During his recent visit to the United States, Prime Minister Scott Morrison backed in President Trump’s call for China to relinquish its developing-country status at the World Trade Organization (WTO). Both leaders argued the injustice of the world’s second-largest economy still calling itself a developing country but did not set out the advantages actually flowing to China from this designation. Beyond the Castle-like “vibe of the thing” it’s important to examine the material benefits China enjoys from its status and the damage it is inflicting on our two countries and the rest of the developed world.
When China joined the WTO in 2001 it designated itself as a developing country but agreed to conditions of entry much tougher than those available to other developing-country members. For example, China needed only cut its average industrial tariff from 42.7 per cent to 31.4 per cent, but instead agreed to cut it to 9.5 per cent. As a developing country, China was obliged to cut its agricultural tariff from 54 per cent to 37.9 per cent but dropped it to 15.1 per cent.
In some areas, China did more than most developed countries, eliminating all agricultural export subsidies upon accession to the WTO, which the US and the EU had deployed to corrupt world agricultural markets during the 1980s at great cost to Australian farmers. Only in 2015 did the US, the EU and other WTO members agree to eliminate these subsidies.
While Trump has accused China of “cheating the system” by maintaining its developing-country status, he has imposed tariffs not only on China but also on the EU, South Korea, India and a host of other countries, in clear contravention of the WTO’s rules. His pretence is that his tariffs are WTO-compliant because they fit into a little-used national-security exemption provided in the rules for cases where a member country might be under threat of invasion. How does Trump explain his decision on national security grounds to apply tariffs on imported washing machines? Could it have anything to do with US washing-machine manufacturer, Whirlpool, being located in Michigan, a Democratic state that flipped in the 2016 US election to help deliver him the presidency?
As a developing country, China is entitled to claim special and differential treatment under the WTO’s rules. This would enable it to implement commitments made in new agreements more slowly than developed countries. But very few new agreements have been negotiated since China’s accession and it has not availed itself of that right in the few that have come into force. For example, under the trade facilitation agreement of 2014, China could draw on a fund to assist developing countries to upgrade their customs procedures, but it never has done so.
One of the few negotiations where China has invoked its developing-country status is in the area of fisheries subsidies. China has a massive fleet of fishing vessels and appears unwilling to be constrained in subsidising its fleet to take fish on the high seas.
The US has accused China of invoking its developing-country status in refusing to negotiate new agreements within the WTO. This might well have validity, since China has not been forthcoming in negotiating new multilateral agreements. China could and should be more engaged in the negotiation of new agreements and in wider reform of the WTO.
But even if that were to come to pass, a number of large developing countries, including India, are not showing much appetite for negotiating new agreements – and for any multilateral agreement to come into force it must be supported by every WTO member.
Instead of simply labelling China a cheat, the US might consider a more constructive approach and agree to set up process for reform of the WTO and lift its veto on new appointments to the Appellate Body. It suits the US that the WTO’s dispute settlement process will become virtually inoperative from December 10, when the Appellate Body, down to a single member out of seven, will cease to exist. Without a dispute-settling process, the Trump Administration will continue to be free to breach WTO rules – the very accusation it levels at China.
As a defender of the multilateral trading system with high standing among the WTO’s membership, Australia could take a position of honest broker instead of siding with either the US or China. And as founder of the Asia Pacific Economic Cooperation forum (APEC), Australia could take that position to the APEC leaders’ meeting next month in Santiago. In this instance, it’s better to have tried and failed than never to have tried at all.