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In losing China tariffs at the WTO, the US dodged a bullet

In losing China tariffs at the WTO, the US dodged a bullet
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On September 15, the World Trade Organization (WTO) found that some U.S. Section 301 tariffs on Chinese goods are illegal. Washington took the news badly. U.S. trade representative Robert LighthizerRobert (Bob) Emmet LighthizerWhiskey, workers and friends caught in the trade dispute crossfire GOP senator warns quick vote on new NAFTA would be 'huge mistake' Pelosi casts doubt on USMCA deal in 2019 MORE declared that the verdict proves the WTO is “completely inadequate.” Sen. Josh HawleyJoshua (Josh) David HawleyTime to bring federal employees home for every holiday Biden's Cabinet a battleground for future GOP White House hopefuls The Memo: GOP mulls its future after Trump MORE (R-Mo.) said the verdict was “more evidence that the WTO is outdated, sclerotic and generally bad for America.”

This is wrong. The worst thing for the U.S. would have been to win, not lose, this case.

The case was over two lists of Section 301 tariffs. China argued that it was singled out by the tariffs, in violation of most-favored nation (MFN) treatment. On this there was no disagreement. The U.S. didn’t offer a single claim insisting otherwise. Not one. The WTO took a mere 17 paragraphs to find that the tariffs run afoul of MFN. 

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The U.S. tried to justify its tariffs in two ways. First, the U.S. argued that China had retaliated with its own tariffs, and that, along with their bilateral negotiations, this meant the two sides had reached a “solution” to this dispute. China disagreed.

Second, and more creatively, the U.S. invoked an exception concerning “public morals.” This was a leap. The U.S. said that China engages in “state-sanctioned theft” of intellectual property (IP), and that this offends American “standards of right and wrong.” China maintained that the tariffs had nothing to do with public morals. The European Union (EU), as a third party, opined that the public morals exception was meant to be about the content of a good or the process of making it, not vague ideas about “fair competition and fair play.”

The WTO needed the U.S. to show a connection between these tariffs and its defense of public morals. The U.S. could do little but answer that the tariffs weren’t “incapable” of stopping China’s “unfair and immoral practices.” 

There was more. First, U.S. tariffs had been imposed on textiles, wood products and paper, none of which figured in U.S. allegations of “forced-technology transfer” or benefited from China’s industrial policy. Second, U.S. firms petitioned for “exclusions” from the tariffs based on economic criteria, not public morals. If there was a “nexus” between the tariffs and safeguarding public morals, the U.S. failed to show it.

Not surprisingly, the WTO ruled for China. The U.S. will appeal the loss, putting the ruling in legal limbo until Washington unblocks the Appellate Body. Critics of the WTO hope the verdict will lead the U.S. to give up on the institution. But let’s take up their complaint head on: What if the U.S. had won the case?

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The only win possible was with respect to the public morals exception. Would this have left the U.S. better off? Not a chance.

A U.S. win would have opened the floodgates to protectionism. Countries could justify blocking imports simply by accusing other countries of being unjust or unfair. As the EU put it, this would “trigger an endless spiral of measures, countermeasures, counter-countermeasures, etc.” This would put U.S. exports at risk in markets around the world. 

As an example, consider the U.S.-UK spat over chlorinated chicken. Britain says it won’t import U.S. poultry rinsed in chlorine, alleging health concerns. The problem for the UK is that it has no science to justify this ban. If you look at some popular UK websites, however, you’ll see suggestions for Plan B: namely, that American poultry workers are “underpaid.” This is the slippery slope to autarky, an outcome far more extreme than even most protectionists would want to see.

The ruling is also interesting because of what it didn’t do. First, the Chinese didn’t pursue their original claim that Section 301 is, itself, illegal. If China saw this through, both sides would have had egg on their faces. The WTO also didn’t ask the Chinese to spell out an alternative measure with which the U.S. could have defended its public morals. Good thing, as this would have served as a template for countries to use against imports from anywhere.

In losing China tariffs at the WTO, the U.S. dodged a bullet.   

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.