Page 1 of 2 China shows its skills with world trade rules
By Peter Lee
The 10th anniversary of China's accession to the World Trade Organization (WTO)
was marked by conspicuous pride by the leadership of the People's Republic, and
ostentatious moaning and gnashing of teeth in the West. Clearly, China's second
decade in the WTO will be considerably more contentious than its first.
The tone was set by US Trade Representative Ron Kirk's report to the US
Congress. While noting progress across the board, he regretfully concluded that
there is "a troubling trend in China toward intensified state intervention in
the Chinese economy over
the last five years".
Kirk enlarged on the theme:
After 2006, as China's progress toward
further market liberalization began to slow, some Chinese government policies
and practices raised increasing concerns that China had not yet fully embraced
the key WTO principles of market access, non-discrimination and transparency
… In 2011, the prevalence of interventionist policies and practices, coupled
with the large role of state-owned enterprises in China's economy, continued to
generate significant concerns among US stakeholders.
favorite trope of China's critics is that the PRC does not "play by the rules",
asserting that the PRC's economic miracle is tainted by skimping on laws,
enforcement, and basic honesty. President Barack Obama promoted this framing of
the issue at the Asia-Pacific Economic Cooperation summit in Hawaii last month,
directly and through statements by his spokespersons:
"What I have said
since I first came into office and what we've exhibited in terms of our
interactions with the Chinese is we want you to play by the rules. And currency
is probably a good example," Obama said, referring to long-standing US requests
for China to let the yuan float freely.
"For an economy like the United States - where our biggest competitive
advantage is our knowledge, our innovation, our patents, our copyrights - for
us not to get the kind of protection we need in a large marketplace like China
is not acceptable," Obama said.
US officials said private talks Obama and [Chinese president] Hu [Jintao] held
later focused heavily on economic issues and that the US president conveyed
growing American concerns about the trade relationship.
"He made it very clear that the American people and the American business
community were growing increasingly impatient and frustrated with the state of
change in China economic policy and the evolution of the US-China economic
relationship," senior White House aide Michael Froman told reporters. 
Looking at some of America's trade beefs, however, one gets the impression that
the problem is not that China doesn't play by the rules, it is that China knows
the rules all too well - and how to stretch them without breaking them. Trade
Representative Kirk's report to congress is an exhaustive, 127-page record of
informed Chinese engagement - plus a certain amount of calculated footdragging
- in every aspect of its implementation of its WTO accession obligations.
The most conspicuous example of China's ability to game the international
system creatively is in the area of environmental investments and subsidies.
China was an informed and enthusiastic customer of the United Nation's Clean
Development Mechanism (CDM), which funneled investment to clean energy projects
in developing countries that provided offset credits to polluters in
industrialized countries under the Kyoto Treaty.
Indeed, one reason China will be sorry to see the Kyoto system sink beneath the
waves is that the PRC had a profitable business - with perhaps $1 billion in
annual revenues - helping the developed world with its greenhouse gas offset
China aggressively worked the green economy cash register. Its persistent
presence atop the CDM league tables for wind and hydro projects became a matter
of envy and resentment, some of it just (in the area of dodgy statistics on
hydro projects) and some less just (the United Nations decided to impute
artificial electricity tariffs that disqualified a passel of wind projects).
The PRC was also accused of cynically gaming the expensive attempts to put a
cap on production of HFC-23, a by-product of (ironically) environmentally
friendly refrigerant and a particularly powerful greenhouse gas: it built
refrigerant factories that produced HFC-23 as a by-product, factories that
seemed to be mostly in the business of destroying HFC-23 and selling the
lucrative offset credits it obtained in return to Europe. 
The interesting point here is that China was "playing by the rules" and, indeed
understood them as well as anybody else in the game.
Beyond Kyoto, the World Trade Organization has another potential loophole for
the environmental business contained in Article 20 of the WTO's enabling
treaty, the General Agreement on Trades and Tariffs, otherwise known as GATT
The relevant paragraphs of GATT XX exempt certain government activities from
the free trade hugger-mugger if (b) "necessary to protect human, animal or
plant life or health" or (g) "relat[ing] to the conservation of exhaustible
natural resources." 
These clauses are, of course, heaven-sent to China as they would appear to
provide cover for governmental regulation to protect the environment and
forestall the depletion of scarce resources.
On the natural resources side, in addition to getting bashed on the issue of
that hardy perennial, rare earths, China also found itself defending itself
before a WTO panel for limits on exports of fluorspar, coke, bauxite, and
several other raw materials that producers outside China rely on for production
of steel, chemicals, and aluminum.
China had invoked Article XX in its defense, as the International Center for
Sustainable Trade and Development reported:
China had argued in its
defence that its export restriction policy was justified under WTO law, more
precisely the general exception clause of Article XX of the WTO's General
Agreement on Tariffs and Trade, for reasons of natural resource conservation
and the protection of public health.
"At the 2009 rate of extraction, only four-and-a-half years of China's reserves
remain," China noted in one of its submissions to the panel. Moreover, the
extraction of certain materials is harmful for the environment and health,
Beijing had argued during the course of litigation.
"The control of the export of high-energy-consumption, high-pollution and
resource-based products was utterly necessary for the [...] reduction of
environmental pollution, freeing the economic development from the limitation
by resource and alleviating the tense relations among coal, electricity, and
oil," China submitted.
Actually, not a terrible defense.
And China will probably learn from the decision to structure its next round of
export restrictions more carefully to make them appear more environmentally
friendly - and ensure its domestic producers don't reap an obvious advantage:
the measures implementing the export restrictions, nor the contemporaneous laws
and regulations, convey in their texts that the export restrictions are
contributing to, or form part of, a comprehensive programme for the fulfillment
of the stated environmental objective."
Furthermore, the panel found "no clear link between the way the duty and the
quota are set and any conservation objective."
The panelists also criticized China for lacking corresponding restrictions on
domestic production and consumption of these materials, which is a requirement
under WTO law when claiming a GATT Article XX exemption.
In this regard, it noted that "export restrictions are not an efficient policy
to address environmental externalities, when these derive from domestic
production rather than exports or imports ... The pollution generated by the
production of goods consumed domestically is not less than that of the goods
consumed abroad." 
There seems to be a certain amount of
anxiety about heading China off at the pass on this issue - and forestalling
the flowering of dozens of mini-OPECs created around nations that dig something
useful out of the ground and shipping it overseas. Even the environmentally
(and GATT XX) friendly European Union opposed China on the raw materials issue.
The big news, however, in GATT XX-tinged US-China trade disputes is solar
panels. And that's because of one word: Solyndra.
The Obama administration faced major and, to a certain extent, politically
driven embarrassment when the Department of Energy's $500 million loan
guarantee to Solyndra blew up as the company toppled into bankruptcy.
Solyndra had been the poster child for the Obama administration's green economy
dreams, funded out of the 2009 stimulus package. There were accusations that
the administration sought to delay Solyndra's financial day of reckoning so
that it would crater after, and not before, the November 2010 congressional
Solyndra was a spectacularly bad bet, technologically. It relied on the
perceived cost superiority of its photovoltaic system, based on lightweight
CIGS (copper indium gallium selenide) materials instead of traditional
Unfortunately, Solyndra's optimistic market projections were based on a
transitory tightening of the polycrystalline silicon market around 2008.
Photovoltaic cells used to use the limited quantities of off-spec silicon
produced by the semi-conductor industry; but as subsidized solar power
installations, largely in the EU, took off, big producers in China and
elsewhere got into the business of building factories to produce
polycrystalline silicon purposed for the solar industry.
Then the global recession clobbered EU purchasing power; although the Chinese
government tightened the licensing of new polycrystalline silicon plants, there
was a glut of material.
Result: polycrystalline silicon prices crashed from a height of US$425/kg to
Solyndra, instead of underselling the market, was the high-priced laggard. Its
cost of $2/watt was not only 66% higher than conventional silicon panels; it
was also higher than the prices asked by First Solar, its major competitor in
the high-tech thin panel market.