Media  Global Economy  2018.08.22

Use the TPP to reform the WTO! - WTO reform is necessary to restrict China's actions

The article was originally posted on Webronza on August 6, 2018

The WTO took "Section 301" away from the U.S.

The Nikkei published an editorial titled "Use the Trump phenomenon as an opportunity for WTO reform" on Aug. 2. One of the proposals in the piece was for trade liberalization in new fields through "plurilateral agreements" (Please refer to "A windfall for Japan? The U.S. and European plan to prevent the introduction of automobile tariffs") among a limited number of countries instead of all World Trade Organization (WTO) members, in order to reform the dysfunctional WTO.

Section 301 of the Trade Act of 1974 was used by the U.S. as the grounds for increasing tariffs on Chinese goods, which triggered the trade war between the U.S. and China. This allows the U.S. government, as the prosecutor and judge, to unilaterally impose trade sanctions against nations that it deems to be conducting unfair trade.

From the 1980s to the early '90s, trade friction intensified between Japan and the U.S. Troubled by unilateral actions by the U.S. that were seen as intimidation, Japan succeeded in pushing for the adoption of rules at the General Agreement on Tariffs and Trade (GATT) Uruguay Round negotiations, which led to the creation of the WTO, which stated that unilateral actions cannot be taken unless dispute settlement proceedings are taken at the WTO.

As a result, unilateral actions such as Section 301 can only be taken against non-members of the WTO. Compared with its predecessor GATT, the WTO has stronger judicial (trial) functions, and this took away the ability of the U.S. government to make decisions as the judge.

Of course, the U.S can file a complaint to the WTO against a country that is violating WTO rules as the prosecutor, but this is a right that every WTO member has.

WTO reform to restrict China

This time, the U.S. has disregarded these rules and applied Section 301 against China, raising tariffs unilaterally. Other WTO members have strongly criticized this move, but the U.S.'s argument is not completely groundless.

This is because most of the issues that the U.S. has against China are not covered by WTO rules. For example, China's demand that U.S. companies operating in China transfer technologies and intellectual property to China, and Chinese companies' acquisition of and investment in U.S. companies for the purpose of acquiring American technologies and intellectual property, are among the grievances that the U.S. has. But these actions are not covered by WTO rules, so the U.S. cannot file a complaint with the WTO. (However, the U.S.'s raising of tariffs against China to achieve its goals is in violation of the principle known as most-favored-nation treatment of GATT/WTO.)

Why haven't WTO rules been created?

The answer to this question is that WTO negotiations for the Doha Round, which began in 2001, came to a standstill because of discord between developed nations such as Japan, the U.S. and the EU -- which sought discipline in new fields and lower tariffs on goods -- and the developing nations that opposed these, led by India and China (which joined the WTO at the start of Doha Round negotiations) (Please refer to "Expand TPP rather than RCEP without being misled by China"). As a result, the WTO's rules do not at all reflect any changes to the economy and trade since 1993 when the Uruguay Round negotiations of GATT were concluded.

This is a concern of not just for the U.S., but for other developed nations such as Japan and the EU as well.

As such, an agreement was reached at the G7 summit in June 2018 to "commit to modernize the WTO to make it more fair as soon as possible." Japan and the EU are opposed to the U.S. raising tariffs on steel/aluminum and automobiles, but they agree with the U.S. that WTO reform is necessary to restrict the actions of China.

How, then, should the WTO be reformed?

A plurilateral agreement cannot discipline China

The following are problems with the plurilateral agreement proposed by the Nikkei.

First, when concluding plurilateral agreements regarding rules, the attitudes of participating nations will differ according to each issue or agreement, such as intellectual property rights and state-owned enterprises. In fact, there was confusion after the conclusion of the Tokyo Round negotiations because participating nations differed on each agreement, and to prevent that from happening again, an agreement method known as a "single undertaking" was adopted at the GATT Uruguay Round, in which all nations agree to and participate in all agreements.

Second, China is unlikely to participate in plurilateral agreements on issues such as intellectual property rights and state-owned enterprises, which are areas of interest for the U.S., Japan and others. If that is the case, then China cannot be disciplined, and the U.S. cannot achieve its goal.

Third, a plurilateral agreement on lowering tariffs on goods means that non-participating nations benefit from the lowering of tariffs by participating nations. It is this "free-rider" problem that led to nations adopting the negotiation method known as "critical mass," in which there is no agreement unless what is believed to be a minimum number of nations participates. So a plurilateral agreement does not necessarily make the goal easier to achieve.

What, then, can we do?

Let's use the TPP

The answer is to use the Trans-Pacific Partnership (TPP). All of the concerns that the U.S. has against China are covered by the TPP agreements. The U.S. surely understands this. This is why U.S. President Donald Trump, who withdrew the U.S. from the TPP, has indicated that the U.S. may return to the TPP, on the condition that it can receive better terms.

If the TPP expands by including Thailand, Indonesia, South Korea, Taiwan, the U.K., Colombia and others, and if the U.S. returns, then the TPP will create a huge free-trade zone. If that happens, then it will become more likely that China will have no choice but to participate in the TPP.

Even if China does not participate in the TPP, efforts can be made to persuade the WTO to adopt the rules of the TPP agreements, which reflects changes in global trade and investment since 1993. The EU will probably agree to this. So the point is to make the TPP rules the global rules. Because the TPP treaty is something that developing nations in the Asia-Pacific region agreed to, and not just a proposal by developed nations, China will find it difficult to object to the introduction of the TPP agreements to the WTO.

Revive the dispute settlement functions of the WTO

Another issue concerning China is that the country is not obeying the existing rules of the WTO, either.

For example, WTO members are supposed to report annual agricultural subsidy amounts to the WTO to allow for an examination of whether each nation's agricultural subsidies are distorting trade, but China has not done this for many years.

Currently, pursuing WTO agreement violations requires that the WTO's dispute settlement procedures function properly. However, three of the seven seats on the Appellate Body, which is the higher of the two-level court system, are unfilled because the U.S. has objected to nominations, and with the term of one member ending in September, only three members will remain. Since each case is reviewed by three Appellate Body members, the remaining three members will need to review every one of the large number of dispute settlement cases.

The U.S. needs to recognize the WTO's dispute settlement functions. This is a path toward avoiding unilateral actions.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on August 6, 2018.)