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Trade War in the Offing?

May 31, 2012

I was on BBC Monday, talking about the latest trade spats developing between the U.S. and China.  Over the past few weeks, the U.S. imposed two distinct sets of retaliatory tariffs on Chinese-made solar panels (and just today, followed up with similar sanctions on Chinese-made wind-turbine towers).  Last Friday, China struck back by asking the World Trade Organization (WTO) to look into whether U.S. “green energy” subsidies and other initiatives violate international trade rules.  These moves come on top of a series of disputes over the past few years involving products ranging from tires to raw earth to steel tubes to chickens.  You can watch my short interview on BBC here.

The first point I made on BBC is that, so far, the areas of dispute — and there have been many — only cover a small portion of US-China trade.  In fact, that trade has been growing, not shrinking, in both directions.  So we can’t really talk about a “trade war” breaking out, at least not yet.  (If that U.S. Congress passed, and the President agreed to, across-the-board trade sanctions against Chinese goods to retaliate for China’s currency policy, THAT would be a trade war.)

What these moves do signify is high-level (and high-stakes) signalling taking place between China and its major trade partners — not just the US, but Europe and Japan as well.  China wants to develop what it sees as key industries by giving Chinese companies a leg up in both the Chinese and global market.  Its trading partners don’t want to see their firms placed at a disadvantage, and in several cases have challenged Chinese policies.  China is challenging them right back, arguing that those countries do the same thing, and that people who live in protectionist glass houses shouldn’t throw stones.  If they do, China can match them “tit for tat.”  (A similar battle involving cross-accusations and threats between the EU and China began unfolding this week — you can read about it here).

There’s a critical difference, though, between China and its trade partners.  They all may both have policies that can be called protectionist, but they come from different starting points.  In the U.S., trade restrictions and subsidies tend to be the exception to the rule, and when they do occur, are usually transparent.  There’s a public approval process and an overt policy that can be challenged at WTO.  In China, restrictions and subsidies are pervasive, due to the large state role in the economy, and often hard to pin down.

When Chinese supplies of rare earth minerals to Japan were disrupted, apparently due to a diplomatic flair-up over contested islands, it wasn’t clear who gave the order or how.  In fact, China’s Commerce Minister explicitly denied that any “embargo” was even taking place.  When Hu Jintao promised President Obama, during his January state visit, that China would scrap its “indigenous innovation” catalogs intended to push government offices and state-run companies to buy domestic Chinese products, it wasn’t clear (and still isn’t) whether China had truly abandoned the animating principle behind the policy or had merely shifted to using other, less obvious approaches to achieving the same goal.

As a result, there’s growing discussion among U.S. officials and trade experts about whether the WTO framework is at all suited to tackling the issues that really matter when it comes to trade with China.  WTO is a rule-based system that does a reasonably good job at striking down overt actions or practices that violate trade agreements.  If the real problem is that a nation’s court system is rigged in favor of state-owned or state-championed companies; that laws that are on the books aren’t enforced, or are enforced unevenly; that business executives are rewarded for pursuing the government’s policy goals, even at the cost of profits; that licensing, investment approval, and other procedures are used to extract commercial concessions such as the transfer of critical technologies — all of these deeply entrenched issues, and more, are beyond WTO’s scope.  Yet they determine the “terms of trade” between the U.S. and China far more than the explicit trade policies WTO is designed to adjudicate.

I’m not saying that U.S. negotiators have any clear alternatives in mind.  There’s no obvious approach that would work “better” than WTO, which is why the WTO framework remains the focus point of recent trade disputes.   But the real dispute — about what constitutes an “even playing field” — goes far deeper, and will continue to be a source of conflict.

11 Comments leave one →
  1. andao permalink
    May 31, 2012 5:27 pm

    I think the biggest problem, and sometimes one of the hardest to detect, will be China’s continued preference towards domestic firms when it comes to raw materials. It might be easy to see that Chinese wind turbine manufacturers get gobs of money from state owned banks, but less easy to see when raw steel or copper wiring is sold to wind turbine companies at subsidized rates. I remember reading about German and US solar panel manufacturers complaining about how Chinese poly-silicone is sold to Chinese companies at less than the cost of raw materials. In that case they were able to discover it, but in others they may not.

    The “indigenous innovation” policy is somewhat humorous too. When’s the last time you’ve seen a domestic Chinese car with a white license plate?

    • steeltrader permalink
      June 6, 2012 3:36 pm

      Andao domestic sale prices of steel to local companies – including wind turbine companies are very high compared to domestic prices.

      • steeltrader permalink
        June 6, 2012 3:37 pm

        Sorry posted too fast…. compared to export prices to places like the US and Germany

  2. Hua Qiao permalink
    May 31, 2012 5:55 pm

    Now now Patrick, you are suggesting the WTO interfere in “internal affairs.” Let’s throw in a dash of “states secrets” and a dab of nationalistic railing against the foreign devils and you have the recipe for continued favoritism.

    It’s not just foreign firms that suffer, it is also the unconnected private firms and SMEs too.

    That’s what happens when the Party controls the puppet strings on all the main actors in the politcial economy, whether it is banks, regulators, judges, the NDRC, or local officials who determine everything from safety inspections to land permits. It’s a parallel universe that most foreigners never see, hidden behind a cloak of lip service to corporate governance and a pronounced “strict” (God, I love that word), strict adherence to rule of law.

  3. May 31, 2012 7:56 pm

    proffesor …nice comercal..thank you

  4. June 1, 2012 6:13 am

    Exactly! To a certain deeper level, Metacognition (thinking about how to think) is weak in China, and results can often manifest without showing/articulating explicit processes.

  5. June 1, 2012 6:14 am

    And btw, “indigenous innovation” is a joke -totally anti the nature of innovation.

  6. June 3, 2012 5:49 am

    Well Germany is buying solarpanels, wind turbines etc. hand over fist.

    There is a connection to their HVDC transmission network .- similar to the ones they have installed in China.
    My guess is that Germany has been offered a discount of at least 50% in connection with among other things exchange rate fluctuations.

    For more – non commercial:
    http://www.valuewalk.com/2012/05/germany-has-a-20-billion-euro-electricity-problem/

  7. June 16, 2012 3:30 pm

    The US reacted strongly in the context of the Trade Policy Review at the WTO a few days back when it stated :

    “Since China’s 2010 TPR, it appears the trend toward state intervention in the Chinese economy has intensified.  China’s tighter embrace of state capitalism now runs directly counter to the economic reform goals that originally drove its pursuit of WTO membership, goals that had offered real leadership and real promise for China’s future economic growth.  The United States continues to urge the Chinese government to reconsider its divergence from the path of reform.”
     
    China reacted equally strongly as reported in Reuters today:
     
    ” China’s Assistant Minister of Commerce Yu Jianhua said he regretted that during the TPR process some WTO members had deemed China was practising state capitalism.
    “The term cannot be found in … WTO documents. It has nothing to do with the TPR or WTO rules. We strongly believe TPR should not be abused for the purpose of domestic politics,” he said.”

     
    Is “Establishment of the socialist system of laws with Chinese characteristics” in conformity with the WTO commitments? Is this another example of creative use of “domestic policy space” within the WTO by an emerging economy? There is little doubt that China has benefitted immensely with its participation in the WTO system since 2001. Has it done so on its own terms much more than other developing countries? If yes, what can other developing countries learn from this experience? The issue of support by China of its State owned enterprises is often a subject of intense discussion and debate. Several countries allege that China unfairly supports its State Owned Enterprises contrary to WTO rules. While China’s “socialist” model adopts adopts a strong involvement of the public sector in its developmental paradigm, whether the modes of support and incentives to the State Owned Enterprises is permissible under relevant WTO rules is a source of constant disagreement. Is Chinese State Capitalism incompatible with WTO rules or only its special Accession Protocol or both or neither? Or are the WTO rules, set up in the context of trade liberalisation and free trade, incapable of handling the complexity of Chinese State capitalism?

    The official submission of China in the Trade Policy review, the WTO Secretariat’s version as well  as the US response raise important points. Can a country pursue its “own development” paradigm (in this case a socialist path) and still be in conformity to the WTO? Does WTO restrict ideological diversity? While the rules of the game within the various WTO Agreements need to be followed in terms of National Treatment and following the Most Favoured Nation principle, is there a prohibition from following one’s own economic model of development? Does the WTO rules mandate that a country must be “capitalist”? Can a “socialist” country be a pioneer in reduction of trade barriers and enhanced transparency? Can a “capitalist” country have many instances of subsidies that are prohibited by the WTO? Should we not go beyond terminologies and ideologies to see actual policies that either are in consonance or contravene the WTO? Does the WTO provide a country domestic policy space to pursue its own “ideological” path as long as the provisions of the various Agreements are adhered to or is it implicit that a country will have to follow a “particular” model of development if it is a WTO member? Is developmental autonomy a myth in the multilateral trading system? Having said this, there is no doubt that “transparency” in policies must be the cornerstone of any system of government. The WTO has a number of provisions that require notifications and measures to be made available to other countries. While some countries follow it in letter and spirit, others are seen lacking. Transparency enhances accountability as well as throws open one’s policies to increased scrutiny. It also increases the need to logically justify your policies against a challenge since it is open to scrutiny. There is also greater awareness of the measures within the country and policies are not seen to be made behind closed doors to reflect vested, domestic or international, interests.There is no doubt that the best practises of countries that follow this well must be replicated in the WTO system.

Trackbacks

  1. China and the WTO: American Buyer’s Remorse | China Hearsay
  2. Letting China Into The WTO May Have Been A Huge Mistake – Business Insider « mawillits

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