TWN Info Service on WTO and Trade Issues (Aug18/01)
1 August 2018
Third World Network

China asks US to set its fiscal house in order, instead of blaming others
Published in SUNS #8732 dated 30 July 2018

Geneva, 27 Jul (D. Ravi Kanth) - China stood its ground against the United States at the WTO on Thursday (26 July) by telling Washington to set its own fiscal house in order by generating domestic savings to contain trade deficits, instead of blaming other countries.

China's trade envoy Ambassador Zhang Xiangchen, in responding to US criticism of Chinese policies, told the US: "If the US does not increase its savings rate, it's unlikely that it can solve its problems of trade deficit."

"We all know at the end of the day, all structural issues are domestic issues," Amb. Xiangchen told the US trade envoy Ambassador Dennis Shea.

The Chinese envoy was responding robustly to the tirade launched by the US trade envoy at the General Council meeting on "China's Trade-Disruptive Economic Model."

The Chinese trade envoy said the US and other developed countries had invented and implemented "industrial policies and subsidies" since 1790.

"Before criticizing others, we should think twice if we have done similar things in the past... Like developed countries had done in the past, today's developing countries also need time to enhance their protection of intellectual property rights, or develop their own industries through strategic planning and policies," Ambassador Xiangchen said.

In an eight-page list of alleged violations committed by China since joining the WTO in 2002, the US trade envoy charged China for violating the Marrakesh Declaration of 1994 by refusing to implement "open, market-oriented policies."

Ambassador Shea had listed "the fundamental aspects of China's disruptive economic model," the costs that China "extracts", and "the benefits that China receives."

The US envoy elaborated on the "non-market oriented conditions set by the [Chinese] government and the [Communist] party," "non-market allocation of resources" by China's administration, including setting industrial policies , and "costs to WTO members [due to] China's economic model" such as non-reciprocal and protected market, excess capacity, and forced technology transfer among others.

Ambassador Shea said that the Chinese Communist Party "have for decades exercised controls over SOEs [State-owned Enterprises] through, inter alia, (1) the control and appointment of key executives through the CCP [Chinese Communist Party] Organization Department, and (2) receipt of preferential access to important funds (e.g., land and capital) and other competitive advantages unavailable to non-state firms."

The US envoy accused China of adopting industrial policies for achieving "sector-specific economic objectives, particularly for those sectors deemed strategic and fundamental."

The costs borne by other WTO members because of China's economic model include "non-reciprocal and protected market," "excess capacity", and "forced technology transfer," the US envoy said.

The benefits seized by China, particularly between 2005 and 2016, the US envoy argued, include real GDP growth rates of 9.5 percent coupled with sudden transformation "from the fifth-largest to second largest economy" in the world.

"For China," said Ambassador Shea, "economic reform means perfecting the government's and the Party's management of the economy, and strengthening the state sector, particularly state-owned enterprises."

"As long as China remains on this path, the implications for the organization are decidedly negative," the US envoy said.

In measured but sharp interventions with historical details and anecdotes, the Chinese trade envoy said, "criticism should be based on facts, should refrain from putting labels on others, should use correct facts and correctly use facts, (and) there should be clear logic in reaching conclusions through analyzing evidence."

Ambassador Xiangchen forcefully reminded his American counterpart that the view that "China would change and move into a different path upon its WTO accession" is "wishful thinking" as "there is more than one model of the market economy in this world."

China, according to Ambassador Xiangchen, "has been vigorously exploring a road of market-economy" for China's own national situation and circumstances.

"We have made remarkable progress in this endeavour," the Chinese envoy asserted.

Ambassador Xiangchen reminded his American counterpart that there is no definition of "market economy" throughout the WTO rule book.

Besides, there is also no one-size-fits-all "market economy" standard in the world, the Chinese envoy told his American counterpart.

Ambassador Xiangchen said if there is any relevance of the term "non-market economy", then it applies to the US because it disregards the WTO rules by using "notorious surrogate country" methodology in anti-dumping investigations despite the commitments made 17 years ago.

He urged the US and other industrialized countries to honour their commitments - "pacta sunt servanda"- by treating China on the same standards as other WTO members in regard to anti-dumping investigations.

The Chinese envoy said the US had selectively quoted from the Marrakesh Declaration of 1994, suggesting that it enjoined on members to adopt "open, market-oriented policies" based upon "the commitments set out in the Uruguay Round Agreements and Decisions."

Ambassador Xiangchen said "each member has its own domestic policy objectives, and the results of the multilateral negotiations are a balance between Member's domestic policies and the process of global trade liberalization."

"Such balance," according to the Chinese envoy, "is reflected in the trade rules, the tariff schedules and services schedules of Members, which contain descriptions of Members' legitimate regulatory policies and measures."

"To put it simply, the WTO Agreement is a set of contracts achieved through negotiations," the Chinese envoy said.

The US is adopting flawed arguments and logic on what constitutes "public bodies" in the context of WTO so as to force subsidy and countervailing disciplines on members.

"In the US-China Anti-Dumping and Countervailing Duties case, the Appellate Body had stated that the mere ownership or control over an entity by a government ... is not sufficient to establish that the entity is a public body," the Chinese envoy pointed out, arguing that "our American colleagues have been quite unhappy with losing this case, but the ruling of the Appellate Body cannot be challenged."

The Chinese envoy drew attention to the industrial and subsidy policies followed by the US after US president Alexander Hamilton drew up the framework that the US must follow since 1790.

[Prior to the Open Door policy, the US had built its industry starting with the Hamilton plan - "Report on the Subject of Manufactures"- in 1791. "The core of his [Hamilton's] idea [is] that a backward country like the US should protect its "industries in their infancy" from foreign competition and nurture them to the point where they could stand on their own feet," said the Cambridge economist Ha-Joon Chang in his book "Bad Samaritans - The Guilty Secrets of Rich Nations and the Threat to Global Prosperity."

[Even Adam Smith, the Scottish father of free trade, "had solemnly advised the Americans not to develop manufacturing," says Chang. "He [Adam Smith] argue d that any attempt to "stop the importation of European manufactures would obstruct instead of promoting the process of their country [Britain] towards real wealth and greatness," writes Chang.

[Indeed, Britain and the US, the two most successful economies, had been protectionist for long periods of time with high tariff walls, according to Chang. "While Britain and the US were protectionist, they were economically more successful than other countries because they were less protectionist than others," Chang has argued.]

Ambassador Xiangchen suggested that the existential challenges being faced by the WTO are arising from disruptive trade measures such as US Section 232 decisions "to restrict the import of steel and aluminum using national security as a pretext," and Section 301 measures that unilaterally impose tariffs on imports.

Worse still, the US is still blocking the reappointment of the Appellate Body members, thereby paralysing the dispute settlement mechanism, the Chinese envoy argued.

"At the present moment, the paramount task for the WTO is to curb the spread of unilateralism and protections, to bring the dispute settlement (mechanism) to its full function and to stop the trade war," the Chinese envoy concluded.

Japan, the European Union, and Australia among others shared several concerns raised by the US against China's industrial and trade policies.

But developing countries said China is justified to implement trade policies in a manner that brought economic development.

On Thursday, the US Trade Representative Ambassador Robert Lighthizer told the Senate Appropriations sub-committee on commerce, justice, science and related issues that it "could take years to resolve trade problems with China, suggesting the escalating tariffs battle could continue indefinitely," according to the Washington Trade Daily of 27 July.

Questioned by the American lawmakers on the US decision to impose global tariffs on steel and aluminum rather than focusing on China, Ambassador Lighthizer argued "that global tariffs are the only way to ensure that Chinese steel does not come into the US market through other countries," according to the WTD.

In short, the US seems poised to intensify the trade war with China by joining forces with the EU and Japan.

It is a defining moment for China whether it can build a solid alliance with all other developing countries or face the wrath of the US, the EU, and Japan which want to fundamentally change the special and differential treatment architecture for developing countries and impose plurilateral trade initiatives at the WTO.