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US–China Trade War: A Way Out?

Published online by Cambridge University Press:  02 July 2020

Weihuan Zhou Open the ORCID record for Weihuan Zhou [Opens in a new window]  and
Henry Gao Open the ORCID record for Henry Gao [Opens in a new window]
Weihuan Zhou*
Affiliation:
Senior Lecturer and Member of the Herbert Smith Freehills China International Business and Economic Law (CIBEL) Centre, Faculty of Law, UNSW Sydney.
Henry Gao*
Affiliation:
Associate Professor at the School of Law, Singapore Management University
*
Email: [email protected].
Email: [email protected].
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Abstract

Recently, a group of eminent Chinese/US economists and legal scholars issued a thought-provoking Joint Statement on ‘US–China Trade Relations: A Way Forward’. However, the Joint Statement does not provide practical solutions to the real issues in the bilateral negotiations. Moreover, by granting excessive policy space to the two largest trading nations, it would encourage them to further deviate from WTO rules and undermine the multilateral trading system. Drawing on the Theory of Distortions and Welfare, we put forward an alternative framework for the parties to tackle protectionist and trade distortive policy instruments while leaving sufficient policy space for them to pursue non-protectionist policy goals. Our framework would minimize WTO-inconsistent outcomes and prevent further erosion of the multilateral system as we encourage the parties to negotiate in a WTO-consistent manner. Hopefully, this would also provide the groundwork for more inclusive trade negotiations under the multilateral trading system.

Type
Snipings
Information
World Trade Review , Volume 19 , Issue 4 , October 2020 , pp. 605 - 617
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press

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Footnotes

The rubric ‘Snipings’ is intended for contributions which, while rigorous, offer early analyses of issues of immediate policy relevance for the multilateral trading system. They would normally be shorter and possibly be less extensively documented than our standard articles with a view to stimulating current debates. They are subject to standard, albeit expedited, refereeing procedures. Further submissions under this heading are welcome.

References

1 Office of the United States Trade Representative, ‘Economic and Trade Agreement between the Government of the United States of America and the Government of the People's Republic of China’ (15 January 2020) [hereinafter ‘Phase One Trade Deal’], https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republicchina/phase-one-trade-agreement/text.

2 Chad Bown (2020), ‘US–China Trade War Tariffs: An Up-to-Date Chart’, PIIE (14 February 2020), www.piie.com/research/piie-charts/us-china-trade-war-tariffs-date-chart.

3 Weihuan Zhou (2020), ‘WTO Dispute Settlement Mechanism without the Appellate Body: Some Observations on the US–China Trade Deal’, 9(2) Journal of International Trade and Arbitration Law 443, 451–453.

4 Office of the United States Trade Representative, ‘2019 Report to Congress on China's WTO Compliance’, March 2020, at 30, https://ustr.gov/sites/default/files/2019_Report_on_China%E2%80%99s_WTO_Compliance.pdf.

5 The US–China Trade Policy Working Group, ‘Joint Statement: US–China Trade Relations: A Way Forward’ (27 October 2019), https://cdn.shanghai.nyu.edu/sites/default/files/_us-china_trade_joint_statement_2019_0.pdf.

6 See e.g. Shawn Donnan (2019), ‘Economists Call for Alternative Path to US–China Trade Wars’, Bloomberg (27 October 2019), www.bloomberg.com/news/articles/2019-10-27/economists-call-for-alternative-path-to-u-s-china-trade-wars.

7 Donald Regan (2006), ‘What Are Trade Agreements For? – Two Conflicting Stories Told by Economists, with a Lesson for Lawyers’, (9(4) Journal of International Economic Law 951, 972–975; Donald Regan (2015), ‘Explaining Trade Agreements: The Practitioners’ Story and the Standard Model’, 14(3) World Trade Review 391, 411–414. For an overview of the history of international trade cooperation, see WTO (2007), Six Decades of Multilateral Trade Cooperation: What Have We Learnt? (Geneva: WTO) 35–43, 179–197.

8 Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 1867 U.N.T.S. 154, 33 I.L.M 1144.

9 The national treatment rule and the abundant WTO case law on it have amply demonstrated how the WTO tribunals, particularly the Appellate Body, have struggled with the issue of whether a violation of the rule may be established based on effect only without inquiring about intent. After years of deliberation in a series of cases, the Appellate Body, in EC–Seal Products (2014), has sent a strong message that the rule is concerned about the discriminatory or disparate effect of a measure, not the intent of it. For detailed discussions of this issue, see e.g. Weihuan Zhou (2011), ‘The Role of Regulatory Purpose under Articles III:2 & 4 – Toward Consistency between Negotiating History and WTO Jurisprudence’, 11(1) World Trade Review 81; Weihuan Zhou (2012), ‘US–Clove Cigarettes and US–Tuna II (Mexico): Implications for the Role of Regulatory Purpose under Article III:4 of the GATT’, (15(4) Journal of International Economic Law 1075. Appellate Body Report, European Communities – Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/AB/R, WT/DS401/AB/R (adopted 18 June 2014).

10 See generally Andrew Lang (2016), ‘The Judicial Sensibility of the WTO Appellate Body’, 27(4) European Journal of International Law 1095; Weihuan Zhou (2020), ‘In Defence of the WTO: Why Do We Need A Multilateral Trading System’, 47(1) Legal Issues of Economic Integration 9.

11 One of the latest illustrations of ‘protectionism’ being a key concern of trade negotiations is India's last-minute decision to pull out of the Regional Comprehensive Economic Partnership (RCEP) for fear of unwanted level of foreign competition with domestic industries. Subsequently, India however indicated its interest to resume negotiation if the other parties reduce barriers to its exporting industries. See e.g. India Today, ‘India Open for Engagement with RCEP Nations again if Our Concerns Are Addressed: Piyush Goyal’, India Today (6 November 2019), www.indiatoday.in/india/story/india-open-engagement-rcep-nations-again-concerns-addressed-piyush-goyal-1616055-2019-11-06.

12 For a flowchart of the escalation of such tariffs, see above n 2, Bown, ‘US–China Trade War Tariffs’; Ralph Ossa (2019), ‘The Costs of A Trade War’, in Meredith Crowley (eds.), Trade War: The Clash of Economic Systems Endangering Global Prosperity (London: CEPR Press) 45–49.

13 Office of the United States Trade Representative, ‘Joint Statement of the Trilateral Meeting of the Trade Ministers of the United States, European Union, and Japan’, Press Release (23 May 2019), https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/may/joint-statement-trilateral-meeting.

14 Office of the United States Trade Representative, ‘2018 Report to Congress on China's WTO Compliance’, February 2019, https://ustr.gov/sites/default/files/2018-USTR-Report-to-Congress-on-China%27s-WTO-Compliance.pdf.

15 Ibid., at 5–20.

16 Ibid., at 20.

17 See e.g. Yawen Chen et al., ‘China Says US Demand on Its State-Owned Enterprises Is “Invasion” on Economic Sovereignty’, REUTERS (26 May 2019), www.reuters.com/article/us-usa-trade-china/china-says-u-s-demand-on-its-state-owned-enterprises-is-invasion-on-economic-sovereignty-idUSKCN1SV0I7.

18 See e.g. Paul Krugman et al. (2018), International Economics: Theory and Policy (Harlow: Pearson Education, 11th edn) at 596; Thomas Pugel (2016), International Economics (New York: McGraw-Hill Education, 16th edn) at 485.

19 For the historical development of the optimal tariff argument, see Douglas Irwin (1996), Against the Tide: An Intellectual History of Free Trade (Princeton, NJ: Princeton University Press) 101–115. One could argue that the Framework is guided by the influential ‘terms-of-trade manipulation’ theorem which views the fundamental function of trade agreements as being to restrain governments from using policies to improve the terms of trade of its own nation at the cost of other nations. Like the limited focus of the Framework, the ‘terms-of-trade manipulation’ theorem targets policies clearly motivated by terms-of-trade manipulation only. It does not prevent countries from using policies for purposes other than terms-of-trade manipulation or countries without market power from using policies to affect trade. Consequently, the most significant policy excluded from the theory, like under the Framework, is protectionism. For the seminal work on the ‘terms-of-trade manipulation’ theorem, see Kyle Bagwell and Robert Staiger (1999), ‘An Economic Theory of GATT’, 89(1) The American Economic Review, 215; Kyle Bagwell and Robert Staiger (2002), The Economics of the World Trading System (Massachusetts: The MIT Press). Notably, terms-of-trade manipulation and beggar-thy-neighbor behavior were used interchangeably in the World Trade Report 2009. See WTO (2009), World Trade Report 2009: Trade Policy Commitments and Contingency Measures (Geneva: WTO) xiii. For major critique of the theory, see Wilfred Ethier (2004), ‘Political Externalities, Nondiscrimination, and a Multilateral World’, 12(3) Review of International Economics 303; Wilfred Ethier (2007), ‘The Theory of Trade Policy and Trade Agreements: A Critique’, 23 European Journal of Political Economy 605. For an explanation of the differences between the terms-of-trade story and the protectionism story, see above n 7, Regan, ‘What Are Trade Agreements For?’, at 953–954; Regan, ‘Explaining Trade Agreements’, at 392–393.

20 Whether the tariffs imposed by the US during the trade war were set at an optimal level is debatable. Studies have shown that the tariffs have caused a net loss to the US economy due to their impacts on consumers’ welfare and retaliation by other countries. See e.g. Alessandro Nicita (2019), ‘Trade and Trade Diversion Effects of United States Tariffs on China’, UNCTAD Research Paper No. 37 (November 2019) (showing that US tariffs did hurt Chinese economy); Pablo Fajgelbaum et al. (2019), ‘The Return of Protectionism’, NBER Working Paper 25638 (October 2019) (showing that the US would have made a small welfare gain in the absence of retaliatory tariffs); Mary Amiti et al. (2019), ‘The Impact of the 2018 Trade War on US Prices and Welfare’, 33(4) Journal of Economic Perspectives 187 (showing that the US tariffs led to significant deadweight welfare costs in 2018).

21 See above n 5, ‘US–China Trade Relations: A Way Forward’, at 4.

22 See e.g. Ernst-Ulrich Petersmann (1993), ‘National Constitutions and International Economic Law’, in Meinhard Hilf and Ernst-Ulrich Petersmann (eds.), National Constitutions and International Economic Law (The Netherlands and Boston, MA: Kluwer Law and Taxation Publishers) 3–52, 47–48. Frieder Roessler (1993), ‘The Constitutional Function of the Multilateral Trade Order’, in Meinhard Hilf and Ernst-Ulrich Petersmann (eds.), National Constitutions and International Economic Law (The Netherlands: Kluwer) 53–62.

23 See generally above n 10, Zhou, ‘In Defence of the WTO: Why Do We Need a Multilateral Trading System’.

24 See e.g. Mark Wu (2016), ‘The ‘China, Inc’. Challenge to Global Trade Governance’, 57(2) Harvard International Law Journal 261.

25 Weihuan Zhou, Henry Gao, and Xue Bai (2019), ‘Building a Market Economy through WTO-Inspired Reform of State-Owned Enterprises in China’, 68(4) International & Comparative Law Quarterly 977.

26 Weihuan Zhou, Huiqin Jiang, and Qingjiang Kong (2020), ‘Technology Transfer under China's Foreign Investment Regime: Does the WTO Provide a Solution?’, 54(3) Journal of World Trade 455.

27 Weihuan Zhou (2019), China's Implementation of the Rulings of the World Trade Organization (Oxford and Portland, OR: Hart Publishing).

28 See Protocol on the Accession of the People's Republic of China (WT/L/432 23 November 2001) [hereinafter Accession Protocol].

29 See Report of the Working Party on the Accession of China (WT/ACC/CHN/49 1 October 2001) [hereinafter Working Party Report].

30 For a more detailed discussion of these rules, see above n 25, Zhou, Gao, and Bai, ‘Building a Market Economy through WTO-Inspired Reform of State-Owned Enterprises in China’, at 1011–1014.

31 This theory was consolidated by Professor Bhagwati in Jagdish N. Bhagwati (1971), ‘The Generalized Theory of Distortions and Welfare’, in Jagdish N. Bhagwati et al. (eds.), Trade Balance of Payments and Growth: Papers in International Economics in Honor of Charles P. Kindleberger (Amsterdam and London: North-Holland Publishing) 69–90. For a review of the historical development of the theory and its applications, see Jagdish N. Bhagwati (2002), Free Trade Today (Princeton, NJ and Oxford: Princeton University Press).

32 For the historical development of the free trade doctrine and the major criticisms, see generally Douglas Irwin (1996), Against the Tide: An Intellectual History of Free Trade (Princeton, NJ: Princeton University Press).

33 See Max W. Corden (1997), Trade Policy and Economic Welfare (Oxford: Clarendon Press, 2nd edn) 33–44.

34 See above n 22, Roessler, ‘The Constitutional Function of the Multilateral Trade Order’.

35 See e.g. John H. Jackson (2000), ‘GATT Machinery and the Tokyo Round Agreements’, in John H. Jackson, The Jurisprudence of GATT and the WTO – Insights on Treaty Law and Economic Relations (Cambridge and New York: Cambridge University Press) at 47; Kenneth W. Dam (2005), ‘Cordell Hull, the Reciprocal Trade Agreement Act, and the WTO’, in Ernst-Ulrich Petersmann (eds.), Reforming the World Trading System: Legitimacy, Efficiency, and Democratic Governance (Oxford and New York: Oxford University Press) 83–96 at 96.

36 See generally above n 10, Zhou, ‘In Defence of the WTO: Why Do We Need a Multilateral Trading System’.

37 Office of the United States Trade Representative, ‘Findings of the Investigation into China's Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974’ (22 March 2018), https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF; Office of the United States Trade Representative, ‘Update Concerning China's Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation’ (20 November 2018), https://ustr.gov/sites/default/files/enforcement/301Investigations/301%20Report%20Update.pdf.

38 For a detailed discussion of this issue, see above n 26, Zhou, Jiang, and Kong, ‘Technology Transfer under China's Foreign Investment Regime: Does the WTO Provide a Solution?’.

39 See above n 28, Accession Protocol, Section 7(3); above n 29, Working Party Report, paragraph 203.

40 《中华人民共和国外商投资法》 [Foreign Investment Law of the People's Republic of China 2020], Order No. 26 of the President, promulgated on 15 March 2019, effective on 1 January 2020.

41 For a comprehensive review of China's implementation of its WTO transparency obligations, see Henry Gao (2018), ‘The WTO Transparency Obligations and China’, 12(2) Journal of Comparative Law 111.

42 See above n 26, Zhou, Jiang, and Kong, ‘Technology Transfer under China's Foreign Investment Regime: Does the WTO Provide a Solution?’, at 473–478.

43 For a detailed analysis of China's purchase commitments and implications for other trading nations, see Chad Bown, ‘Unappreciated Hazards of the US–China Phase One Deal’, PIIE (21 January 2020), www.piie.com/blogs/trade-and-investment-policy-watch/unappreciated-hazards-us-china-phase-one-deal.

44 For discussions of the potential WTO-inconsistencies, see Henry Gao (2019), ‘Trade War: From a Phase One Deal to Perpetual Peace’, The Interpreter by the Lowy Institute (18 November 2019), www.lowyinstitute.org/the-interpreter/trade-war-phase-one-deal-perpetual-peace ; Weihuan Zhou and Henry Gao (2020), ‘US–China Phase One Deal: A Brief Account’, Regulating for Globalization (22 January 2020), http://regulatingforglobalization.com/2020/01/22/us-china-phase-one-deal-a-brief-account/.

45 For a more detailed discussion on the special agricultural safeguard mechanism, see WTO, Market Access: Special Agricultural Safeguards (SSGs), www.wto.org/english/tratop_e/agric_e/negs_bkgrnd11_ssg_e.htm.

46 See generally 《国 务 院 关 于 印 发 <中 国 制 造 2025 >的 通 知 》 [Notice on the Printing and Release of ‘Made in China 2025 ’] (2015), Decree No. 28 of the State Council, issued on 8 May 2015, www.gov.cn/zhengce/content/2015-05/19/content_9784.htm. For an empirical study of China's policies in the shipbuilding industry, see Panle Jia Barwick et al. (2019), ‘China's Industrial Policy: An Empirical Evaluation’, NBER Working Paper No. 26075 (September 2019), www.nber.org/papers/w26075.

47 See generally Chad Bown and Jennifer Hillman (2019), ‘WTO'ing a Resolution to the China Subsidy Problem’, 22(4) Journal of International Economic Law 557.

48 See generally Paul Blustein (2019), Schism: China, America and the Fracturing of the Global Trading System (Ontario: Centre for International Governance Innovation). For a short summary of the negotiations, see Jeffrey L. Gertler (2003), ‘China's WTO Accession – the Final Countdown’, in D.Z. Cass, B.G. Williams, and G. Barker (eds.), China and the World Trading System: Entering the New Millennium (Cambridge: Cambridge University Press) 55–67.

49 H. S. Reiss (ed.) (1991), Kant: Political Writings (Cambridge University Press, 2nd edn) at 98.