In July, the US filed a trade dispute in the WTO against China – the 13th one under the Obama administration alone, all of which the US has won (1). The case in question concerns Chinese export taxes on nine raw materials; export taxes are illegal under WTO guidelines, but China has so far failed to remove these duties despite promising to do so upon joining (1). Currently, China levies taxes ranging from five to 20% on these raw materials (2).
Ironically given recent prevalent anti-free trade sentiment in the US election, it is in America’s interest that China exports more, not less, of these raw materials to the US. However, in forcing Chinese producers to pay to export these commodities overseas, an export tax has the effect of reducing the amount that the US can import and raising prices on imported raw materials. This is particularly damaging to US interests because the raw materials in question – antimony, cobalt, copper, graphite, lead, magnesia, talc, tantalum and tin – are essential inputs into key domestic industries like aerospace, automotive, electronics and chemicals (1).
In effect, the Chinese export tax raises costs for these American industries by raising the prices of materials. This then translates into higher prices of finished products, or forces companies to cut costs elsewhere. The tax is especially damaging to US industry because these raw materials cannot be produced domestically; China is the only major source for many of these minerals, meaning that US producers do not have the option of simply importing from another country. If this were the case, the export tax would be largely inconsequential for foreign countries and even counterproductive for China by reducing exports as foreign countries turn to other sources to obtain their mineral imports.
As it is, Chinese companies that use these raw materials as inputs have an unfair competitive advantage over foreign competitors, including those in the US. By making inputs more expensive for others, the Chinese can afford to sell at lower prices, making their products more competitive in any market. Under WTO guidelines, this constitutes an unfair business practice.
Another way in which this tax has the potential to undermine US economic interests is not as easily apparent; if hypothetically left unresolved, the export duties could potentially drive American jobs overseas. Because Chinese-based branches of international firms do not have to pay export taxes, companies which source raw materials from China could relocate to keep costs low and avoid paying duties. However, this would signify a shift of production – and therefore, jobs – to China from the US, exacerbating an already prevalent American fear.
However, this scenario is unlikely given that the US will likely win the WTO dispute. In past years, many such disputes have been filed and won by the US; the only real difference in this case lies in the specific raw materials in question (2). The EU has also filed a similar dispute over the same export taxes in question. In previous cases, the Chinese have agreed to remove export duties once the WTO reached a decision on the case, though the policies may take several years to fully enter into effect.
As such, the US trade dispute should be regarded more as a formality and a reminder for China to honor its international obligations rather than an indicator of any sort of US-China trade war. It is crucial not to exaggerate this case or use it to advance anti-globalization and anti-WTO rhetoric. In fact, this case highlights the necessity of the WTO in maintaining fair trade practices globally, and even more importantly, the benefits of free trade for the domestic economy. In helping eliminate the Chinese export tax, the WTO will not only lower costs for American businesses and make them more competitive at home and abroad; it will also help protect US manufacturing jobs. While this seems counterintuitive in a climate that tends to place domestic workers’ interest as clashing with the forces of globalization and free trade, in this case the reality turns out to be quite the opposite.
(1) "United States Challenges China's Export Duties on Nine Key Raw Materials to Level Playing Field for American Manufacturers." Ustr.gov. Office of the United State Trade Representative, July 2016. Web. 9 Aug. 2016.
(2) Brown, Chad P. "The U.S. Filed a WTO Dispute to save Jobs — by Increasing Imports from China. Here’s Why." Washingtonpost.com. The Washington Post, 26 July 2016. Web. 9 Aug. 2016.
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