TWN Info Service on WTO and Trade Issues (Apr19/16)
19 April 2019
Third World Network

US leaning towards China’s demand for “two-way” enforcement system

Published in SUNS #8889 dated 16 April 2019

Geneva, 15 Apr (D. Ravi Kanth) – As the United States bends towards China’s demand for a “two-way, fair and equal” enforcement system for the resolution of bilateral trade disputes, a new norm is sought to be established in the global trading system to make irrelevant the World Trade Organization’s dispute settlement mechanism.

[However, it is difficult to see how this would be achieved without changes to the DSU that needs consensus of all members, leading to amendments in the DSU. SUNS]

The US stance on the creation of a two-way enforcement system for resolving bilateral trade disputes arising from the proposed US-China trade agreement also suggests that cracks are emerging in Washington’s negotiating positions, especially between the US Trade Representative (USTR) Ambassador Robert Lighthizer on the one side, and the US Treasury Secretary Steven Mnuchin on the other over crucial elements in the US-China trade agreement.

An early indication of the emerging differences within the US establishment came into the open when Treasury Secretary Steven Mnuchin said on Saturday (13 April) that the bilateral deal will have “real enforcement on both sides, including detailed enforcement offices on both sides with significant resources,” according to a report in the Wall Street Journal on 13 April.

Until now, USTR Ambassador Robert Lighthizer, the chief negotiator for the US delegation in the bilateral talks, clung to his unilateral demand that only the US can retaliate in case China fails to adhere to the commitments agreed in the bilateral agreement, but not Beijing, if the US failed to comply with its side of the bargain.

The USTR had also suggested that the proposed bilateral dispute resolution system be stationed in Washington to oversee China’s implementation of all the commitments in the US-China agreement.

Such a system based on the USTR’s demands, said a Chinese trade official, would be a throwback to the days of the infamous unequal treaties during the 19th century when China was strangulated.

Senior Chinese trade official, Mr. Wang Shouwen, vice-minister of commerce, had reportedly insisted that any proposed enforcement mechanism had to be “two-way, fair, and equal.”

China had also pushed back against the US demands in electronic commerce, especially on issues of removing restrictions on data flows and storing data in its local servers.

Ahead of the crucial round of the negotiations, US Treasury Secretary Mnuchin told reporters (on the margins of the International Monetary Fund and World Bank meeting in Washington on Saturday) that “there are certain commitments the US is making in this agreement and there are certain commitments that China is making. And I would expect the enforcement works in both directions,” according to the WSJ report.

The US is also making certain bilateral commitments, Mnuchin said, “without providing details on those commitments,” according to the WSJ report.

“If such an arrangement were agreed and reciprocal, it would expose US companies to adverse actions by China, which the US would have committed not to challenge in the WTO,” according to a news report in the Financial Times on 13 April.

Quoting Daniel Price, managing director of Rock Creek Global Advisors, a Washington-based consultancy, and a former senior economics official in the George W Bush administration, the FT report suggested that “the right unilaterally to retaliate for non-compliance looks a lot different if it’s reciprocal. I can’t imagine the US business community would be enthusiastic.”

For the past several months, according to various news reports, there is a running tension between the US Treasury Secretary and the USTR because of their priorities.

The US Treasury Secretary wants to safeguard the interests of the Wall Street banks and financial services suppliers in which the Chinese purchase of American treasury bills plays a major role.

But the USTR, known as an established China hawk, seems determined to force stringent conditions on China, including unilateral rights to slap tariffs as and when China is found to be breaching its commitments.

“If the US Trade Representative pushes the Chinese too far, the talks could collapse, which would deal a big blow to Mr Trump’s top political priority and the heart of his trade agenda,” according to a news report in the Financial Times on 15 April.

“If Mr Lighthizer settles too easily, Mr Trump can expect a domestic backlash for having struck a weak agreement, which would also create a problem for him heading into the 2020 re-election battle,” the FT report suggested.

The two sides still remain apart on the US demand for structural changes in the Chinese economy, including regulatory changes, as well as “a scheme to enforce the agreement and the fate of existing tariffs.”

The US also wants far-reaching changes in the Chinese regulations in electronic commerce with the removal of prohibitions on data flows and requiring storing the data in the local servers and cloud-computing, areas in which the US companies – Google, Amazon, and Microsoft – among others dominate the global market.

“The biggest risk he [Ambassador Lighthizer] faces in the China negotiations is not necessarily from the other side of the table but from his side of the table, from being undermined at home,” the FT report suggested, quoting an anonymous former senior US trade official.

Against this backdrop, Mnuchin’s announcement “that a deal had “pretty much” been reached on enforcement with China, and the refusal of Mr Lighthizer’s office to confirm the breakthrough, was seen as a sign of split between the two,” the FT report said.

Meanwhile, in a separate development, China has raised at the World Trade Organisation the discriminatory market access prohibition imposed on its telecoms giant Huawei that supplies the 5G mobile internet network.

During a meeting of the WTO’s Council for Trade in Goods (CTG) on Friday, China expressed sharp concern over Australia’s “prohibition on the Chinese equipment from the Australian 5G rollout.”

Despite repeated pleas to address the underlying transparency concerns in its international dealings, Australia has “not provided any clear and sufficient evidence in fact or in law for the exclusion of the Chinese equipment from Australia’s 5G rollout,” China maintained at the CTG meeting.

Further, the Australian government has failed to indicate whether it has excluded 5G equipment of vendors from other WTO members, and “on what conditions or by what standards did Australia base its distinction between 5G equipment from vendors of China and like equipment from vendors of other Members?”, China asked.

Australia’s prohibitions on the Chinese vendors are a violation of various provisions of the WTO agreement, especially inconsistent “with the MFN principle in Article 1 of the GATT, and does not comply with the provisions regarding the elimination of quantitative restrictions set out in Article 11 of the GATT,” China said.