Coalition for a Prosperous America

China and the WTO – remarks by Dennis C. Shea to the Coalition for a Prosperous America

On March 26, 2021, the former Deputy USTR in Geneva during the Trump Administration, Amb. Dennis C. Shea, spoke to the Coalition for a Prosperous America. While the remarks were made in his individual capacity, the remarks reviewed the challenges for the World Trade Organization remaining relevant with the current activities of the People’s Republic of China. His remarks, entitled “Three hard truths” can be found on his linkedin page. See Remarks to CPA, 3.26.2021, https://www.linkedin.com/feed/update/urn:li:activity:6781608096750956544/?updateEntityUrn=urn%3Ali%3Afs_feedUpdate%3A%28V2%2Curn%3Ali%3Aactivity%3A6781608096750956544%29.

The three hard truths from his remarks are copied below.

“The first of these hard truths is that China’s economic system – with its unique melding of public, private, and Chinese Communist Party resources, all harnessed to advance industrial policy objectives – is incompatible with the WTO norms of market orientation, transparency, non-discrimination, and reciprocity.”

“The second hard truth is that the WTO has proven itself incapable of restraining the trade disruptive activities of the Chinese non-market economic system.”

“The third hard truth is that China does not want change at the WTO.”

Amb. Shea reviews in some detail the actions of China post-accession to move away from market reforms that trading partners expected from China’s accession to the WTO and why such actions frustrate the proper functioning of the WTO. He also reviews China’s willingness to retaliate against trading partners for their legitimate use of WTO rights and to punish trading partners for comments China views as against their interests. The import bans against Australian products when Australia urged an independent investigation into the source of the COVID-19 virus is one example mentioned. Finally, on the issue of not wanting change at the WTO, Amb. Shea reviews China’s opposition to every reform issue raised by the United States.

Amb. Shea’s remarks are worth a close read. While he doesn’t address a road forward, his well founded concerns about China’s role in the trading system and its incompatible economic system with WTO rules bring to mind a piece by a former EC Director General for Trade, Mogens Peter Carl which I reviewed in an earlier post. See July 25, 2020, 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, https://currentthoughtsontrade.com/2020/07/25/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/ . I reproduce much of that post below.

“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.”

The WTO now has a new Director-General who is working to see if Members can achieve breakthroughs on the existing fisheries subsidies, make significant progress on Joint Statement Initiatives, while encouraging Members to limit export restraints on medical goods needed to address the COVID-19 pandemic, promote rapid return to trade growth post pandemic, and work on WTO reform.

The Biden Administration has a desire to work with trading partners in multilateral organizations like the WTO and has articulated the need of allies to work together to address problems caused by non-market economies like China. While the Biden Administration will certainly pursue WTO reform, Amb. Shea’s final paragraph of his remarks is on point.

“The Biden Administration has made working with friends and allies a hallmark of its diplomatic approach, particularly when it comes to China. When the Administration brings this approach to the WTO, I sincerely hope our friends and allies will appreciate the gravity of the moment and what’s at stake.”