U.S. LAW & GLOBAL TRADE RELATIONS.

This is a slightly longer version of my article that appeared in the New York Law Journal (August 9, 2013)    ………………………………….           

US-China Trade Relations — Litigation in the WTO 2001-2013

Introduction.

The WTO dispute resolution system is widely used and is a litigation-oriented process.  It is at the core of global trade relations  today.  Both  the  United  States and China have been aggressive users of it. Each country has shown a willingness to address contentious issues. This has been to the benefit of both countries. As newer trade issues arise this process will be indispensable in keeping US – China trade relations on a stable course.

My approach to assessing US-China trade litigation in the WTO is to examine the data provided by the WTO and the United States Trade Representative (USTR) concerning the WTO dispute resolution system from its inception, the activity of the Bush and Obama administrations,  and  China’s  record  in the WTO.

This is not a jurisprudential study but one assessing  empirical litigation data in order to disclose implications for American trade policy and the international  trade  system.  A  series  of charts with short explanatory passages helps illustrate this story. A statistical assessment of WTO litigation is essential to policymakers confronting the future of the WTO.1

The specific conclusions are straightforward. The dispute resolution system is widely used by many developed and  developing  countries.  The  US  has been the most active country in it. The focus of the US has increasingly been on China and Chinese litigation has been primarily focused on the US. Further, the pace  of  WTO  litigation  among  all countries has picked up.

This review of US-China litigation is of competition reflecting trade flows and friction, which are addressed successfully in a rules-based system, rather than a narrative of a deadly, winner-take-all conflict.  Such  legal  conflict  and diplomatic resolution is the way that the system was intended to work by its architects, principally the US.

My general conclusion is that, whereas the US and China are competitors, they have  channeled  their  major  trade disputes into an international diplomatic and adjudicatory mechanism that demonstrates cooperation and management. This approach is beneficial to both parties politically, US-China trade relations, and global governance.

 Background.

The dispute resolution system is at the heart of the WTO and decides trade disputes between members. It is the judicial system of the WTO and of the global trading system.

The WTO and its dispute resolution system is the successor to the older, much weaker GATT system, and came into existence in 1995. For the first time in history, there is now a multilateral system that resolves trade disputes with binding decisions enforceable by sanctions. There is  nothing  else  like  this  in  the international economic arena today.

The basis of the dispute resolution system is the WTO’s “Dispute Settlement Understanding,” one of the multilateral agreements that came into force in 1995. It provides compulsory jurisdiction and decisions enforced by trade sanctions. It applies all the rules found in the whole range of WTO agreements relating to agriculture, intellectual property, dumping, subsidies, services, investment measures, merchandise trade, among others.

For example, the US has filed various actions against China concerning what it considers improper export subsidies and failure  to  enforce  intellectual  property rights. On the other hand, China has filed actions against the US for their imposition of antidumping duties and safeguard tariffs. Most trade cases before the WTO involve “trade remedy legislation” authorizing dumping, subsidies, and safeguard measures. The dispute resolution system is widely used by many states, but most WTO litigation involves that  between  the  US  and  the  EU. However, the most politicized and high- profile litigation involves the US and China.

The actual dispute resolution process combines traditional negotiations and litigation and is relatively simple and quick. From start to finish this entire process takes 12–15 months. States file a request for consultation which involves confidential diplomatic negotiations between the parties. If consultation does not result in a settlement, the complaining party may request the establishment of a panel to hear the case. This is where the litigation takes place. However, the majority of cases requesting consultation are resolved without ever going through the full litigation process.

Panel members are trade experts selected by the WTO and then chosen by the parties. The cases are decided by the panelists and not juries—a seeming adaptation of the civil-law approach to litigation. For a very long time these proceedings were closed and did not allow amicus briefs, but this has now changed somewhat.

Parties may appeal the decision of the panel  to  the  Appellate  Body  which  is composed of members selected by the WTO. Determinations by both the panel and Appellate Body are required to be adopted by the Dispute Settlement Body, essentially the entire membership of the WTO. In reality this adoption has proven to be automatic. When a decision is finalized, the losing party is required to bring its offending measure into compliance with the decision (technically, a recommendation) which allows it to formulate the specifics of its compliance.

If there is a failure to comply after a reasonable time, the complaining party may request the panel to impose sanctions on the losing state. Most often, these sanctions are tariff surcharges on imports from the responding state until the offending measure is removed. Requests for sanctions have been very rare and, even when authorized, they have not been imposed. States are no longer allowed to unilaterally  impose  trade  sanctions  on others unless authorized by the WTO. Only multilateral trade sanctions as authorized by the WTO are lawful under global trade law today.

Overview.

At  the  outset  of  any  discussion  of WTO  litigation,  it  is  important  to  note that only approximately 1/3 of cases filed go through the entire WTO litigation system. (It is a bit higher for cases involving the US.) The first stage in the litigation process is filing a request for consultation. This stage involves confidential diplomatic negotiations. Often,  cases  are  dropped  in  this  stage, even when there may not have been an agreement to remove contested restrictions. Only after negotiations are unsuccessful can the parties request a panel  to  be  formed.  The  chart  below covers January 1, 1995 through October 31, 2012. Of the 451 cases filed (request for consultations), only 145 have led to litigation (some are still pending).

The  WTO  dispute  resolution  system has  been  widely  utilized  by  both developed and developing countries. Developing countries have filed over 1/3 of the requests for consultation. For example,  in  2012  Latin  American countries alone filed 9 of the 27 requests for consultation.2 “(D)eveloping countries participated strongly in the dispute settlement system, both as complainants and respondents.3

US (1995-2012)

The US has been extremely active in the WTO litigation process. In fact, it has been  the  most  active  member.4   The  US was brought before the WTO approximately  50%  more  often  than  it brought cases. As the complainant, it brought a total of 99 cases. (This includes 9 compliance cases which were brought after the original case in order to secure compliance.)  It  was  a  respondent  in  a total of 140 cases. (This includes 16 compliance  cases.)  Of  the  90  original cases it brought, 42 were fully litigated, resulting in 38 wins and just 4 losses. Of the 124 original cases brought against the US, it lost 50, but won a relatively high number of 17. In total, the US won just about as many cases as it lost (55 wins and 54 losses). It is interesting to note that a significantly higher number of cases went on to the full litigation process when it was the respondent than when it was the complainant.

During the last presidential election, President   Obama   made   much   of   his record for bringing legal actions against China and his aggressiveness in the WTO legal process as a means of enforcing global trade obligations.

It is interesting to note that President Clinton actually brought a far larger number of cases before the WTO than either  President  Bush  or  President Obama. Over eight years, President Clinton brought 69 cases, whereas President Bush brought 24 cases. In four years, President Obama brought only 11 cases. China was not a member of the WTO during President Clinton’s administration. This decrease in number of  cases  brought  subsequent  to  the Clinton years may well indicate that the United States is more satisfied today that trade obligations are being observed than in the earlier years of the WTO.

Comparing President Bush’s eight years and President Obama’s first four years,  it  is  clear  that  President  Obama has been more aggressive than his predecessor. President Obama brought 8 cases in four years compared to President Bush’s 7 cases in 8 years. What is most interesting is that President Obama was much more focused on China in WTO litigation than President Bush. President Bush brought a total of 24 cases; only 7 were  directed  against  China.  President Obama brought 13 cases; 8 of them were against China. Therefore, it is fair to conclude that President Obama was very aggressive against China in his four years. I would add that he was hyper-focused on this litigation.

China in the Dispute Resolution System.

Almost immediately after its accession to the WTO, in 2001, China became extremely active in the WTO litigation process. In fact, China filed a case against the US before the US filed its onslaught of cases against China.5  China and the US have been major adversaries in  the WTO’s litigation process, but China’s litigation has also involved other member states, such as the European Union (EU) and Japan.

China has brought 11 actions against WTO  members.  It  brought  8  cases against the US and 3 against the EU. However, China has been brought before the WTO more often than it has brought cases. China has been a respondent in 31 cases. The US brought 15 cases, whereas the EU brought 7. Further, 9 other cases have  been  filed,  including  those  by Mexico  and  Japan.  It  should  be  noted that most of the cases brought against China were parallel actions to those filed by the US, although some were totally independent.  Parallel  actions  are  those that by-and-large mimic US arguments and legal issues. They merely involve different countries with their own fact- specific situations.

In the 11 cases brought by China, 5 were decided concerning the US. The others are pending. China won 3, and the US prevailed in 2. These cases almost exclusively involved dumping and safeguard  issues.  In  the  15  actions brought by the US against China, the US won all of the 6 decided cases. The other cases are pending.  The cases won by the US involved, among other issues, intellectual property rights, dumping, and export controls. Therefore, in the 11 decided cases involving the US and China, the US won a total of 8 cases, whereas China won 3.

One of the highest profile trade issues, the valuation of the yuan, has not been submitted by the Obama administration to the WTO, despite significant demands from Congress and the public that undervaluation amounts to an export subsidy.  In  my  opinion,  both  the  Bush and the Obama administrations understand that the WTO agreements were never intended to cover this type of currency-exchange issue. Similarly, no cases have been filed by China against the US concerning US restrictions on Chinese direct investment in the US when based upon claims of national security. The WTO provides architecture for global trade relations. The WTO’s central mandate is trade, not finance nor investment.

Observations.

The  Obama  administration  has  not filed a new case against China since the2012 election. In contrast, both the EU 6and Japan 7  have filed actions. Moreover, China has filed a recent action against the EU8 as well as against others.

Some observers argue that constant litigation is corrosive to the international trading system. For example, one commentator laments the fact that “more and more of the work of trade relations has  shifted  away  from  negotiations  and towards    litigation    and    arbitration.”9

Another argues, “The Obama administration has put enforcement of trade agreements at the heart of the approach toward China … But winning in the courtroom is often only the start of the battle.”10

However, others have taken a more nuanced approach. In fact, an earlier skeptic recently stated, “In fact, the situation is more complex, and less worrying, than it might appear … (A) heartening amount of the litigation has actually been aimed at preventing arbitrary trade restrictions in the future … Much is aimed at obtaining rulings preventing others using ‘trade defense’ instruments, such as antidumping and countervailing duties as a politicized tool of arbitrary retaliation.”11

I view US-China litigation in the WTO as validating the strength and critical importance of the WTO and its dispute resolution   system.   China   is   now   the second-largest economy in the world. It is expected that disputes increase with trade flows. The strength of the international system is not the absence of disputes, but the   way   that   they   are   resolved.   The failure of the WTO to conclude the Doha round of negotiations and the formulation of new trade rules only highlights the growth  and  immense  historical significance of the dispute-resolution system.

An examination of the cases involving China shows that trade disputes that arise between it and the United States are submitted to the WTO and are resolved, either by diplomatic negotiations in the consultation stage or in the litigation phase. No enforcement actions by either country asking for sanctions have been filed under Article 22 of the Dispute Settlement Understanding. The primary focus  of  China’s  litigation  in  the  WTO has been the US.

Nevertheless, China is paying an increasing amount of attention to the EU and other countries.12 China’s use of the dispute resolution system and observance of  its  decisions  are  beneficial developments in promoting a rules-based global trading system. It shows a growing acceptance of global trade rules by China. This is a shift from China’s skeptical view of international law bred in the 19th- century era of unequal treaties imposed by Western powers. This newer view represents an understanding that to benefit from the global trading system it needs to follow the rules of the road.

Conclusions

An analysis of all WTO cases filed in 2012 in The WTO Annual Report for 2013 shows that the US filed 5 cases (requests for consultation), whereas China and Japan filed 3 each.13  The main targets of all litigation were China (7), the US (6), and the EU (3).14 The report concluded, “In sum, WTO dispute settlement activity increased  markedly  in  2012.  It  is  clear that WTO members, both developed and developing,   continue   to   have   a   high degree of confidence in the WTO dispute- settlement mechanism to resolve their disputes in a fair and efficient manner. It is also evident that members are confident that the system is capable of adjudicating a wide variety of disputes covering significant     questions     and     complex issues.”15

It is worthwhile to note the recent observation by Pascal Lamy, Director General of the WTO.16 He argued that trade frictions are a statistical proportion of trade volumes, whereas trade disputes are a statistical proportion of trade frictions. He brushed off concerns about the increasing number of trade disputes between the US and China. He contended that the WTO mechanism takes the heat out of disputes by utilizing a process that is       rules-based,       predictable,       and respected.17

Lamy warned in a subsequent presentation that geopolitics is back at the trade table.18  He noted that the value chains   are   multilateralizing   and   that trade   governance   needs   to   meet   this challenge. Lamy argued that China would benefit from taking a more active role in global governance in trade and related issues. “China’s economic take-off benefited from a stable external environment.  Its  sustainability  depends on a well-functioning global trading system. As a key stakeholder, China should  take  a  more  proactive  role  in international economic governance ….”19

While inheriting a complex trade situation20, the Obama administration has clearly  put  trade  at  the  heart  of  its second-term  agenda.21   This  policy includes negotiating the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade  and  Investment  Partnership (TTIP). However, at the core of the administration’s trade policy is its insistence  on  greater  trade  enforcement by US trade agencies and the WTO, particularly with China. What is the sense of negotiating rules if they are not enforced? New Secretary of State John Kerry succinctly stated, “Foreign policy is economic policy.”22

The  2012  Report  to  Congress  on China’s WTO Compliance by the USTR stated clearly the central position of WTO litigation in US – China trade relations, “When trade frictions have arisen, the United States has preferred to pursue dialogue with China to resolve them. However, when dialogue with China has not  led  to  the  resolution  of  key  trade issues, the United States has not hesitated to invoke the WTO’s dispute settlement mechanism. In fact, the United States has used this mechanism against China more than  any  other  WTO  member.”23   This policy is set to continue under the newly appointed USTR Michael Forman, a former member of the National Security Council.24

At least in terms of adjudicating trade disputes and governing existing and emerging trade issues, the WTO has proven itself well beyond the grandest dreams of the early architects of the dispute resolution system.

Newer  trade  issues  are  emerging swiftly  between  ever  more  countries  in this  rapidly  globalizing  trading  system. For example, the EU25 and Japan have recently filed the first cases in the WTO against the Russian Federation just joined the WTO last year. A recent WTO panel, “Defining the Future Trade Issues,” released its report in April of this year.26

It enumerated nine issues, including competition policy, international investment, currencies, labor, climate change, corruption,27 and coherence of international  economic  rules.  Some  of these issues have been around for a while, and some have become much more pressing.

To this list, I would add the issue of cyberespionage for commercial and economic gain as a new front in global trade  wars.  The  Obama  administration has suggested28 that trade tools should be become  the  scourge  of  many  countries and  international  organizations.  They have targeted it as economic development and national budgets come under increasing   pressure   because   of   global economic problems.31  These areas  could certainly  benefit  from  greater multilateral-based solutions through the WTO  perhaps  leading  to  trade agreements relating to direct investment (TRDI) and to international taxation (TRIT).  These  areas  as  they  relate  to trade may even be subject to future litigation  in  the  WTO   under  existing rules.

The recently released World Trade Report for 2013 by the WTO assesses the factors shaping the future of world trade. It concludes, “[T]he landscape and nature of world trade are changing fast. As trade evolves, new policy challenges will arise. If properly managed, international trade will  further  increase  prosperity  around the globe.”32

Challenges remain and are expected to continue. Those relating to the most important bilateral trade relations in the world today between the US and China are set to grow as trade develops even more. Global transactions in a multijurisdictional world need a mechanism  to  resolve  a  wide  range  of  business, trade, and economic issues.   In   addition  to  this   newer issue, I would add two additional issues: foreign direct investment and taxation. Growing foreign investment by Chinese companies    has    raised    questions    of national  security.30    Tax  avoidance  has an increasingly interconnected trading system and a less hierarchical political system, cooperation through diplomacy and adjudication is preferable to outright power-politics  confrontation.  Each country  has  shown  that  it  is  willing  to work with the other to apply the rules of global trade, which will need to continue as  new  disputes  arise  and    even  newer  trade issues evolve.

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