market-economy based systems. China and others have objected to U.S. efforts to define “developing country” and effectively have Members take on obligations commensurate to their stage of economic development. Stated differently, China is working hard to defend the status quo and prevent consideration of reforms that would achieve greater balance among all WTO Members.

While USTR Lighthizer and others have said that if the WTO didn’t exist, it would have to be created, Mr. Carl’s opinion suggests that one option that may take on greater appeal is the withdrawal from the WTO and the creation of a new international trade regime among countries with similar economic systems. Such a move away from the WTO would certainly involve enormous economic upheaval and political tensions. The more desirable course of action is to achieve timely reform of the WTO so that all Members feel the system achieves reasonable reciprocity.

Time will tell whether WTO Members find a path forward or whether the WTO becomes less and less relevant and even ceases to function. In a Member driven organization, the answer lies with the membership.

U.S.-China Phase I Deal is Failing Expanded U.S. Exports Even Before Recent Efforts by China to Limit Certain U.S. Agriculture Exports as Retaliation for U.S. Position on Hong Kong

The U.S.-China Phase I trade agreement went into effect in mid-February just as the COVID-19 pandemic was rapidly spreading globally.  In the United States, the U.S. Trade Representative and U.S. Secretary of Agriculture have released a series of statements indicating that China has been making a number of the substantive changes that were contained in the agreement, with the U.S. being pleased with the progress.  See, e.g. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement

The COVID-19 pandemic has seriously reduced economic activity in the United States and in many other countries.  Despite such reduced economic activity in recent months, the U.S. Administration has remained optimistic about China’s meeting the agreement’s terms and the agreement being “a success,” including the significant increase in exports to China from the United States over two years (2020-2021).  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement.  An important measure of the success will be the extent to which there are significant increases in U.S. exports.

As reviewed in a recent post, the United States has announced it will be terminating special status of Hong Kong in light of Chinese security actions taken vis-a-vis Hong Kong.  U.S. Withdrawal from the World Health Organization and Decision to Revoke Preferential Treatment for Hong Kong – Reduced Cooperation as COVID-19 Pandemic Rages On, https://currentthoughtsontrade.com/2020/05/30/u-s-withdrawal-from-the-world-health-organization-and-decision-to-revoke-preferential-treatment-for-hong-kong-reduced-cooperation-as-covid-19-pandemic-rages-on/.  U.S. action did not call for the termination of the US-China Phase I Agreement.  In recent days, the press have reported that China has ordered state-owned entities to stop purchasing from the United States various agriculture products, including soybeans, pork, corn and cotton.  https://thehill.com/policy/finance/trade/500464-china-halts-state-purchases-of-us-soybeans-pork-report.  There have been some statements in the U.S. press suggesting that China continues to buy U.S. agricultural products including soybeans despite the earlier reports to the contrary.  See, e.g.,   https://insidetrade.com/trade/grassley-confident-china-will-meet-phase-one-commitments.

With April 2020 U.S. export data now available, what is clear is that China is far behind in meeting the levels of purchases from the United States in a wide range of goods categories to meet the first year growth over 2017 on goods of $63.9 billion.  Total U.S. domestic exports to China in 2017 were $119.910 billion.  The $63.9 billion increase of U.S. exports of goods were on a subset of total U.S. goods exports, just $66.381 billion.  Thus, the rate of increase in the first twelve months under the agreement is expected to be 96.26% on the categories contained in Annex 6.1 to the Agreement.  There are specific commitments with regard to certain manufactured goods (increase of $32.9 billion over 2017 levels), agriculture (increase of $12.5 billion over 2017 levels) and energy (increase of $18.5 billion over 2017 levels).  While there are no specific commitments on other products the U.S. exports to China, the rate of increase as measured against all U.S. domestic exports to China in 2017 would be 53.29% if all other products were at the same level as in 2017.

Unfortunately, looking just at March and April 2020 (the first two full months after the agreement took effect for which U.S. export data are available), U.S. domestic exports of the products contained in Annex 6.1 to the agreement declined by 4.04% from the March-April 2017 period.  All other U.S. domestic exports of goods to China declined 39.35% in March-April 2020 compared to the same period in 2017.  In total U.S. domestic exports to China of all products declined by 20.24% in March-April 2020 compared to the same months in 2017.  Thus, the early months of the first year of the Phase I Agreement are moving in the wrong direction in terms of U.S. exports.  While challenges in China and in the United States from the pandemic have undoubtedly dampened both demand in China and ability to ship from the U.S. for some products, that situation has changed in May and will presumably improve moving forward.

The above figures do not account for increased U.S. services exports to China contained in Annex 6.1 to the agreement (increase of $18.5 billion over 2017 levels).  Data for U.S. services exports for 2020 are not available by country at this point for January-April.  But overall U.S. services exports have been hard hit in the first four months of 2020 and this will include U.S. exports to China.  U.S. exports of services to the world were $169.482 billion in the January-April 2020 time frame, down from $193.010 billion in 2019, with March and April 2020 being more sharply contracted, $72.117 billion vs. $97.103 billion in 2019.  See https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf (page 16).

The table below shows the 18 categories of goods for which there are growth commitments in Annex 6.1 of the Agreement.  All figures are in U.S.$ billions.

Product CategoryMarch-April 2017March-April 2020Change
Manufactured goods
1. Industrial machinery$1.845$2.091+$0.246
2. Electrical Equipment
and machinery
$0.694$0.867+$0.173
3. Pharmaceutical
products
$0.323$0.501+$0.178
4. Aircraft (orders and
deliveries
$0$0 $0
5. Vehicles$1.747$0.716-$1.031
6. Optical and medical
instruments
$0.522$0.566+$0.044
7. Iron and steel$0.232$0.081-$0.151
8. Other manufactured
goods
$1.737$2.224+$0.487
Subtotal — MFG goods$7.099$7.046-$0.053
Agriculture
9. Oilseeds$0.747$0.230-$0.517
10. Meat$0.106$0.582+$0.476
11. Cereals$0.224$0.194-$0.030
12. Cotton$0.229$0.200-$0.029
13. Other agricultural
commodities
$0.000$0.354+$0.354
14. Seafood$0.231$0.152-$0.079
Subtotal – Agriculture$1.536$1.712+$0.175
Energy
15. Liquefied natural
gas
$0.014$0.162+$0.148
16. Crude oil$0.658$0.210-$0.448
17. Refined products$0.334$0.193-$0.241
18. Coal$0.090$0.016-$0.074
Subtotal – Energy$1.096$0.581-$0.515
Total of 1.-18.$9.731$9.339-$0.392

Conclusion

The Trump Administration has had an aggressive program over the last several years to address perceived serious problems in our bilateral relationship with China. The Phase I Agreement was viewed as a down payment with the more challenging issues still on the table to be negotiated in a phase 2 agreement. There is no sign that Phase 2 negotiations have started. The history of U.S.-China consultations has been a great many promises of change by China and relatively little action by China to address U.S. concerns.

It is a positive that a number of the specific changes China has agreed to in the Phase I Agreement have been implemented to date. The U.S. has also made modifications it agreed to make in the Phase I Agreement. But the core issue for the Trump Administration is to see if its different approach to China can achieve meaningfully greater reciprocity in our trade relationship with China. That has been the justification for the large tariff increases on large parts of Chinese exports — getting long overdue changes to Chinese actions that harm American businesses and workers and obtain greater market access to the Chinese market.

Through April, U.S. trade data don’t show meaningful expansion of exports to China despite the commitments contained in Annex 6.1 to the Agreement. Indeed, U.S. exports are down sharply to China (U.S. imports from China are down sharply as well).

Despite the ongoing bilateral differences and actions causing a continuation of tensions between the two largest economies in the world, improving bilateral trade to a more reciprocal level would be in both countries’ interest. With China having recovered from COVID-19 constraints and with the U.S.having started its reopening process, the coming months will reveal whether the Agreement represents a further lost opportunity or a sea change in trade flows.

U.S. Withdrawal from the World Health Organization and Decision to Revoke Preferential Treatment for Hong Kong — Reduced Cooperation as COVID-19 Pandemic Rages on

On May 29, 2020, President Trump indicated that the United States was withdrawing from the World Health Organization (“WHO”) because of the WHO’s failure to adopt reforms the U.S. had demanded and the belief of a bias within the WHO towards China and China’s failure to provide timely information on the start of the virus and the likely nature of the problem. https://www.nytimes.com/2020/05/29/us/politics/trump-hong-kong-china-WHO.html. This followed the U.S.’s earlier temporary withholding of funds from the WHO while awaiting developments on reforms.

President Trump also indicated that in light of actions by China to assert security controls over Hong Kong, the U.S. viewed China as violating its commitment to maintain “one China, two systems” and would accordingly be taking actions to remove special treatment provided Hong Kong in a wide range of areas (extradition, export controls, etc.) and would be treating Hong Kong as part of China for tariffs, export controls, etc. https://www.wsj.com/articles/u-s-to-cancel-visas-for-some-chinese-graduate-students-11590744602.

Not surprisingly, China has reacted negatively to the statements of President Trump on Hong Kong and has threatened to take retaliatory actions if the U.S. takes actions contrary to China’s interests and indicated that any U.S. action was doomed to fail. https://www.bloomberg.com/news/articles/2020-05-30/china-says-us-action-on-hong-kong-doomed-to-fail; https://www.cnbc.com/2020/05/30/china-says-us-action-on-hong-kong-doomed-to-fail.html.

Concerns have also been raised that U.S. action would be a double-edged sword in light of the large trade surplus the U.S. has with Hong Kong and the enormous presence of U.S. businesses in Hong Kong. For example, based on U.S. Census data as compiled by the U.S. International Trade Commission, the United States had a trade surplus with Hong Kong (total exports – general imports) of $26.086 billion in 2019 [the trade surplus based on domestic exports – imports of consumption being lower at $11.845 billion]. While China has not identified actions it is considering, harming U.S. interests in Hong Kong would obviously be one avenue China might take.

The trade implications, in terms of U.S. imports from Hong Kong, are relatively minor. If imports from Hong Kong are treated as imports from China, imports of items subject to additional duties from the 301 investigation would be relatively minor. That is because U.S. imports for consumption from Hong Kong in 2019 were just $4.646 billion, with half of that being under HS 9810 for articles that have been imported after exportation, after repair, etc. If China were to impose additional duties on U.S. exports to Hong Kong, the effect would be larger. U.S. domestic exports to Hong Kong in 2019 were $16.491 billion.

Increased tensions; reduced cooperation

Whatever the merits of the actions being taken by the United States (and the reactions anticipated from China), the results are predictable — we are entering a period of reduced cooperation and coordination of actions to address the pandemic as well as increasing bilateral tensions between the U.S. and China at a time of global economic contraction. This despite the fact that cooperation has been less than robust even before the current increased tensions.

In the trade arena, the pandemic continues to grow in severity as confirmed cases continue to climb globally with the hot spots shifting. Cooperation at the WTO and G20 is critical in terms of keeping markets open, minimizing export restraints, addressing logistics needs in a manner that preserves the health needs of importing countries, avoiding inventory builds of agricultural products, the introduction of export restraints where there is no underlying agriculture production problem globally, taking actions to expand production of medical goods to meet the demand surge flowing from the pandemic, ensuring transparency, and promoting best practices. The world is struggling already to achieve the trade needs identified above. Reduced cooperation will make the challenges that much harder.

Similarly, the search for vaccines, therapeutics and diagnostics to effectively prevent, treat and identify medical needs requires global cooperation, information sharing and the work of a multilateral institution like the WHO and various NGOs to ensure all peoples who need these products have equitable and affordable access to them when developed. Trials on potential vaccines are at various stages in China, in the United States and in Europe and possibly other areas. Often the research is amongst companies working jointly from multiple jurisdictions. Which research project or projects will prove effective, if any, is obviously not known. Implications of a lack of cooperation between countries should effective vaccines, therapeutics and diagnostics be developed are for the possible hording of products, refusal to sell to other countries or delays in sharing and other actions that would make global escape from the pandemic harder, longer and more deadly.

And for many developing and least developed countries, the pandemic, whether significantly affecting individual countries directly, threatens most countries through contraction in global trade (estimated to be between 13 and 32% by the WTO in 2020), limited financial capabilities to address budget shortfalls and increased unemployment and challenges to existing health care infrastructure from the pandemic. Multilateral institutions like the World Bank and the IMF and others are critical here but are dependent on the cooperation of key members like the U.S., China, and others. While these organizations have been working effectively to date, the size of the challenge posed by the pandemic which is unprecedented will likely result in additional funding needs in the coming months or years which will require cooperation to meet.

Conclusion

The United States and China have very different economic and political systems. In the trade sphere, the United States has reached the conclusion that coexistence of such disparate systems doesn’t make sense under the World Trade Organization’s rules which are premised on market-based economic policies. The U.S. actions vis-a-vis China on trade have been an effort to achieve reciprocity with China, a situation not possible under the existing WTO rules. That the U.S. effort to obtain reciprocity in fact is proving contentious is hardly surprising and will not likely lessen in bilateral tensions in the near future.

In the political sphere, our two systems have resulted and will continue to result in periodic tensions, such as we are currently witnessing over the actions of China on security measures in Hong Kong.

Historically, major nations who view each other as adversaries have been able to cooperate effectively on issues of mutual interest. That was true during the cold war between the U.S. and the Soviet Union on certain issues. Whether the U.S. and China view each other as adversaries as well as competitors at the present time, the same ability to cooperate between them should be true when looking at issues such as addressing the pandemic effectively and efficiently.

Let us hope that regardless of the bilateral tensions and of the U.S. departure from the WHO, all WTO Members can step up their efforts to keep markets open and transparent and that governments will cooperate to ensure that medical developments are available to all on an equitable and affordable basis and that the financial resources are available to help those least able to weather the pandemic’s effects alone to survive and move forward.