In the latest salvo against free trade, Donald Trump argued that the World Trade Organization is a disaster and fails to protect US interests—and said he might pull the country out of the agreement altogether.
And yet a recent WTO trade dispute involving China adds an interesting twist. The US case, filed in July, alleges that China applies an export tax to mineral products, in violation of international law.
In this case, the United States wants to make sure China exports more—not less—of these materials because US jobs depend on these imports. This clearly runs counter to the anti-globalization rhetoric we’ve seen this US presidential election season.
Law and order: The allegations
The United States claims China imposes illegal export taxes of 5 to 20 percent on nine raw materials—antimony, cobalt, copper, graphite, lead, magnesia, talc, tantalum, and tin. US manufacturing companies rely on these products to make high-tech goods such as semiconductors, medical devices, and aerospace products, as well as the batteries used in electric and hybrid vehicles.
The United States has already fought and won a similar case involving a different set of raw materials in 2009 and a rare earth metals case in 2012. Having established the core legal arguments twice against China already, US officials expect to win this case as well. While it may take two or three years for the judicial process to resolve the dispute, the main distinction from the prior cases is simply the nine products.
In mid-July, the European Union also filed a similar case, adding indium and chromium to the list of items affected by China’s export taxes. The European Union had also worked alongside the United States in the two earlier export tax disputes with China.
What is an export tax, anyway?
Many countries are relatively unfamiliar with export taxes. In the United States, for example, these taxes are unconstitutional—the US government cannot tax US exports.
So here’s the quirky thing: When the Chinese government imposes an export tax, this affects only sales to foreign-located buyers. So Chinese buyers catch a break because they are not obligated to pay the export tax, but foreign purchasers effectively have to pay more for those items. By making this product more expensive for foreign buyers, an export tax would tend to reduce China’s exports of these raw materials to markets like the United States.
With all the talk in recent years on how cheap imports from China hurt the US economy, that sounds like good news. Doesn’t fewer imports from China mean lower numbers of US job losses, and less adjustment by local US communities to the forces of globalization?
But the US really needs these particular Chinese exports
In this case, no. Here the downstream US manufacturing industry—and the US jobs—desperately needs these imports, because the United States produces very little of these raw materials.
According to the US Geological Survey (USGS), the United States stopped mining tin in 1989 and tantalum in 1959. In 2015, the United States also did not mine any graphite or antimony. For the other raw materials, US mining production is insufficient to meet the US consumer manufacturing industry needs.
And, no, don’t blame China for this situation—according to the USGS, the United States not only failed to mine many of these materials in 2015, but there are no known US reserves for graphite and tantalum in particular.
China’s policy of limiting exports would backfire if foreign companies had access to other international producers, or substitute products were available. For copper, for example, Chile would probably be an alternative source and reliable trading partner.
Yet, for many of these materials, China may be the only game in town. Again, according to USGS 2015 figures, China mined 76 percent of the world’s antimony, 66 percent of graphite, 49 percent of lead, and 70 percent of magnesia.
These imports from China make US manufacturing firms more competitive—and help keep US jobs
The export tax drives up the price that US manufacturing firms pay to buy the inputs needed to make their high-tech products. So US-headquartered multinational companies such as Qualcomm and DJO Global—firms that Vice President Biden mentioned in his July 13 speech announcing the dispute at the Port of San Diego—see higher production costs.
But that’s not all. Because this quirky tax affects only exports—and does not apply to domestic sales of raw materials to companies located in China—not only do the US company’s costs increase, but a rival, China-based company’s costs of purchasing one of these raw materials actually falls.
So the export tax hurts the US company along two dimensions. First, its own costs are higher. Second, the costs to a competitor located in China are lower. A US firm is now less competitive with a China-based producer of semiconductors or medical devices anywhere that the two firms might compete head-to-head—in China, in the United States, or in any third market.
The inability of Qualcomm and DJO Global to procure low-cost tin and cobalt for their US plants—through imports—could push them to establish manufacturing facilities in China. A China-based subsidiary of a US firm should be able to buy these raw materials without having to pay the Chinese export tax. But making semiconductors or medical devices in China, of course, would tend to shift US manufacturing jobs to China.
Countries use trade policy to exert market power when they can
The Organization of the Petroleum Exporting Countries in the 1970s is one example of countries exerting their influence over markets. In that case, it was a coordinated limit on oil extraction that drove up petroleum prices.
More recently, there has been a lot of economic research on how governments more generally apply policy to exert their market power—i.e., intervening to change prices away from what they would otherwise be.
The empirical support for the importance of market power in trade policy first came to light in a study by Nuno Limão and coauthors that examined the import tariffs that China, as well as a group of other countries, imposed before entry into the WTO agreement.
But joining the WTO can cut the link between market power and policy behavior. Kyle Bagwell and Robert Staiger found that for China and the handful of new WTO members that joined after 1995, acceding to the trade agreement can sever the relationship between a country’s market power and some of its trade policies. China’s 2001 membership, for example, eliminated the link between its market power and its import tariffs—the Chinese government could no longer use import taxes to drive down the prices that US and other companies received for selling their exports to that market.
For the United States and countries that joined the WTO earlier, there is also evidence that the relationship between their market power and applied policies still exists.
Rod Ludema and Anna Maria Mayda recently found that the US and other WTO countries’ own import tariffs remain linked to their market power in sectors such as agriculture, footwear, and textiles and apparel. US tariffs remain high in these sectors because the foreign exporters of these goods are globally diffuse. These exporting countries are unable to organize effectively to overcome what political scientists call the collective action problem.
WTO disputes are sometimes needed as a reminder
In the case of the nine minerals, any market power influences of China’s export tax policy were supposed to have been negotiated away when China agreed, as part of the terms of its 2001 accession, to no longer impose export taxes. The WTO has already ruled against China in those two earlier disputes, and in both instances China subsequently agreed to remove the export restrictions.
Sometimes it takes a formal WTO dispute to remind countries of their international obligations. It is not just China; the United States has gotten a recap of its WTO commitments on more than a hundred occasions.
This latest dispute by no means suggests a US-China trade war is underway. Overall, the WTO has handled more than 500 formal disputes since 1995, but fewer than 10 of those resulted in any form of retaliation. None of those cases involved China. Ultimately, this case shows simply how the United States is exerting its rights under international law to help maintain US manufacturing jobs.
Despite what US presidential candidates seem to be saying, this US action is not only a vote in favor of globalization, but it also shows the need for continued imports from and engagement with China. The case also highlights the continued importance of the WTO and its dispute settlement arm in particular.