China is squarely in the sights of North America as the USA and Mexico fire the first volleys against China’s contentious subsidy regimes in the WTO. Hot on the heels of the US, Mexico requested consultations with China (the People’s Republic of China ‘the PRC’) under the WTO’s Rules and Procedures Governing the Settlement of Disputes, a precursory process to an action in the WTO trade court. This step could see two large developing countries setting up to tackle each other in the WTO, which is interesting in that it indicates that the ‘usual suspects’ in the 1ST World are not the only ones that are actively distorting trade with illegal subsidies.
The essence of the complaint is that local content requirements in domestic production processes are WTO incompatible because these types of domestic provisions discriminate against foreign products beyond negotiated tariff concessions. In specific terms the PRC grants its companies (many are State controlled enterprises) taxation refunds, reductions and exemptions which would otherwise be collected by their government. These concessions are provided in return for using Chinese originating inputs in their production processes. These measures are most likely 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 including these kinds of subsidies as well as currency manipulation to create Chinese industrial strength. China’s undervalued Yuan gives its exporters an unfair price in boosting exports. In particular this has led to a mounting trade surplus with the United States, fuelling American manufacturers to support the related WTO subsidy action. The South African textile and clothing sectors have had similar objections to China’s currency management policies.
None the less, South Africa has a more convivial view of Chinese traders. Recall that as of last September South Africa signed an international legal agreement undertaking not to question China’s free market status when evaluating dumped imports from China.
The effects of dumping and subsidies are similar so from a South African perspective this new WTO case will be notable to follow for two reasons. Firstly South Africa is currently courting the PRC to conclude a bilateral free trade agreement. This means that South Africa (with its SACU partners) is considering duty free (or partly duty free access) for a host of products that are seemingly being heavily subsidised in China. This is a valid concern that has been vociferously raised by the local business community, especially in the textile and clothing sectors. The progress in this case should provide valuable information for SACU’s negotiators in deciding which products can equitably be afforded tariff preferences in a free trade agreement with China. Secondly this case may be a portent of what may lie ahead for South Africa itself as regards illegal subsidies in the motor industry. It has long been held (notably by Australia and the EU) that the South African motor industry support programme (the MIDP) is in fact merely a local content scheme, similar in some aspects to the Chinese schemes now challenged by Mexico and the US. It is not inconceivable that a success in this case may encourage others to take a closer look at the South African motor industry. South Africa may this find it of value to look after its systemic interests, which seem both defensive under the FTA and offensive under the MIDP, and follow the proceedings via limited participation in the matter as a so-called 3rd party.
Sources close to the SA motor industry have said that China will settle ‘out of court’, much like South Africa did in undertaking a voluntary export restraint with Australia. This, as an aside, is also a WTO illegal measure, so perhaps two wrongs do make a right? In any event, these sources may be correct. It is notable that even the hint of a WTO dispute can make iterant traders have second thoughts on their actions. Through this ‘chilling effect’ China took only two weeks before unilaterally terminating one of the nine measures complained about by Mexico and the US. This measure is a regulation implemented by China’s central bank allowing exporters to benefit from low interest loans not available to other companies.
The WTO dispute finds its legal basis in the GATT (Article XXII:1 of the General Agreement on Tariffs and Trade 1994), the Agreement on Subsidies and Countervailing Measures (Articles 4 and 30), the Agreement on Trade-Related Investment Measures (Article 8) and is also contrary to the conditions of the PRC’s Protocol of Accession (the document containing the conditions upon which China was allowed to join the WTO back in November 2001). 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. South Africa would do well to keep a wary eye on these developments.
