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

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.