Since joining the World Trade Organization (WTO) in December 2001, China has been one of its greatest beneficiaries, enjoying lower tariffs and market access to virtually every other country in the world. But the honeymoon might be coming to an end.
Until recently, WTO membership has had few downsides for the Chinese. Its manufacturing sector has grown at an astonishing pace, providing the country a hefty trade surplus with the rest of the world. With that growth has come increasing political influence and a seat at the table alongside other leaders in the international arena.
Critics have argued that China enjoys all the benefits of WTO membership, namely market access, while remaining protected. Foreign ownership of Chinese companies is limited, for example, and China has brushed aside complaints from the United States and others that its artificially weak currency amounts to a trade-distorting subsidy.
But a big loss at the WTO in a case involving auto parts could be a sign of things to come.
"China is going to be increasingly targeted," said one U.S. trade attorney who has argued cases before the WTO. He noted that because of its size, the United States was an early target for WTO action. "Just as China has grown to control a larger portion of world trade, it is going to be a target for other WTO nations when it doesn't comply with the trade rules."
The auto parts case was the first wake-up call for the Chinese, and even die-hard free traders said China's position was suspect. China had agreed to open its market to foreign auto suppliers when it joined the WTO but then raised tariffs on car parts. The only thing that surprised most observers was that China didn't settle the case before it reached the WTO panel, sparing itself an international embarrassment. The Chinese have even indicated that they may appeal the decision.
After the ruling, it didn't take long for the United States and its allies to strike again U.S. Trade Representative Susan Schwab announced March 3 a new case targeting China's treatment of U.S. suppliers of financial information services.
China's regulatory regime requires foreign financial information suppliers to operate through a government-designated distributor in China and prohibits them from establishing local operations to provide their services, the complaint says. The agency designated to regulate this financial service appears to have a conflict of interest, since the agency seems to be closely aligned with a Chinese competitor in the supply of these services.
"The United States believes that China's treatment of foreign financial information suppliers is inconsistent with China's WTO obligations," Schwab said.
Meanwhile, China is still consulting with the United States over a case launched in April 2007 alleging intellectual property rights violations. The complaint said that China's legal regime has been lax in its protection and enforcement of copyrights and trademarks on a wide range of products, including books, music, videos and movies.
"Piracy and counterfeiting levels in China remain unacceptably high," Schwab said at the time, and anyone who has walked the streets of Beijing, Shanghai or any other major Chinese city can attest to the overwhelming number of pirated DVDs readily for sale along the sidewalks.
So the Chinese are fighting cases on all fronts—manufactured imports, services and intellectual property—and there's no reason to think the pressure is going to let up.
China's options are limited, but there could be an opportunity for progress. "I don't think it's viable for anyone to retreat from the WTO; they benefit too much from it," the trade attorney said. "But what they can do is address the most egregious laws and regulations that they have that are inconsistent with WTO rules."
One example of that is the case filed against China on export subsidies. Instead of going through with the case, China voluntarily ended the programs.
"It's fair to say that other nations have found that (litigation) is a more effective way of addressing their concerns than having dialogue with China," he said. "Dialogue only goes so far. It's nice to have, but if it isn't going to prompt any change then the United States and the European Union have to resort to other measures."
However losses at the WTO could prove to be a blessing in disguise for China, if they encouarge Beijing to reassess what its role should be, the trade attorney noted. "Maybe it will lead them to engage more as a leader in the WTO process," he said. "China really is a trading power and should be trying not just to comply with the WTO, but to try to direct its course. That would be another option."