On June 9, 2010, Ambassador Alan Wolff was asked by the U.S. China Economic and Security Review Commission to deliver a testimony on China in the WTO. Below is the summary of his testimony.
CHINA IN THE WTO
Summary of Written Testimony for Oral Delivery
Alan Wm. Wolff
Hearing on
Evaluating China’s Role in the World Trade Organization Over the Past Decade
Before the
U.S. China Economic and Security Review Commission
Washington, D.C., June 9, 2010
Mr. Chairman, Members of the Commission, I appreciate the opportunity to testify this morning on Evaluating China’s Role in the World Trade Organization. I have prepared more extensive written testimony that will, I understand, be published on the Commission’s website.
You have posed an extremely important series of questions about America and most of the world’s economies choosing to manage their trading relationship with China through the WTO.
In my view, the framework for considering these questions is the following:
America’s national security depends on the strength of its economy. Strength is measured in terms of productive capability and ability to innovate. It means having human resources, capital and tools that place the U.S. economy second to none. America’s leaders have re-discovered this fundamental truth. Whether we as a country act upon it, base national policies on it, is another matter.
Second, our nation is in a competition with other countries, both economic and political. It is unavoidable, and has always been the case and, unless human nature changes, will always be the case. A principal source of competition now is from a rising power, China. This competition is similar in some respects to that from Japan in the last third of the 20th Century, and markedly different in others. China is much larger, it welcomed other countries’ investment as a means of its own economic development as Japan did not, and its foreign policies are certainly less clearly aligned with those of the United States than was the case of Japan. And China is building military capability without being an ally of the United States.
In this context, the following is a very brief summary of my answers to the questions posed by the Commission:
The true test of the WTO as an effective means by which the United States and other nations and China manage their trade relationships will occur in the second decade of China’s WTO membership, not the first decade.
This is true for several reasons:
• (1) There is a real question whether China is now in the process of reversing the policy direction of market liberalization set by Deng Xiaoping in 1978. There are policy measures being contemplated and put into place that threaten access both through imports and through foreign direct investment.
• (2) The renminbi is, economists generally agree, severely undervalued, and China’s trade surpluses continue to grow.
• (3) The three transitional measures of China’s accession – the review mechanism, the special safeguards, and nonmarket economy antidumping methodology are expiring,
• (4) The WTO rules will be tested where they may prove to be least effective:
- a) When national standards are imposed instead of international standards, is this protection actionable?
- (b) When state-owned and other Chinese enterprises choose not to buy foreign products, can their actions be proven to be state-directed?
- (c) At what point is a high rate of piracy of intellectual property actionable as a failure to live up to WTO commitments?
- (d) When a currency is seriously undervalued, will the WTO rules provide an effective remedy?
- (e) To what extent will domestic subsidies prove to be actionable when they appear to cause import substitution?
- f) Will the WTO dispute settlement system’s bias against trade remedies impair effective responses to injury caused by China’s exports?
- (g) Will China’s purchasing of first stage primary products while resisting processed products and manufactured imports distort the development of emerging economies?
- (h) And last but not least: if these policies are pursued by China and the WTO’s potential weaknesses exploited, will China’s economy stagnate the way Japan’s economy has due to China’s failure to continue to liberalize its economy and a continuing domestic misallocation of resources.
With respect to each of these points, we (and China) can hope for the best but need to be concerned about the worst. China is moving into the implementation phase of the National Indigenous Innovation Policy; there is evidence of a Buy-Chinese procurement bias by state-owned enterprises; in telecommunications and electronic equipment, national standards as opposed international standards are being deployed; there will be resistance within China to any substantial appreciation of the renminbi; and the Antimonopoly Law was used in a high profile case to limit foreign investment. In some sectors, foreign market share has plummeted. (Your recent hearing highlighted the dramatic reduction in foreign companies’ sales of wind electrical generating equipment.)
On a spectrum of various types of economies, China’s economy is closer to a model of state developmental capitalism at one end of the spectrum, and our own, at the other end, the free market. The WTO agreements implicitly assume that market forces determine competitive outcomes. For this reason, on its accession to the WTO, China was asked for a very long list of commitments in scope and content required of no other WTO member. Those commitments will undoubtedly be severely tested in this second decade of the 21st century.
Greater reliance by China on state-owned enterprises and seeking autarky in innovation will, if this is the direction chosen by China’s leaders, lower China’s rate of growth and make China’s industries less internationally competitive, even as its market closure damages foreign industries.
As for the questions the Commission posed about the first ten years of China’s membership, the following are my conclusions:
FIRST. The United States would not have been better off with China outside the WTO. The alternatives — the imposition of trade sanctions, free use of trade remedies, a form of trade warfare — were not feasible alternatives, economically, politically, or realistically. To paraphrase Winston Churchill, the WTO is the worst form of structuring trade relations with China but for all the others.
SECOND. In order to join the WTO, China undertook greater changes than any other country ever did in transforming its economy and its system of regulating its economy. Key elements were the opening first to foreign investment and then through WTO accession to foreign goods. China’s achievements in this regard were remarkable.
THIRD. There are economic costs to important segments of the United States economy of trade with China, but on the whole these are not greatly affected by whether China is within the WTO or not. The United States was not going to maintain a Cold War tariff level on China’s goods and this decision was taken decades before China’s WTO accession. Industries which could do so brought antidumping or safeguard actions. I believe that the United States is better off having China in the WTO, and that the alternative was in no way superior. The WTO is not a cure-all, however.
• If going forward China chooses to use measures that are designed to slip past its WTO obligations, where WTO disciplines are not clear-cut or the evidence is not available to support a dispute settlement case, or the political will to bring a case is absent, there will be adverse consequences for U.S. economic and commercial interests.
• And, more fundamentally, litigation is not an adequate substitute for general adherence to the WTO rules nor should it be used to plug holes in the existing rules – that is the responsibility of the WTO members themselves through negotiations. Unfortunately, the WTO has not evolved an effective means of updating its system of multilateral rules.
In conclusion, Mr. Chairman, I have two recommendations to make:
• First, the United States must devote adequate resources to understanding the nature of competition in and with China. We are paying a price for our ignorance. This needs to be remedied.
• Second, there must be a strategy for enhancing the prospects of the United States in this competition. Pieces of a potential strategy exist, but they are just that, pieces.
One additional question should be posed:
• Are there ways in which the United States and China could cooperate to deal with shared challenges? These could include, for example, developing non-carbon-based technologies, alleviating poverty and disease on a global scale, ensuring food and product safety, enhancing global food supplies, and fostering innovation to these ends.
One should never rule out cooperation as an alternative to potential and real confrontation. It is a form of tough but high-minded pragmatism that America’s foremost leaders practiced, Lincoln for one. It is worth thinking about this possibility as well.
To read Ambassador Wolff’s entire testimony, click here.