March 2019


Both countries are working towards resolving their trade disputes bilaterally. This has the potential to undermine the multilateral trading system and the WTO.

By D. Ravi Kanth

As the world's two largest economies, the United States and China, zero in on a "trade agreement" that is likely to be signed by end-March, a new normal is being established for resolving bilateral trade disputes. This has the potential to throw the World Trade Organization into uncharted waters.

With the two leading trading nations setting their own rules, it could irreparably damage the WTO's negotiating function, its adjudicating role, and even the proposed reforms for an enhanced oversight role of the WTO Secretariat, according to trade envoys.

Preliminary details of the proposed US-China deal, as reported in the Wall Street Journal on 3 March, suggest that the China hawks led by the US Trade Representative Ambassador Robert Lighthizer and White House trade policy adviser Peter Navarro have suffered a setback in their internal battle, with Wall Street and US treasury secretary Steven Mnuchin, insisting on a rapprochement.

There is a lurking fear among Wall Street financial firms and asset managers as to what China would do in its purchase of US Treasury bonds, if its trade surplus is reduced.

"What worries me about the conversation between the US and China is: China has a $1.3 trillion pool of US Treasurys, they've been accumulating because of the [US] trade deficit," Larry Fink, the head of the world's largest asset management fund Black Rock told CNBC television channel on 24 February.

"And if China reduces the purchase of US treasurys because of the proposed reduction in trade [gap] as demanded by the US, who is going to be the substitute buyer to buy this", he asked.

The fear that China could cause disruption by reducing its purchase of the US treasurys in the financial markets and even the stock market weighed heavily in ramping up pressure on Ambassador Lighthizer to reach a deal, according to commentators in the US media.

China appears not to have conceded ground on the so-called structural reforms involving rapid reforms of its state-owned enterprises, radical changes in the intellectual property provisions, and far-reaching reforms of the subsidy regime, according to the WSJ report.

The preliminary details of the deal to be signed by the US President Donald Trump and his Chinese counterpart President Xi Jinping on 27 March, according to the Wall Street Journal of 3 March, suggest that China will provide enhanced market access for American farm, chemical, auto, and energy products among others through reduced tariffs and scaling down of trade-related restrictions.

China has already signalled that it is ready to reduce import tariffs on foreign vehicles (autos) well below the current tariff of 15% to somewhere close to zero.

More important, as a political bonanza for the much-tormented American president Trump who will face re-election in 2020, China will buy unspecified amounts of soybeans, beef, and pork among others running into tens of billions of dollars.

These purchases by China could buoy the electoral prospects for President Trump in major farm states - such as Iowa and mid-west states - where farmers are angry with the unilateral tariffs imposed on Chinese products.

Beijing is also expected to import natural gas from the US to the tune of $18 billion as part of the deal. China is eager to buy American semiconductors and other vital products needed for its burgeoning telecommunications companies.

According to the WSJ report, the US could allow American companies to export some of these hi-tech items to the Chinese companies with safeguards.

In return, the US is expected to gradually remove the unilateral tariffs imposed under the US Section 232 national security provisions and the US Section 301 on Chinese products of more than $260 billion.

The proposed "trade agreement", instead of memorandums of understanding (MoUs) as conceived by the US Trade Representative Ambassador Robert Lighthizer, will indicate a timetable for China to carry out the so-called structural reforms in terms of removing restrictions on the foreign-ownership holdings in the joint ventures, particularly in the auto and financial sectors, and increased protection of intellectual property provisions.

According to the WSJ report which quoted recent comments made by the US Trade Representative (USTR), provisions involving protection of intellectual property are covered in 30 pages of the proposed agreement.

A bilateral mechanism to address specific concerns of the American companies is going to be established as part of the proposed deal.

"The plan under discussion calls for bilateral meetings of officials from both countries to adjudicate disputes [and] if those talks don't produce agreement, Mr. Lighthizer has said the US could impose tariffs," the WSJ reported in its story.

China is also resisting a demand from the US that Beijing must agree not to "retaliate at least in some cases - if the US levies sanctions".

China reportedly told the US negotiators that such a demand from the US will make the agreement an "unequal treaty for China of the sort imposed by Western powers in the 19th century," according to the WSJ report.

Clearly, the American lobbies and China hawks seem unhappy with the manner in which President Trump is plunging into the deal with President Xi on grounds that the "enforcement measures may not be strong enough and will tie down the US in the endless talks," according to the WSJ report.

"The whole process is a fraud," said Derek Scissors, a China expert at the American Enterprise Institute, who argues that the US could better enforce its will by taking unilateral actions rather than getting hooked into consultations, according to the WSJ report.

But there is no clarity yet on the creation of such a mechanism for addressing the specific complaints and concerns of the Chinese companies in the proposed agreement.

If the details of the proposed US-China trade agreement, as reported in the Wall Street Journal on 3 March, are any indication, then, it may sound the death-knell for the WTO's adjudicating and enforcement functions.

[It is not at all clear whether the experts being cited in US media reports are fully clued in on the WTO provisions. The WTO and its adjudicatory or enforcement functions can come into play only if and when the two parties to the bilateral accord, not only notify the WTO of the accords (as the WTO treaty and its agreements require), but amend their schedules to give effect to the terms of the accord. However, whether they do it or not, any other member of the WTO can raise a dispute, citing the MFN requirements of the GATT, GATS and TRIPS Agreement. SUNS]

Further, it will be the end of the road for any meaningful negotiations for any multilateral tariff reductions and for establishing new rules in electronic commerce or other plurilateral trade agreements as the norms set in the US-China deal could become the benchmarks, said a trade envoy, who asked not to be quoted.

Also, if the deal materializes between the two, it could also pose a problem to China's demand to be treated as a developing country for availing special and differential treatment, said a Western trade envoy, who asked not to be quoted.

In short, the proposed US-China agreement could throw the WTO and the multilateral trading system into uncharted waters for years to come. Third World Network Features.


The above article is reproduced from South-North Development Monitor (SUNS) #8859, 5 March 2019.

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