China-U.S. Trade Law : International Trade Lawyer & Attorney : Baker Hostetler Law Firm : Trade Remedies, Customs & Export Controls

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Recent U.S. free trade agreements (“FTAs”) and comments from U.S. government officials suggest that obligations to respect and enforce internationally recognized labor standards could become part of the text offered by the United States for the negotiation of a bilateral investment treaty (“BIT”) with China. The trend of making labor rights more prominent in U.S. FTAs and BITs is likely to continue for agreements currently being negotiated under President Obama and a Congress controlled by the Democratic Party, including the U.S.-China BIT.

         The United States approaches its negotiations of BITs by working from a model text that has evolved from prior BITs and free trade agreements. In 2004, the United States developed a Model BIT that it has used as the basis for negotiating BITs and investment chapters in FTAs. The 2004 Model BIT contains a brief chapter on Investment and Labor providing that the parties may not weaken their domestic labor laws in violation of internationally recognized labor standards to encourage investment in their respective territories.

         Revisions to the 2004 Model BIT were being made last year, and reportedly will conclude with a new Model BIT text to be released by the government sometime during the next three months. The 2010 Model BIT is likely to serve as the foundation for U.S. negotiations of a BIT with China. Administration officials have not stated publicly the extent to which the 2010 U.S. Model BIT will include provisions protecting labor rights, and in some respects it would be logical to reserve agreement on labor rights for FTAs. FTAs cover a much wider range of policy issues than BITs, and application of international labor standards is more comprehensible in the context of agreements specifically addressing trade.

         Despite the logic, there are indications that the revised 2010 U.S. Model BIT is likely to include enhanced obligations to protect labor rights and to address breaches of those obligations. On May 10, 2007, Congressional Democrats and leading officials in the Bush Administration reached agreement on a set of labor rights provisions that were inserted in U.S. FTAs with Peru, Colombia, Panama and South Korea. The Democratic Senator from Montana, Max Baucus, who is also Chairman of the Senate Finance Committee and known to be an influential force on international trade issues, reportedly would like to see the labor rights provisions from what is now known as the “May 10 agreement” carried forward in future U.S. BITs, including the 2010 Model BIT. A July 2009 report to Senator Baucus from the U.S. Government Accountability Office criticized the inadequate efforts, primarily of prior U.S. administrations, to ensure that governments with whom the U.S. had negotiated FTAs (specifically, Jordan, Morocco, Singapore and Chile) were making significant progress toward adoption and enforcement of fair labor laws. Thus, the interagency review of the 2010 Model BIT provides an opportunity to raise standards and expectations.

        Labor interests have exerted their influence inside the Office of the U.S. Trade Representative as the Administration has been developing its trade policy. Although the President’s promotion of exports in his State of the Union Address indicated a desire to expand trade, there remains in the Democratic Party suspicion of trade as a vehicle to export jobs as well as goods and services. Inclusion of apparently enforceable labor standards in international agreements would provide some cover against allegations that, were jobs exported, at least they would not be exported to foreigners working under substandard conditions.

         The Obama Administration has filled its ranks – in the White House and in several agencies – with officials who have strong views on protections for workers. Given the President’s and Democratic Party’s dependence on labor interests for their political base (a political reality China already has experienced in the application of the Section 421 safeguard over commercial tires), labor rights are likely to play an important role in the negotiation of a BIT with China, as well as any other BITs or FTAs negotiated during the Obama Administration.

         The “May 10 agreement” labor provisions that could be included in the 2010 Model BIT adopt the rights expressed in the 1998 ILO Declaration on Fundamental Principles and Rights at Work:

(a) freedom of association and the effective recognition of the right to collective bargaining;

(b) the elimination of all forms of forced or compulsory labor;

(c) the effective abolition of child labor; and

(d) the elimination of discrimination in respect of employment and occupation.

          Recent U.S.-FTAs incorporate these rights as mutual, reciprocal obligations undertaken by the FTA partners. Parties must agree not to waive or otherwise derogate from statutes implementing these international standards in a manner affecting trade or investment between the parties, and they must commit to effectively enforce their labor laws. They must ensure access to tribunals to enforce labor laws and procedural guarantees of transparency and due process.

          The agreements provide dispute resolution procedures in the event that these rights are not believed to be respected and enforced by the FTA partner. The process, however, is fashioned to blunt attacks on foreign labor practices. In the Korea-U.S. FTA, for example, the dispute process over labor rights is potentially lengthy, with multiple stages of consultation between the governments before an arbitral panel eventually is formed to adjudicate and the awards are not self-executing. Although the dispute settlement process does allow for compensation and sanctions as potential remedies for a party’s failure to implement an award, there are abundant opportunities for international diplomacy and negotiation to avoid an outcome requiring strict enforcement. The dispute settlement framework seems designed to cushion the effects of a violation of the labor obligations, and to allow governments opportunities to save face in the event of an alleged breach.

          Were the 2010 Model BIT to go beyond the text of recent FTAs by establishing well-defined labor standards with strict and efficient dispute settlement mechanisms, accession to such a BIT with the U.S. could be problematic for China. The All-China Federation of Trade Unions is the only legally authorized union in China, and critics claim that it is more interested in preserving stability for the government than it is in protecting workers’ rights. U.S. labor organizations have argued that even where China has the appropriate labor laws on its books, enforcement of those laws consistent with international standards remains unreliable. The Obama Administration has heard from some in the United States that China never will agree to the adoption and enforcement of international labor standards and reportedly is weighing those views carefully.

         A dispute-settlement model based on the Korea-U.S. FTA, however, might be palatable if China were to see in it sufficient flexibility for negotiation, diplomacy, and the ability to preserve a public face of sovereignty with respect to its labor laws. The United States currently appears to be making serious progress on BIT negotiations with China’s competitors, India and Vietnam. Were these countries to move more rapidly to agreement on the inclusion of meaningful protections for labor rights, competition and comparative advantage may create additional incentives for China to accept such provisions in a BIT with the United States. China might then hope to mitigate their impact, whether through the kind of consultation processes suggested in the Korea-U.S. FTA, or by maintaining the appearances of a commitment to enforcement as circumstances may require.
 

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Whenever the United States complains about its trade imbalance with China, China responds that it would buy more goods and services from the United States were it not for U.S. export controls that either prevent or restrict those purchases.  Export controls serve important national security and foreign policy goals and the United States will not be eliminating them any time soon.  Nonetheless, there has been a general recognition among U.S. industry and government officials that the present controls are more restrictive and cumbersome than they need to be. 

There have been many attempts at export control reform in the recent past, but those initiatives usually died in inter-agency squabbles.  The Obama Administration is determined to change that pattern through strong support for the reform process from the very top.  President Obama, during his State of the Union address on January 27, linked export control reform to economic recovery, stating:

Third, we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.

Another change from prior attempts at export control reform is that, according to statements made by Pentagon Press Secretary Geoff Morrell at a January 27 Pentagon press conference, the leadership of the Defense Department now is committed to working with other agencies and Congress "to make meaningful and lasting changes to our export controls."  Mr. Morrell noted that Defense Secretary Gates "believes that [export control reform] is imperative to keep our nation competitive in this global economy."  He further noted in response to questions that:

[W]hat is required here is not, you know, tinkering around the edges of what is a rather cumbersome, antiquated, outdated, bureaucratic set of rules and regulations governing the export of technology.  [Defense Secretary Gates] believes you need to conduct a wholesale reform of export controls, really starting with a blank sheet of paper. And ...he fully supports and is willing to go to bat for [the initiative of the President].

John Boehner, the Republican party leader in the U.S. House of Representatives, stated in a news conference on January 28 that he believes there could be bipartisan support for legislation to overhaul the export controls.  With the Defense Department and both political parties supporting reform, the chance for meaningful reform of the U.S. export control system may be greater now than it has been in many years.

Chinese companies should not expect a drastic loosening of restrictions on exports to China right away.  As President Obama noted in his State of the Union address, any reform of export controls must be consistent with national security. While administrative agencies and members of Congress are in principle in favor of eliminating unnecessary restrictions on exports, they also are sensitive to concerns that loosening of export controls, particularly with respect to China, might undermine national security.  We expect export control reform to go forward, but only in areas where a consensus is reached that a loosening of controls would not undermine national security.

One of the areas where export control reform may most increase the ability of Chinese companies to buy products from the United States is the commodity jurisdiction process, which determines whether a product or technology should be controlled as a "defense article" by the State Department under the International Traffic in Arms Regulations ("ITAR") or by the Commerce Department under the Export Administration Regulations ("EAR").  This jurisdiction issue is critical to whether a product can be exported to China because Congress has banned all products controlled under the ITAR from being exported to China.  By contrast, products subject to control under the EAR generally can be exported to China, often without the need for an export license. 

The commodity jurisdiction process currently is extremely cumbersome, which means that military controls often remain on technologies that may have been developed originally for the military long after these items have become predominantly commercial.  Reform of the commodity jurisdiction process could mean much greater opportunities for Chinese companies to buy U.S. products.

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One of the most troubling features of the growing tensions between China and the United States is that both countries legitimately have a lot to complain about, and typically they are the same things. Three issues are particularly conspicuous at present and at the core of difficulties in the trade relationship – the definitions and status of “market” and “non-market” economies; the role of governments as owners of strategic economic sectors and retaliation over grievances arising from that role; and cyberattacks. When China and the United States criticize each other, they often are launching their complaints from inside glass houses, fortifications especially vulnerable to retaliation.

Market Economies

Almost every member of the World Trade Organization, and even countries (such as Russia) that are not, for international trade purposes are considered “market economies.” The designation is important because the rules of fair trade are written to promote markets, rewarding market transactions and penalizing conduct judged to distort markets. The distinctions emerged at the dawn of the Cold War when the rules enabling private enterprise to compete with state-directed economies were written.

State economic interventions, according to world trade rules, distort markets. State-directed economies – “non-market economies” (“NMEs”) – are inherently distorting. World trade rules deal with them through exclusion, denying them entitlement to the benefits of favorable assumptions.

Although China agreed, when it acceded to membership in the WTO in 2001, that it was not yet accepted as a market economy, it did not expect such recognition to be far behind. Now, nearly a decade later, it seems nowhere in sight, and largely because of objections raised by the United States.

The United States sees too much state direction in the Chinese economy. National plans are reinforced by regional and local planning. State-owned enterprises are dominant, particularly in the most important sectors of steel and energy production. State-owned banks control most lending. Tax schemes systematically favor designated sectors. Utilities providing manufacturers with energy are state-owned. There is no private ownership of land. And today, most important of all, currency is tied to the dollar and does not trade freely in international markets.

China does not see its economy this way. State enterprises are enterprises whose profits go to all shareholders, who are the people of China and not small investing bands of capitalists. They are controlled by boards with mandates to operate competitive, profitable businesses. Banks, controlled by the state, protect the state’s interests, and thus avoid reckless and feckless lending that can jeopardize whole economies. Labor is mobile and subject to competition. Land tenures in Britain, and some other Commonwealth countries, are based on the theory that the Crown owns all of the land, but thriving markets in land tenures exist. No one claims that the Crown’s ownership of all of the land in these countries suggests they are not market economies. The dollar began to float freely and trade on international exchanges less than forty years ago, and no one suggests that prior to the collapse of Bretton Woods the United States was not a market economy. In China’s view, all the people of China are the shareholders of the economy at large, but no less capitalistic in their support of competition and free enterprise. Most observers of China today remark on the Chinese worship of money, no less than in traditional capitalist societies.

The American indictment of China as an NME is defended now from inside a glass house. After the fall of Lehman Brothers in September 2008, the federal government in the United States took large ownership positions in many key banks. The government took effective ownership of the automobile industry. The Congress of the United States endlessly writes tax laws to favor one industry or another, especially the larger ones dependent on exports. Property is private, but government institutions set the terms of ownership and all of the financing that makes ownership possible. And the government in the United States intervenes in the economy regularly to create and save jobs, regulating the labor market, encouraging companies to hire labor and discouraging dismissals.

Neither China nor the United States is an ideal market economy. The distinctions might not matter practically, representing different paths to the acquisition and distribution of the benefits of commerce, except that they do in the application of trade laws. China thinks itself stigmatized by its designation as an NME, and it is disadvantaged in international trade.

Until 2006 there was at least a trade-off. Trade law, as applied everywhere, recognized that state intervention in the economy could not be market-distorting if there were no market. Consequently, trade remedy actions based on subsidy allegations could not be initiated, both because there was no way to measure a subsidy in the absence of market prices, and because a subsidy by definition must distort a market and in an NME there is no market to distort.

In late 2006, the United States began to have things both ways. It said China was enough of a market economy to justify bringing subsidy cases against its exports, yet not enough to shed its designation as an NME.  Ever since, China has been manifestly subject to a deliberately unfair trade regime. Yet, when China takes exception, it does so from within its own glass house, and not only because of the conditions that shaped American views in the first place.

Even as China began in 2006 to defend its practices in the United States, its conduct tended to reinforce the indictment instead of refuting it. Instead of acknowledging that it had little control over regional and local governments, their “planning” or their commercial practices, the central government, citing to the Constitution of the People's Republic of China, asserted that all governments reported to it.  Instead of acknowledging difficulty in amassing information demanded by U.S. authorities in trade investigations, it tried to answer questions without verifiable information. Instead of leaving private enterprises in China to find counsel and defend their own interests, the government convened supposedly independent chambers of commerce and largely directed the management of China’s legal defenses. It relied principally on the advice of Chinese lawyers with very limited knowledge of U.S. law. All these actions tended to convince American investigators that China is state-run and not ready to be considered a market economy.

As a practical matter, this issue has lost most of its importance. U.S. authorities have developed methodologies that would reach the same conclusions about fair trade even were China now recognized as a market economy. But symbolically this issue remains critical.

China’s Retaliation: Mutual Accusations Of Subsidies

Exhausted, perhaps, by the apparent futility in its claim that it should be recognized as a market economy, China has adopted an alternative strategy, accusing the United States of similar market deficiencies. China now formally accuses American exports of being subsidized in an economic system marked by substantial state involvement.

China does not deny that the development of its automobile industry has been heavily subsidized. Instead, China argues that it has graduated from subsidization. This view, however, neglects the history of international trade disputes centered on the privatization of state enterprises that followed on the collapse of Communist regimes. The United States accused all such enterprises, especially in the steel industry, of continuing long-term benefits, arguing that privatization could not extinguish the value of subsidies unless the sale of the state enterprise took place at a full market price. The United States placed the burden of proof that no subsidies passed through from the state to the private enterprise on the foreign private enterprise, a burden virtually impossible to bear because of inadequate documentation.

China, perhaps preemptively, has accused the U.S. automobile industry of exporting subsidized vehicles to China. As we discussed on December 1, 2009 on this blog, the countervailing duty investigation launched in November 2009 arises from a petition that argues the American automobile industry is in historic decline and survives only due to massive government subsidization. The central problem of these accusations, however, is that they are hurled from a glass house. The United States will now almost certainly accuse China of subsidizing the automobiles China is gearing up to sell to the United States. Hence, while the industries in both countries are trying to develop fuel efficient automobiles that will eliminate carbon emissions, thereby serving mutual objectives related to saving the planet, trade laws in both countries already are impeding direct competition based on the quality of the product.

China’s action, contending that the United States does not produce automobiles through free market enterprise, is a transparent retaliation for the American insistence that China is a non-market economy. However, this action carries the disagreement forward into the terrain of the future, where China and the United States need most to cooperate.

Cyberattacks

The United States has complained for a long time that China has subjected American defense and security establishments to incessant and invasive cyberattacks. These complaints took on a new character and dimension when Google complained that a coordinated Chinese assault on Google customers included an invasion of the accounts of Chinese dissidents. Google, already criticized for accepting Chinese government censorship that affects the internet in no other country, found the latest attacks intolerable. Google threatened to leave China.

The Google-China confrontation led Secretary of State Hillary Clinton to deliver a major speech on “internet freedom” that called for international condemnation of China.  Jack Goldsmith, Harvard Law School professor and former senior Justice Department official in the Bush Administration, responded quickly in The Washington Post: “[T]he problem with Clinton’s call for accountability and norms on the global network,” Goldsmith wrote, “is the enormous array of cyberattacks originating from the United States. Until we acknowledge these attacks and signal how we might control them, we cannot make progress on preventing cyberattacks emanating from other countries.”

The cyberattacks from China are presumed to be state-directed because of the state control and censorship of the internet imposed on companies such as Google. Attacks from the United States are presumed, at least by Americans, to be the work of private individuals, free-lancers, the sort of people who fill e-mail boxes incessantly with spam. Goldsmith accepts this orthodoxy, noting that “Scores of individuals and groups in the United States design or employ computer payloads to attack government Web sites, computer systems and censoring tools in Iran and China. These efforts are often supported by U.S. foundations and universities, and by the federal government. Clinton boasted about this support seven paragraphs after complaining about cyberattacks.”

Boarding Up The Glass Houses

China surely knows at least as much about what is happening in its cyber sphere as Professor Goldsmith. The American complaint about Chinese interference with the internet appears well-founded, as is the American complaint about China’s control of its economy and China’s subsidization of industry. But each of these complaints is launched from a glass house. Until China and the United States acknowledge mutually the problem – that their legitimate reciprocal complaints need more solution than aggravation – such complaints will compound and multiply, and the two countries will grow further apart and more antagonistic. They must either appreciate the view that glass houses uniquely afford – a place from which one can see out very well, but others can also see in -- stop throwing things at each other from inside the glass houses, or board them up. The last choice, which may define the direction in which things are going, is probably the worst of all.

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