The Public Policy

A Trade War Averted

Unless Congress gets in the way, U.S.-China trade is doing just fine.

By 4.13.07

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The media has spilled lots of ink these past several months keeping up with developments in the U.S.-China trade relationship. Since February, the U.S. Trade Representative has initiated three separate cases against China in the WTO, and the U.S. Commerce Department broke with a 22-year tradition by applying preliminary countervailing duties (to countervail subsidies) against Chinese exports of coated paper.

The rash of activity leads some to speculate that recent actions signal the beginning of a trade war with China. Though such a sensational conclusion is what headlines are made of, the appropriate conclusion is probably exactly the opposite: recent U.S. actions are likely to head off a trade war with China.

Trade disputes, particularly between the world's largest and fastest growing economies, are inevitable. Fortunately, there is a functioning and respected venue for arbitrating those disputes in the World Trade Organization. As far as I can tell there is nothing particularly provocative or unjustified in the Bush administration's assertion of U.S. rights in its WTO complaints, and I see a silver lining in the Commerce Department's decision to apply countervailing duties.

By bringing its actions through the WTO, in a manner that appears to be consistent with U.S. obligations, the Bush administration may be preempting the Congress from passing legislation that would take the kind of unilateral action that could justify retaliation, and ultimately spark a trade war.

Although Chinese officials have registered incredulity and anger over these disputes, I would interpret most of it as posturing and face saving. It would be naïve to expect China's response to the U.S. complaints to be contrition. ("Oh yes, we realize that our policies are discriminatory and our laws inadequate, but we just haven't had the chance to get around to fixing them. Sorry, how can we mend our ways?") These cases have been in the works for a long time and the Chinese have had to expect that the United States would be lodging formal complaints at some point.

With Congress foaming at the mouth to punish China for its audacity in running a large trade surplus with the United States, the Chinese should even welcome the administration's WTO path. One complaint I've heard registered by Chinese officials is that they thought the Bush administration had signaled a willingness to engage in dialogue, and that the recent actions constitute a form of betrayal. Well, the two are not mutually exclusive. In fact, dialogue is encouraged under WTO dispute settlement. It is the first step ("request for consultations") of the dispute settlement process. There is a preference for members resolving their disputes without need of formal WTO adjudication. Filing these cases just puts an hourglass on the negotiating table.

Despite some suggestions that there will be retaliation, I'd put those chances at about 0 percent. China has no legitimate recourse to any retaliation (at least at this point) because the United States has not acted in a manner contrary to its WTO obligations. If China were to retaliate officially (outside of choosing to forgo purchases of U.S. wheat or Boeing jets or U.S. government securities, for effect), it would be in violation of its WTO commitments. And China cannot afford that stigma at this point, since governments across the globe are looking for excuses to at least temporarily disregard their own WTO commitments to hammer Chinese exports.

As an advocate of unfettered trade who recognizes that trade disputes are inevitable, I see these recent trade actions as part and parcel to an evolving, mutually beneficial relationship.

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