An Urban's Rural View

The China Syndrome

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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It didn't attract much attention, but the Trump administration has filed a brief in a critical World Trade Organization court case. Though agriculture isn't directly involved, farmers and ranchers should care about the outcome. There's a real risk it could undermine the rules-based international trade order and increase the odds of a U.S.-China trade war.

At issue in the case is whether China has earned the right to be deemed a "market economy." The European Union says no. In its brief, the U.S. has now said no, too. If the court says yes, the EU and the U.S. will be limited in their ability to impose heavy anti-dumping duties on Chinese imports.

Without that ability, many U.S. and European manufacturing industries would be defenseless. China has so much excess industrial capacity that it's flooding the market with artificially cheap goods and driving foreign competitors into the ground.

Take steel, for example. Nariman Behravesh, IHS Markit's chief economist, told the DTN/Progressive Farmer Ag Summit that China's excess steel capacity is equal to the total steel capacity of the next four biggest steel-producing countries combined. Thinking he must have been exaggerating, I checked -- and found support for his assertion in the Economist: "By one oft-cited gauge, China's unused steel capacity equals the total annual output of the next four biggest producers (Japan, India, America and Russia) combined" (http://tiny.cc/…).

A yes by the WTO tribunal would infuriate the Trump administration, which is already unhappy with the WTO. President Trump has occasionally even threatened to withdraw from the WTO, and while he won't necessarily follow through on that threat, his trade team has been obstructing the WTO's dispute-resolution capacity by blocking appointments of new judges. It's understandable, then, that trade mavens worry about how the U.S. would react to an unfavorable ruling.

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They should probably have similar concerns about how China would react.

The Chinese feel strongly that they've lived up to the 2001 protocol under which China joined the WTO. They expected the strict terms of that protocol to expire in 15 years, at which point their trade partners would no longer be able to impose those heavier-than-usual dumping duties. They feel betrayed.

The problem for the U.S. and EU is that the Chinese appear to have a good case legally, even though they have not liberalized their economy anywhere near as much as their partners reasonably expected in 2001 (http://tiny.cc/…). When the rules governing non-market economies were written, nobody envisioned an economy quite like the one China has today, combining strong elements of market pricing with heavy-handed state direction. The Chinese can also point to a clause in their WTO protocol that seems to grant China automatic market-economy status after 15 years.

If the U.S. and EU lose, will they abide by the WTO ruling? Even the EU's adherence is in doubt. The Europeans are already reserving the right to impose heavy dumping duties, however the WTO tribunal rules (http://tiny.cc/…). It's hard to imagine the U.S. doing any less. It's easy to imagine the U.S. going further and throwing more wrenches into the WTO machinery.

It's surprising no one is asking how the Chinese would deal with an adverse ruling. They're not likely to withdraw from the WTO, which they worked so hard to join. But if the U.S. or EU impose heavy dumping duties whose legality they dispute, they might well retaliate with trade barriers of their own. The Chinese know how to play this game, and they don't like to lose.

Sovereign nations aren't easy to push around. They decide whether they'll abide by international law. When a tribunal of the Permanent Court of Arbitration in the Hague rejected China's territorial claims to the South China Sea last year, China refused to recognize the verdict (http://tiny.cc/…). (The U.S., while applauding the tribunal's ruling, has refused to ratify the Law of the Sea Convention under which the case was decided.)

The WTO is far from perfect. As a negotiating forum, it suffers from the requirement that all 160 member nations agree to new terms. As a court, it suffers from the vague rules it's asked to enforce, which often leave it in the position of having to make law instead of interpreting it. No wonder everybody's frustrated with it.

Still, the WTO is a small step toward the rule of law and away from the law of the jungle. The loser in this WTO case will be tempted to think the law of the jungle favors strong nations like them and ignore the verdict. If that happens, stand by. When strong nations go head to head in the jungle, the carnage is often not pretty.

Urban Lehner can be reached at urbanize@gmail.com

(ES)

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