A Private Bargaining and Efficient Breach Approach to the Problem of US-China Trade: Bringing a Non-Violation Case in the WTO.

• Author: Chow, Daniel C.K.

TABLE OF CONTENTS I. INTRODUCTION 748 II. CHINA, STATE-OWNED ENTERPRISES, AND THE WTO 756 A. China, Free Market Reforms, and the WTO 756 B. The Problem of China's State-Owned Enterprises 758 C. GATT/WTO Disciplines for Subsidies 761 1. A Brief Overview of Subsidies in the GATT/WTO 761 2. Harm Caused by Subsidies 762 3. GATT/WTO Remedies for Subsidies 764 D. Bringing Subsidies Cases in the WTO 766 1. Nullification or Impairment 768 2. Bringing a WTO Violation Case against China 771 3. Advantages of a Non-Violation Case 772 III. "POWER-BASED" BARGAINING AND TRADE NEGOTIATIONS 776 IV. THE ECONOMIC LOGIC OF GATT/WTO 779 A. Resolution to a Prisoner's Dilemma 779 B. Return to the Nash Equilibrium? 782 V. GATT/WTO: ADDRESSING DOMESTIC POLICIES 783 A. Shallow Integration 783 B. An Incomplete Contract 784 C. Domestic Policies and No Disputes 785 D. Domestic Policies and Disputes 788 VI. THE US -- CHINA TRADE DISPUTE: THE CASE FOR A NON-VIOLATION CLAIM 790 A. Revisiting the Dispute 790 B. Bargaining in the "Shadow of the Law" 791 C. Violation versus Non-Violation Complaint? 793 VII. CONCLUSION 796 I. INTRODUCTION

When Joseph R. Biden defeated Donald J. Trump to become president of the United States in 2020, many hoped that Biden would reset the US--China trading relationship after the turbulent years of the Trump administration. (1) Yet, nearly two years into the Biden presidency, the US--China relationship has undergone not a reset but a pause. (2) Biden has left in place nearly all of the Trump-era trade policies towards China, choosing to maintain the status quo while the United States mulls its next steps in its trade policy with China. (3) Maintaining the status quo of the Trump-era policies, however, leaves the global trading system and the United States' economic and trade relationship with China in an uneasy, precarious state.

Under the Trump administration, the United States abandoned all pretense of following the rules of the multilateral trading system established seventy-five years ago by the World Trade Organization's (WTO) predecessor, the General Agreement on Tariffs and Trade (GATT). (4) Instead, the United States adopted a unilateral and power-based approach to international trade. The United States asserts that it will follow only those GATT/WTO obligations with which it agrees and will repudiate or ignore GATT/WTO obligations inconsistent with US interests. (5) The Trump administration shocked the global trading community, including some its closest trading partners, by imposing punitive new tariffs on all imports of steel and aluminum from any country based upon a dubious rationale that is inconsistent with the GATT/WTO. (6)

As part of its power-based approach, the Trump administration also crippled the dispute settlement system of the WTO by paralyzing the WTO Appellate Body so that other WTO members can no longer challenge US actions in the WTO. (7) The result of this US blockade of the Appellate Body, also maintained by the Biden administration, is that all WTO obligations are, in effect, no longer enforceable. (8) Any nation that loses a case in the first instance at the panel stage in the WTO can nullify the decision by appealing it to the now-decommissioned Appellate Body. (9) Once an appeal is lodged, no decision can become legally effective until the appeal is concluded; (10) as the paralyzed Appellate Body cannot convene, the appeal cannot be concluded, so the decision is suspended in a legal limbo. (11) The losing party in the panel decision can now ignore the decision as it has become a legal nullity. (12) As a result of this US-instigated crisis, the WTO now finds itself imperiled and its future survival at stake. (13)

The United States reserved some of its most belligerent tactics for its chief antagonist, the People's Republic of China (PRC or China), by imposing or threatening to impose draconian tariffs on the bulk of imports from China. (14) When China responded with retaliatory tariffs on US goods, the relationship between the two nations spiraled into a destructive trade war. (15) The two nations reached a truce when they signed Phase I of the US--China Economic and Trade Agreement (USCTA) on January 15, 2020. (16) In exchange for the US suspension of new tariffs, China agreed to purchase $200 billion in US goods and services over a two-year period, (17) and made other commitments, including many in the area of intellectual property protection. (18) The USCTA also established a dispute resolution process for USCTA and WTO disputes that is completely under the control of the United States, ensuring that the United States will never lose another trade dispute with China. (19)

As the Biden administration continues to develop its trade policy towards China, US concerns about China remain just as serious as those that previous US administrations have held ever since China joined the WTO in 2001. Since China's accession to the WTO, the United States has consistently asserted that China has reneged on its obligations to dismantle its state-led economy and embrace free market reforms, which was a condition of its WTO membership. (20) Instead, the Chinese Communist Party (CCP or Party), China's ruling party, has tightened its control over the economy and has implemented many interventionist domestic policies that harm the United States. (21) Among the most serious US concerns are the myriad of non-transparent domestic policies that China uses to funnel industrial subsidies toward and grant favorable treatment to Chinese business entities, including its state-owned enterprises (SOEs), which are business enterprises under the ownership of the state. (22) These subsidies allow China to export lower-priced goods to the United States, harming US industries and consumers. (23) Lower priced Chinese domestic goods, sustained by subsidies, also act as an import barrier that prevents US goods from entering the Chinese domestic market. (24) The Trump administration had planned to address subsidies and SOEs in Phase II of the USCTA, but the Biden administration has indicated that a Phase II agreement will not be forthcoming. (25) Katherine Tai, the United States trade representative (USTR) under the Biden administration, also claims that using the WTO dispute settlement system is not useful because it cannot address the type of internal non-market domestic policies and structural issues at the heart of the China subsidies problem. (26) These positions of the Biden administration leave the United States without a current strategy for addressing United States' longstanding concerns about China's use of industrial subsidies and other non-market domestic policies.

This Article explains a strategy that the United States can adopt and use to challenge China's interventionist and non-market policies against this background of uncertainty and turbulence in the US--China economic relationship. The key to this approach is that the United States should launch a "non-violation case" against China's use of subsidies and other non-market policies in the WTO dispute settlement system. (27) The GATT/WTO distinguishes between a "violation case," which asserts a breach of a textual provision of the WTO agreements, and a non-violation case, which asserts that a benefit has been denied by actions of a nation although no violation of a textual provision has occurred. (28) One major advantage of a non-violation case is that the parties can bargain for a mutually satisfactory solution to the dispute. (29) Such bargaining is not possible under a violation case because the losing party in such a case has a fundamental obligation to cure its breach of a textual provision. (30) China has already accepted such a private bargaining approach under the USCTA, which can be viewed as a bargain reached by the parties for China to compensate the United States for China's market access issues. The USCTA, however, is outside the WTO so it is a bargain in the shadow of the law. A non-violation case will allow the parties to reach a private bargain within the confines of the rules-based WTO system.

Within the larger overall context of a long-term US--China trade relationship, the approach suggested by this Article also has at least three major advantages:

First, bringing a non-violation case against China is not part of a power-based approach but is a return to the rules-based multilateral approach of the GATT/WTO. We believe that the Trump administration's power-based approach towards trade with China is not a viable or sustainable long-term strategy. A power-based approach rejects the economic logic of the GATT/WTO, which provides an optimal solution to the terms-of-trade prisoner's dilemma: a dilemma in which two countries acting selfishly will reach a suboptimal solution on tariffs and fail to cooperate on low tariffs even when it is in their best interests to do so. (31) In the absence of a trade agreement, the outcome of the prisoner's dilemma is for a country to set a high tariff no matter how low the tariff set by the other country. (32) Under the trade agreements of the GATT/WTO, however, countries have an incentive to agree to low tariffs; the successful history of the GATT/WTO has resulted in the lowest tariffs in world history. (33) A non-violation case will allow the parties to reach an optimal solution to the prisoner's dilemma of US--China trade. (34)

The power-based approach of the United States has already resulted in a far higher level of US--China tariffs by both countries than under their WTO commitments. (35) Under a power-based approach, the response of the United States is to use the threat of trade sanctions, given credence by its economic power, to bully China and other countries into trade concessions. (36) But unlike smaller economies, China is not capitulating to US pressure without a fight but has imposed retaliatory tariffs inflicting pain on the United States. (37) Because the United States...