Founders Broadsheet trade correspondent L.C. reports:
The US has won a significant World Trade Organization (WTO) decision in a case filed against China for its “market price support” farm subsidies. The complaint was filed in 2016 by the Obama administration.
The US alleged that about $100 billion in government subsidies to Chinese farmers exceeded China’s allowable limit on trade-distorting subsidies. The subsidies gave farmers an incentive to overproduce wheat, corn, and two kinds of rice that they could then sell cheaply. This harmed US grain sales both domestically and globally.
The victory was anticipated already in 2016, contrary to Trump zealots who suppose the WTO decision to have been a capitulation to the US president. As the Obama Administration said at the time, this was the twenty-third WTO case the US had filed – fourteen of which were against China — and the US had won every single case that reached a conclusion. President Obama declared that the US expected to win this one as well.
After a brief period of uncertainty, the Trump Administration continued to pursue the case. The WTO’s Dispute Settlement Body agreed with US allegations about rice and wheat but not corn.
US Trade Representative Robert Lighthizer welcomed the ruling as a “significant victory.”
“The US proved that China for years provided government support for its grain producers far in excess of the levels China agreed to when it joined the WTO. China’s excessive support limits opportunities for US farmers to export their world-class products to China. We expect China to quickly come into compliance with its WTO obligations,” Lighthizer added.
“Market price support programs are some of the most trade-distorting agricultural policies, and are therefore subject to clear limits under the WTO Agreement on Agriculture and a WTO Member’s specific commitments,” he continued. “Compliance with WTO rules will lead to a reduction in the excessive support provided to China’s grains producers and should increase market forces in China, leading to a more level playing field.” China is the world’s largest producer of wheat and rice.
Each party has sixty days to file an appeal. But it is not certain when, or if, an appeal might reach a conclusion given the Trump administration’s refusal to appoint new Appellate Body judges. If China takes the appeals route, the Trump administration’s deliberate paralysis of the Appellate Body could end up causing the US to snatch defeat from victory.
But Beijing may not appeal. Its WTO ambassador told reporters that a decision hasn’t been made because the government is already developing reforms to its farm subsidy regime that would resolve the dispute. It is also possible that the matter will be brought within the ongoing US-China trade talks.
Implications
In addition to the case showing that the WTO can be used to fight China’s unfair subsidies generally, it also relates to the wider problem of China’s government programs encouraging overcapacity. To the extent that Beijing complies and trims back its subsidies, the overproduction problem will be reduced. Admittedly, in the global effort to force a reduction in China’s metals overcapacity there are many complications, including that much of the subsidization takes place at the local/regional level and is not so directly under Beijing’s control. But given the fact that China’s president Xi Jinping is a virtual dictator over policy and personnel throughout China, a Chinese argument of local exceptionalism would be met with considerable skepticism.
The ruling could also impact other WTO members. At the time of the original filing, then-USTR Michael Froman told reporters that because this is the first WTO case that targets price supports, which are widely used, the decision would likely have a “systemic” impact.
The ruling could also bolster the US push for more transparency and accuracy in the notifications that countries are required to make to the WTO regarding their farm subsidies. This is a US push that is also supported by Japan and the EU – but which Beijing has opposed.
But what goes around comes around, as they say. The US is also under pressure for its own excessive farm supports. The US’s vulnerability was shown years ago when Brazil prevailed in its complaint against US cotton subsidies. The US was found to grant huge cotton subsidies in excess of WTO allowable levels.
In fact, complaints about US farm subsidies have not abated. At a February 27th meeting of the WTO Committee on Agriculture where Chinese and Indian subsidies were being discussed and attacked, Australia, Brazil, Canada, China, the EU, New Zealand – which are major agricultural exporters – raised questions about the new US farm bill.
Separately, at the WTO Agriculture Committee meeting, the US and Canada went after India’s farm subsidies, claiming that New Delhi is grossly under-reporting them. Brazil and Australia, for their part, filed a WTO complaint against India’s subsidies for sugar, charging that they have caused a global sugar glut and suppressed the global price. The two allege that the subsidies, which are greatly harming their sugar farmers, are WTO-illegal.
The issue of subsidies notification and the accuracy of such notifications, which is an issue in the case the US just won, is of high importance to the US. The Trump Administration has called for changes to the notification system, and Washington, Tokyo, and Brussels have all submitted a proposal to the WTO for notification reform. If the US and its allies win on this matter, the Trump Administration might reconsider its hostility to the WTO.
The bilateral trade negotiations with China
Meanwhile, the Trump Administration has set a path to an agreement in the “90-day talks” process with China – though it is not a done-deal yet, and the President’s advisers are not entirely on the same page regarding either the deal’s likelihood or its scope.
Stock market investors in China are convinced that there will be a deal. That belief has propelled an upsurge in equity prices there that were previously lying prostrate as US tariff road kill.
There are also late reports that the Chinese National People’s Congress (NPC), which is about to convene its annual gathering, will give its support to legislation aimed at stopping local officials from demanding the transfer of foreign technology. Although it will have to be shown that such a legal change has teeth, it is certainly something that begins to address one of the US’s fundamental complaints. The NPC reportedly may consider other structural changes as well.
A US agreement to end the 10% tariffs on $200 billion in Chinese imports settles an issue that had become increasingly annoying to American businesses. The current scenario would have President Xi Jinping endorse an agreement that is being worked out by US and Chinese negotiators, who have been meeting regularly and have also kept in contact by phone.
Most of the world would welcome an end to the US-China tariff war, which is catching many countries in its headwinds. Yet there are also concerns being expressed that a bilateral deal could “shut out” the rest of the world in a way that would further distort world trade. If so, a US-China trade deal might find itself challenged at the WTO.
The US president is enamored of many bilateral trade deals as opposed to a few multilateral deals. But multiple bilateral deals disadvantage small US exporters in favor of the big US multinationals — for the same reason that the Dodd-Frank bill harms small banks but benefits large ones. In both cases the fixed cost of a greatly enlarged administrative and compliance burden is peanuts to a large firm but a business-destroying expense to a small one.
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