WTO Bashes PRC in Trade Report; So Does US

There appear to be some fireworks in store as the WTO is about to release its biannual survey of China's trade practices in a Trade Policy Review. Think of it as the trade equivalent of the IMF's Article IV surveillance. This publication is the third such report to come out since China joined the WTO in 2001. The ever-reliable Reuters alerts us to potentially controversial viewpoints aired by the WTO. Although it's supposed not to take sides in looming trade disputes, it's said to clearly fault China on disallowing the export of rare earth metals and other important but not-so-abundant raw materials (more on this in a recent post):

China's curbs on exports of some raw materials to conserve resources may not meet the stated goals while giving Chinese manufacturers an unfair advantage, the World Trade Organization said on Monday. The remarks, in a report prepared for China's two-yearly trade policy review, constituted a rare comment by the WTO's secretariat on a current dispute between members.

By cutting off exports of some raw materials, China makes them more expensive for foreign manufacturers who use them while making them cheaper for its own processing industry, which is able to sell finished goods abroad more cheaply than foreign competitors can. China's restrictions on raw materials sales have been challenged by the United States, European Union and Mexico, and the WTO set up a panel in December to rule on the complaints...

China uses restrictions such as prohibitions, licensing, quotas, taxes and partial tax rebates to manage certain exports in order to conserve resources and energy, it said. The report questioned whether this approach was economically effective, and noted that such restraints tend to reduce export volumes of the targeted products, diverting supplies to the domestic market and depressing their domestic prices.

"Export restraints... may implicitly assist domestic downstream processing of the products concerned," it said.

For trade law junkies, the pending case at the dispute settlement referred to above is DS 398. So China has received a fairly hard time from the WTO. Those critical of the WTO will probably say that the US is simply getting its policy preferences across since it basically set the outlines of the organization. However, note that the current US Permanent Representative to the WTO Michael Punke is, if anything, even more critical of China than the WTO. In addition to it limiting the export of critical raw materials, Punke lodges a laundry list of grievances against China's trade practices, saying that progress towards trade liberalization since 2006 has stalled:

Turning to the analysis in the Secretariat’s Report, the United States notes its disagreement with the Report’s broad assertion that “China has maintained its long-term strategy of gradually opening up its economy to international trade and FDI” since its Trade Policy Review in 2008. In the United States’ view, this statement should be qualified.

In the first years after China’s accession to the WTO, China made noteworthy progress in adopting economic reforms that facilitated its transition toward a market economy and increased the openness of its economy to trade and investment. However, beginning in 2006, progress toward further market liberalization began to slow.

By the time of China’s Trade Policy Review in 2008, the United States noted evidence of a possible trend toward a more restrictive trade regime, citing several Chinese measures signaling new restrictions on market access and foreign investment in China. At the root of many of these problems was China’s continued pursuit of problematic industrial policies that relied on excessive government intervention in the market through an array of trade-distorting measures designed to promote and protect domestic industries. This government intervention appeared to be a reflection of China’s historic yet unfinished transition from a centrally planned economy to a free-market economy governed by rule of law.

Since China’s Trade Policy Review in 2008, there is increasing evidence of such a restrictive trend. Examples from the past two years include: (1) the continued and incrementally more restrictive use of export quotas and export duties on a large number of raw material inputs; (2) the selective use of other border measures such as value-added tax rebates to encourage or discourage exports of particular products; (3) the setting and enforcement of unique Chinese national standards, such as an informal requirement that all new 3G mobile handsets be enabled with a unique Chinese national standard for wireless Internet access; (4) China’s government procurement practices, including an array of new central, provincial and local government “Buy China” policies; (5) a new Postal Law that excludes foreign suppliers from a major segment of the domestic express delivery market; (6) impediments to the foreign supply of value-added telecommunications services and an informal ban on new entrants in China’s basic telecommunications sector; and (7) continuing significant restrictions on foreign investment in China, along with continuing consideration of “national economic security” when evaluating foreign investment through mergers and acquisitions.

As plentiful as it may seem, the above is only an excerpt of a very long list of US bellyaching about China's trade practices. Still, it's notable that currency matters were not brought up, as it does focus more on conventional trade-related issues (or those which have been subject to legal action at the WTO in the past).

The final report is yet to be posted on the WTO site, but I'll update this post when it is. At the end, of the day, though, it boils down to this question for Ambassador Punke & Co: so what are you going to do about it? Don't wimp out all the time like Geithner if you want some respect. Show them you're a real man, not a punk, Punke...

2/6/2010 UPDATE: The 2010 China Trade Policy Review has finally been posted on the WTO site.