NAFTA Allies Close Ranks on China

The recent announcement by Mexico that it plans to challenge certain Chinese subsidies (read the Chinese subsidies story here) is a strong show of support for its North American Free Trade Agreement (NAFTA) neighbour the United States. NAFTA is a free trade agreement between the US, Canada and Mexico implemented in 1994.
The US brought a similar request for WTO consultations last month alleging that China continues to apply a series of trade distorting subsidies that, by allowing for refunds, reductions and exemptions from taxes owed to the government, are designed to subsidise exports of manufactured goods or to support the purchase of domestic over imported equipment and certain other manufacturing inputs. These measures are ostensibly contrary to a number of WTO rules, including the explicit prohibitions against export subsidies and import substitution subsidies set forth in the WTO Agreement on Subsidies and Countervailing Measures.
Given the extensive involvement of the government in commercial activity in China, disciplines on subsidies were a critical issue in the negotiations leading to China’s accession to the WTO in November 2001. The importance of this issue is reflected in China’s express commitments in its accession protocol to abide by WTO prohibitions on the granting of export and import substitution subsidies. The Chinese government has continued to use a number of industrial policy tools, which included these kinds of subsidies as well as currency manipulation to create Chinese industrial strength.
The Mexican support for the US action is a pertinent indicator of the ‘hunting pack’ potential that is released via the endorphins of regional trade agreements, and Africans would do well to take a lesson from this collaborative action. Understandably the Mexican action is the result of intimate bilateral consultations and the US has expressed its delight at the direct Mexican support. It is notable that indirect support has been given by Japan, Australia and the European Union who have asked to participate in the WTO consultations as third parties. This joint action is notable in that it is indicative that the WTO community can work cooperatively under international law to encourage (and later retaliate against, if things get serious) other iterant States to comply with their international trade treaty obligations.
The present consultations are the first step in the WTO trade dispute process. Under the WTO rules, parties that do not resolve a matter through these consultations within a 60 day window may then request the establishment of a formal WTO dispute settlement panel. It is likely that the US and Mexican actions will be combined into one panel at that point.