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August 8, 2012

Why U.S. WTO Wins Against China Derives Few Economic Gains

By Stan Abrams 

One reads complaints about China trade and the WTO system every day in the U.S. These statements usually concern rule violations by China, limitations of the WTO, and the inability of the U.S. to enforce WTO law.
Howard Schneider, who covers international economics for the Washington Post, went even further in an article yesterday, saying that even though the U.S. has won a lot of cases recently, the WTO system still doesn’t work. The article’s title, “At WTO, a growing U.S. record of wins against China, but a less than certain benefit,” sums up Schneider’s thesis. The U.S. has been chalking up quite a few wins against China these days at the WTO, but the gains are difficult to ascertain.

Before we get to specifics, my response is to question those expectations. Who said that WTO wins would directly translate to specific gains for U.S. companies? That may be true, but not necessarily. If that is what industry and government believe the system promises, then I’m not surprised at all the recent grousing.
Schneider uses plenty of examples, some of which are inappropriate or are based, possibly, on limited knowledge of the underlying trade disputes. Let’s have a look at a few:
U.S. challenges, for example, have led to the repeal of Chinese import tariffs on American-made auto parts. But by the time the United States prevailed, China was well on its way — with the help of the protective tariffs — to developing its own industry for manufacturing engines, transmissions and other components, say U.S. auto industry officials. The repeal did little to stem the long-term movement of auto-parts work from America to China.
Typical case, and a good example of a trade dispute win that doesn’t translate to a boost for the domestic industry. Does this mean that the WTO system is not working?

It is true that the system takes time to resolve disputes, sometimes as much as several years, and by that time the protection afforded by tariffs or trade barriers can seriously distort a market. But Schneider seems to suggest that this situation favors China over the U.S., failing to realize that although the system may be flawed, anyone can take advantage of the time lag, such as the U.S. did in the mid-00s under George Bush with respect to protection for the steel industry.

The criticism is accurate, but let’s not pretend that China is the only one playing this game.
Schneider also talks about the A/V products case, which was only recently resolved:
Another WTO case challenging Chinese restrictions on U.S. film exports led to a partial opening of China’s market. But China was able to maintain strict limits on how many major movie releases can be shown there each year, and studio box-office receipts are capped far below levels that prevail in the United States and other major markets.
This comment is illuminating. Like many journalists who covered the A/V product case, Schneider apparently believes that the dispute was about China’s film quota. Not true. The dispute only involved the ability of foreign companies to engage in import and distribution of certain audio-visual products. The import film quota and box office profit sharing schemes are both legal under WTO law and were never challenged by the U.S.

The problem here is expectations. For people who thought that the A/V products case was about film quotas and profit sharing, I can certainly understand why they would disappointed by the eventual deal struck between the U.S. and China, which did involve adjustments in both of those areas. However, those expectations are based on an incorrect understanding of the actual dispute.
Here’s another one:
A WTO case brought in 2007 against China’s lax intellectual property laws was won by the United States two years later. But U.S. Undersecretary of the Treasury for International Affairs Lael Brainard said recently that theft of U.S. intellectual property in China remains “rampant.”
This is either completely misleading or based on an incorrect understanding of that dispute.
The problem is that the 2007 case was not about China’s overall IPR protection system, but rather several technical areas that the U.S. argued were not in conformity with WTO law, including copyright content review, disposal of counterfeit goods, and criminal penalties. It was never meant as a panacea for China’s IPR enforcement problems, and I doubt that anyone at the US Trade Representative’s Office ever sold it as such.
In addition to these mistaken interpretations of past cases, I also believe that Schneider’s general expectations about the WTO may be flawed as well. This comment seems extremely naive:
The WTO offers a neutral forum where a country can call out another for cheating. This was supposed to help keep nations honest when they trade with one another, fostering freer and fairer commerce and fueling economic growth all around.
Really? Well, the WTO certainly is a forum where countries can bring disputes over “cheating.” Schneider’s own list illustrates that point quite well. But to say that having such a system will ensure that countries remain “honest” with each other seems to me rather naive. Since when has such a system succeeded? Nations are self-interested entities that will game whatever system they can, whether it’s the United Nations, the IMF or the WTO. Does Schneider believe that the U.S. never cheats? (Whether China cheats more often is a related, though separate, issue.)

Or perhaps we can look at things in a different way. There are plenty of protectionist measures that countries could implement, and yet most nations generally do play by the rules. Even China has lived up to the vast majority of the promises it made when it joined the WTO. We don’t know whether this is the result of the dispute resolution system keeping China honest or some other motivation, but the result is undeniable, and I think Schneider paints a rather exaggerated portrait of the state of international trade.

The WTO is a consensus-driven, multilateral body whose aim is to reduce tariffs and trade barriers. It has succeeded in doing so, by and large, although many problems persist. It was never designed to include a strong dispute resolution component, although that aspect of the organization has, in my opinion, had an overall positive impact on the behavior of Member States.

However, the WTO was not created to help individual industries or companies, and it was not about fixing bilateral trade imbalances. To look at U.S.-China trade, tick off the wins and losses, and wonder where the economic gains are, makes absolutely no sense. If expectations are based on this kind of thinking, disappointment is sure to follow.

About The Author - Stan Abrams is a Beijing-based IP/IT lawyer and law professor with an M.A. from Johns Hopkins in International Relations, a J.D. from Boston College Law School, a B.A. from Pomona College, and writes at China Hearsay.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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