The bipartisan trade war

Nita Ghei International Trade Economist
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The United States just filed a case with the World Trade Organization, alleging that China was unfairly restricting exports of 17 rare minerals, in violation of treaty obligations. This is the latest move in the long-running, low-level trade war between the two countries, following the passage of a bill in Congress which allows the Commerce Department to slap countervailing duties on Chinese imports, while retaining the non-market economy designation China so ardently wishes to shed.

President Obama has promised to sign the bill, which has widespread bipartisan support. And that alone should have been sufficient warning to the rest of us that American consumers were going to be shafted. By passing this bill, in typical Washington fashion, Congress has chosen the worst option, enacting legislation that will not only damage the credibility of the U.S. as a bastion of free trade and a country which respects the rule of law, but also eventually result in American consumers, already hurting in a sluggish economy, paying more for a variety of goods.

At the heart of the issue is the imposition of countervailing duties, that is, duties to offset subsidies on goods imported from countries designated as non-market economies, such as China and Vietnam currently, and Russia in the past. Until a few years ago, the Commerce Department did not impose countervailing duties. The logic is simple: it is too difficult to calculate subsidies when there are no accurate market prices available, as is the case for non-market economies.

Under pressure from various industries, particularly steel manufacturers, the Commerce Department started imposing countervailing duties on Chinese goods in 2007. The process accelerated under the Obama administration. China challenged the policy in the WTO, as did Chinese producers in the U.S courts, and they won.

The WTO’s Appellate Body held that the offsetting duties set by the U.S. authorities were too high, and thus violated treaty obligations, because they effectively penalized the allegedly offending goods twice, imposing both the countervailing duties and anti-dumping duties. The Commerce Department admitted there was no way to resolve this double-counting problem. In December of last year, the Court of Appeals for the Federal Circuit ruled that the current laws, as drafted, did not permit imposition of countervailing duties on goods imported from countries designated as non-market economies.

A law that keeps China classified as a non-market economy, and permits the imposition of countervailing duties, as the recently passed bill would do, does not improve the situation in any way. It allows the administration to continue a policy that is in violation of treaty obligations, and weakens our legitimate complaints about the many distortions in China’s trade policy, both in bilateral negotiations and before the WTO, including the latest dispute.

The better solution would have been for Congress to pass a law that changed China’s status, so it would no longer be classified as a non-market economy. This is a change that China wants, and it fits with the new reality of China’s growing share in the global economy. Removing the cover of being a non-market economy would also force China to comply with global rules the big players abide by. And we all, both Americans and the Chinese people, win in that case.

China is rapidly approaching the limits of gains from a mercantilist policy. It needs to complete its transition to a market economy, including moving to freer trade and a floating exchange rate, if it wants to keep growing. A recent report from the World Bank emphasized the need for deep structural reforms in China, including opening “its markets to greater competition and innovation,” if it is to avoid stagnation. China needs to cut back on the size and share of public sector enterprises, reform the financial sector and strengthen the rule of law if it is to keep growing, according to the World Bank.

Congress had a simple choice here. It could have done nothing, and left China as a non-market economy, not subject to countervailing duties. That would at least have been consistent with our treaty obligations. Better yet, it should have passed a law saying China is no longer a non-market economy. What it should not have done is the choice the bipartisan consensus picked — leave China designated a non-market economy subject to countervailing duties. That is the path to unending trade war, where there are no winners, only losers.

Nita Ghei is an international trade economist and a contributor to the Encyclopedia of Law and Economics (Edward Elgar 2012).