A U.S. trade team is in China this week to discuss the countries’ trade disputes and the U.S. threat of $150 billion in sanctions. Dispatching Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, U.S. Trade Representative Robert E. Lighthizer, White House trade adviser Peter Navarro and White House economic adviser Larry Kudlow is a high-powered diplomatic move — and a departure from the past 20 years of trade practice, which focused on the multilateral and legal adjudication of disputes at the World Trade Organization (WTO) in Geneva.
The fact that these talks are bilateral — and in Beijing — heralds a broader question of the WTO’s future as a meaningful constraint on countries’ trading practices, and a core institution of the international legal order.
The Trump administration has dealt three hard blows to the WTO thus far. As a major global economic power whose interests increasingly are not served by the WTO’s trade rules, China is paying close attention to how the U.S.-WTO relationship evolves.
Unilateral trade moves by the United States provide China with the political space to act similarly if it wishes — and refuse to abide by global trade rules or cast aside the existing multilateral trade dispute mechanisms. If the United States breaks the WTO, it will be China’s choice whether the certainty of existing rules makes the WTO worth saving or whether a new, more negotiable system will emerge.
[interstitial_link url=”https://www.washingtonpost.com/news/monkey-cage/wp/2018/03/02/donald-trump-says-trade-wars-are-good-and-easy-to-win-hes-flat-out-wrong/?utm_term=.b3a4b2ee5c31″]Donald Trump says trade wars are ‘good, and easy to win.’ He’s flat-out wrong[/interstitial_link]
How did we get here?
As a first move, the Trump administration refused to appoint or reappoint any member of the WTO Appellate Body, from any country. This means the WTO’s court system is running out of members and might shut down next year, which would affect any country that wants to use the WTO dispute settlement system.
A second threat came with the U.S. decision to breach a fundamental principle of WTO due process — that states agree to seek multilateral adjudication of disputes instead of taking unilateral action. The U.S. threat last month to impose sanctions on China regarding intellectual property (IP) protection was this type of unilateral move.
The U.S. threat is based on U.S. assessments that China violated IP rules — and effectively returns the world to a time before the WTO, when individual nations determined whether others were playing by the rules. The WTO is supposed to prevent unilateral trade attacks by sending all disputes to a multinational body.
And there was a third attack on the WTO system when the Trump administration claimed its tariffs on steel and aluminum are necessary for national security. The WTO allows national security exceptions to trade rules, but countries have been careful to use this exception sparingly because it could swallow all trade rules.
What does this mean for China?
China may see U.S. trade actions as an opening to reshape the WTO. Unlike other major developed economic powers (the United States, the European Union and Japan), the WTO’s rules often do not fit China’s model of economic growth.
For instance, while China has strengthened its IP law, it wants foreign companies to share their intellectual property so China can transition into high-value manufacturing. It also wants to rely on industrial subsidies to manage its economic development.
Finally, China may want to use its growing economic power to force open foreign markets. As Chad Bown explained in the Monkey Cage, most countries continue to label China a “nonmarket economy” — and use high tariffs to limit Chinese access to their markets.
[interstitial_link url=”https://www.washingtonpost.com/news/monkey-cage/wp/2016/12/12/trump-says-china-is-not-a-market-economy-heres-why-this-is-a-big-deal/?utm_term=.c36238aeb857″]Trump says China is not a market economy. That’s a big deal.[/interstitial_link]
Relying on U.S. precedent in recent months, China may seize the political option to disregard the WTO as well. It, too, can block Appellate Body appointments, engage in unilateral retaliation for alleged violations and block foreign market access by claiming its national security is at risk. The question is whether China will want to utilize the WTO as it now stands — or use this opportunity to reshape the global trading system.
Predictable trade rules may help Beijing
China may want to support the WTO in an effort to maintain predictable trade rules, which has advantages as China’s economic power grows. Many of the world’s large economies generally accept WTO rules, making this framework a stable basis for China’s economic power to expand. Beijing may also value the legitimacy of the rule-based WTO adjudication of trade disputes rather than relying on more uncertain political resolutions.
[interstitial_link url=”https://www.washingtonpost.com/news/monkey-cage/wp/2017/10/25/xi-jinping-just-made-it-clear-where-chinas-foreign-policy-is-headed/?utm_term=.289591403e7c”]Xi Jinping just made it clear where China’s foreign policy is headed[/interstitial_link]
Supporting the WTO may also allow China to gain the mantle of global trade leadership that President Xi Jinping seemed ready to take up in Davos this year. China’s Minister of Commerce Gao Feng recently called on the United States to abandon unilateralism and engage in the WTO’s multilateral process, as well as end the block on Appellate Body appointments.
Although China has successfully used WTO rules to expand its economy, the big question is whether China will continue to stick with WTO rules going forward. When it joined the WTO, China accepted WTO rules as the best means to integrate with the global economy, with the promise that it would be treated as a market economy by 2017. If this promise is not fulfilled, and the United States sanctions China unilaterally, then the value of supporting the WTO diminishes.
It’s not likely China would withdraw officially from the WTO, however. Without a U.S. commitment to abide by WTO rules, China’s interests may best be served by following the United States’ lead — and acting outside WTO rules for certain issues, such as market access and intellectual property.
How would this change the global trading system?
With two of the world’s major economic powers making unilateral decisions on trade matters, the WTO’s ability to moderate countries’ trade policy would be fundamentally undermined. At a minimum, the real threat of trade wars through unilateral retaliation and escalating counter-retaliation, which the WTO prevents, would return.
At the extreme, this may lead to a two-track international trade system in the future, in which major economies make their own rules and settle their own disputes while WTO laws apply only to those who do not have the economic power to demand otherwise.
Rachel Brewster is a professor at Duke Law School and co-director of Duke’s Center for International and Comparative Law.