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For U.S. to Stay in WTO, China May Have to Leave

Instead of unilateral tariffs, the U.S. and its allies could use the World Trade Organization to force China to alter its trade-distorting behavior—or leave


President Trump and Chinese President Xi Jinping shake hands in Beijing in November 2017. The U.S. and China are in an intensifying trade fight.
Add captionPresident Trump and Chinese President Xi Jinping shake hands in Beijing in November 2017. The U.S. and China are in an intensifying trade fight. Photo: Qilai Shen




The intensifying trade fight between the U.S. and China didn’t come out of the blue. American frustration has long been building over China’s failure to live up to its commitments when it joined the World Trade Organization in 2001.
But President Trump’s unilateral tariffs risk a Pyrrhic victory that damages global trading rules that have broadly served U.S. interests. There may be a more effective solution: threaten China with expulsion from the WTO.
Calling this the nuclear option doesn’t really do it justice since the nuclear weapons don’t even exist. The WTO lacks a formal mechanism to throw out a member. But its founding charter, the General Agreement on Tariffs and Trade, includes a section, Article XXIII, that can achieve the same thing. It allows a case to be brought against a member for behavior that doesn’t specifically violate the treaty but “nullifies or impairs” the benefits every other country expects to derive from the WTO.
“China’s economy is structured differently from any other major economy…in ways that were not anticipated by WTO negotiators,” Jennifer Hillman, a Georgetown University law professor told Congress’s U.S.-China Economic and Security Review Commission in June.
WTO rules don’t deal well with the extensive overlap between China’s government, ruling Communist party and companies. Article XXIII, she said, was designed “exactly for this type of situation.”
China is more open and market oriented today than before it joined the WTO. It has generally adhered to the letter of WTO decisions, including when it loses cases there. And it argues much criticism aimed at it is unfounded. For example, no formal laws force foreign companies to transfer technology to Chinese firms, it says.
But as Ms. Hillman, a former member of the WTO’s top dispute-settlement panel, shows, that misses the many ways China violates the commitments it undertook when it joined the WTO. In the 1994 Marrakesh declaration, which led to the WTO’s creation, members agreed to a trading system based on “open, market-oriented policies.” Yet market forces in China are retreating as the state expands.
Foreign companies report they are routinely compelled to transfer technology to Chinese companies to do business there, in violation of Beijing’s commitments. Ms. Hillman notes that even unwritten measures can be challenged at the WTO.
China’s discriminatory licensing treatment and its failure to better police the theft of foreign intellectual property both violate its obligations under the WTO’s side agreement on intellectual property.
China, like all WTO members, is supposed to publish all of its subsidies so that others can respond to them. It doesn’t, because many take the form of low-cost loans, raw materials or other inputs to or from state-owned enterprises.
China isn’t sued more often for such transgressions, Ms. Hillman says, because such cases can be hard to win. Foreign companies are reluctant to provide evidence because they see foreign competitors as intertwined with the Chinese government, which can retaliate, for example by blocking their expansion. Many countries won’t bring cases against China on their own for the same reason, says Chad Bown, of the Peterson Institute for International Economics. No such fear exists about suing the U.S.
Ms. Hillman says this is why other countries should bring a “big, bold” case based under Article XXIII; by addressing China’s systemic violations, such a case would depend less on proving smaller, specific violations.
If the U.S., European Union, Japan, Canada, Australia, Mexico and South Korea brought the case jointly and won, China would either have to change its policies, or face WTO-sanctioned penalties on almost all of its exports. Ms. Hillman goes further: The findings could be used to amend the WTO charter to explicitly prohibit the offending policies. If China couldn’t abide by amendments, it would effectively withdraw from the WTO.
Ordinarily the WTO acts by consensus, so China could just veto the amendments. But Ms. Hillman notes that if consensus can’t be reached, the WTO allows amendments with a supermajority of members.
All of this is risky and unprecedented; only a handful of WTO cases have been brought under Article XXIII. (Ms. Hillman says they were much narrower and not relevant to the China situation.) No country has left the WTO, much less been expelled.
Putting together a case would take a long time and require the U.S. to work with allies it has alienated with tariffs. The Trump administration has little love for the WTO and has reportedly weighed withdrawal, while blocking appointments to its dispute settlement body.
Yet some administration officials are willing to entertain this strategy. Does China “want to be a part of the WTO and just behave like everybody else, or don’t they?” Kevin Hassett, chairman of the White House Council of Economic Advisers, said on Fox Business Network last week. “And if they don’t, then we, the community of nations, are we going to let them stay in the WTO?” Before he became Mr. Trump’s trade ambassador, Robert Lighthizer proposed bringing a case against China under Article XXIII.
Japanese and EU trade officials are meeting with their American counterparts in Washington Friday to discuss China. They already have their own reasons for wanting China to change, but now they have another: forcing China to act like it belongs in the WTO may be necessary to keep the U.S. from leaving.