Global Overview: What if China keeps growing?

Gary Horlick
Law Offices of Gary N Horlick
Washington DC

In 1986, when China began its negotiations to join the GATT (now WTO), no one in China or outside foresaw that China's economy would grow from a GDP of $951 billion in 1986 (in 2010 dollars) to $4.9 trillion in 2010. At that level, enough Chinese can afford the material possessions of modern civilisation so that China in 2009 – already the world's largest market for mobile telephones, shampoo, and refrigerators – became the world's largest market for automobiles (and seems likely to remain so even after the US market recovers). Obviously, there is no guarantee that China will continue to grow as it has – all economies are subject to external price shocks, financial collapses, and/or dithering governments. But, notably, China's growth rate barely dipped during the 2008-09 recession, so for planning purposes, businesses (and their lawyers) have to include the possibility of continued Chinese growth. That prospect will have complications far beyond trade policy – but what does that mean for international trade lawyers?

Most obviously, there will be more trade remedy cases (antidumping, countervailing duties, safeguards) against Chinese products in the EU, US, Brazil, Mexico, India, and almost everywhere. As China's internal market grows, manufacturers with large market shares there will achieve larger and larger economies of scale, making them more and more competitive against competitors without access to a similarly large market. For any product where demand correlates roughly with number of people, China is or will be the largest market in the world, even though its economy measured by GDP is only one-quarter the size of the US.

This is also true for services – China is or will be the largest market for X-rays/MRIs, for example. Of course, trade remedy laws only apply to goods, so other, more creative means would have to be used by competitors against Chinese service providers benefiting from the large home market.

It gets far less attention in the West, but China has an active trade remedy programme of its own, with 16 AD cases (#5 in the world) and 3 CVD cases (#3 in the world) initiated in 2009. Even less attention has been paid to the possibility that China is using these cases in a more tactical or strategic sense than other countries.

For example, an EU case against imports of metal fasteners from China was met not only with a sweeping WTO challenge to the results of the EU case, but also by a parallel case in China against imports of EU metal fasteners, and China stopped soy bean imports from Argentina to protest AD cases there. Most strikingly, China initiated three CVD cases against US exports in 2009 and to date has issued a final ruling that the US Buy America government purchasing pref-erences are a subsidy to US industry and a preliminary determination that US gov-ernment subsidies to corn and soybeans subsidise US exports of poultry, and presumably, beef and pork (China does not complain about the allegedly subsidised US corn and soybean which it buys in massive quantities), and China is poised to declare that the US auto bail-out was a subsidy to the Big Three.

Both of these phenomena will continue to provide work for trade lawyers around the world out into the medium and long term. But by far the most important impact will be the long-term effect of China's growth, as it forces a complete re-ordering of US and EU trade policy priorities. Put most directly, in products where China is the biggest market, US, European and other countries' companies that are not number 1, 2 or 3 in China may well become irrelevant even if they are successful in their home markets. In numerical terms, if the Chinese market for widgets is four times larger than the US market for widgets (perfectly plausible, as China's population is more than four times that of the US), and Chinese Company A has 50 percent of its own market and 25 percent of the US market, and US Company U has 50 percent of its own market and 25 percent of the Chinese market, Chinese Company C will have 45 percent of the combined markets, and US Company U will have 30 percent of the combined markets. In the many industries where economies of scale matter (for example, the ability to do more R&D, or to buy components more cheaply), that gap could be fatal. And if US Company S had 25 percent of the US market and zero in China, it will disappear as an independent company. So what matters for the US and EU trade policy, and that of many other countries, for the future is to ensure that their companies are competitive in the Chinese market (and the Indian market if India reaches Chinese levels of wealth, since India's population will soon pass China's (this analysis is not China-targeted).

The obvious candidates for highest priority for future US and EU trade policy include (but are certainly not limited to):

• Investment rules in China, to ensure that foreign companies have the same opportunities as Chinese ones [which of course complicates Western attempts to stop or limit Chinese investment in their countries].
• Government procurement, a large market in China.
• Intellectual property rules to make sure that companies can sell their trademark, patented, or copyrighted products without facing competition from direct copies.
• Standards can be an extremely effective market access barrier.
• Chinese trade remedy rules, to make sure products can be exported there as well as manufactured there.
• Subsidy rules, so that Chinese companies do not receive larger subsidies than their non-Chinese competitors (which may require some discipline in the West as well – the recent WTO panel reports on Large Commercial Aircraft contain long lists of subsidies to industrial enterprises in the West, and they are not limited to aircraft producers).

This is not necessarily bad news for non-Chinese economies. The supply chain has disaggregated production so that it is perfectly plausible that a non-Chinese company, manufacturing and selling a large volume of product in China could well generate a large number of jobs in the US. A 2007 study of the Apple iPod suggests that, of the $299 retail price, more than $130 (and the jobs that go with it) stayed in the US, while less than $10 stayed in China, where the product was manufactured. As suggested above, Apple would not be able to continue making iPods if it sells one million in the US and a Chinese competitor sells ten million of a comparable product in China. The Chinese competitor would have enormous economies of scale and be able to out-compete Apple quite fairly world-wide, so Apple has to be able to sell large amounts in the Chinese market as well as the US market. But if it does it will generate jobs and profits in the US more than in China.

None of this is completely news, of course. Non-Chinese companies are well aware of the business exigencies of the future, and have pressured their governments to complain vigorously about China's "famous brands" subsidies (the subject of a WTO case), and the more recent "indigenous innovation" programme. What is new is the growing consciousness of the need to re-think the priorities in trade policy. The US and EU have spent enormous amounts of their negotiating clout with China to limit imports from China into the US and EU of ladies' clothing. The textile quotas imposed by the US ended in 2005, so there are many other suppliers, and well under four percent of all clothing sold at retail in the US is manufactured in the US. So there is no real possibility of growing a US industry making women's blouses. In the abstract, it may make sense politically to protect that industry, but the effort may have been much better spent on ensuring US and the EU companies' access to the government procurement market in China, a market where possibly as much as fifty percent of all purchases are by the government or state-owned enterprises. Of course, it is easier to close one's own borders than seek changes in the larger market – but that will only make it too easy to focus policy on the smaller of the two markets!