Global Insight Perspective | |
Significance | There has been strong political pressure in the United States for tougher trade diplomacy with China, but the administration had been resisting this of late. Recently appointed Treasury Secretary Hank Paulson has been leading a charm offensive, hoping to shift China's stance without coercion. |
Implications | The move on 2 February confirms there is a limit to the United States' patience and it may be followed by World Trade Organization (WTO) moves on other fronts such as intellectual property. This challenge covers a wide range of Chinese industrial policies, and goes much further than the two previous U.S complaints to the WTO. |
Outlook | The United States faces a tough dilemma over how to handle China, and the options it has are steadily narrowing as the Asian giant's economic and diplomatic might grows. The Democrats, newly in control of Congress, have tended to press for a more muscular China policy, but it remains to be seen whether the WTO challenge will forestall their more contentious proposals. |
U.S. Departs from Softly-Softly Approach
For the third time since joining the World Trade Organization (WTO) in 2001 China faces a legal challenge from its main economic competitor, the United States. On 2 February the United States asked the international organisation to investigate whether China gives "illegal" assistance to its exporters, while hindering U.S. exporters. The scope of this challenge is much wider than the two earlier ones, and would entail a considerable shift in Chinese policy. U.S. Trade Representative Susan Schwab told reporters that efforts to bring about change through dialogue had been exhausted and that the legal challenge was now the only option. Other trading partners such as the European Union (EU) and Japan were invited to join the United States, but declined.
So what does the challenge actually entail? The complaint automatically triggers consultations between the two countries, and if these fail to produce agreement within 60 days, the United States can submit an appeal to a WTO dispute settlement panel. The latter will have to decide whether tax breaks and tariff exemptions encourage Chinese firms to buy Chinese-made equipment rather than imports, and whether financial incentives unfairly assist exporters. Nine subsidy programmes are targeted, six of which are said to encourage exports, and three that deter imports. The main areas cited by the United States with regard to export subsidies are paper, steel and information technology products. In these sectors "foreign-invested enterprises"—which accounted for nearly 60% of China's manufactured goods exports in 2005—receive financial incentives such as tax breaks. In terms of "import-substitution" the United States points to incentives such as sales tax refunds, tariff barriers, financial help and equipment spending by the state. The United States argues that these practices are "prohibited outright" by the WTO, and that they should have been eliminated back when China joined the trade body. The United States had waited until now to act as China only filed a notification of its subsidy programmes to the WTO in April 2006. U.S. small- and medium-sized enterprises, which account for over 35% of U.S. goods exports to China, are said to be worst affected. The United States hopes the challenge will prompt China to scrap the subsidies voluntarily—failing this, it could be forced to do so by the WTO, and face huge fines. Past experience offers some hope of a deal; China scrapped a value-added tax rebate on semi-conductors after the United States lodged a challenge in 2005, and settled a dispute concerning cardboard when the United States was about to file a complaint. However, this time round the scope of the challenge is much broader and more contentious. There is also an ongoing WTO complaint from the United States and the EU regarding "unfair" Chinese tariffs on imports of auto parts that has yet to be resolved.
Democrats Up the Pressure
The announcement comes at a time when the U.S. administration is under growing domestic pressure to get tough with China. There are many loud voices in Congress calling for action to contain the trade deficit and assist struggling U.S. manufacturers. The chorus has grown since the Democrats took control of both chambers at the start of the year. They have embraced a more protectionist stance than seen during the Clinton presidency, vowing to "stand up" for blue-collar workers. The WTO challenge could be seen as a bid by the administration to forestall pressure from the Democrats for a more confrontational approach. Many in Congress still want the administration to take matters into its own hands and impose retaliatory tariffs. The leading voice for such action is Democratic Senator Charles Schumer, who has threatened legislation to this end. It remains to be seen how strongly China figures in the build-up to the 2008 presidential election, however. The leading Democratic candidates for their party's nomination have so far chosen to focus on other issues such as Iraq.
Outlook and Implications
U.S. officials warned over the weekend that this challenge is only one element of a more muscular U.S. approach. A suit may be lodged over intellectual property, while the United States is continuing to press hard for further relaxation of China's exchange-rate policies. Schwab said that diplomacy would continue on both fronts for now, but that legal challenges were possible. Paulson vowed during a Senate testimony last week to increase pressure over the currency issue. He has spearheaded a new economic dialogue between the countries, which kicked off in the Chinese capital, Beijing, in December. There is growing concern in the United States, however, that this dialogue is not producing enough progress. Criticism was fuelled by the announcement that Under Secretary for International Affairs at the Treasury, Timothy Adams, has stepped down. This is the second time in five months that the Treasury's top China dialogue official has departed. Several media commentators have interpreted this as an acknowledgement of frustration with the dialogue's progress, although it may have been more to do with a personality clash with Paulson. Adams claimed that his decision was motivated instead by a desire to spend more time with his wife and children, the same reason that was given by his predecessor, Deborah Lehr, only five months ago.
All in all, the new WTO challenge does serve to escalate trade tensions with China, but the U.S. administration will not want to sacrifice the diplomatic progress made over recent months. It needs to play a careful balancing act as there are many other areas where it needs China's help. These include efforts to counter North Korea's nuclear programme, as well as action at the United Nations against Iran. Economically, the United States cannot afford to turn its back on China either. While manufacturers may have suffered to a degree, the influx of cheap goods and manufacturing inputs has helped the country sustain strong growth over recent years and has kept down prices for consumers. The Chinese reaction to the WTO challenge has so far been characteristically low-key, with officials expressing "regret".