(i) Shifting Views of Engagement with Trade and China

The old China consensus was built on a broad understanding of the benefits of engagement, an optimism about liberalization in China, a desire to avoid Sino-American confrontation as well as a belief that Chinese-American economic ties would provide material and, in some cases, domestic political benefits, for key U.S. stakeholders. These interests and beliefs were the basis of U.S.-China policy and ensured relative stability from administration to administration. It was under the auspices of this coalition that the pre-requisite for China’s admission to the WTO – “permanent normal trading relations” between China and the United States – was established. Now, however, a growing conviction that the People’s Republic of China (PRC) poses a fundamental threat to the United States’ hegemonic role, as well as economic losses and growing income inequality associated with trade with China, has undermined support for the expansive trade policy the United States once regularly pursued.

Policymakers on both sides of the aisle have also become skeptical of the material benefits offered by engagement. Rather than opening markets to U.S. firms, a more cynical view that sees globalization and trade as hollowing out the U.S. manufacturing base and the middle class is increasingly common.Footnote ¹ As China has moved up the global value chain and become a direct competitor in sectors previously thought to be U.S. strongholds like advanced computing and telecommunications, China’s economic might and state-led practices have begun to pose a direct threat to the United States’ defense industrial base and other influential elements within the U.S. political system.Footnote ² Both parties have endorsed and continue to explore industrial policies that would have once been taboo.

At the same time, the political benefits of opposing a liberal trade policy have grown. Republican Party leaders, a traditional stronghold of free trade sentiment have, in recent years, grown more skeptical both of China and open trade policies more generally. The Democratic Party, long divided on trade, has been faced with the need to compete for blue-collar voters distributed in strategically important states and has grown skeptical that trade can deliver the broad-based growth imagined by members of the Clinton administration, who championed China’s accession to the WTO.Footnote ³ Those within the Democratic Party who see an open trade agenda as essential to both economic growth and successful competition with China have become more self-conscious of the political liabilities associated with trade and have tempered their aspirations accordingly.Footnote ⁴

Washington’s evolution has deep implications for the future of the WTO. Born in an era of American self-confidence, military dominance, and liberalizing ambition, the WTO is perceived in some quarters to be ill-suited for the current moment. In the face of a growing Chinese-American contest, the WTO’s challenge is to avoid being trampled or sidelined while still working to preserve the multilateral, rules-based trading regime. This can only be accomplished if the WTO reorients itself to become a venue where competitors are able to come together to address pressing global problems like climate change, global health, income inequality, digital commerce, and the implications of significant non-market economy actors as members of the WTO.

(ii) Policy of Engagement

From at least the end of the Cold War to the late 2010s, the United States pursued a strategy of “engagement” towards China.Footnote ⁵ Under the auspices of this strategy, the United States attempted to expand economic and political ties between the two countries. While trade normalization is the most prominent element of this strategy, it also included military-to- military dialogues, educational and scientific contacts, and collaboration in multilateral fora.

As a strategy, engagement was broadly intended as a way of managing the rise of China. The architects of engagement sought to accomplish a wide variety of goals, ranging from increased Sino-American collaboration on non-proliferation and environmental issues to accelerated economic growth in the United States.Footnote ⁶ Among these goals were the political and economic liberalization of China. By approaching China with an open hand, U.S. officials believed they would be better positioned to accomplish these goals. The engagement was thought to produce comity and trust between the two powers, empower less confrontational elements within the regime, and set the groundwork for liberalization.

In recent years, the policy of engagement has been reconsidered.Footnote ⁷ This shift has been substantially the result of China’s growing geopolitical power, increasingly assertive behavior on the international stage, and a turn toward a more state-centric, Chinese Communist Party (CCP) controlled economy. The engagement was explicitly intended to prevent a Sino-American confrontation. Today, there is a sense that some sort of Chinese-American competition is inevitable and, perhaps concerningly, may even be desirable. China’s pivot away from market reform has also undercut one of the primary rationalizations for engagement. Unlike their predecessors, policymakers in the United States are increasingly skeptical that reformist elements in China can change China’s economic path or that U.S. actions can empower the reformists. Finally, domestic dynamics have made open trade writ large increasingly toxic and trade with China an especially hot-button issue.

As the U.S. policy towards a more assertive China has come under increased scrutiny, attitudes toward the WTO have shifted. Initial optimism about the power of the WTO to discipline and mold China has been replaced by frustration with the WTO’s apparent inability to confront Chinese abuses. That frustration has itself contributed to a lack of support for the WTO as an institution, particularly for its dispute settlement system and its Appellate Body.

(i) Expansive View of the Role of the WTO Accession Process

China’s accession to the WTO was negotiated under the Clinton Administration, taking as their point of departure President Clinton’s view that China could play a positive role in advancing environmental standards, fighting transnational crime, bolstering the international trading system, contributing to an arms control regime, and promoting stability in East Asia.Footnote ⁹ While “political pluralism” and “free markets” in China were stated goals of the Clinton administration, these long-term objectives were part of a larger agenda that included pressing short-term concerns like the burgeoning North Korean nuclear program and the desire to diffuse tensions over Taiwan. PNTR was viewed internally by advocates, as Ambassador Charlene Barshefsky later recounted, as “the one chance the U.S. and China had to create an enduring foundation for the relationship.”Footnote ¹⁰ The logic was that “if we treated China as an enemy, we were guaranteeing an enemy in the future. If we treated China as a friend, we could not guarantee friendship, but we could at least keep open the possibility of more benign outcomes.”Footnote ¹¹

For the Clinton team, the benefits of engagement were not theoretical. They had seen how deeper ties could help diffuse both bilateral and regional stressors. The U.S. Trade Representative at the time, Mickey Kantor, would later argue that trade ties helped the two countries manage the 1995 Taiwan Strait Crisis, commenting that he was “convinced that the trade relationship was a strong connecting bond between the U.S. and China at a time when we needed it, particularly in late ’95 and early ’96.”Footnote ¹² According to former Secretary of Defense William Perry, the threat posed by North Korea, “provided a pretty strong incentive to see if we could go out and re-establish a reasonable relationship with [China],” which had previously provided useful intelligence about North Korean ambitions.Footnote ¹³

The Clinton administration also saw their ability to encourage and support reformers within the Chinese regime as essential to accomplishing their varied goals. The contention was the boost to Chinese economic growth contributed by PNTR would “bolster the confidence of Chinese leadership in ways that reduce their fear about political reform.”Footnote ¹⁴ Enabling “reformers” within China could allow the United States to pursue a wide range of priorities by creating a China that was “more cooperative on such crucial issues as nonproliferation, regional security, peacekeeping, human rights, and arms control.”Footnote ¹⁵ Rejecting PNTR, however, would empower elements within China “who want to tighten the internal clamps, invest more heavily in the military-industrial complex, and hunker down for the ‘inevitable struggle’ with America bilaterally, regionally, and globally.” The “worst case” scenario was a “US-China confrontation across Asia.”

The United States’ ability to tip the scales in China’s domestic political debates was a core assumption of the engagement strategy. President Clinton suggested that refusing to engage with China “would encourage the Chinese to become hostile,” while National Security Sandy Berger argued that U.S. aggressive U.S. policies would “fuel the very inward-looking forces that trample human rights.”Footnote ¹⁶ While the administration was also clear that China would ultimately choose its own destiny, there was a sense that the right set of U.S. actions could enable the rise of reformers who would be amicable to the United States and the international system.

(ii) The PNTR Vote

In the summer of 2000, nearly 18 months before China would formally join the WTO, came the Congress’ big moment to weigh in on U.S.-China trade policy. In the end, the vote was not particularly close, especially in the Senate, with the House voting in favor of granting PNTR to China in May 2000, 237–197; and the Senate following in September 2000, approving by a vote of 83–15.Footnote ¹⁷ But the vote came only after fierce debate before a skeptical Congress. While technically the Congress had been acting on China policy through its annual decision to waive freedom-of-emigration requirements (called Jackson-Vanik provisions) that would have the effect of taking away China’s Normal Trade Relations (NTR) status, the reality was that while the House of Representatives voted to deny NTR to China in 1990, 1991 and 1992, there was no agreement from the Senate, and neither legislative body took any action to change China’s status after 1992.Footnote ¹⁸ As a result, China had effectively been receiving NTR treatment and access to the U.S. market on terms comparable to other WTO members since 1980. But the lead-up to the 2000 vote to grant China NTR status on a permanent basis underscored deep divisions and concerns over the future economic relationship between the United States and China.

The Clinton Administration put on a full-court press, with most of the cabinet weighing in to support a vote in favor of shifting U.S. policy from one in which China’s access to the U.S. market had to be, at least technically, reviewed each year, with the possibility that it’s “most favored nation/normal trade relations” status could be removed at any time. In urging Congress to pass PNTR legislation, President Clinton noted that supporting China’s entry to the WTO was in the United States’ broader national interest because it represented “the most significant opportunity we have had to create positive change in China since the 1970s.”Footnote ¹⁹ He made clear, however, that it would also advance U.S. economic interests, describing the U.S. agreement as “the equivalent of a one-way street. It requires China to open its markets – with a fifth of the world’s population, potentially the biggest markets in the world – to both our products and services in unprecedented new ways. All we do is to agree to maintain the present access which China enjoys.”Footnote ²⁰

President Clinton described the outcome of the affirmative vote in the House as “a historic step toward continued prosperity in America, reform in China, and peace in the world” and for “an America that will be more prosperous and more secure; for a China that is more open to our products and more respectful of the rule of law at home and abroad.”Footnote ²¹ At the same time, Clinton recognized that nothing about the trajectory of China or the U.S.-China relationship was guaranteed – but represented a chance for the U.S. and China to build a better and different future in the Asia Pacific community.

The American business community for its part believed that the normalization of trade relations with China would offer an economic windfall. The business community had long been advocates of increased trade with China. Their lobbying – supported by the Chinese government – helped reverse Clinton’s initial China policy, which had linked trade access to progress on human rights.Footnote ²² As Warren Christopher, Clinton’s Secretary of State and an advocate for the linkage policy, later put it, “the business community had convinced the president that trade for America was a higher value, or perhaps to put it more charitably, that nothing would be accomplished in the field of human rights by denial of trade, and so that became the basic policy.”Footnote ²³

Advocates argued that PNTR would promote U.S. security and economic interests and have little downside. Then-Senator Joe Biden, for instance, argued that it would “help promote stability across the Taiwan Straits,” encourage China to reform its economic system, and “enhance their respect for the rule of law,” while offering the United States “one-way” trade concessions.Footnote ²⁴ Those supporting PNTR for China focused on the economic gains and the chance to support economic reforms in China, with even Federal Reserve Chairman Alan Greenspan declaring PNTR would “create new opportunities for American businesses and farmers.” Critics, on the other hand, focused on China’s poor human rights record, its continued threats to Taiwan, its contribution to nuclear proliferation, its violation of environmental standards for development, and its labor abuses.

The Clinton administration explicitly pushed PNTR as a way of accelerating Chinese marketization and democratization, suggesting that it would “strengthen reformers” who were “trying to move policy in the right direction.”Footnote ²⁵ The deal was seen as a potential boon to U.S. exporters, something that excited many Congressional supporters, while USTR Charlene Barshefsky indicated that the administration had “no reason to expect any substantial increases in Chinese imports at all.”Footnote ²⁶

(iii) The Reality of China’s Accession Commitments

While the arguments in the United States for granting China PNTR status in order to pave the way for its entry into the WTO may have focused on a broad range of geostrategic, political, national security, human rights, and economic issues, along with the empowerment of the reformists in China, the negotiations in Geneva were limited to trade issues and to the trading rules that China was signing up to.

When the accession negotiations were ultimately concluded and China joined the WTO in December 2001,Footnote ²⁷ it did so only after making a substantial number of commitments and changes to its domestic economic laws, including:

• Major reductions in Chinese tariffs. Average tariffs on industrial products were reduced to 9.4% by 2005; elimination of all tariffs on high-technology products; auto tariffs fell from 80–100% to 25% by 2006; agriculture tariffs fell to an average of 17.5% by 2004.

• Elimination of import quotas and licensing requirements by 2005.

• Granting import and distribution rights to foreign corporations, which allowed them to set up wholly owned distribution, sales (including retail), shipping, and service networks over a three-year phase-in period.

• Financial services and telecommunications – ending the outright ban on any foreign ownership but leaving a number of restrictions and limitations on foreign ownership in place.

• Other services – increased market access for professional services, including accounting, consulting, engineering, medical, and information technology, while maintaining numerous restrictions and limitations.

• Commitment to implement and enforce international standards on the protection of intellectual property; provision for increased access and distribution rights for a specified number of motion pictures, music, and software.

The WTO-Director General at the time, Supachai Panitchpadi, described China’s accession agreement as signaling “China’s willingness to play by international trade rules and to bring its often opaque and cumbersome government apparatus into harmony with a world order that demands clarity and fairness.”Footnote ²⁸

The USTR report to Congress in 2004 summed up the process and the outcome:

None of these commitments, however, directly addressed the broader issues and aspirations for change within China that were an integral part of the debate over the passage of PNTR. For example, none of them spoke to issues such as nuclear proliferation or human rights that had been critical points underlying support for PNTR.

(i) The China Economic and Security Review Commission

The China Commission was created with the legislative mandate to monitor, investigate, and submit to Congress an annual report on the national security implications of the bilateral trade and economic relationship between the United States and China, and to provide recommendations, where appropriate, to Congress for legislative and administrative action. Even the title of the Commission with its joint focus on security and economics reflects the desire to use PNTR and China’s accession to the WTO as leverage over security and geostrategic issues as well as trade and economic matters. From its inception, the Commission was skeptical that China would live up to its WTO commitments without constant and extraordinary vigilance from the U.S. In its very first (2002) report issued less than one year after China’s accession, the Commission recommended that: (1) the U.S. shore up its toolbox by renewing the “Super 301” law that identifies priority practices and priority countries for trade liberalization, (2) commence WTO litigation over non-compliance with intellectual property rights, (3) engage in a more intensive examination of WTO compliance, and (4) consider a national security-based case to protect the U.S. steel industry.

The Commission also focused early attention on one of the major issues upsetting the balance of concessions reached through China’s WTO accession – currency manipulation. Starting in the early 2000s and continuing for at least a decade thereafter, China kept the exchange rate of its currency pegged at artificially low levels.Footnote ³⁰ Such currency manipulation made Chinese exports to the world cheap but exports to China more expensive. The Commission noted that “China’s currency manipulation acts as a subsidy for Chinese exports to the United States and a tax on imports from the United States, and serves as an incentive for U.S. and foreign firms to move production to China.”Footnote ³¹ The Commission noted in 2005 that most economists believe that the Chinese renminbi (RMB) is undervalued by 15–40 per cent.Footnote ³² China’s ability to manipulate its currency by buying dollars and other foreign currency in China at a fixed rate contributed to an excessive reliance on export-led growth that deepened distortions in the Chinese economy and in its trading relationships.

By the mid-2000s, the China Commission’s reports were sounding the alarm about the “profound differences between the open-market approach of the United States and the managed trade principles and predatory practices observed by the Chinese government.”Footnote ³³ It began using a “responsible stakeholder” index to assess whether China not only observes international norms but works to strengthen them, finding that China was far from meeting that standard.Footnote ³⁴ Following Chinese President Xi Jinping’s first state visit to the United States in 2015, the Commission reports cataloged long and growing lists of grievances the United States has against Chinese behavior, with currency manipulation, forced technology transfer, intellectual property theft, and excessive use of state subsidies often topping the list.Footnote ³⁵ The most recent (2020) report concludes:

(ii) Annual USTR Reports on China’s WTO Compliance

To attempt to hold China to its WTO commitments, the United States used a multi-tracked approach. One track involved a series of annual high-level bilateral talks between U.S. and Chinese officials over three successive presidential administrations. These talks, initially called the Joint Commission on Commerce and Trade (JCCT, started in 2004), the Strategic Economic Dialogue, begun in 2006, and the Strategic and Economic Dialogue (S&ED) begun in 2009, were intended to push China towards complying with and internalizing WTO rules and norms and making other market-oriented changes. The second track involved WTO disputes to challenge China’s compliance with its WTO obligations.

Both tracks for holding China to its WTO commitments have been cataloged over the past 20 years in the annual report that USTR is required to submit to Congress under the mandate included in the legislation granting China PNTR status. The initial report, submitted in 2002, reflects considerable optimism, noting the significant progress China made in implementing its WTO commitments, including “reviewing more than 2,500 trade-related laws and regulations, repealing 830 of them, and amending 325 more.”Footnote ³⁷ The report also acknowledges the considerable resources devoted to restructuring the various trade-related government ministries and agencies and to the education and training of central and local government officials. It also emphasized the commitments that the U.S. thought it had obtained regarding China’s transition to a market economy: “For much of the past two decades, China had been gradually transitioning toward a market economy from what in the late 1970s was a strict command economy. In acceding to the WTO, China was required by the United States and other WTO members to agree to accelerate this process of market reform in order to comply with WTO requirements.”Footnote ³⁸

At the same time, the USTR Report raised early concerns over transparency, agriculture, intellectual property rights, and services. Just two years later, the 2004 report was even more hopeful, quoting two trade associations’ view that “China is now substantially in compliance with its WTO obligations – a marked improvement over last year.”Footnote ³⁹ The report also noted continued areas of concern, including intellectual property rights, services, agriculture, industrial policies, and transparency. It added that the work of one of the many high-level dialogue groups –the Joint Commission on Commerce and Trade (JCCT) – was “highly constructive.”

Over the next number of years, these annual reports continued to report on bilateral dialogues and WTO disputes, coming to the general conclusion that the intensive dialogues with China generated positive outcomes on a number of contentious issues, while U.S. use of WTO dispute settlement continued to generate favorable settlements and favorable WTO dispute settlement decisions. The reports also continued to note ongoing problem areas, including principally intellectual property rights, industrial policies, trading rights, agriculture, and services, including distribution services. Increasingly the reports focused on the Chinese government’s interventionist policies and practices and the large role of state-owned enterprises and other national champions in China’s economy, which generated significant trade distortions giving rise to trade frictions. The final Obama Administration report (2016) noted the major expansion in U.S. goods and services exports to China but concluded that “despite these positive results, the overall picture currently presented by China’s WTO membership remains complex.”Footnote ⁴⁰

Once the Trump Administration took office, however, the tone and underlying message changed to one of failure. The view shifted, noting that “China largely remains a state-led economy today, and the United States and other trading partners continue to encounter serious problems with China’s trade regime. Meanwhile, China has used the imprimatur of WTO membership to become a dominant player in international trade.” The report concluded: “Given these facts, it seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime.”Footnote ⁴¹

(i) Failures to Guard Domestic Markets

Among the most highly touted of the provisions designed to guard against any potential harm from China was a product-specific, selective safeguard provision that allowed WTO members to impose safeguards (which normally can only be applied to imports from all sources) on imports from China alone.Footnote ⁴⁶ The provision included a lower threshold for its application than traditional safeguard measures which require a showing that imports have caused “serious injury” to a domestic industry producing comparable goods. Here, the standard permitted the application of a China-only safeguard if Chinese imports were causing “market disruption.” In addition, a clause in this new safeguard allowed a second country to justify its own imposition of a new import restriction after a first country has implemented a China safeguard on the basis of a “trade deflection” threat alone, without having to carry out its own injury investigation. In the United States, the common answer to Congressional concerns over a potential flood in imports from China was the existence of this special safeguard and the ease in its application. The process to implement it called upon the independent U.S. International Trade Commission (USITC) to investigate all claims of market disruption and to report to the President any affirmative findings, along with recommendations for actions to be taken to address the market disruption caused by Chinese imports.Footnote ⁴⁷ The President was given the authority to accept, modify or reject the USITC’s recommendations.Footnote ⁴⁸

In the 12 years that the China-specific safeguard provision was in effect and despite the substantial increase in imports from China in a wide variety of products, the United States imposed a China-specific safeguard only once.Footnote ⁴⁹ Part of the reluctance stemmed from decisions made by the Bush administration not to impose safeguards despite a recommendation from the USITC in five cases to do so.Footnote ⁵⁰ Failure to obtain a remedy despite proving market disruption may have deterred potential complainants while concerns over WTO decisions striking down global safeguards may have contributed to reticence in applying for safeguard relief. The one China-specific safeguard that was imposed – on passenger vehicles and light truck tires – came eight years after China’s accession to the WTO. It was also the first such safeguard challenged by China, with the WTO’s Appellate Body upholding the United States’ determination to apply safeguard measures to Chinese tires.Footnote ⁵¹

Antidumping (AD) (selling goods in foreign markets for less than prices at home) and countervailing duties (CVD) (offsets for government subsidies), however, were more commonly deployed. From 2001 to 2020, WTO members have reported imposing 917 AD measures against Chinese imports, approximately 30% of the total reported, and 129 CVDs against Chinese imports, approximately 46% of the total actions.Footnote ⁵² For U.S. industries, the primary tool to respond to increased imports from China, particularly in the 2000s, was anti-dumping duties, with the use of the “non-market economy methodology” permitted under Section 15(b) of China’s protocol of accession to calculate the amount of those duties. As of September 2021, the United States has 142 AD orders in place on various goods from China, far more than the number of AD measures against imports from any other country.Footnote ⁵³

Prior to 2007, the United States did not apply its CVD law to countries considered to be nonmarket economies (NMEs) based in part on a conclusion by the Department of Commerce (Commerce) that it could not determine where government action began or ended and therefore could not specifically identify subsidies. In 1986, the US Court of Appeals for the Federal Circuit in Georgetown Steel Corp. v. United States upheld this interpretation of the CVD statute as reasonable. In 2006, Commerce changed its position, accepting a petition seeking a CVD on imports of coated free-sheet paper from China. Commerce distinguished the current Chinese economy from the Soviet-style economies at issue in Georgetown Steel and found that the imported Chinese paper was subsidized. Numerous CVD cases followed, with 80 CVD orders now in place against imports from China. But the rest of the world has been less willing to use this tool, perhaps in part because it involves a direct challenge to the practices of the Chinese government and the CCP compared to anti-dumping cases, which focus on the behavior of individual companies. Even less clear is how willing countries are to use the “special difficulties” tool provided in Paragraph 15 to overcome evidentiary hurdles in proving the existence of a subsidy.

The textile-specific growth limit was similarly far less utilized than might have been expected, given China’s dominant position as a supplier of textiles and clothing. In the United States, the use of such safeguards became bogged down in protracted legal battles over the application when there was only a threat of market disruption.Footnote ⁵⁴

The world’s failure to use these tools – at least not early and often enough – was part of what allowed China’s relatively unchecked rise in exports to the world.Footnote ⁵⁵ In the United States, China’s rise was documented and labeled in a 2016 article titled “The China Shock: Learning from Labor-Market Adjustment in Large Change in Trade,” by David Autor from MIT, David Dorn (University of Zurich) and Gordon Hanson (UC-San Diego).Footnote ⁵⁶ The article noted that China’s economic size, speed of growth, and import penetration were all of an order of magnitude different from previous waves of imports from Japan or Mexico or others. Imports from China grew from 1.0 per cent of the US GDP in 2000 when China’s accession to the WTO was being negotiated to 2.6 per cent of GDP ten years later. The impact on communities where goods competing directly with Chinese imports (such as furniture, toys, electronics, jewelry, shoes, and clothing) were particularly profound, due in part to the lack of sufficient safety nets or trade adjustment assistance and in part due to the unexpected immobility of labor.

While the U.S. imposed 199 anti-dumping and countervailing tariffs, primarily targeting raw and semi-processed imports with some cases addressing finished goods like furniture and tires, the wave of imports appeared to simply overwhelm many companies, leading to a conclusion that the trade rules were not up the task of coping with the China shock and to the parallel determination that it was a mistake for the United States to have allowed China to enter the WTO on the terms that it did.Footnote ⁵⁷

(ii) Failure to Hold China to Its Commitments on Transparency, Market Economy Orientation, Rule of Law, and More

A critical aspect of its advocacy for PNTR and China’s accession to the WTO was the assertion that China’s conduct would be “monitored by more than 130 other WTO Members with a common interest in seeing China’s market opened.”Footnote ⁵⁸ “Unlike our bilateral agreements,” the Clinton administration argued, “we will not be alone in our enforcement efforts if China fails to live up to its commitments.”Footnote ⁵⁹

The most significant commitments for which compliance was sought involved those that required China to open up its market under numerous specific commitments with respect to trade in goods, agriculture, and particular services commitments;Footnote ⁶⁰ various commitments with respect to the rule of law and transparency in the Chinese system,Footnote ⁶¹ intellectual property rights requirements,Footnote ⁶² and numerous commitments intended to keep China on the path toward becoming a fully market-oriented economy.Footnote ⁶³

For the first few years following China’s 2001 accession to the WTO, most WTO members took a “wait and see” approach. For its part, the United States filed 23 different cases against specific Chinese practices, with its first case filed in 2004, winning all that was completed, settling eight of them through mutual agreement, with three still pending.Footnote ⁶⁴ The entire rest of the world combined brought a comparable number of cases, with many countries appearing reluctant, particularly early on, to challenge China for fear of retaliation or for lack of evidence from China’s opaque system. However, each of these cases was somewhat narrowly focused on individual measures or particular sectors. None spoke to the bigger, more systemic issues that are at the heart of U.S. concerns with China or to China’s failure to fulfill its notification and transparency requirements.

What might have been a better approach would have been a “big, bold, coalition-based case” that would have represented an “opportunity to bring together enough of the trading interests in the world to put sufficient pressure on China to make it clear that fundamental reform is required if China is to remain a member in good standing in the WTO.”Footnote ⁶⁵ Just such a case was recommended by the U.S.-China Economic and Security Commission, based in part on the author’s testimony to the Commission.Footnote ⁶⁶

In my construction, the case could include claims to address China’s: (1) coercion of technology transfers in light of China’s commitment that it would not condition investments on the transfer of technology,Footnote ⁶⁷ (2) restrictions on the right of foreign companies to license their technology (or choose not to license it) under the conditions and terms that they would like in violation of China national treatment and MFN commitments;Footnote ⁶⁸ (3) direction of outbound investment to obtain cutting-edge technology in service of China’s industrial policy, in violation of China’s commitment to treat foreigners on a reciprocity basis;Footnote ⁶⁹ (4) investment restrictions that preclude or unreasonably delay market entry for foreign companies in violation of China’s commitment not to condition investments on performance requirements or technology transfer,Footnote ⁷⁰ (5) use of export taxes to restrict or encourage certain exports over others, in violation of China’s commitment not to charge such export taxes other than on a specific list of products,Footnote ⁷¹ (6) services restrictions that are inconsistent with China’s GATS schedules, (7) restrictions on agriculture imports under non-transparent and non-science based sanitary and phytosanitary measures, (8) lack of transparency and access to China’s laws, regulations and rules on timely basis, (9) failure to establish independent judicial review of trade-related administrative decisions,Footnote ⁷² and (10) failure to meet the reasonable expectations of WTO members that China’s economy would become a market-oriented one.Footnote ⁷³

The last claim that I suggested is the one designed to get at the heart of the United States’ concern – that China’s U-turn away from market orientation to an ever more state-controlled economy violates the spirit, if not always the letter, of the WTO.

(iii) China’s Turn Away from Market-Oriented Reforms

The overarching Marrakesh Agreement establishing the WTO declares that the organization was designed as a world trading system “based upon open, market-oriented policies.” China, for example, expressly declared as part of its accession commitments that “that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability …”Footnote ⁷⁴

As a result, the United States and all other WTO members had legitimate expectations that China would increasingly behave as a market economy – that it would achieve a discernable separation between its government and its private sector, that private property rights and an understanding of who controls and makes decisions in major enterprises would be clear, that subsidies would be curtailed, that theft of IP rights would be punished and diminished in amount, that SOEs would make purchases based on commercial considerations, that the Communist Party would not, by fiat, occupy critical seats within major “private” enterprises and that standards and regulations would be published for all to see.

But starting in the mid-2000s, China began what has now become a complete U-turn back to becoming a state and Communist Party dominated economy.Footnote ⁷⁵ While parts of the economy appear to have a thriving private sector, intervention by the government and the CCP has become far more pervasive. Institutions were established giving Beijing tighter control over China’s large and fast-growing SOEs (overseen by the State-owned Assets Supervision and Administration Commission (SASAC)) and its banks (influenced via Central Huijin Investment). The overlapping ways in which China’s economy is unique and state driven results in a phenomenon dubbed “China, Inc.” that is hard to reach with WTO rules.Footnote ⁷⁶ Concerns about the direction of China’s economy greatly intensified with the rise of Xi Jinping as China’s leader in 2012 and the release of the Made in China 2025 plan designed to create Chinese self-sufficiency in a range of critical technology sectors.

These concerns were succinctly summarized in the statement made by the then U.S. Ambassador to the WTO, Dennis Shea, in a May 8, 2018 statement to the WTO General Council:

It is this collective failure by China that underlies the trade friction between the United States and China.

The concerns over the market orientation of China’s economy are shared by many other WTO members. When the G-20 trade ministers met in September 2020, for example, much of the discussion centered on strengthening the WTO, beginning with a reaffirmation of commitment to the objectives and principles in the Marrakesh Agreement. But when it came to affirming that “market-oriented policies” is a principle of the WTO, China objected. It is this fundamental split that has led some leading trade scholars to conclude that “the world is now presented with two conflicting economic systems: (1) a Western-led, market-driven, model based on the rule of law and (2) an authoritarian state-driven model championed by China,” and that the solution is to “establish a ‘compact’ among like-minded developed market economies to agree to new common approaches to counter unfair non-market practices; address critical twenty-first-century economic issues such as the digital economy, climate change and the environment, and labor; and improve economic ties in industries that are key to innovation, economic growth, and national security.”Footnote ⁷⁸