Section 421: China's WTO noncompliance and the protection of U.S. corporate interests.

• Author: Bouts, Michael W.

1. INTRODUCTION II. BACKGROUND A. The WTO B. Sino--U.S. Trade Relations Overview 1. China's WTO Accession 2. United States--China Relations Act of 2000 C. Possible Remedies for U.S. Companies 1. The General Safeguard Provision: Section 201 a. Legal Standard b. Procedure 2. China-Specific Safeguard Provision: Sectios 421 a. Legal Standard for Imposing Safeguards i. Differences Between Sections 421 and 201 in Legal Standards b. Procedure for Imposing Section 421 Safeguards i. Procedural Differences Between Sections 201 and 421 D. The Comparative Success Rates of Sections 421 and 201 Investigations E. The Tires Decision III. ANALYSIS A. Why China's Compliance with WTO Obligations Is Important B. China Has Failed to Meet Its WTO Obligations 1. Intellectual Property Rights 2. Services 3. Industrial Policy C. China's Noncompliance and the Future of Section 421 IV. RECOMMENDATION A. Create a Monitoring System . B. Companies Should Petition the ITC Now C. Investigate the Section 421 Negotiation V. CONCLUSION I. INTRODUCTION

   The United States continues to be a major global force, but the United States' relative power is in decline as the developing world continues its economic and political growth. The United States must increasingly collaborate with emerging powers and rely on the authority of international organizations such as the World Trade organization (WTO). china, particularly, is one of the emerging powers the united States frequently must coordinate with and consult. China's economic and political rise is the major geopolitical issue for the 21st century. china is already a powerful force in the global economy, and trade with what will soon be the world's largest economy is essential for sustained U.S. economic growth.

   China's membership in the WTO creates vast opportunities, but also vast potential costs for the United States. U.S. companies will have access to a massive market of goods and services. Yet, china will try to shape the WTO to its own advantage at the expense of other WTO members, including the United States. (1) The WTO regulates international trade law and promotes free trade worldwide. The WTO creates "a more prosperous, peaceful and accountable world." (2) China is failing to implement WTO obligations on schedule, and its noncompliance poses a threat to world trade and global prosperity if China continues to experience no significant negative consequences for its WTO noncompliance.

   One way the United States can combat China's WTO noncompliance is through section 421 of the 1974 Trade Act. In 2001, the United States enacted section 421 to protect U.S. companies from Chinese exports as long as China is not in compliance with WTO obligations. (3) In 2009, President Obama became the first President to provide import relief under section 421. (4) On September 5, 2011, the WTO Appellate Body decided in favor of the United States on all counts in a dispute over U.S. measures to stop a surge in Chinese tires. (5) WTO Appellate Body's Tires decision unequivocally validated section 421 as a legal, effective tool in U.S. trade policy with China. Section 421 expires, however, on December 11, 2013, leaving the United States without a powerful, China-specific trade remedy. (6)

   President Obama emphasized the importance of section 421 in his 2012 State of the Union Address, saying that "[o]ver a thousand Americans are working today because we stopped a surge in Chinese tires. But we need to do more." (7) President Obama also vowed to expand U.S. capabilities to combat unfair trade by creating a Trade Enforcement Unit and various other measures. (8)

   This Note explores both the implications of the Tires decision and how the Tires decision fits into the United States' reinvigorated effort to protect U.S. companies and consumers from unfair trade practices. Part II of this Note examines U.S. trade law and gives a targeted history of Sino--U.S. trade relations. Part III details China's WTO compliance and its relationship with section 421. Part IV recommends that the President work with the WTO to create a monitoring system, that U.S. companies seek import relief from Chinese imports from the President, and that the President investigate the section 421 negotiations for error.

2. BACKGROUND

   The background establishes the essential facts surrounding the Tires decision and its impact on U.S. trade policy. First, this Part describes the WTO and its role in global trade. Second, this Part gives a history of Sino--U.S. trade relations. Third, this Part overviews U.S. trade remedies and highlights section 421's unique role in U.S. trade law.

   1. The WTO

      Since 1995, the WTO has acted as the permanent governing body for world trade. (9) The WTO is the sole international organization dedicated to global trade rules. (10) Its goal is to "improve the welfare of the peoples of the member countries." (11) The WTO works to achieve its goal through trade agreements, which create the legal framework of international commerce among member countries--a group that includes a sizeable majority of the world's trading nations. (12) The WTO encourages equal treatment of all countries, allows countries to resolve disputes legally, aids economic development, and promotes domestic reform. (13) The impact of the WTO and the rule-based trading system on member countries' economies is undoubtedly positive. (14)

   2. Sino--U.S. Trade Relations Overview

      A brief overview of the history of the frequently tense trade relationship between the United States and China can best place the Tires decision in context. (15) The Trade Act of 1974 (Trade Act) provides a convenient starting point because it is still a major piece of legislation that governs trade relations between China and the United States. (16) When the United States enacted the Trade Act in 1974, communist countries did not enjoy normal trade relations with the United States. (17) The Jackson--Vanik Amendment to the Trade Act presumed that the United States did not have normal trade relations with any country that placed restrictions on its citizens' ability to emigrate, effectively targeting communist countries. (18) The President could, however, grant any country a year-long waiver and establish normal trade relations through Title IV of the Trade Act. (19)

      The United States established diplomatic relations with China in January 1979, and the two countries signed a bilateral trade agreement in July 1979 (1979 Agreement). (20) The President used Title IV to create normal trade relations with China every year after the 1979 Agreement. (21) While the United States granted China a waiver every year, China felt the United States held it hostage by asking for various concessions in return for the waiver. (22)

      1. China's WTO Accession

         The next major phase in Sino--U.S. trade relations was China's WTO accession process, which began in 1986. (23) The accession process was contentious and drawn-out, but China was determined to join the WTO because it had much to gain. (24) Though the Communist Party only partially embraced market reforms, the technocrats at the helm of Chinese policy saw WTO membership as "golden handcuffs." (25) China was willing to constrain its own future policy choices in order to gain the wide array of political and economic benefits that the WTO's market-oriented reforms would bring. (26) WTO membership would symbolize China's growing power, enable China to influence WTO rule development, give China access to the WTO dispute resolution process, and create permanent normal trade relations (PNTR) with the United States. (27) Not only would WTO membership have great economic benefits for China, it would be a "historic breakthrough in China's modernization drive." (28) In return, China's membership in the WTO would increase the WTO's legitimacy as a truly global organization. (29)

         China's accession document illustrates the difficulty of China's accession. (30) Generally, acceding countries are in full compliance with WTO obligations by the time they join. (31) Accession documents note exceptions to WTO compliance and are usually short. (32) The abnormally long duration of China's accession process and the complexity of its accession document "attest to the wide array of practices within China that remain non-WTO compliant at the time of accession as well as the concerns of existing WTO members on how well China's economic system would mesh in fact with underlying WTO obligations." (33) China's accession negotiations took 15 years, and its accession document is 103 pages long. (34) In contrast, Taiwan has the second-longest accession document at seven pages. (35) The accession documents of all other WTO members, as of 2002, were three pages. (36)

         The question of whether China would accede as a developed or developing country was a roadblock to China's accession. (37) The WTO provides special benefits to developing countries that it does not give to developed countries. (38) Developing countries have more time to implement obligations, they have fewer WTO obligations to meet, and they receive technical assistance from developed countries. (39) Moreover, developing countries have economic advantages in the WTO. (40) Developing countries may impose safeguards for two years, but developed countries cannot do the same without meeting strict requirements. (41) Essentially, the WTO allows developing countries to erect certain tariffs and safeguards to protect domestic industry that would be illegal for developed countries to erect. (42) The United States argued that the WTO should classify China as a developed nation, like Japan and the United States, because of China's strong economy. (43) China argued that it was still a developing country. (44) After protracted negotiations, the WTO ultimately classified China as a developing country. (45)

         The WTO accession negotiations also focused on Chinese laws about trade flow, tariff levels, intellectual property rights, restrictions...