The U.S.-China trade war: why not go back to the WTO?

Last week, bilateral trade talks in Washington D.C. ended with China inviting the U.S. to send a negotiating team to Beijing this month (The Guardian, January 31, 2019).  The headline news from the talks was that the Chinese delegation offered to expand imports from the U.S., most notably of soybeans (New York Times, February 2, 2019).  Although heralded as progress, there is still a  really thorny problem on the negotiating table: how to deal with current Chinese business practices, including theft of intellectual property and the forced transfer of technology (Morrison, Congressional Research Service, July 30, 2018).  In its 2018 report to Congress about China’s compliance with World Trade Organization (WTO) rules, the Office of the United States Trade Representative (USTR) reported that, “…the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open market-orientated trade regime…” (USTR, January 2018).

The United States is not alone in expressing concern about Chinese business practices.  At the December 2017 WTO Ministerial Conference, the trade representatives of the European Union (EU), Japan and the United States announced a joint initiative to address these issues (USTR, December 12, 2017).  However, despite the three countries meeting again on several occasions during 2018, the United States has chosen instead to adopt an aggressive unilateral approach to dealing with China on matters of trade and investment.

Unfortunately, in seeking to force China to meet its WTO obligations, the United States has abrogated its own commitments to the global trading system.  For example, in selectively applying tariffs to imports of steel and aluminum on grounds of national security, the Administration has undermined a key pillar of the WTO – the most favored nation (MFN) principle which ensures non-discrimination between trading partners (Lawrence, PIIE, August 2018).  Not surprisingly, this action, along with others has alienated natural allies of the United States, the EU and other countries imposing their own retaliatory tariffs against the U.S. as well as filing formal disputes at the WTO.

What struck me most about U.S. Trade Representative Robert Lighthizer’s comments last week was his focus on, “…verification mechanisms to “enforce” China’s follow-through on any reform commitments it makes…” (Reuters, January 31, 2019).  Yet oversight and enforcement of global trading rules are precisely what the WTO was designed to achieve.   Rather than pursuing a unilateral approach to China, legal observers argue that the U.S. should pursue “…a comprehensive case at the WTO filed by a broad coalition of countries that share the United States’ substantive concerns about China…” (Hillman, Congressional Testimony, June 8, 2018).

Such an approach could resolve a basic “collective action” problem (Bown, Harvard Business Review, December 11, 2018).   By acting unilaterally, the United States cannot garner all of the benefits from China meeting its WTO obligations due to free-riding by other countries, i.e., the United States has no real incentive to push China for substantive change in its business practices.  Instead, the U.S. will probably end up securing a deal that focuses narrowly on the bilateral trade deficit it currently has with China.

Ultimately, cooperation among a set of key countries is more likely to get the Chinese to undertake the necessary economic reforms to meet their WTO obligations, and at the same time, boost the standing of the WTO as the relevant multilateral institution for managing and enforcing the rules of the global trading system.