China’s Reluctant Usage of the WTO Dispute Settlement System

By JESSICA C. LIAO

There is no better time than now to examine China’s participation in WTO dispute settlement. This December will mark the 10th anniversary of China’s accession to the WTO, a meaningful time to review China’s progress integrating into the multilateral trade system. Second, China has recently become a prominent actor in WTO dispute settlement, particularly  since the 2008 financial crisis when heated Sino-American trade tussles aroused concerns of a trade war and overshadowed global economic recovery. In such an atmosphere, many speculated that China would become more aggressive in utilizing the dispute settlement understanding (DSU) process against the United States and other trading partners.

China’s DSB activity has changed over the past ten years. Ji Wenhua, the legal advisor at the Chinese Mission to the WTO in Geneva, characterizes China’s DSU activity by three distinct periods of time.  From 2002 to the middle of 2003, except for one case where China joined seven WTO members against U.S. steel safeguard measures, it mostly acted as a quiet observer, reserving meaningful participation and watching other members’ interaction. From mid 2003 to early 2007, China became a proactive third party actor, joining every single panel issued in this period. The third period started in February 2007 when China changed its third-party participation into a selective basis so as to respond to consultations requested by other WTO members. Soon after this shift, China made its first move in the dispute settlement body (DSB) as a sole complainant against the United States (hereafter the U.S.) and since then has been more active in dispute settlement. This change is illustrated by the fact that China was, either as a complainant or a respondent, party to 50% of all DSB cases filed in 2009.

Regardless of the increase, in comparing China with other developing countries, it remains inactive in utilizing the DSU to solve trade disputes in relation to the size of its economy. China only requested 2 consultations with the U.S. for every trillion dollars of two-way merchandise trade flow from 2002 to 2010, much lower than Brazil (14.3), India (8.1) and Mexico (2.9).  This is puzzling given the fact that China is, since 2010, the largest exporter and second largest economic entity in the world, and should have a higher chance of dispute with others. So, how do we explain China’s moderate action in taking other countries to WTO dispute settlement? Why hasn’t WTO litigation become the core of China’s foreign trade policy? How do we explain the increase in China’s filing of litigation cases in recent years?  
   
Putting the time horizon into perspective, many legal experts describe China as a student rapidly moving along the learning curve through its experience as a  third-party participant.  They believe that China’s relatively short history within the WTO contributes to its moderate litigation behavior.  However, this argument falls short of the context of the dispute case and the explanation on how decision-makers deliberate over a case. A second explanation comes from the perspective of inter-state relations. This perspective portrays China as a rising power within an unfriendly international environment who attempts to keep a strategically low profile in order to maintain stable relations with its trading partners.  However, when others become  protectionist, China doesn’t hesitate to fight back in order to balance such moves.  But this explanation is too simplicitic as it assumes the state is a unitary actor without further exploring the origin of the issue in dispute and the domestic context in which the subject takes place .

Still others explore this question from a cultural perspective. They argue that litigation is not part of Chinese culture and is viewed by Chinese as harmful to the relationship between disputing parties.  Instead, the argument goes, diplomatic negotiation better suits China as a solution to dispute.  However, this cultural explanation is known for its fuzziness and low predictability  since one cannot explain clearly when and why a deviating action takes place from the predictions of the cultural trajectory . Finally, the most important problem shared by these three arguments is a lack of analysis on domestic factors that affect policymakers’ decisions on WTO litigation. After all, foreign policy is made within a country’s domestic structure, either at the political or economic level.

My trip to China this summer aims to map out the policymakers’ strategy and decision-making within the domestic context to launch litigation, particularly in cases against the United States, China’s major opponent in WTO dispute settlement. The problems derived from China’s subsidies and industrial policies are the main source of domestic considerations that I focus on. China’s subsidy system has been, and to some extent still is, the solutions and problems behind its industrialization as the preferential incentives help promote foreign investment as well as maintain the operation of loss-making state-owned enterprises. However, as China integrating into the global economy, such practices have undergone enormous pressure for reform.  

In order to understand policymakers’ calculation on the issue of subsidy, I talked to about 20 people, from the Chinese academia, media, law firms, government think tanks and agencies to U.S. business council in China and the US embassy in Beijing. In addition, I visited paper archives and digital database at the library of Peking University, searching for the statements made by high-ranking Chinese officials for the past ten years regarding the grand strategy of China’s trade policy, China’s dispute settlement activity, and US-China trade disputes.

My preliminary study confirms my reckoning that China’s policymakers see the subsidy issues as a main source of contention between China and its major trading partners. Despite admitting that there’s room to improve in China’s subsidy policies, they also emphasized the remarkable change that China has made in an effort to tune its practices with the WTO standards. Moreover, they also criticize the effect of rising protectionism for unreasonably accusing China’s subsidy practices as WTO-inconsistent. My study found that the concern of subsidy problems affect the policymakers’ recalculation on issues including legal capacity, strategy of crafting legal arguments and the political cost of losing a dispute. In my working paper, I break the analysis of the subsidy into three parts. The first part shows how the legal team in the Chinese government has been overloaded and has adjusted their litigation strategy to meet its capacity. I then show that the losing experience caused by subsidy problems makes the Chinese decision-makers less confident to bring litigation against other WTO members. Even after China’s subsidy system has improved greatly to meet the WTO requirement, China’s policymakers remain prudence in their recent approach to WTO litigation. With evidences from the recent cases about the imposition of countervailing and antidumping measures, I examine how this prudence is in part derived from their concern of winning WTO cases and why winning is valuable to them. The final section points out the indirect effect of subsidy system on political elite’s consideration of WTO litigation. I explain how China’s subsidy regime makes its business groups less active in petitioning for WTO litigation.

Towards the end of my trip, I presented the preliminary findings of my research to the economic section and USTR branch in the US embassy in Beijing. In order to protect my source, I did not disclose names of the interviewees in my presentation. In addition to the great feedback from my audience, my presentation helped me access to more important people of my research. I am now in the process of finishing up my essay that I would like to submit to an academic journal by the end of this year to meet the 10th anniversary of China’s WTO accession.

Click here to view projects of other 2011-2012 USCI Graduate Summer Fieldwork Grant recipients.