USTR Report to Congress on China's WTO Compliance

USTR’s 2021 Report to Congress on China’s WTO Compliance — a recognition that all of China’s distortions to competition cannot be dealt with within the WTO

China’s retreat over the last 15 years from reforms to move its economy to a market-based one has led the United States, first under the Trump Administration and now under the Biden Administration, to view some actions outside of the WTO as necessary to deal with the many distortions in trade being experienced by China’s practices. The U.S. position is made clear in today’s (February 16, 2022) report from the U.S. Trade Representative, 2021 Report to Congress on China’s WTO Compliance, https://ustr.gov/sites/default/files/enforcement/WTO/2021%20USTR%20Report%20to%20Congress%20on%20China’s%20WTO%20Compliance.pdf. As stated in the USTR press release on the Report,

“WASHINGTON – The Office of the United States Trade Representative today released its annual “2021 Report to Congress on China’s WTO Compliance,” laying out the Biden Administration’s assessment of China’s membership in the World Trade Organization.

“’China has not moved to embrace the market-oriented principles on which the WTO and its rules are based, despite the representations that it made when it joined 20 years ago,’ said Ambassador Katherine Tai. ‘China has instead retained and expanded its state-led, non-market approach to the economy and trade. It is clear that in pursuing that approach, China’s policies and practices challenge the premise of the WTO’s rules and cause serious harm to workers and businesses around the world, particularly in industries targeted by China’s industrial plans.’

“The Biden Administration is pursuing a multi-faceted approach to address the harm caused by China’s trade and economic policies through both bilateral engagement with China and the use of trade tools to protect American workers and businesses.  The Administration’s strategy also includes enhanced engagement with allies and partners in order to build broad support for solutions to the many unique problems posed by China and defending our shared interests.”

Indeed, as reviewed in prior posts, former Deputy Director-General of the WTO Alan Wolff has articulated that the WTO is premised on economies converging to a market-based structure. Coexistence of fundamentally different economic systems – the path China is insisting on – is simply incompatible with WTO principles. See, e.g., January 16, 2022:  Is it time for a new approach to bilateral trade with China?https://currentthoughtsontrade.com/2022/01/16/is-it-time-for-a-new-approach-to-bilateral-trade-with-china/ (and posts cited therein on DDG Wolff’s comments).

The frustrations with the many distortions caused by China’s economic system and the inability of the WTO to effectively address the distortions has led at least one former senior trade official to opine about the desirability of market economies withdrawing from the WTO and establishing a new organization. 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/.

The challenges also led the Trump Administration to take aggressive action under Section 232 of the Trade Expansion Act of 1962 (steel and aluminum global excess capacity driven largely by China) and Section 301 of the Trade Act of 1974 (various practices of China).

Moreover, part of the U.S. concern about problems with the WTO dispute settlement system was the effect of problems on the U.S. ability to address Chinese market distortions. See, e.g., August 9, 2020:  USTR Lighthizer on WTO dispute settlement – answers to Congressional questions from June 17 hearings, https://currentthoughtsontrade.com/2020/08/09/ustr-lighthizer-on-wto-dispute-settlement-answers-to-congressional-questions-from-june-17-hearings/ (“‘Appellate Body overreaching has unfairly taken away U.S. rights and advantaged China. Through a series of deeply flawed reports, the Appellate Body has eroded the U.S. ability under WTO rules to counteract economic distortions caused by China’s non-market practices that harm our workers and businesses. For example, the Appellate Body’s erroneous interpretation of ‘public body’ threatens the ability of WTO Members to counteract trade-distorting subsidies provided through state-owned enterprises, favoring non-market economies at the expense of market economies.”).

While the Biden Administration has expressed support for the WTO and is pursuing reforms within the WTO with like-minded countries, the consensus system of the WTO basically limits the realistic ability of WTO Members to address the principal concerns flowing from the Chinese economic model,

Thus, the USTR 2021 report released today is not surprising in articulating working within WTO where possible but working outside of the WTO where needed.

Below is the Executive Summary of the Report (pages 2-4).

“In Part One of this report, we provide an assessment of China’s WTO membership, including the unique and very serious challenges that China’s state-led, non-market approach to the economy and trade continue to pose for the multilateral trading system. In Part Two, we review the effectiveness of the various strategies that have been pursued over the years to address the unique problems posed by China. In Part Three, we emphasize the critical need for new and more effective strategies – including taking actions outside the WTO where necessary – to address those problems. Finally, in Part Four, we catalogue the numerous problematic policies and practices that currently stem from China’s state-led, non-market approach to the economy and trade. (emphasis added)

PART ONE

“Part One explains that when China acceded to the WTO, it voluntarily agreed to embrace the WTO’s open, market-oriented approach and to embed it in China’s trading system and institutions. China also agreed to take on the obligations set forth in existing WTO rules, while also making numerous China-specific commitments. As we previously documented, and as remains true today, China’s record of compliance with these terms has been poor.

“After 20 years of WTO membership, China still embraces a state-led, non-market approach to the economy and trade, despite other 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. In fact, China’s embrace of a state-led, non-market approach to the economy and trade has increased rather than decreased over time, and the mercantilism that it generates has harmed and disadvantaged U.S. companies and workers, often severely.

“China also has a long record of violating, disregarding and evading WTO rules to achieve its industrial policy objectives. In this report, as in our prior reports, we identify and explain numerous unfair, non-market and distortive trade policies and practices used by China in pursuit of its industrial policy objectives. We also describe how China has sought to frustrate WTO oversight mechanisms, such as through its poor record of adhering to its WTO transparency obligations.

PART TWO

“As we explain below in Part Two, for nearly two decades following China’s accession to the WTO, 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 state-led, non-market approach to the economy and trade.

“For many years, the United States pursued a dual track approach in an effort to resolve the many concerns that have arisen in our trade relationship with China. One track involved using high-level bilateral dialogues, and the other track focused on enforcement at the WTO.

“The United States approached its bilateral dialogues with China in good faith and put a great deal of effort into them. These dialogues were intended to push China toward complying with and internalizing WTO rules and norms and making other market-oriented changes. However, they only achieved isolated, incremental progress. At times, the United States did secure broad commitments from China for fundamental shifts in the direction of Chinese policies and practices, but these commitments were unenforceable and China repeatedly failed to follow through on them. Over time, moreover, commitments from China became more difficult to secure.

“Meanwhile, at the WTO, the United States brought 27 cases against China, often in collaboration with like-minded WTO members. We secured victories in every case that was decided. Still, even when China changed the specific practices that we had challenged, it did not typically change the underlying policies, and meaningful reforms by China remained elusive.

“In 2017, the previous Administration launched an investigation into China’s acts, policies and practices relating to technology transfer, intellectual property and innovation under Section 301 of the Trade Act of 1974. The findings made in this investigation led to substantial U.S. tariffs on imports from China as well as corresponding retaliation by China. Against this backdrop of rising tensions, in January 2020, the two sides signed what is commonly referred to as the ‘Phase One Agreement.’ This Agreement included commitments from China to improve market access for the agriculture and financial services sectors, along with commitments relating to intellectual property and technology transfer and a commitment by China to increase its purchases of U.S. goods and services.

“Many of the commitments in the Phase One Agreement reflected changes that China had already been planning or pursuing for its own benefit or that otherwise served China’s interests, such as the changes involving intellectual property protection and the opening up of more financial services sectors. Other commitments to which China agreed reflected a calculation, as it saw them as appeasing U.S. priorities of the prior Administration, as evidenced by the attention paid to the agriculture sector in the Phase One Agreement and the novel commitments relating to China’s purchases of U.S. goods and services ostensibly as a means to reduce the bilateral trade deficit.

“Given these dynamics, and given China’s interest in a more stable relationship with the United States, China followed through in implementing some provisions of the Phase One Agreement. At the same time, China has not yet implemented some of the more significant commitments that it made in the Phase One Agreement, such as commitments in the area of agricultural biotechnology and the required risk assessment that China is to conduct relating to the use of ractopamine in cattle and swine. China has also fallen far short of implementing its commitments to purchase U.S. goods and services in 2020 and 2021.

“The reality is that this Agreement did not meaningfully address the more fundamental concerns that the United States has with China’s state-led, non-market policies and practices and their harmful impact on the U.S. economy and U.S. workers and businesses. China’s government continues to employ a wide array of interventionist industrial policies and supporting measures, which provide substantial government guidance, massive financial resources and favorable regulatory support to Chinese industries across the economy, often in pursuit of specific targets for capacity and production levels and market shares. In furtherance of its industrial policy objectives, China has also limited market access for imported goods and services and restricted the ability of foreign manufacturers and services suppliers to do business in China. It has also used various, often illicit, means to secure foreign intellectual property and technology to further its industrial policy objectives.

“The principal beneficiaries of these non-market policies and practices are China’s state-owned and state-invested enterprises and numerous nominally private domestic companies that are attempting to move up the economic value chain in industries across the economy. The benefits that Chinese industries receive largely come at the expense of China’s trading partners and their workers and businesses. As a result, markets all over the world are less efficient than they should be, and the playing field is heavily skewed against foreign businesses that seek to compete against Chinese enterprises, whether in China, in the United States or globally.

“The industrial policies that flow from China’s non-market economic system 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. At the same time, as is their design, 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 in these sectors on behalf of Chinese companies. Companies in economies disciplined by the market cannot effectively compete with both Chinese companies and the Chinese state.

PART THREE

“In Part Three, we explain that, in recent years, it became evident to the United States – and to an increasing number of U.S. trading partners − that new strategies were needed to deal with the many problems posed by China’s state-led, non-market approach to the economy and trade, including solutions independent of the WTO. We also emphasize that these strategies needed to be based on a realistic assessment of China’s economic and trade regime and need to be calibrated not only for the near-term but also for the longer term. Accordingly, as explained below, the United States is now pursuing a multi-faceted strategic approach that accounts for the current realities in the U.S.-China trade relationship and the many challenges that China poses for the United States and other trading partners, both now and likely in the future. (Emphasis added)

“The U.S. Trade Representative announced the initial steps of the United States’ strategic approach in October 2021. This approach includes several components, which we have begun to implement.

“First, the United States is continuing to pursue bilateral engagement with China and is seeking to find areas where some progress can be achieved. China is an important trading partner, and every avenue for obtaining real change in its economic and trade regime must be utilized. Currently, we are engaging China on the United States’ most fundamental concerns with China’s state-led, non-market approach to the economy and trade, which includes China’s industrial policies. At the same time, the United States is working to hold China accountable for its existing commitments, including under the Phase One Agreement. If China fully implements the Phase One Agreement, it will help establish a more solid foundation for bilateral engagement on more significant outstanding issues.

“Second, it is clear that domestic trade tools – including updated or new domestic trade tools reflecting today’s realities – will be necessary to secure a more level playing field for U.S. workers and businesses. The United States therefore is exploring how best to use and improve domestic trade tools to achieve that end.

“Finally, it is equally critical for the United States to work more intensely and broadly with allies and like-minded partners in order to build support for solutions to the many significant problems that China’s state-led, non-market approach to the economy and trade has created for the global trading system. This work is taking place in bilateral, regional and multilateral fora, including the WTO.

PART FOUR

“Part Four discusses specific problematic Chinese policies and practices in more detail. These policies and practices are grouped into sections on non-tariff measures, intellectual property rights, agriculture, services and transparency.”

In Part Three of the Report, there is a section on “Changing Global Perspectives” which outlines the U.S. understanding of where trading partners are moving in terms of concerns with the Chinese economic model. The section (pages 20-22) is copied below.

“Over the last few years, as changes have taken place in how the United States and U.S. stakeholders view the United States’ trade relationship with China, it has become apparent that the views of other countries have also been evolving toward the U.S. view. More and more trading partners appear to accept that China’s state-led, non-market approach to the economy and trade has been severely harming their workers and businesses. While each trading partner is impacted differently by China, there is also a growing consensus that this situation will not change unless new strategies are pursued.

“While the WTO remains a strong focus for many of the United States’ trading partners, there is a growing awareness that it may be necessary to pursue some solutions outside the WTO in order to avoid the severe harm that will likely continue to result from China’s state-led, non-market economic and trade regime. For example, some of the United States’ trading partners are now exploring possible new domestic trade tools to address the challenges posed by China’s state-led trade regime. These and other like-minded trading partners have also begun working with the United States ― sometimes confidentially ― in pursuit of new joint strategies to address China’s harmful non-market policies and practices, including China’s increasing use of economic coercion. At the same time, still other trading partners appear to be replicating certain of China’s unfair trade practices, or at least accepting them as a result of China’s tactics to coerce or entice countries to acquiesce to its practices. Consequently, addressing these practices in China could have the additional benefit of dissuading these countries from following China’s example. (emphasis added)

“Meanwhile, many of China’s trading partners are increasingly skeptical of China’s rhetoric. For example, China often touts its strong commitment to win-win outcomes in international trade matters, but its actions plainly belie its words. Through state-led industrial plans like Made in China 2025, which targets 10 strategic emerging sectors, China pursues a zero-sum approach. It first seeks to develop and dominate its domestic markets. Once China develops, acquires or steals new technologies and Chinese enterprises become capable of producing the same quality products in those industries as the foreign competition, the state suppresses the foreign competition domestically and then supports Chinese enterprises as they “go out” and seek dominant positions in global markets. Based on the world’s past experiences with industries like steel, aluminum, solar panels and fisheries, a new wave of severe and persistent non-market excess capacity can be expected in industries like those targeted by Made in China 2025, to the detriment of China’s trading partners.

“It has also not gone unnoticed among China’s trading partners ― particularly the democratic market economies ― that China’s leadership appears confident in its state-led, non-market approach to the economy and trade and feels no need to conform to global norms. China’s leadership demonstrates confidence in its ability to quiet dissenting voices, as if China’s continued rise is inevitable and cannot be held back. Indeed, it has become increasingly evident that China’s leadership is seeking to establish new global norms that better reflect and support China’s interests, providing an attractive alternative for other authoritarian regimes around the world.

“China has also regularly used its economic clout in a coercive way if it perceives that a foreign company or a foreign country has spoken or acted in a way that undermines China’s economic and trade interests. This economic coercion can mute international objections to China’s non-market policies and practices, even when China flouts the WTO’s rules-based international trading system. In recent years, China has increasingly expanded its use of economic coercion to take on foreign governments whose policies or practices are perceived to undermine not only China’s economic and trade interests but also China’s political interests. China’s coercive economic measures have taken a variety of forms, including, for example, import restrictions, export restrictions, restrictions on bilateral investment, regulatory actions, state-led and state-encouraged boycotts, and travel bans. Many countries have been subjected to this economic coercion. One prominent example currently involves Australia, where China has taken formal and informal measures restricting imports of Australian products like meat, barley, wine, coal, cotton, logs and lobster, apparently because of various legitimate actions taken by the Australian government, such as calling for an independent investigation of the origins of the coronavirus pandemic and enacting a law that prohibits political contributions from foreign sources.

“In sum, the reality confronting the United States and other market economies ― especially the democratic market economies ― is not simply that China has a different economic system from ours. China plainly does not hold the same core values that we hold, and its state-led, non-market approach to the economy and trade conflicts in significant and harmful ways with our market-oriented approaches, to the detriment of our workers and businesses.”

Observations

It has been clear for some time that the trading system has been unable to address many of the major distortions caused by the state-led, non-market economy of a major country like China. While WTO reform may address some issues, it is unlikely that WTO reform will be achieved for years. The 20 year effort to complete negotiations on a fisheries subsidy agreement (still not completed) demonstrates just how broken the WTO negotiating function is and how protracted efforts at reform will likely be.

Efforts at plurilateral agreements open to all WTO Members are addressing a number of important issues, though not with regard to major distortions caused by state-led, non-market economies.

Bilateral and plurilateral agreements can be useful for the participants. However, the success of such agreements depends on the willingness of participants to honor commitments undertaken or the effectiveness of enforcement provisions in the agreements. The bilateral Phase I Agreement between the U.S. and China is comparable to China’s accession to the WTO in that many commitments undertaken have not been implemented and to date have proven largely unenforceable.

The road ahead for democratic, market economies is unclear. But the problems with WTO compatibility of the Chinese economic model and the challenges in achieving meaningful WTO reform will likely lead to a much larger role for non-WTO solutions in the future. That will of necessity reduce the relevance of the WTO over time.