The Legal Nature of Default under Accession Treaties to the World Trade Organization and its Legal Remedies: the Chinese Case

Published by “Periodical of China´s Admission into The World Trade Organisation Seminar”, released by UIA – Union Internacionale des Avocats and All China Lawyers Association, Beijing, People´s Republic of China, April 16 and 17, 2004.


I have divided today`s presentation in the following manner:

this Introduction;

China’s accession to the WTO and the profile of its initial international trade tensions;

The legal nature of default under the multilateral trade system and the different categories of legal remedies: arbitration before the WTO and domestic administrative litigation (anti-dumping, safeguards and countervailing duties);

A comparative analysis of the different remedy options for addressing international trade disputes involving China; and


China`s accession to the WTO and the profile of its initial international trade tensions.

The accession of the People’s Republic of China (China) to the World Trade Organization (WTO), on December 11, 2001, after 15 years of negotiations, represented a watershed in multilateral trade. It was so not only because the 143rd member of the WTO(3) is the most populous nation on earth, but also as a result of its economic importance. From the perspective of developing countries, very often the victims of arbitrary action in trade relations, the accession of China represented a significant reinforcement in the quest for increased juridicity in the multilateral trade system(4). Accordingly, developing countries experienced an immediate reinforcement of their negotiation positions, which could be felt instantly in the workings of the Doha Round of the WTO.

Undoubtedly, no other member of the WTO made so many concessions as China with a view to joining the multilateral trade system. Moreover, China based much of its development strategy in the economic and market liberalisation required by the accession agreements and relevant multilateral treaties. In spite of that, China immediately became the target of attacks from several member states of the WTO with respect of possible infringements of those agreements and treaties. Some of those incursions are already in place and others are moving very rapidly from the area of rhetoric to that of legal action, which may take place in the appropriate fora, in the near future. The most trenchant of those attacks have come from the United States of America (USA).

The United States’ Trade Representative 2003 Report to Congress on China’s WTO Compliance (USTR Report) (5), whilst noting a number of “positive developments(6)”, the conclusion is basically that “the shortcomings in China’s WTO commitments are noteworthy(7)”. Accordingly, the USTR Report denounces inter-alia illegal subsidies in the form of tax policies; illegal industrial policies that distort trade; fairness in agricultural trade; violations of obligations in the area of intellectual property rights; problems in the area of liberalisation of financial services; lack of transparency in the laws and regulations; and insufficient implementation of commitments in the area of trading rights and distribution services. The USTR Report also states that the “institutionalisation of market mechanisms still remains incomplete, and intervention by Chinese government officials in the market is common(8)”.

Of course, much of this outcry is motivated by the tensions originated in the fact that in 2003 the U.S. trade deficit with China soared to US$ 120 billion, from US$ 103 billion in 2002. With some other trade partners, tensions are also increasing in view of China’s booming merchandise exports, which jumped almost 35 percent last year to US$ 438 billion, even if its imports leapt 40 percent over the same period to US$ 412 billion. At the same time, Chinese foreign currency reserves went from US$ 146 billion in December of 1999 to US$ 220 billion in December of 2002(9), a jump of US$ 74 billion in a period of only 3 years!

Much of the excellent results obtained by China in the recent past derive directly from the competitive advantage the country has in many economic areas, particularly in those requiring intensive labour. The long controversial sector of textiles is one of them. Thus, frictions have escalated in such areas. In Europe, for instance, the textiles industry reported many Chinese violations to international trade law. The report itemised these as: lengthy customs clearance procedures, lack of transparency; arbitrary customs valuation; discriminatory application of value-added tax (VAT); export and import subsidies; non-tariff barriers, etc.(10) As a result, the European textiles industry has threatened immediate safeguards action against China under article 16 of the WTO Accession Protocol. The US promoted safeguard action against Chinese textile imports towards the end of 2003 and extended such action in 2004 to comprise additional textile products. Also in the USA, the furniture manufacturers filed for section 421 safeguards against Chinese products.

Peru, on December 23, 2003, imposed a provisional safeguard on Chinese textile and clothing imports. Similarly, Brazil imposed a provisional safeguard on Chinese toys on December 30, 2003. In addition, Poland, a new member of the European Union (EU) as of May 1, 2004 has asked for consultations with China with a view to imposing a safeguard measure of footwear(11). Both sectors are similar to textiles in that they depend heavily on unqualified labour. In India, Japan and Korea, similar action has taken place against China(12). On the other hand, African trade officials have warned against a perceived ” threat of Chinese domination of world textiles and clothing exports(13)”. Accordingly, African countries are voicing fears that China will dominate the world markets in textiles after quotas are eliminated by the end of 2004, as required by the Agreement on Textile and Clothing, one of the Uruguay Round treaties.

It is now estimated that there are today more than 500 anti-dumping actions against Chinese companies in WTO member state countries(14). Similarly, Chinese products are represented in more than 50% of the safeguard cases in the world today. In addition, there are ostensible threats of US action against China before the Dispute Settlement Body (DSB) of the WTO, in the matter of the alleged discriminatory application of the VAT(15). Other quite extraordinary pressure from the USA against China has occurred in the area of the exchange rate, as the North-American government perceives that the Chinese currency is grossly undervalued, what would be a violation of Article XV of the General Agreement of Tariffs and Trade 1947, still in force. The possibility of bringing this matter to a DSB panel is already being entertained in some think-thanks in the USA(16).

The legal nature of default under the multilateral trade system and the different categories of legal remedies: arbitration before the WTO and domestic administrative litigation (anti-dumping, safeguards and countervailing duties).

From the above enunciation of the current trade tensions, one can discern the following areas of possible legal conflict involving Chinese companies and/or government in international trade disputes:

action within the ambit of the Dispute Settlement Understanding (DSU) of the WTO.

safeguard actions, under the idiosyncratic rules of article 16 of the Protocol on the Accession of China to the WTO; and / or

anti-dumping actions, to which Chinese companies are very vulnerable, under the idiosyncratic rules of article 15 of the Protocol on the Accession of China to the WTO;

Of course, the options above vary enormously not only with respect to the applicable forum, which in the first two cases is an administrative domestic agency of municipal law, as against thA comparative analysis of the different remedy options for addressing international trade disputes involvine multilateral forum of the DSB, but also in respect of rules. In addition, the options, most importantly from a pragmatic legal perspective, differ in connection with the sanctions available. However, whilst the fora, rules and sanctions may be different, all alternatives have the same legal foundation in the treaties of the multilateral trade system.

Before we examine each to those options, however, I would like to address the matter of the legal nature of WTO obligations. Treaties can be divided into bilateral treaties (between two countries); multilateral treaties (between more than 3 countries, where no reservations are allowed); and plurilateral treaties (between more than 3 countries, where reservations are allowed) (17). It is a matter of common sense deriving from very basic principles of justice that a bilateral treaty generates reciprocal obligations, as long as multilateral agreements generate integral obligations or obligations erga omnes partes. This interpretation derives very clearly from article 60, 2, of the Vienna Convention on the Law of Treaties(18) which authorises any of the parties of a multilateral treaty to terminate or suspend its operation as a consequence of its breach by one of the parties.

However, in multilateral trade law, many basic principles of international law have been inappropriately set aside in order to accommodate expedient diplomatic solutions(19). One of those pertains to enforceability of rights. Whilst the right exists erga omnes partes, it is only enforceable by a member in cases where there is a “direct or indirect” impairment of a benefit under one of the multilateral trade agreements(20). In cases where there is not a direct or indirect impairment of a benefit, but there is nevertheless a “substantial interest in a matter”, then the member will be entitled to become a “third party” to the dispute(21), a position that allows no right of action. Therefore, even if a default under an obligation under one of the WTO treaties is considered to be a breach against rights of all the parties thereto, only the member states which suffered a direct or indirect impairment of a benefit will have locus standi or right of action against the state in breach.

In view of its numerous systemic and operational failures and to the non-existence of effective sanctions, the recourse to the dispute settlement mechanism of the WTO is neither justiciable nor very effective, for the reasons that we will see ahead. Thus, the option for such mechanism in trade disputes is taken more for political reasons of state with a view to exerting political and diplomatic pressures on another state, rather than for pragmatic judicial motives. The legal nature of the system is quasi-judicial, a diplomatic forum, and, accordingly its objectives are defined in the DSU in the following manner: “the aim of the dispute settlement mechanism is to secure a positive solution to a dispute(22)” (sic). Consequently, the system is not to be intended or considered as contentious(23). The right of action in the system is reserved to member states and thus excludes private parties, which almost always raise conflict of interest issues(24).

Among the systemic shortcomings of the DSU, we can indicate the lack of institutes to deal with preliminary issues as conflict of treaties, right of action, locus standi, judicial economy, non-liquet or déni de justice. In addition, the DSU eschews legal terminology with definite meanings established for over two thousand years in favour of imprecise diplomatic lingo, very often used to obfuscate rather than to clarify issues. The DSU also lacks institutes of fundamental importance such as the provision for the participation of lawyers and the issue of interlocutory applications, which can be of utmost importance in addressing situations when there is a grave and imminent danger of serious and irreversible damage. The joinder of defendants is expressly disallowed, as long as the joinder of plaintiffs is highly defective, with the disparate creation of the “third-party” figure(25).

Similarly, counter-claims are expressly disallowed(26), which causes the formation of different panels, with different terms of reference and diverse panellists for related parties and claims. The Appellate Body (AB) of the DSB does not have power to remand a case to the panel that heard it originally, but only allows the AB to uphold, modify or reverse the ruling of first instance. A lacuna of the greatest importance in the DSU pertains to the omission of rules of evidence, as not even a quasi-judicial system may aspire to work properly without those.

The matter of compliance under the DSU has been the subject of many criticisms as DSB`s rulings are not self-executing. Of course, “the first objective of the dispute settlement mechanism is usually to secure the withdrawal of the measures concerned if these are found to be inconsistent with the provisions of any of the covered agreements(27)”. However, a member state may, if it so chooses, not to adhere to the ruling. In this case, the other remedies of the DSU will become applicable, namely “compensation” or, at last resort, “retaliation”. Compensation must not be understood within its lexical meaning, but rather as the mutually agreed suspension of a trade concession in an amount equivalent to de damage suffered. In case there is a failure in reaching a mutually agreed solution, and “compensation” is not possible, then a “retaliation” would be applicable. “Retaliation” is the unilateral suspension of a trade concession in an amount equivalent to the damage suffered(28). Because of this non self-executing nature, the affected sector in the prevailing member-state will not benefit from the victory of its case in the DSB, in most instances.

In addition to the systemic problems of the dispute settlement mechanism of the WTO, listed above, there are other operational problems, which may affect the choice of this particular forum. These start with the confidentiality of the system, particularly in the consultation phase, when developing countries have suffered extraordinary threats from developed countries with respect of areas frequently unrelated to bilateral trade. Because it is the member-state that has the right of action in the DSB, it has occurred that a member-state has been intimidated during the consultation phase and dropped the case of interest of a particular industry. The negative influence of the legal division of the Secretariat of the WTO in the workings of panels, and in the writing of awards, has been most abundantly denounced(29). Other points of concern when opting for a procedure under the DSU are the venue, Geneva the language, English, and the costs, comparatively high.

The widely perceived utter discredit of the dispute settlement system of the WTO prompted proposals for reform of a very broad nature(30), involving all of the articles of the DSU and its annexes, under the workings of the Doha Round, currently under way. The poor work produced as a draft denominated “Proposed Amendments to the DSU”(31), in time for the Cancun Ministerial Conference in late 2003, has reaffirmed that a very substantial effort has yet to be made with a view to restoring hopes for the affirmation of credibility in the system.

During the 15 years of bilateral negotiations with a view to acceding to the WTO, China had in the USA the most demanding trade partner. As a matter of fact, the USA made more demands for Chinese concessions than all other trade partners together. Therefore, in most respects, the China accession protocol to the WTO mirrors US requirements. The EU was very distantly the second demandeur to China. In contrast, countries like Brazil sorted out conditions with China in a matter of days. Accordingly, several authors refer only to the China-US bilateral accession negotiations and to no others(32). Two of the most stringent conditions demanded of China by the USA pertained to the matter of commercial defence, antidumping, countervailing duties and safeguards.

The substance of the issue was very well explained by Barfield and Groombridge, in the sense that “under current WTO rules, nations can institute safeguards for a four-year period, renewable once. They cannot single out individual nations for special action, and they must gradually phase out the protection”. Under the China Accession Protocol, however, “the US forced the Chinese to accept this highly protectionist action for 12 years, or in the crucial textile sector for nine years.” Similarly, the authors continue, “the US demanded long-term manipulation of trade flows through the application of special antidumping methodology”, according to which China will continue to be defined as a “non-market” economy for 15 years, “thereby perpetuating an even more arbitrary methodology to determine whether Chinese exports are `unfairly` traded. Using non-market criteria allows the complainant to ignore local Chinese prices and use surrogate or constructed prices, a practice which allows large-scale manipulation of data, as the U.S. Department has ably demonstrated over the years.” (33)

Specifically with respect to countervailing duties and anti-dumping, article 15 of the China Accession Protocol allows the authorities of the importing member-state to use a methodology that is not based on a strict comparison with domestic prices or costs in China, if the producers under investigation cannot clearly show that market economy conditions prevail in the affected industry(34). This methodology in practice involves surrogate prices of third countries that very often have nothing to do with China and places the burden of proof of market economy reality on the Chinese exporters(35). This provision is valid for a period of 15 years from the date of accession(36). With respect to subsidies, the respective determination enshrines the “anything goes approach” and allows for methodologies that take into account that benchmarks in China “may not always be available”(37) (sic). Member-states were obliged to publish these methodologies but so far few have done so.

These extraordinarily callous conditions have been typically greeted with the cynicism that flavours the US attitude to international trade, in the following manner: “the agreed protocol provisions ensure that American firms and workers will have strong protection against unfair trade practices including dumping and subsidies(38)”.

The matter of special treatment for safeguards is the object of Article 16 of the China Accession Protocol, which establishes a consultation mechanism in case there is a surge of Chinese imports that cause or threaten market disruption(39). A market disruption shall exist whenever imports of an article competitive with the domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of or threat of material injury to the domestic industry(40). In case China takes no adequate action to prevent or remedy such disruption(41), the member concerned shall be free, with respect to such products, to withdraw concessions or limit imports to the extend necessary to prevent or remedy such market disruption(42). In critical circumstances, where delay would bring about damage which is difficult to repair, the affected member-state may impose a provisional safeguard measure pursuant to preliminary determinations(43).

In case, however, that the market disruption is of a relative increase of imports only, China will have the right to suspend the application of equivalent concessions under the GATT 1994, if such measure remain in effect for more than three years(44). If a third member-state considers that a compromise, definitive or provisional safeguards will cause significant trade diversions into its market, and negotiations to this effect fail, then the third member-state is authorised to withdraw concessions from China with a view to remedying such diversions(45). This extraordinary treatment will be valid for a period of 12 years from the date of accession(46).

The US business lobby commented such enormous advantages in the following manner: “This mechanism, which is in addition to other WTO Safeguards provisions, differs form traditional safeguard measures. It permits the US to address imports solely from China, rather than from the whole world, which are a significant cause of material injury through measures such as import restrictions. Moreover, the US will be able to apply restraints unilaterally based on legal standards that differ from those in the WTO Safeguards Agreement. This could permit action in more cases….(47)

A comparative analysis of the different remedy options for addressing international trade disputes involving China.

As we have indicated before, the dispute settlement mechanism of the WTO is rife with structural and operational shortcomings, vices and failures. We also saw that it is a power prone system, more suitable to address questions diplomatic than in a judicial manner. As a result, we saw that the DSB cannot be considered a judicial body, being at very best a quasi-judicial organ. We have also examined that private parties have no right of action under the DSU and that only member-states of the WTO do. We learned why governments very often cannot address matters of conflicts of interests and how often a private interest is sacrificed in the WTO forum for opaque reasons of state. Very importantly, we examined how the dispute settlement mechanism of the WTO does not have an effective sanctions system and that specific enforceability of the awards of the DSB is impossible. We have also seen how the DSB is manipulated by the major hegemonic member-states. And we have learned that often even a victory in the DSB is meaningless to the concerned private party of the affected member-state. This is so because the award is not enforceable and often the original illegal measure will remain in place, retaliation being brought to an unrelated economic segment of the succumbed member-state. We have also considered the high costs of litigation before the dispute settlement mechanism of the WTO and the eventual difficulties of doing so in a foreign language.

On the other hand, we saw that the rules for commercial defence in the areas of anti-dumping, countervailing duties and safeguards allow for an administrative procedure of domestic law, before a local administrative authority, in the language of the member-state. Costs are therefore much more reasonable than litigating a matter in Geneva. However, more importantly, the commercial defence mechanisms have effective sanctions in the form of countervailing duties for subsidies or antidumping duties, corresponding to the subsidies’ or dumping margins. In addition, in the case of safeguards, quantitative restrictions to imports may be applied. Therefore, an affected business interest can address its problem more effectively with the available domestic trade defence options than resorting to the dispute settlement mechanism of the WTO. In addition, we saw that the trade defence rules applicable to China are callous and favour enormously the private parties of the importers of Chinese products.

As a result, we can prognosticate that most of the remedies used against China, in connection with the eventual or perceived breach of the rules of the multilateral trade system will be brought directly by the interested parties, companies or industries, before their domestic trade defence administrative authorities. Accordingly, the number of anti-dumping and safeguard cases against Chinese exports will increase substantially. This tendency will be reinforced by the fact that historically Chinese interests have not been defended in most anti-dumping, safeguards and countervailing duties’ cases, which presents an added encouragement for action on the part of rival business interests. The harsh consequences of the non-market treatment in anti-dumping cases will be ameliorated whenever China will be able to obtain from its trade partners, on a bilateral basis, firm criteria and test for market economy consideration in given economic segments, as those already in place in the EU and Canada.

Some cases of major political and strategic trade importance, however, will be brought against China before the DSB of the WTO, by some of its trade partners. Such cases will be used to exert pressure for the achievement of desired modifications in the configuration of China’s internal economic and/or monetary policies, regulation and legislation, as in the matters of VAT and exchange rate discussed before.


In any event, it is certain that China will face during the next 15 years a great degree of activities in legal disputes pertaining to its multilateral trade relations with both domestic and international repercussions. Such disputes will arise as a result of conflicts deriving not only from this China`s importance in international commerce, but also from the idiosyncratic and callous conditions imposed for its accession to the WTO.