China – the runaway trade giant

May 10, 2006

Free Market Foundation

China has met most of its easier market-access commitments to the World Trade Organisation (WTO). But forcing Beijing to address some of the big grievances that mark its trade with the United States will be tough, say observers.

For example:

China has pledged to crack down on intellectual property rights for years, but because of weak enforcement, U.S. software, music and film companies claim $2 billion in lost sales each year in China due to piracy; the United States could file a complaint with the WTO, but it may not win because the WTO lacks clear standards for defining lack of compliance.

Chinese producers of everything from steel and chemicals to chips and networking gear benefit from cheap or free loans, R&D subsidies, free land, tax holidays, and other advantages; many of these subsidies don’t violate WTO rules, and even if they give the Chinese an unfair advantage, the lack of government and company transparency makes the subsidies hard to document.

Beijing keeps the yuan tightly linked to the United States dollar leaving the currency undervalued by up to 40 per cent, giving mainland exporters a big price advantage; the United States could file a WTO case alleging that China is manipulating its currency, but that would be hard to prove.

What can be done to achieve radical change? “You will not litigate a country into changing its more important principles on how to run its economy,” says a U.S. trade official. Washington can bring Beijing to the bargaining table with WTO threats, but progress will be slow. China the heavyweight will set the rules for some time to come, say observers.

Source: Dexter Roberts, Nanette Byrnes and Michael Arndt, The Runaway Trade Giant, BusinessWeek, April 24, 2006.

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FMF Policy Bulletin/ 02 May 2006