United States-China trade war: signs of protectionism in a globalized economy?

• Author: Loridas, Kara

1. INTRODUCTION

   China and the United States have waged an ongoing legal battle over trade policies since 2006, using the World Trade Organization (WTO) dispute settlement system as a forum. (1) Despite negotiation talks during the Doha Development Round of the WTO and continuous WTO litigation, there are signs that the relationship continues to deteriorate. (2) As recently as September 2009, China filed a complaint with the WTO in response to the United States' announcement of plans to increase tariffs on tires from China, and in September 2010, a U.S. Congress committee approved a bill imposing duties on China. (3) The future of the US-China trade relationship is extremely important to the economies of both countries because China is the second largest trading partner of the United States. (4)

   This Note will examine the conformity of United States-China trade policies with the WTO agreement and the possibility of a resolution to the current conflicts. (5) Part II of this Note will provide a history of the WTO agreement and the failure of the most recent round of WTO multilateral trade negotiations, the Doha Development Round. (6) Part III of this Note will explain the recent trade disputes between the United States and China. (7) In Part IV, this Note will discuss the ways in which each country's trade policies conform with and violate the WTO rules. (8) Part V will argue that the best hope for a cooperative United States-China trade relationship is a resumption of multilateral negotiations with the goal of completing the Doha Development Agenda. (9)

2. HISTORY: TRADE LAW

   1. World Trade Organization

      1. Purpose and Functions of the WTO

         Established on January 1, 1995, the WTO replaced the General Agreement on Tariffs and Trade (GATT) as the international trading system. (10) The WTO is a negotiating forum whose overall mission is to promote free trade globally by way of multilateral negotiations among the 153 member countries. (11) Member countries must conform their trade laws to the terms of the sixteen different agreements comprising the WTO rules. (12) If one Member country believes that another Member's law violates the WTO rules, it can file a complaint with the WTO's dispute settlement system. (13) Consistent with its emphasis on negotiating conflicts, the dispute settlement system encourages private negotiations between the complainant and respondent prior to establishing a formal panel to litigate the dispute. (14) To create a stable system of free trade, the WTO seeks to achieve multilateral agreements that reduce trade barriers, encourage trade development, and provide predictable rules. (15)

      2. WTO Rules

         To achieve its goals of free trade and economic development, the WTO focuses on limiting trade barriers and eliminating discrimination in international trade. (16) The goal is to level the playing field in the international trading system for all WTO members. (17) In order to eliminate discrimination, member countries adopted the Most Favored Nation (MFN) concept and the national treatment concept as core principles of the WTO rules. (18) MFN requires a member country to give equal treatment to all other member countries with whom it trades. (19) Essentially, a member country cannot give special treatment either positive or negative--to another member country without doing the same for all other member countries. (20) While there are exceptions to MFN, these exceptions only apply to strictly defined circumstances. (21) In addition, the national treatment concept--also aimed at eliminating discrimination--requires that imported goods be treated equally to domestic goods once the imported goods enter the domestic market. (22)

         The WTO goal of limiting trade barriers is accomplished via bound tariff rates. (23) These bound rates set limits on the tariff rates that a member country may impose on a certain import. (24) While not every type of import has a bound rate, the number of imports to which a bound rate applies has increased since the establishment of the WTO. (25)

      3. Dispute Settlement System

         Recognizing that disputes over the application of these principles is inevitable, the WTO's dispute settlement system permits a member country to file a complaint when that country believes certain trade laws of the other member country violate WTO rules. (26) The initial phase--consultations between the complainant country and the respondent country--encourages negotiations so that the countries can reach a settlement and avoid litigation. (27) If consultations fail to produce a settlement, the complainant country may request that a panel be established to hear the arguments of both countries. (28) The panel will then draft a report to which the member countries have the opportunity to respond. (29) Then the panel prepares a final report that is accepted as a ruling unless the Dispute Settlement Body, consisting of all member countries, reaches a consensus to reject it. (30)

         Either side is allowed to appeal the ruling on a question of law, and the Appellate Body, consisting of appointed individuals, will review the ruling. (31) The report of the Appellate Body becomes the final ruling unless rejected by a consensus of the Dispute Settlement Body. (32) If there is a violation of WTO rules, the losing party must promptly comply with the recommendations of the Dispute Settlement Body. (33) Failure to promptly comply may result in sanctions, but full implementation of the panel's recommendation is preferable. (34)

         The WTO admits that the dispute settlement system is subject to several weaknesses. (35) For example, the process can take a "considerable amount of time." (36) Additionally, because the process offers no interim relief, the complainant country must suffer the economic harm of a law that is inconsistent with WTO rules until a final ruling is reached. (37) Finally, the prevailing complainant party receives no compensation for damages. (38)

   2. United States-China Trade Law

      The United States was a "GATT contracting party," which means the U.S. government signed GATT in 1948. (39) When the WTO replaced GATT on January 1, 1995, the United States signed the new WTO agreements, including the updated GATT of 1994. (40) The United States is considered a developed member country. (41)

      In contrast to the United States' long history with WTO, China's accession to the WTO came after years of transformation in China's trade law, and was preceded by a thawing of economic relations between the United States and China. (42) In the late nineteenth century, China traded with the United States under the Open Door policy, which allowed trading partners unrestricted access to the Chinese market. (43) Following the founding of the People's Republic of China in 1949, however, the Chinese government rejected the Open Door Policy and began a period of economic self-isolation. (44) In the 1970s, realizing the economic opportunities of international trade, the Chinese government adopted its own version of the Open Door Policy. (45) Aiming to further increase United States-China trade, the two countries signed a bilateral trade agreement in 1979, granting each other MFN-status. (46)

      The culmination of China's transition to a market economy was its accession to the WTO on December 11, 2001. (47) There has been much speculation about China's decision to join the WTO. (48) Among the speculated motivations are the establishment of a normal trade relationship with the United States and the ability to exert its influence within the existing legal framework of international trade. (49) WTO membership also provides China protection against unilateral protectionist measures by WTO members. (50) Unlike the United States, which is a developed country, China has indicated its status as a developing member country. (51) In terms of monetary value of total trade conducted, the United States and China are currently the world's first and third largest trading nations, respectively. (52)

   3. Doha Development Round

      Throughout its existence, the WTO has periodically held rounds of multilateral negotiations among all members. (53) Since both the United States and China have been members of the WTO, there has been one round of multilateral trade negotiations, the Doha Development Agenda, which began in November 2001. (54) Among the aims of the Doha Development Round are a rejection of protectionism and an attempt to ensure fair application of trade rules to developing countries. (55) A major cause of the breakdown in these negotiations was the disagreement between developed countries, led by the United States, and developing countries, among which China is a major representative. (56) This disagreement concerned the proposed special safeguard measure to protect poor farmers in the event of a surge in imports or a drop in the price of the farm products. (57) Not only was the disagreement an indication of the United States-China trade breakdown, but it was also a signal to the world that China was now a major player in international trade and a representative of developing countries. (58) Despite the breakdown, the WTO remains focused on completing the Doha Agenda, and the United States and China maintain their commitment to finishing the Doha Round. (59)

3. FACTS: US-CHINA TRADE RELATIONSHIP

   As a result of the onslaught of WTO litigation between the United States and China, their relationship was characterized by the media as war-like, a characterization that speaks more to the political ramifications of the disputed trade barriers than to their economic magnitude. (60) The disputes involve a wide array of WTO principles, including the two most fundamental concepts of MFN and national treatment. (61) While the United States acknowledges China's progress towards compliance, it maintains that China has yet to bring its law into full compliance with the WTO rules. (62) China, at the same time, complains of being the victim of protectionist...