US-China trade war intensifies as WTO reaches ‘debilitating’ dispute settlement impasse

Warnings over the impact of escalating trade tensions between the US and China are pouring in. In early October, the International Monetary Fund’s turn lowered its global growth forecast by 0.2 per cent for 2018 and 2019 as the possibility of an all-out trade war between Washington and Beijing looks increasingly real.

The US government has imposed tariffs on more than $250bn of Chinese imports, claiming China’s ‘unfair’ trade policies have put US companies at a competitive disadvantage.

The tariffs have targeted a wide range of goods, from aluminium and steel to consumer goods, such as washing machines and solar cells. This has prompted retaliation, with China putting charges on $110bn of US goods.

Above: Podcast on US-China trade with former US Trade Representative Michael Froman

 

Vanessa Sciarra, vice-president for legal affairs and trade and investment policy at the National Foreign Trade Council, says that from the outset China has been the most pressing trade issue facing the Trump Administration. ‘China is the dominant issue in the trade space for this administration,’ she says. ‘The President’s instincts continue to be very hawkish on trade – very much ‘America First’,’ says Sciarra. ‘He’s very concerned about our bilateral relationships. I think he’s consistently convinced that the United States has been taken advantage of and that we’re not consistently enough pursuing our rights.’

‘‘Many businesses are thinking of changing their supply chain, relocating their suppliers to another country or sourcing from another country

Eric Jiang
A senior partner at Jurisino Law Group in Beijing

There have been three rounds of US tariffs on Chinese imports so far this year. Sciarra believes there could be even more on the horizon: ‘Essentially the current situation is that about half of the trade with China is going to be subject to these tariffs – 10 per cent at the moment, but that will escalate to 25 per cent in January. The president has also talked about putting all the imports from China under these restrictions. That will certainly affect the trading relationship with China.’

China’s economy has already taken a hit. Both the trade war and higher US interest rates spooked investors so much in mid-October that China’s main stock exchange index, the Shanghai Composite, slumped to its lowest level since November 2014. Companies across China have already been affected says Eric Jiang, a senior partner at Jurisino Law Group in Beijing and an officer of the IBA International Trade and Customs Law Committee. ‘Many businesses are thinking of changing their supply chain, relocating their suppliers to another country or sourcing from another country,’ he says. ‘There’s even talk of companies trying to change their tariff classification to avoid immediate tariffs.’

US companies are also feeling the heat, says Eric Emerson, chair of the International Trade and Investment Group at Steptoe & Johnson in Washington DC.  ‘These tariffs are costing US businesses millions of dollars, and are forcing US businesses to make difficult commercial decisions in an extremely uncertain legal environment,’ says Emerson, who is Senior Vice-Chair of the IBA International Trade and Customs Law Committee. ‘Even if these tariffs were to disappear tomorrow, the genie is now out of the bottle, and it seems impossible to believe that we could go back to the business assumptions prevailing before these tariffs were imposed.’

In early November, President Trump indicated that he had been in discussions with President Xi Jinping to reach a deal on trade. The next opportunity for the two countries’ leaders to meet will be at the G20 summit in Buenos Aires at the end of November. Meanwhile another challenge has emerged in the form of a new free trade agreement (FTA) negotiated between Canada, Mexico and the United States. In particular, the new United States-Mexico-Canada Agreement, which is set to replace the North American Free Trade Agreement, contains Article 31.10, a US-devised provision that requires each party to inform the other signatories in the event that they plan to sign a FTA with another state.

The clause has been dubbed a ‘poison pill’, effectively giving the US the power to veto any plans by Canada and Mexico to sign FTAs with other global powers like China. The concern now is that this provision could be replicated in any future FTAs brokered by the US, which is already planning to negotiate three separate deals with Japan, the UK and the EU in the coming months. ‘They could have this poison pill everywhere so if anyone wants an FTA with China then they’ll need to get consent from the US,’ says Jiang. ‘That is a serious check on China’s ability to sign trade agreements with major economies.’

WTO in peril

The Trump Administration has repeatedly criticised the World Trade Organisation (WTO) for allegedly treating the US unfairly. As the US-China trade war continues, there’s growing unease that US influence at the WTO could severely affect the body’s ability to resolve trade disputes. Since 2016, Washington has blocked the reappointment of judges to the Appellate Body of the WTO’s Dispute Settlement Body, which was established to deal with disputes between WTO members.

The Appellate Body typically consists of seven judges and requires a quorum of three judges to make a final decision on any dispute. However, the number of judges is now down to just three – one Chinese, one US and one Indian judge. In June, the chair, Ujal Singh Bhatia, said the impasse on reappointing judges was ‘debilitating’ the WTO dispute settlement system and called on members to ‘take swift and robust action to remedy this situation.’

Cases involving the US or China could be particularly affected since WTO rules stipulate that judges must be ‘independent, impartial and avoid conflicts of interest’ or risk being recused from a case. Since the WTO’s inception in 1995, the US has filed 23 cases against China, China has filed 15 cases against the US and together the two countries have acted as a third party in almost 300 disputes.

Terms for two of the incumbent judges are due to expire in December 2019, but Jiang warns that the high potential for conflict of interest could prevent the Dispute Settlement Body from issuing judgments much earlier. ‘If a recusal request is raised for any reason and agreed to there will be no quorum of judges, which would delay all the cases and there will be no decisions from now on,’ he says. ‘These are the ways the US is trying to sabotage the system and I’m not optimistic about the WTO being able to settle this war.’