Attempts to address systemic issues through new GATT/WTO disciplines

In addition to efforts to provide “symptomatic relief” for the large bilateral imbalances via US import restrictions and export promotion, US policy makers also undertook actions to address what they perceived as important underlying causes of the persistent imbalances. In this section we describe these underlying causes (as portrayed by US officials and the US public at large) and the consequences for the international trading system of US efforts to address those causes.

As we describe in Sections 5.1 and 5.2, a common view in the US during both episodes was that inappropriate foreign government interference with market forces lay at the root of the imbalances. This perception led naturally to US efforts to use (and modify) the rules-based trading system to address the troubling imbalances in a systematic way. The differences in the bilateral imbalance that the US faced with Japan versus its bilateral problem with the PRC are found in the details. Finally, Section 5.3 discusses some unintended consequences of the evolution of the trading system from the perspective of the US—in particular, how Japan and the PRC have used the WTO dispute settlement process to self-enforce their exporters' access to the US market.

5.1 US-Japan Conflict and the Reach of WTO Disciplines

US priorities in the Uruguay Round were shaped by dissatisfaction arising from US exporters' inability over several decades to access certain export markets, especially that of Japan. This is clearly reflected in Table 5, which lists the exported products and disciplines at the heart of the formal actions (Section 301 and GATT disputes) the US initiated against Japan during the 1977–1994 period.

In the Uruguay Round, the US sought to negotiate more rules and greater transparency, as well as extending disciplines in areas such as “standards” (including the Agreements on Sanitary and Phytosanitary Measures and Technical Barriers to Trade), government procurement, trade in services (General Agreement on Trade in Services [GATS]), subsidies (SCM Agreement), and intellectual property rights protection (TRIPS). All countries also had to accept new disciplines over trade in agriculture (subsidies and domestic support) as well as clothing and textiles through the phase-out of the MFA.

We have already seen some of the results in the context of our discussion of WTO disputes brought by the US against Japan since 1995 (see Table 5), which put the new rules to the test. One example is a 1995 WTO dispute under the new TRIPS agreement, in which the US alleged that Japan was not sufficiently protecting the copyrights of US musical artists for their past performances and sound recordings. The US also quickly tested the reach of the new GATS in the highly publicized 1995 Kodak-Fuji dispute, in which it alleged that Japanese government policies were the cause of Kodak's inability to gain access to the Japanese market for photographic film and paper. Finally, US agricultural interests continued to play a role as the US pursued standards cases under the new Agreement on Sanitary and Phytosanitary Measures. The US demanded that Japan remove burdensome import restrictions and testing requirements for various US fruit exports, arguing that such trade barriers could not be justified on the basis of scientific risk assessments as required under the new WTO disciplines.

5.2 US-PRC Conflict and the Reach of WTO Disciplines

Perhaps the most fundamental issue raised by the PRC's entry is its legacy as a centrally planned economy. Although industrial policy has now been decentralized to a significant extent, explicit and implicit subsidies remain an integral part of the nation's industrial policy. Under the terms of its accession agreement it is still accorded non-market-economy status, which in practice has translated into huge dumping margins and AD duties. Along with remaining cash subsidies and tax rebates, the PRC continues to provide financial support to state-owned enterprises (SOEs), easy access to loans for preferred companies and sectors, and administrative guidance favoring FDI in preferred sectors, as well as persistent exchange-rate undervaluation (with the effect of protecting all domestic producers from competing imports and subsidizing all exporters).

Current trade rules cover explicit cash subsidies and some tax rebates, but the protected status of SOEs and governmental discretion in the allocation of financial capital have parallels in the policies and practice of many other member countries. WTO disciplines regarding trade-related investment are weak at best, and the WTO has no explicit (actionable) mechanisms for dealing with a country's manipulation of its exchange rate as an implicit means of favoring national firms over their foreign rivals in domestic or export markets.

With the opportunity to negotiate the terms of the PRC's entry into the WTO, countries that had already attained membership were able to extract massive accession commitments from the PRC. These included commitments by the PRC to scaling back explicit subsidies to SOEs and reforming the banking sector. However, given the self-enforcing nature of the WTO system, other members must enforce the PRC's commitment to reining in subsidies by initiating formal WTO complaints under the WTO's dispute settlement understanding (DSU). Moreover, since there is no explicit WTO mechanism for dealing with the issue of implicit subsidization via currency undervaluation, even countries seeking to contest the PRC's explicit subsides through the DSU must resort to other policy options to confront the currency issue.

WTO members have used two approaches to confront the PRC subsidy problem. The first, used by the US, is to initiate anti-subsidy disputes at the WTO (see Table 7). Through 2008, the PRC has settled every WTO dispute over subsidies with a promise to remove the allegedly WTO-inconsistent measure. The only exception is the “Famous Brands” case, which was initiated only in December 2008.²² The alternative way to contest the PRC's use of subsidies is for affected countries to facilitate use by their domestic firms of the country's own countervailing duty law. There is evidence (see Table 3) that WTO members including the US are using this second route.

5.3 New Rules and the Ability of Japan and the PRC to Self-enforce US Market Access

US actions in the Uruguay Round also had an important influence on the negotiating positions of other countries. The new WTO Agreement on Safeguards banned the use of VERs, an attempt to halt the proliferation of VERs that began in the 1960s and continued through the 1990s (Bown 2002b).²³ US resort to “aggressive unilateralism” and retaliation threats through its increasingly active use of the Section 301 policy in the 1988–1994 period helped convince Japan and other US trading partners to accept a more binding and legalistic system of dispute settlement, resulting in the WTO DSU.

Table 8 [ PDF 14.1KB | 1 page ] shows how Japan has used the WTO (and GATT) dispute settlements against the US. While Japan rarely used formal dispute settlement against the US during the GATT era, it has been much more active during the WTO period. The clear focus of Japan's WTO trade dispute efforts has been on reforming US use of AD. This is not surprising, given that Uruguay Round negotiators failed to agree on new rules to discipline use of AD.²⁴ Japan has filed disputes over US imposition of AD measures on specific Japanese exports (e.g., hot rolled steel). Japan also challenged the little-used “other” US AD law (Antidumping Act of 1916) as WTO-inconsistent because it allows for punitive damages beyond the imposition of ad valorem duties, and Japan joined the collective challenge to the US Byrd Amendment, which required AD duties collected from foreign firms to be refunded to the domestic US firms behind the AD petition. Japan has also challenged the Department of Commerce's use of “zeroing” to inflate dumping margins and thus justify higher AD duties (see Bown and Sykes 2008). Finally, Japan challenged the way in which the US conducts its “sunset reviews.” These reviews are supposed to lead to the removal of the imposed AD duties after five years, but in most instances US duties have remained in place well beyond the five-year limit.

Table 8 indicates that the PRC has also been using WTO dispute settlement as a complainant since its accession. The PRC's approach been similar to that of Japan, but its activity has been more limited. On the complainant side, the PRC's only involvement in a formal dispute prior to 2007 was the challenge it joined with Japan, the EC, and six other WTO members seeking removal of the steel safeguard import restrictions imposed by the US in 2002.

Since 2007, however, the PRC has begun to challenge US use of AD and countervailing duty policies. The first dispute the PRC initiated against the US (after the imposition of a preliminary duty) became moot after the USITC found no evidence of injury, and so no final duties were imposed, as discussed in Section 3. However, in response to increasing US AD activity (see Figures 2 and 3b) and the new US stance on countervailing duty use (see Table 3), in 2008 the PRC initiated a challenge to the US laws in the first four instances in which the PRC's exporters were targeted with US countervailing duty investigations. In April 2009, the PRC initiated its first challenge to trade barriers over a standards issue, questioning whether the US ban on poultry imports from the PRC could be justified scientifically.

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