Tag Archives: World Trade Organization

No Endgame In Sight As China-US Trade Tension Escalates

THE SLIDE IN commodity prices over the recent day or so portends investor concern about the prospects for and impacts of a US-China trade war that has yet entirely to materialise in currency and equities markets.

Energy markets, in particular, are skittish. Between them, China and the United States account for one-third of world oil demand, which will fall if the spillover from the trade measures taken so far slows global economic growth. Traders are also starting to speculate about the possibility of a seismic realignment of global energy markets should China price US energy out of its market.

Metals markets were also hit, as China is the biggest consumer of most metals, used as raw materials for its exports. Similarly, agricultural commodities, such as soybeans.

The White House announced on Wednesday an additional $200 billion-worth of tariffs to be introduced in September at 10% on for the most part Chinese consumer-goods exports, but also components and semi-manufactures.

Beijing’s reaction was predictably along the lines that Washington’s trade actions would hurt everyone; seventy of the top 100 exporters from China are foreign companies, Zhu Haibin, chief China economist at JPMorgan, told the Financial Times.

The commerce ministry said that it would have no choice but to respond to the latest US move. It also said that it would take the matter to the World Trade Organization, a jibe at US President Donald Trump’s reported wish to remove the United States from the world trade body but not one that veers too far from the generally measured tone taken so far (to the point of sanctimoniousness).

A question for this Bystander is, what is the Trump administration’s real endgame?

It says the tariffs are to get China to end its ‘unfair’ trade practices and open its markets. But the president in his public comments has fixated on the size of the US merchandise trade deficit with China. That would imply a grand trade deal between the two nations that would reduce the headline number of that deficit.

That would give the US president a trade war win that would be straightforward to promote to his electoral base. However, there is no sign at this point of such a deal being in the making.

But it would not solve the other complaint that the United States has against China, over technology transfer, both as a quid pro quo required by China for foreign firms for market access or through straightforward theft of intellectual property.

Washington has a legitimate case on both fronts. It might be able to use its trade war as leverage to get concessions on the first, under the rubric of a deal over market opening.

However, tariffs do little to remedy the second. With technology development so fundamental to China’s economic future, Beijing will hold out to the last over striking any deal that would be effective in curtailing something that it anyway denies doing.

In 2015, President Xi Jinping reached a ‘common understanding’ with Trump’s predecessor President Barack Obama that their governments would hold back on cybertheft of intellectual property for commercial gain.

The formulation was always vague — Xi’s definition of its scope was much narrower than Obama’s — and there was no formal mechanism of verification or enforcement. Both that and its provenance would prevent its embrace by the current US president.

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When Elephants Fight, It Is The Grass That Suffers

 

THE WHITE PAPER on China’s membership of the World Trade Organization (WTO) since it acceded to the world trade body in 2001 released by the State Council Information Office on June 26 implicitly acknowledges how much China has benefited from its membership.

This is all couched in terms of how China has lived up to its membership obligations and is now championing global free trade — an unabashed riding on the coattails of the global backlash against the United States’ protectionist turn.

The latest step in that come today with US tariffs of 25% on $34 billion worth of Chinese goods from ball bearings to lithium batteries coming into effect and China retaliating by imposing a similar 25% tariff on 545 US products, also worth a total of $34 billion, and likely to focus on agricultural products.

US President Donald Trump had previously threatened a 10% levy on an additional $200 billion of Chinese goods if Beijing’s trading practices remain unchanged, and raised the stakes on Thursday by saying that more than $500 billion of Chinese exports could be tariff targets.

Should that happen, Beijing may resort to non-tariff retaliation in forms such as more expensive and lengthy customs inspections and consumer boycotts of US products, as it did last year to South Korea’s Lotte Group.

That would be a display of patriotic citizen loyalty that the United States would be unable to match and may point to the Achilles’ heel of Trump’s belief that he can push hard on trade because the U.S. holds the strongest hand and thus the rest of the world will, ultimately, back down.

Two days before the imposition of these latest tariffs, the WTO reported that in the seven months to May, trade restrictions imposed by the G20 had doubled over the previous reporting period. These include tariff increases, stricter customs procedures and imposition of taxes and export duties.

In a nod to its purpose, the WTO noted that during the seven months reported on (so they do not include the latest tariffs), trade liberalisation measures taken by G20 members covered $82.7 billion of trade, versus the $74.1 billion affected by trade restrictions. But the gap is narrowing rapidly.

The WTO’s report is blunt in saying that further escalation of protectionism — measures and rhetoric — could carry potentially large risks for the global trading system itself:

At a juncture where the global economy is finally beginning to generate sustained economic momentum following the global financial crisis, the uncertainty created by a proliferation of trade restrictive actions could place economic recovery in jeopardy. The multilateral trading system was built to resolve such problems and it has the tools to do so again. However, further escalation could carry potentially large risks for the system itself. Its resilience and functionality in the face of these challenges will depend on each and every one of its Members. The G20 economies must use all means at their disposal to de-escalate the situation and promote further trade recovery.

Trump’s antipathy for the WTO — beyond a general belief that all multilateral organisations exist to do down the United States — is that it has provided China with a mechanism to create the vast trade surpluses with the United States on which he is now waging trade war.

Our man in Washington tells us that in private Trump repeatedly says that United States should get out of the WTO because it is anti-American and recalls the president on the campaign trail in 2016 calling the WTO a “disaster”.

Perversely, because the US-created the system and has lots of effective lawyers at the WTO, it does better than most when it comes to dispute resolution at the WTO. According to this year’s Economic Report for the President, the US has had an 85.7% success rate in cases it has initiated before the WTO since 1995, compared with a global average of 84.4% and China’s 66.7%. And it wins 25% of the cases brought against it, compared to the overall average successful defence rate of 16.6%.

Whether Trump would push the destruct button on the WTO remains an open question, though he is constrained to an extent in that the US Congress would have to pass legislation for the United States to leave the organisation.

Doing so would send both world trade and world financial markets into a tailspin. Stockmarket indices are scoreboards that get Trump’s attention. A deal to ‘fix’ the WTO might appeal more to him, especially if markets react badly to this latest round of tariffs.

For all the rightful concern, the US tariffs so far are tiny in the global scheme of things, affecting the equivalent of 0.6% of global trade and accounting for 0.1% of global GDP, according to Morgan Stanley.  The collapse of the WTO would be on an altogether greater scale.

Meanwhile, Beijing will continue to play its long game and to occupy the moral high ground over the WTO, its belief in its ability to outlast Trump as unshakeable as Trump’s belief that it cannot.

 

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Trade For Two, And Two For Trade

The South Korea-U.S. free trade agreement comes into force today–as this Bystander feels sure you have noted in your diaries. It is tangental to our brief but worth noting in passing for several reasons. Beijing, Seoul and Tokyo hope to start the sharp end of talks on their own free trade agreement later this year. China is both being dragged and dragging its trade partners before the World Trade Organisation with some regularity. And while the next round of the WTO’s global free trade talks, the Doha round, is proceeding even more glacially than reform in China, free trade agreements are popping up everywhere.

Nearly three score have come into force since January 2008. The total in effect is fast approaching 300 and many more are being talked about. (Trade trivia question: now Mongolia has struck a free trade agreement with Japan, which is the one WTO member left that is not party to any free trade agreement?)

The days when free trade agreements were seen as undermining the multilateral global trading system seem distant memory. Bi- or limited plurilateral regional free trade agreements will shape trade policies for the foreseeable future. They are also more suitable for developing existing cross-border trade flows being created by the needs of global logistics chains. Whether they undermine the big benefit  of multilateral agreements, that they increase trade overall by lowering restrictions across the board, is moot. But then the Doha round isn’t doing anything to boost trade overall for as long as it remains stalled.

The most significant of the free trade agreements under discussion for  the Asia-Pacific region is the Trans-Pacific Partnership (TTP) that the U.S. is taking over. China is on the outside of that at this point. Japan is the swing state. If it joins the TTP, China’s exclusion will be of more consequence than if it does not. Another free trade agreement in the pipeline that has implications for China is one between the EU and India. Meanwhile, Washington and Seoul are putting in place another piece of the new world trade order.

Footnote: The answer is Mauritania.

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WTO Natural Resouces Ruling Not Prelude For Rare Earths

China’s WTO loss over certain natural resource exports shouldn’t overly encourage anyone who would like the same approach to be taken towards Beijing’s export restrictions on rare earths. These were introduced in 2010 to prevent environmental damage and unsustainable depletion of the country’s rare earth reserves. Beijing’s tough enforcement of them makes the case that they are a mere pretext for protectionism more difficult to sustain. Indeed, Beijing make make use of the latest WTO ruling to enforce them more vigorously and to bear down on foot dragging enterprises and local officials. China is the world’s largest supplier of rare earths. Unlike coke, zinc, bauxite and the six other raw materials whose export quotas, licences and duties the WTO has decided break world trade rules, rare earths are of such strategic importance to China’s economy and its military’s development that Beijing is not going to leave itself vulnerable to any trade challenge.
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Subsidy Or Welfare Spending?

In an economy such as China’s, standing somewhere uncertain in the transition from being centrally planned to a market economy, is everything a subsidy? The question is raised again both by the World Trade Organization’s surprise ruling that the U.S. had introduced illegal anti-dumping and anti-subsidy duties on some steel exports and by a new World Bank research working paper looking at the effects of a countervailing duties case brought by the United States in 2007 against Chinese imports of coated free sheet paper which were alleged to be being sold at below fair market value because of government subsidies to the Chinese manufacturers.

That case petered out after the U.S.’s International Trade Commission eventually found that no injury had been done to American paper producers. Its significance lies in that it reversed a long-standing American policy of not imposing countervailing and their sister anti-dumping duties on exports from non-market economies (into which category China falls until 2016 under the terms of its joining the WTO), thus opening the door for at least eight such trade actions from a wide range of industries.

Wonk warning: The paper will put any trade policy wonk in pig heaven. You will be neck deep in WTO rules and regs and the arcane arts of diving fair market value and identifying subsidies. If that is what fascinates you, you will find it a fascinating case study. If that’s not you, read on here.

The broader question is how does China, or any other transitioning economy for that matter, implement social and economic development policies it legitimately wants to pursue, as set forth, for example, in the new five-year plan, without distorting trade? What counts as an export subsidy and what is fair game for a countervailing or anti-dumping duty? For example, does the VAT rebate that Chinese farmers get (they effectively pay 5.8%, not the full 13% as part of the push to narrow urban-rural income disparities) count as an export subsidy, as some at the U.S. agriculture department argue? Or discounted land or energy supplies given by central or local governments as an inducement to attract new industry to desired regions, as some in the U.S. steel industry promote. What about a bank loan; the U.S. commerce department has determined that the domestic banking sector doesn’t operate on a commercial basis? Or China’s managed currency, which some in the U.S. Congress want made subject to trade remedies? Even censorship is starting to come under the microscope to examine if it, too, is a trade issue.

China has made great progress in reducing its overt subsidies (tariffs, subsidies and export taxes/rebates), down from 8% of GDP in 1985 to 0.7% by 2005 according to one 2007 study. But there are still a lot of subsidies designed to promote economic and social welfare goals, particularly poverty reduction and environmental protection, some of which are reported to the WTO but which need to be made trade neutral and applied according to universal principles not discriminatorily in line with WTO rules.

It is now a reasonable argument to make that U.S. trade remedy laws have strayed far from their original purpose, and are now being used by special interests to shield themselves from competition. Greg Mankiw, the Harvard University economist who is a former chair of the U.S. President’s Council of Economic Advisers, has said, “Anti-dumping is the ‘third rail’ of U.S. trade politics, with few politicians of either party willing to point out its broadly negative impact.” The World Bank paper quotes recent research that found that each job saved by steel tariffs cam e at the cost of three jobs in steel-using industries and caused economic distortion equal to some $450,000.

The paper suggests three remedies: contesting these cases in the courts or via the WTO disputes mechanism, as in the case of the steel duties–China and its companies now have hordes of trade lawyers in Geneva, Washington and Brussels on retainer; changing the rules on countervailing and anti-dumping duties via the Doha round of trade negotiations, but which would depend on the chimera of the Doha round actually being concluded; and China advancing the date of its recognition as a market economy from 2016, which would come with its own baggage. That, though, would be the idealists’ solution as it would let China provide a model for developing economies designing industrial and development policies intended to achieve social objectives that don’t simultaneously distort trade.

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