Reaching a trade deal with China is only half the battle

If the United States and China are somehow able to make a breakthrough this week on a deal to resolve their current trade conflict, how do they plan to enforce it?

There has been much speculation about what a deal between the two biggest trading countries in the world might contain. There has been much less speculation about how the U.S. and China would make a two-way deal work if they concluded one.

{mosads}Eyes in Washington this week are focused on the weary trade negotiators from the two countries as they labor together to reach a deal before they hit the March 2 deadline.

If a deal is not reached by then, President Donald Trump has threatened to increase tariffs on $200 billion worth of Chinese imports to 25 percent from 10 percent, which would inflict even more mutual and increasingly global economic pain.

Both the U.S. and China are among the 164 countries in the World Trade Organization (WTO). Should the two countries enter into a deal that rose to the level of a “free trade agreement” under the WTO treaty by covering “substantially all” the trade between them, they would have broad discretion to improvise on how to enforce any disputes that would inevitably arise between them over fulfilling their mutual obligations under the deal.

As part of a free trade agreement (FTA), the U.S. and China could, if they wished, create an entirely separate dispute settlement system to uphold the deal. This is what has been done, for example, in other FTAs.  

One example is the North American Free Trade Agreement (NAFTA), which features a dispute settlement system that Trump is currently trying to undermine in some respects with his proposed substitute — the U.S.-Mexico-Canada Agreement.

But the United States and China are not even considering a free trade agreement. As a result, if President Trump and his trade negotiators reached a deal with the Chinese, they would — whether they liked it or not — be obligated under international law to enforce that deal largely within the legal framework of the WTO rules for dispute settlement.

If the U.S. chose instead to ignore WTO rules, if China acquiesced to it, and if their actions pursuant to their bilateral deal harmed their other trading partners, the two countries could each face the possibility of losing billions of dollars annually in their current trade benefits from other WTO members through lawful economic sanctions authorized by the WTO.

All WTO members have agreed in the WTO treaty to take all their disputes involving matters covered by the treaty to the WTO for dispute settlement before retaliating by imposing tariffs or other trade restrictions to counter perceived unfair trade practices.

The WTO treaty covers about 98 percent of all world commerce, including trade in both goods and services. To a limited extent, it also covers foreign direct investment. Thus, punitive tariffs and other trade restrictions in response to concerns about matters falling within the scope of the WTO treaty that are imposed without first seeking legal judgment and approval by the WTO are violations of the treaty.

So far, in his imposition of unilateral tariffs on products from China and other U.S. trading partners, President Trump has ignored this WTO treaty obligation, which is why the United States is now facing an uphill battle in defending against an ever-growing number of legal complaints by other countries in the WTO.

China received permission from the WTO to proceed with its basic challenge to the unilateral tariffs Trump has already applied earlier this week.

If, in return for the removal of the Trump tariffs, China agreed in a deal with the U.S. to favor an American product with a guaranteed purchase amount or with a guaranteed percentage of the Chinese market in that product, or if China agreed to give that same U.S. product special treatment on Chinese technology transfer requirements, these would be clear violations of China’s basic WTO obligation to give like imported products of all 162 other WTO members non-discriminatory “most-favored-nation” treatment.

And if, as has been speculated, a U.S.-China trade deal permitted the U.S. to enforce these illegal obligations made by China in the deal by restoring some or all of the current illegal unilateral tariffs on imported Chinese products, then such an enforcement provision would itself be in violation of WTO rules because it would simply be a renewal of tariffs that were illegal in the first place.

Conceivably, China could agree, under U.S. pressure, to such an arrangement, slanted against China. The U.S. market is vital to China. Countries can sign away their legal rights if they want. But would the Chinese yield to Trump’s intimidation in such a way — especially in as much as they are challenging the very tariffs that would “snap back” as a penalty in the WTO now?

Agreeing to such an arrangement would be all too reminiscent of the unequal treaties that were often forced on a weakened China by foreign countries in the 19th century.     

{mossecondads}On matters not falling within the scope of the WTO treaty, such as most matters relating to foreign direct investment, the U.S. and China are much freer to agree on a separate deal.

Ideally, enforcement of their mutual investment obligations would be done under a bilateral investment treaty (BIT), which, despite years of talk, is not on the horizon. Short of a BIT, a trade deal between the two countries could also be an investment deal and could include its own means of enforcing most investment obligations.

The irony here is that, in order to work, those means might need to look a lot like the investor-state dispute settlement provisions that Trump and his trade enablers loathe in other international agreements.

Otherwise, in trying to enforce a trade deal with China, the Trump administration will likely find itself more often where it least likes to be: in Geneva pleading the U.S. case before the judges for the WTO. 

Former Rep. James Bacchus (D-Fla.) is a former chief judge for the World Trade Organization. He is an adjunct scholar at the Cato Institute and professor of global affairs at the University of Central Florida. His new book is “The Willing World: Shaping and Sharing a Sustainable Global Prosperity” (Cambridge), named by the Financial Times as one of the “Best Books of the Year” for 2018.