China’s role inWTO dispute settlement

Abstract: This study describes and analyzes trends in China’s participation in the WTO dispute settlement system during the first ten years of its membership. China has used the system to challenge differentiated treatment of its exports by its two largest trading partners, a theme related to sensitive aspects of its accession negotiations. The study reviews the record of China’s conformity to WTO dispute settlement practices, and its contribution to their development, and finds that China is playing the role of a ‘system-maintainer’. The study concludes by considering a future challenge that the emergence of this large new player may pose for the system.

1.   Introduction

The tenth anniversary of China’s accession to the World Trade Organization (WTO) is an opportune moment to review China’s participation in the WTO dispute settlement system. China has rapidly developed into one of the world’s largest trading nations and become party to a considerable number of trade disputes. In that capacity it has the potential to affect the operation of the dispute settlement mechanism, which is a major contributor to the WTO’s success. China’s current domestic legal system has only a short history and its pre-accession experience of international legal proceedings was non-existent but now, as a WTO Member, it is subject to compulsory jurisdiction, independent reviews of its domestic legislation and the possibility of trade sanctions, all of which heightens interest in its participation. Even five years after its accession, China was still only a marginal participant in dispute settlement proceedings but today it has a sufficient track record to evaluate the role that it is playing. It is not as mysteriousas before.

This study is structured as follows:Section 2 reviews the trend in China’s rate of participation in the WTO dispute settlement system and compares it with that of other Members. Section 3 considers the subjects of recourse to the system where China is concerned and observes a country-specific characteristic of China’s complaints. Sections 4 and 5 consider the extent to which China has conformed to the system’s requirements and contributed to the system’s development, and characterize the role that China is playing. Section 6 considers a future challenge for the system and Section 7 presents the conclusions.

This study focuses on China’sperformance in the WTO dispute settlement system but it does not directlyreview China’s compliance with its substantive WTO obligations. Given thesubject matter, the study is limited to trade and does not imply a view as toChina’s role in other areas of international cooperation.

2.   Trends in China’s participation

The volume of disputes to which China isparty has had a significant impact on the business of the WTO disputesettlement system. Given China’s size, this should not be surprising. Overall,recourse to the Dispute Settlement Understanding (DSU) has declined since2002/03, both in terms of the numbers of disputes initiated and the number ofpanel proceedings. Disputes filed by other Members against China, and by Chinaitself, have lessened that decline but they have not flooded the system.

Figure 1 below shows the total annualvolume of disputes initiated in each year since the establishment of the WTO,disaggregating the data where China was a principal party, either ascomplainant or respondent. These comprise all requests for consultations filedunder the DSU. The volume of panel proceedings, including and excluding China,(not shown) reveals a similar trend. These data do not include compliancedisputes.

China ranks among the top three partiesin WTO dispute settlement during the period since its accession in 2001. It hasbeen a principal party in 35 disputes under the DSU in relation to 24 distinctmatters, and in 15 panel proceedings, more during the same period than anyother WTO Member except the European Union and the United States. China hasparticipated as a principal party in all the usual stages of the procedures upto and including implementation of Dispute Settlement Body (DSB)recommendations, both as complainant and respondent. This has been a rapiddevelopment for a country that until 2001 was only an observer in DSB meetings.

The overall volume of disputes involvingChina (in terms of separate requests for consultations) is skewed heavilytoward complaints by other Members. In terms of distinct matters involvingChina (which filter out multiple requests for consultations by differentMembers regarding the same matter), those raised by other Members also outnumberthose raised by China itself. The number of panel proceedings to which Chinahas been a principal party have been fairly evenly divided between those inwhich it is complainant and those in which it is respondent. This reflects thefact that a significant proportion of disputes in which China is respondent hasbeen settled without recourse to a panel.

China’s large share of disputes actuallydeveloped in five years, not ten. China’s role during its first five years ofWTO membership was basically that of a perennial third party in panelproceedings. It was only during the second five years that China became afrequent principal party in its own right at the consultations, panel andappellate stages. Even now, it has not been a principal party to a compliancedispute or to arbitration on retaliation.

China’s share of total disputesinitiated under the DSU is large relative to the respective shares of mostother Members in the second five years of its membership, but not during thefirst five-year period. Figures 2a and 2b show the relative proportion ofdisputes (in terms of separate requests for consultations) to which each Memberwas a principal party during these two five-year periods. China’s share of disputesin the second five years was also large in terms of distinct matters, but lessso, due to the fact that in several disputes there were multiple complainants. Chinaalso had the third-highest rate of participation as a principal party in panelproceedings in the second five-year period.

China’s emergence as a major player indispute settlement is the most significant change in the identity of thesystem’s top participants since the establishment of the WTO. China’s rate ofparticipation as a principal party in the last five years ranks in a leaguewith the European Union and the United States during the same period. However,this is still a recent phenomenon. Further, China has not created a new ‘hub’in the dispute settlement system, that is to say a majority of WTO disputes, interms of distinct matters, and a larger majority of panel proceedings continueto involve either the European Union or the United States, or both, in the roleof principal party, with or without other parties. Every distinct matter raisedin China’s disputes to date can be related to one or both of these pre-existinghubs.

The trend in China’s emergence as amajor player in WTO dispute settlement has been the inverse of the trend inoriginal Members’ recourse to the system as a whole. In China’s case,membership began with a period of virtually no recourse to the DSU followed bya rapid increase in disputes. In contrast, the system as a whole began with asurge of complaints that later abated (as shown in Figure 1). This phenomenonhas contributed to China’s larger relative share of disputes during the lastfive years. There has been no similar trend in disputes involving otherrecently acceded Members.

The DSU was not irrelevant to China’strade relations during the first five years of its membership. In 2002–2003,China was a co-complainant in US–Steel Safeguards. In 2004, an EC complaintconcerning China’s export restrictions on coke used in the production of steelwas averted by a bilateral agreement. In 2004, the United States did initiate adispute under the DSU regarding China’s VAT refunds on integrated circuits, butthe matter was quickly settled. In 2006, the United States was ‘on the verge offiling a WTO case’ regarding China’s anti-dumping duty on kraft linerboard butrefrained after the measure was repealed a week later.

This low rate of complaint apparentlyreflects a policy of restraint by other Members in recourse to the DSU duringthis period, although there was no ‘peace clause’ in China’s terms ofaccession. Transitional periods for specific accession commitments played apart in this. China was entitled to three more years to implement tradingrights, periods up to 2005 or earlier to phase out certain nontariff measures,and transitional periods up to six years to implement certain GATS commitments.A transitional review mechanism began operation in 2002 and, while most of theclaims raised in the 2006–2007 disputes concerned obligations that entered intoforce upon China’s accession, they were raised in the transitional reviewmechanism first. Precipitate dispute settlement on the part of other Membersmight not have been more effective (and might well have been counterproductive)at a time when China was, in its own words, ‘facing enormous difficulties andcapability constraints’ in implementation.

As for China, it was very active inaddressing foreign market barriers through other avenues. In 2002–2003, itpursued its rights under the Agreement on Textiles and Clothing (‘ATC’) againstTurkey and the United States in the Textiles Monitoring Body, but with limitedresults. From 2002 onwards, it responded to numerous consultation requestsunder the China-specific safeguard mechanism in its Accession Protocol, anddefinitive safeguards have rarely been applied under that mechanism. After theexpiry of the ATC at the end of 2004, China negotiated certain bilateralagreements to address textile safeguards applied under another transitionalmechanism in its terms of accession. It was not clear that recourse to the DSUwould have been a more effective means of addressing these concerns. A suitwithout co-complainants may also have seemed daunting when China was still aneophyte in DSU procedures. In 2005, the Ministry of Commerce adopted rules onforeign trade barriers investigations and began publishing annual ForeignMarket Access Reports. China has also pursued a diplomatic campaign forrecognition of its market economy status, including in the context of freetrade agreement negotiations, and has obtained agreements from other countriesnot to have recourse to Section 15 of its Protocol of Accession (on non-marketeconomy treatment) and Section 16 (the China-specific safeguard mechanism), orto the now-defunct China-specific textile safeguard mechanism.

China appears to have anticipated itslater participation as a party to DSU proceedings. As early as 2003, in thenegotiations on DSU reform, it proposed to halve the DSU time periods for paneland Appellate Body proceedings in disputes involving safeguards andanti-dumping measures, unless the respondent was a developing country Member.Most of China’s subsequent complaints fit this description. It also proposed tolimit to two the number of panels that could be established in a calendar yearagainst a particular developing country Member (such as itself) at the requestor joint request of a particular developed country Member. Multiple panels wereindeed established against China at the request or joint request of the UnitedStates in 2007 and again in 2010.

Major changes took place in the volumeand terms of China’s trade during this period that probably contributed to theend of restraint in initiation of WTO disputes against China. In 2003, China’smerchandise export growth rate was double that of world exports. China becamethe largest source of imports for Japan, the second largest source of importsfor the European Union (after the United States), and replaced Mexico as thesecond largest supplier to the United States (after Canada). By 2004, thesustained and dynamic growth in China’s merchandise exports and imports led itto rank in the world’s top three traders. By 2005, China’s trade surpluses withNorth America and Europe had roughly doubled or more from the time of itsaccession. Further, some of the measures at issue in the subsequent disputes,such as the Auto Industry Development Policy, were only adopted during thisperiod.

Disputes with China under the DSU began in earnest in 2006/07, starting with the complaints in China–Auto Parts, and they have continued up to the present time. This change in approach has not led China to disengage from bilateral channels of dispute resolution. Five of the 15 distinct matters raised under the DSU in which China was respondent have been settled at an early stage of the DSU procedures and another was settled in part.40 Under the terms of each settlement,