AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro

The Japan Institute ofResearch Institute for

Peace InstituteInternational Affairs

Peace and Security

Editorial Advisory Board:

No. 261

Akio Watanabe (Chair)
Masashi Nishihara
Kenichiro Sasae
Taizo Yakushiji

19 July 2018

Editorial Committee:

THE US-LED TRADE WAR: TOWARDS A
RULE-BASED SOLUTION

Taizo Yakushiji
Tsutomu Kikuchi
Tsuyoshi Sunohara
Shujiro Urata andKoichi Ai
Editor & Online Publisher:

Junji Nakagawa

Kenichiro Sasae
President, JIIA・ The US’ trade dispute with China escalated intoa full-fledged war on July 6th, as the US
imposed retaliatory tariffs against China’s
IPR-related policies in accordance with Section
301 of the Trade Act of 1974, and China
simultaneously retaliated against this move.
・ Both sides seems to prefer a shortcut victory in
the present trade war to solving the disputeaccording to the rules of the WTO. They should
realize that, in doing so, they imperil the WTO
dispute settlement procedure as a whole.

The views expressed in this piece are the author’s own and should
not be attributed to The Association of Japanese Institutes ofStrategic Studies.

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The Association of Japanese Institutes of Strategic Studies

・ As the present dispute is pending under two WTO dispute cases, both sides
should seriously commit themselves to solving the dispute according to therules of the WTO, so that they may claim themselves responsible leaders of
the global economy and the world trading system.
The US’ trade dispute with China escalated into a full-fledged war onthJuly 6 , as the US imposed retaliatory tariffs of 25% on US$34 billion worth ofChinese products in opposition to China’s IPR-related policies and inaccordance with Section 301 of the Trade Act of 1974, and China simultaneously
retaliated against this move with the imposition of additional tariffs on the sameamount of US products. The war between the world’s largest and second largest
economies shows no sign of early settlement. Indeed, it may escalate with theimposition of additional retaliatory tariffs, as the Trump Administration is likely tocontinue its “America first” trade policy to garner domestic voters’ support so asto win the midterm elections this coming November.
This is not the first case in which the US has applied Section 301 to
China’s IPR-related policies. In April 1991, the USTR designated China aSpecial 301 Priority Watch Foreign Country, and self-initiated a Section 301
investigation against China’s inadequate protection of IPR. When negotiations
did not produce an agreement, the US threatened to impose additional 100%
tariffs on US$1.5 billion worth of Chinese products. In January 1992, the twosides reached a memorandum of understanding (MOU) where China committedto take steps to strengthen its IPR enforcement regime, and the US did notimpose the additional tariffs on Chinese products. The US took similar Section
301 actions against China’s IPR-related policies in 1994 and 1996 as well. Thisis, therefore, the fourth time that the US has applied Section 301 to China’s
IPR-related policies. However, this is the first case since China joined the WTO
in November 2001, and the US measure is problematic in light of the relevant
rules of the WTO.
One of the major goals of the US during the Uruguay Round of the GATT,
which gave birth to the WTO, was to strengthen the GATT’s dispute settlementprocedure. Under the GATT, members could delay or block the dispute
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The Association of Japanese Institutes of Strategic Studies

settlement panels and its reports. While many US trading partners criticized
Section 301 as unilateral, the US claimed that it was often forced to apply
Section 301 unilaterally because of the lack of an effective dispute settlement
procedure. As a compromise solution, the WTO dispute settlement procedure
prevents members from blocking panels and its reports, and it can authorize
retaliation only if a member fails to implement a WTO Dispute Settlement Body’sruling. The US has used the WTO dispute settlement procedure for almost all
Section 301 cases involving WTO members. The Trump Administration’s
retaliatory tariffs against China mark a departure from past US practice.
If the US claims that China’s IPR-related policies violate the TRIPS
Agreement, it should seek redress through the WTO dispute settlement
procedure. It did file a request for consultation, or a WTO complaint, against
China’s discriminatory licensing processes to force technology transfers from US
companies on March 23rd. Many WTO members, including Japan and the EU,
joined the consultations as third parties, alleging that they also have serious
concerns about China’s discriminatory IPR-related policies, and that they havesubstantial trade interest in the consultations. These are what the rules of theWTO require members to do in settling disputes among them with respect toalleged violations of WTO Agreements, including the TRIPS Agreement.
However, on March 23rd, alongside with the WTO complaint, President
Trump directed the USTR to take all appropriate action under Section 301,
including retaliatory tariffs, to address “the acts, policies, and practices of Chinathat are unreasonable or discriminatory and that burden or restrict UScommerce”. The US seems to argue that Section 301 action can be pursued
against any acts, policies and practices of WTO members that are unreasonable
or discriminatory, insofar as they burden or restrict US commerce, even when
they do not violate the rules of the WTO. This is, however, not acceptable under
the rules of the WTO. Otherwise, a WTO member might be able to “punish” other
WTO members on any ground that it deems appropriate by unilaterally imposingretaliatory tariffs. The US unequivocally violated these WTO rules by unilaterallyimposing retaliatory tariffs against China. It was therefore proper for China to filea WTO complaint against the US’ proposed retaliatory tariffs on April 4th.
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The Association of Japanese Institutes of Strategic Studies

As both sides filed WTO complaints, we may claim that the WTO disputesettlement procedure is still a viable alternative to this US-led trade war.
However, the US and China practically disregarded the WTO dispute settlementprocedure by unilaterally imposing retaliatory tariffs on July 6th. According to therules of the WTO, retaliatory tariffs may be allowed as “compensation” solely
with the authorization of the WTO Dispute Settlement Body (DSB) if thedisputing party does not implement the rulings of the DSB. Of course, the US is
to be blamed as the first mover. However, China is also to be blamed forimposing tit-for-tat retaliatory tariffs without the authorization of the DSB. In doing
so, the US and China imperil the WTO dispute settlement procedure as an
indispensable means of solving trade disputes according to the WTO rules.
I do not claim that the WTO dispute settlement procedure is a panacea.
It has a number of defects as a means of solving trade disputes. First, notinfrequently, it takes several years to reach the final rulings, especially when thecase is brought to the Appellate Body. While the case is pending, the alleged
wrongdoer may maintain the measures at issue, as a stay of execution is notavailable under the system. Even the “compensatory” retaliatory tariffs may notforce the wrongdoer to abandon the measure, as there is no means ofcompulsory execution available. Consequently, the WTO dispute settlement
procedure is a time-consuming means of solving trade disputes, with a limited
capacity to discipline wrongdoers. We must note, however, that suchcharacteristics of the system are the result of compromises among thenegotiating members of the Uruguay Round, where both more legalistic
approaches and more sovereignty-friendly approaches were dismissed. In otherwords, the WTO dispute settlement procedure reflects a balance between free
trade and sovereignty, and its effectiveness relies largely on the mutual respectand self-restraint of the disputing parties.
These are exactly what are lacking on both sides of the US-China tradewar. The Trump Administration seems to prefer a shortcut victory totime-consuming WTO litigation, whereas China does not seem ready to give way
in the exchange of tit-for-tat retaliations. Both sides should realize that theyimperil the WTO dispute settlement system as a whole, which is too precious for
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The Association of Japanese Institutes of Strategic Studies

the global economy and the world trading system to be destroyed. As thepresent dispute is pending under the aforementioned two WTO dispute cases,
both sides should seriously commit themselves to solving the dispute according
to the rules of the WTO. By doing so, they may claim themselves responsible
leaders of the global economy and the world trading system.

Junji Nakagawa is Professor of International Economic Law at the Institute of Social
Science, The University of Tokyo. He is also a founding member and a co-treasurer of theSociety of International Economic Law (SIEL), Chairman of the Asian International
Economic Law Network (AIELN), and a member of the Asian WTO Research Network(AWRN).

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