U.S.-China trade deal violates WTO: lawyer

An international trade lawyer says countries are not allowed to enter into deals that discriminate against other countries

A former Canadian diplomat says the recently announced trade deal between the United States and China flagrantly violates World Trade Organization rules.

“It is a highly objectionable agreement in that it offends global trade rules in a major way,” said Larry Herman, an international trade lawyer with Toronto-based Herman and Associates.

Countries are not allowed to enter into trade deals that discriminate against other trading partners, and Herman said that is exactly what is happening.

China has agreed to buy an additional US$12.5 billion of U.S. agricultural commodities over 2017 levels in year one of the two-year pact and $19.5 billion over 2017 levels in year two.

Herman said those extra purchases will come at the expense of other exporters such as Canada.

Chinese Vice-Premier Han Zheng recently told the World Economic Forum that the deal with the U.S. will not hurt nations that are not included in the pact.

“China’s increasing purchases of U.S. goods are in accordance with WTO guidelines and will not impact its imports from other countries,” Han said, according to an article that ran in the South China Morning Post.

Herman said the WTO allows preferential deals but only when they are comprehensive trade deals that cover “substantially all” trade in goods and services between the countries involved in the agreement.

That is not the case in the deal between the U.S. and China. Herman said the two countries are trying to pull a fast one by calling this a “phase one” agreement that will be followed by a “phase two” deal that will make it a truly comprehensive agreement compliant with WTO rules.

“Frankly, I think that is rather cynical and disingenuous,” he said.

European Union Trade Commissioner Phil Hogan also expressed concern about the deal.

“We haven’t analyzed the document in detail, but we will. And if there’s a WTO compliance issue, of course we will take a case,” he said on a recent trip to Washington, according to a story in the Financial Times.

Herman believes the EU will challenge the agreement, and he thinks Canada should as well, although he acknowledged the deal will be over by the time a challenge wends its way through the WTO.

It is still worth challenging, he added. The deal should not go unopposed because it sets a bad precedent.

“It betrays the whole principle of non-discriminatory treatment,” said Herman.

It is also a strange agreement in that it focuses on China making big volume purchases of U.S. products rather than reducing barriers to trade.

“This deal is very different from the standard trade agreement,” he said.

Herman added that the U.S. and China seem to be getting a pass from the international community because many countries are relieved the two parties averted an all-out trade war.

However, he said the phase one trade deal is an armistice rather than an end to hostilities.

That sentiment was echoed by Rabobank, one of the world’s leading agricultural lenders.

“We see clear risks that this deal collapses sooner rather than later as one or both sides see the other as not meeting its terms or spirit,” Rabobank stated in a recent outlook on China.

“Naturally, we therefore do not expect a phase two to emerge over the course of the year, and, by the end of 2020, we expect that trade tensions will have re-emerged and that China-U.S. economic dislocation and separation will increase.”

DTN analyst Todd Hultman also expressed reservations about the trade deal.

Item five of the agreement has him concerned. It states that purchases will be made at market prices “based on commercial considerations.”

“If we’re being generous, ‘based on commercial considerations’ could just mean that China wants the flexibility as to when they will make purchases,” he stated in a recent column.

“However, if the clause ‘based on commercial considerations’ means that China doesn’t have to buy U.S. soybeans when Brazil’s beans are cheaper, then we’ve got a big problem and the phase one agreement doesn’t mean much for U.S. agriculture.”

Hultman said the devil will be in the details regarding that clause.

“On one hand, we have a trade agreement that appears to be so bullish it could severely distort the markets. On the other hand, China may have agreed to nothing more than a decision to act in their own self-interest,” he said.

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