By Nicole Golliher

The European Union and the United States in July filed with the World Trade Organization (WTO) new disputes against China regarding its raw materials export duties. Both complaints claim China export duties unfairly favor Chinese industry, which is against the laws of the organization.  

These complaints were filed just months before the 15-year anniversary of China’s entry into the WTO, and the deadline to remove China’s non-market status. What they must do beyond this, however, is controversial. While China argues that countries must grant it market economy status, the agreement does not specify that requirement. And as the deadline looms, many in the United States and the EU are worried about protecting themselves from overcapacity, especially in steel.

The complaints

The EU launched a complaint July 19 that China failed to remove export duties on 11 raw materials (graphite, copper, cobalt, lead), a violation of its WTO commitments. China is the main exporter of raw materials essential to EU industry and export duties on these goods makes them cheaper to purchase in China than abroad.

The  EU has brought three cases against China in its 15-year WTO membership; in that same time, the United States has brought 13 disputes, including a recent case that mirrors the EU complaint.

The July 13 US dispute  cites China’s 5-20 percent export duties on nine raw materials:  antimony, cobalt, copper, graphite, lead, magnesia, talc, tantalum, and tin. These goods affect vital US industries, such as automobiles, electronics, and chemicals.

China says its export duties are consistent with WTO rules, a claim that will be decided by the WTO. So far, the United States has won every dispute it has filed, including 12 cases against China. If the WTO finds China in violation of its rules, China must comply or face retaliatory measures, such as trade sanctions.

Dispute resolution: Its function and effect

The WTO can judge trade disputes on the basis of its trade agreements, and member countries are obligated to bring disputes to the organization rather than unilaterally act. A WTO ruling determines which country is just and outlines acceptable courses of action for both parties to resolve the dispute. Of the 400 cases brought before the WTO since 1995, less than 4 percent resulted in sanctions, which highlights the high compliance rate.

The results are mixed. On one hand, WTO  provides an outlet for trade disputes that averts unilateral actions and reduces tit-for-tat protectionism. On the other hand, it’s clear that even when used, it does not automatically remove the problem. The concurrent current cases by the United States and EU illustrate this since they closely mirror previous cases against China.

This month, the Office of the US Trade Representative lead a hearing examining the effect of China’s WTO admission. Erin Ennis, senior vice president of the US-China Business Council (USCBC), served as a witness to the panel. Ennis said “On balance, China’s WTO entry has been positive,” calling the United States’ ability to use a rules-based system to hold China accountable for its commitments a major positive.

Implications of these challenges

The important aspect of these challenges is the timing. Both complaints were filed as concerns about China’s protectionism are on the rise and the United States and EU grapple with the December deadline for China’s NME Status. The United States and the EU worry that dropping China’s NME designation will hinder their ability to address market distortions, including export duties and overcapacity in steel and other industries.

To uphold its commitments, the EU Commission plans  to drop the NME designation, but sidestep the question of market-economy status. This would address the concerns of some countries and industries while adhering to international legal commitments. The commission states that its plan would “allow for high tariffs to be imposed on imports deemed to be priced below international-market levels and accelerate anti-dumping procedures.” The EU has already placed new export duties on Chinese steel, foreshadowing this strategy.

Europe isn’t united on this strategy; there’s ongoing debate among those who want to be tough on China, like Italy, and Nordic countries who think granting China full status and will encourage it to engage more with the European economy.

The United States wants a level playing field. Many policy makers argue that dropping China’s NME status would hamper the United States’ ability to fix market distortions, but that’s not the case. Just because the United States must drop China’s NME status, doesn’t mean it must adopt a market economy status. Like the EU, the United States can adopt a flexible approach that would enable it to address market distortions, like China’s overcapacity or protectionist measures, while upholding its international commitments.

Posted by Nicole Golliher