Three US-China Trade Disputes
Note prepared for the conference "The China Balance Sheet in 2007 and Beyond" Co-hosted by the Center for Strategic and International Studies and the Peterson Institute for International Economics
© Peterson Institute for International Economics
WTO Subsidies Case
Description. In February 2007, the USTR requested consultations with China (the first step of the WTO dispute settlement process) regarding nine Chinese measures that benefit both Chinese companies and foreign-invested enterprises (FIEs) operating in China's manufacturing sector.1 One measure has already been withdrawn by China, leaving eight at issue.2 The cited measures take the form of fiscal incentives, tariff exceptions, and preferential lending arrangements. The United States claims that these measures violate various WTO rules: the national treatment principle of the GATT, the Agreement on Subsidies and Countervailing Measures (ASCM), the Agreement on Trade-Related Investment Measures (TRIPS), and commitments undertaken by China in its WTO Accession Protocol. In terms of their trade impact, the measures can be divided in two broad categories:
- Prohibited export subsidies, namely financial incentives that are conditioned de jure or de facto on the export performance of specific firms or industries;
- Domestic subsidies that adversely affect US sales, either by disadvantaging US exports or by discriminating against US firms operating in China.
Under the WTO dispute settlement procedures, the United States and China have initiated consultations. If consultations do not lead to satisfactory results, the United States can request the establishment of a dispute settlement panel after 60 days from the request for consultations (the date was reached in the beginning of April 2007). So far, consultations are ongoing and a panel has not been established. In any event, it would take time for the parties to agree on the panelists.3 Once a panel is established, it should reach its determination within about six months. An appeal to the Appellate Body (AB) is all but certain, and the AB normally renders its decision within 60 days, but can take 90 days in a complex case. The WTO members then adopt the AB report within 30 days. If the measures in question are found to violate the WTO, and the losing party does not change its practices, an arbitration panel will be formed to recommend appropriate countermeasures. In a complex and contested case, the whole dispute settlement process may last 18 months to two years.
Instant Assessment. Prohibited export subsidies and national treatment violations that are plain from a reading of Chinese statutes and regulations (de jure measures) are relatively easy to prove. On the other hand, claims that require factual evidence that US exporters have lost sales, or that US firms operating in China incur discrimination, are much harder to establish. My guess is that the United States will prevail in the WTO on its de jure claims, but not on its de facto claims.
US Countervailing Duty Case against a Nonmarket Economy
Description. On March 30, 2007, the US Department of Commerce (DOC) announced its preliminary decision to apply the US countervailing duty (CVD) law to coated free sheet paper from China, a nonmarket economy (NME).4 This decision departs from a 24-year old policy (announced by the DOC in 1982 and upheld by the Court of Appeals for the Federal Circuit in the 1986 Georgetown Steel case) not to apply CVDs against imports from an NME.5 In its preliminary ruling, the US Court for International Trade, sitting in New York, held that the DOC can depart from its previous policy. The DOC is expected to make its final determination in summer 2007 (the deadline can be extended until mid-October). The application of CVDs also requires a material injury finding by the US International Trade Commission (USITC).
Given the pervasiveness of subsidies in the Chinese economy, the coated paper case is likely to open the door to many other preliminary CVD findings over the next few years. China is likely to challenge the DOC's final determination both in the US Court for International Trade and in the WTO. China will argue that it cannot be both a nonmarket economy for the purpose of antidumping determinations and a market economy for the purpose of countervailing duty determinations.
Instant Assessment. In its WTO Accession Protocol, China conceded that other WTO members can use the NME methodology until 2016, unless the Chinese "producers under investigation [can] clearly show that market economy conditions prevail in the industry…."
China can argue that, upon joining the WTO in 2001 and agreeing to the cited Protocol language, it legitimately expected that the United States would stick to the rationale of Georgetown Steel. In other words, China can argue that the United States implicitly agreed not to impose antidumping duties under the NME methodology and countervailing duties on the basis of Chinese financial incentives. I doubt this argument will carry much weight in the US Court for International Trade, nor do I think it will prevail in the WTO Appellate Body- unless China can unearth language that explicitly states such a bargain. Nevertheless, because the dualistic implications of the coated sheet paper case belong more to the realm of quantum mechanics than to pedestrian economics, the case opens the door for the United States to reconsider the application of its NME methodology to China well before 2016. In the context of a larger bargain over currency practices and other issues, the United States could declare China a market economy. Following that designation, the US antidumping and countervailing duty laws would be enforced against China just as they would be enforced against any other WTO member.
WTO Intellectual Property Rights Cases
Description. In April 2007, the USTR announced the filing of two WTO cases against China (consultations are the initial step; see the description of the Subsidies case for the WTO timeline).6 The first case involves Chinese restrictions on market access for publications and audio/video products. These restrictions are claimed to violate China's Accession Protocol to the WTO, and its national treatment obligation.
- The United States argues that China's continued reservation of the right to import publications and audio/video products to state trading enterprises is at odds with China's WTO Accession Protocol.
- The United States also claims that China restricts the right of foreign companies to distribute these products within China, through measures that favor state-owned enterprises, in violation of the national treatment principle under GATS.
The second case centers on alleged deficiencies in China's IPR regime. While the underlying complaint is weak enforcement of IPR, the US claims are expressed in terms of shortcomings in China's legal regime. The United States asserts that, in its details, the Chinese regime does not meet the obligations of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
- The United States argues that the quantitative threshold which must be met in order to initiate criminal prosecutions of IPR infringement allows large scale piracy and counterfeiting by street vendors.
- The United States argues that Chinese rules allow the disposal of infringing goods through normal market channels, to the detriment of the IPR holder.
- The United States claims that China denies copyright protection to imported works awaiting censorship review, and that these are often pirated during the waiting period.
- The United States claims that Chinese law in certain cases does not prosecute unauthorized reproduction of copyrighted works unless reproduction is accompanied by unauthorized distribution.
Instant Assessment. The United States appears to be on strong ground with respect to its market access claims. However, the deeper the United States gets into the "weeds" of Chinese enforcement rules, the further the WTO case will need to delve into the murky factual terrain of counterfeiting and piracy. The WTO Appellate Body will be challenged to establish standards for evaluating the efficacy of national laws that carry out obligations stated in the TRIPS Agreement. It seems unlikely that the AB will fault all the details of Chinese rules questioned by the United States; it seems equally unlikely that the AB will give China a complete pass.
Costantino Pischedda provided helpful research in preparing this note.
1. "United States Files WTO Case Against China Over Prohibited Subsidies." Press release of the USTR (February 2, 2007). China-Certain Measures Granting Refunds, Reductions, or Exceptions from Taxes and Other Payments (DS/358).
2. The withdrawn measure is the China Central Bank's program that granted discounted loans to firms meeting certain export requirements. See "Challenged by Trade Partners, China Ends Export Credit Subsidy," USINFO, Current Issues (March 12, 2007).
3. In the last resort, if the parties cannot agree, the WTO Director General will name the panelists.
4. "Commerce Applies Anti-Subsidy Law to China." US Department of Commerce Release (March, 30, 2007).
5. For a short discussion, see "Georgetown Steel Corp. v. United States. Appeal no. 85-2805". The American Journal of International Law, vol. 81 no. 1 (January 1987): 212-214.
6. United States Files WTO Case Against China Over Deficiencies in China's Intellectual Property Rights Laws and Market Access Barriers to Copyright-Based Industries." USTR News (April 9, 2007).