How China Continues to Shirk Its Trade Obligations, With Dennis Shea

China has had a dismissive attitude about its obligations as a member of World Trade Organization (WTO) ever since it joined the organization. Rob and Jackie sat down with Dennis Shea, executive director of the J. Ronald Terwilliger Center for Housing Policy, to discuss how China’s current non-market economic system is simply incompatible with WTO norms. 

Mentioned

• Dennis Shea. China’s Trade-Disruptive Economic Model and the Implications for the WTO. (U.S. Mission to International Organizations in Geneva, 2018).
• 2022 Report to Congress On China’s WTO Compliance. United States Trade Representative, February 2023.
• Robert D. Atkinson. How China’s Mercantilist Policies Have Undermined Global Innovation in the Telecom Equipment Industry. (ITIF, 2020).
• Stephen Ezell. False Promises II: The Continuing Gap Between China’s WTO Commitments and Its Practices. (ITIF, 2021).

Transcript

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Rob Atkinson: Welcome to Innovation Files. I'm Rob Atkinson, founder and president of the Information Technology and Innovation Foundation.

Jackie Whisman: And I'm Jackie Whisman. I head development at ITIF, which I'm proud to say is the world's top ranked think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF from the broad economics of innovation to specific policy and regulatory questions about new tech. If you're into this stuff, please be sure to subscribe and rate us. It really helps.

Jackie Whisman: Today, we're talking to Dennis Shea, who is the executive director of the J. Ronald Terwilliger Center for Housing Policy at the Bipartisan Policy Center. Immediately prior to joining the BPC, he served as Deputy US Trade Representative and US Ambassador to the World Trade Organization in Geneva, Switzerland. We're going to talk about that today. Welcome, Dennis.

Dennis Shea: Thanks, Jackie. Thanks you, Rob. Great to be here.

Jackie Whisman: Why don't you tell us a bit about your background and how you came to be appointed to the WTO?

Dennis Shea: Well, for about 11 years, I served as a member of the U.S.-China Economic and Security Review Commission. And during a period of those 11 years, I was also either the chair or the vice chairman of commission. This was an advisory body to the US Congress to examine the national security implications of the US-China trade relationship. That got me into the issues surrounding China's accession to the WTO and whether China was living up to its obligations as a WTO member.

But the immediate approximate cause of my being US Ambassador to the WTO was a call from Bob Lighthizer who served as many of your listeners know as the US Trade Representative in the Trump administration. And I knew Bob from working with him on the Dole campaign. I also worked at the law firm that Bob was a partner at when I first came to Washington, that was Skadden Arps. So Bob called me up and said, "Do you want to be a US ambassador to the World Trade Organization?" And it was out of the blue. It's not something that I was seeking. And I said, Bob, wow. He said a few other things about the job. And I said, well, Bob, that's really intriguing. Let me check with my wife and I'll call you back tomorrow. And that's how I got the job. So that's how I ended up in Geneva because of a call from Bob Lighthizer.

Rob Atkinson: That's really interesting. Dennis, one thing you didn't mention, because I've testified a couple of times at the U.S.-China Economic and Security Review Commission that you chaired and co-chaired, early on it was seen as kind of outside the Overton windows. What are these people doing? Why are they looking at these questions? Why are they being so tough on China? I mean, it really had that reputation and now the rest of the world, the rest of the US is caught up and now commission's very mainstream. But it didn't change, the political attitudes and environment changed.

Dennis Shea: That's absolutely right. When I was on the commission, I started serving, I believe in 2007, and we were definitely the outliers who were viewed in many circles as frankly a little fanatical or really out there. And it was, as you said, Rob, the whole mainstream thinking in Washington has shifted to the position of the China Commission. We've been warning about practices that China's been engaged in, the trade practices, the intellectual property theft, the military buildup. For many years, the commission was prior to the seeping into the sort of the consensus viewpoint here in Washington, so you're right, it's changed. It's really interesting.

Initially, the commission was viewed as sort of a compilation of on the Republican side as national security hawks and on the Democratic side as sort of pro-union, pro-labor Democrats. And they somehow found common ground in the commission. And I think the Democrats in the commission have a greater appreciation over time of the national security concerns raised by the Republicans on the commission. And the Republicans had a greater understanding and appreciation for the deleterious economic impact that Chinese practices had on the United States. The common wisdom, particularly I'm a Republican, the common wisdom was that economic security is not national security. They're siloed. That was the traditional Republican view. There's tanks, planes, aircraft on one column and then the economy, trade in the other lane. But now there's a much greater appreciation, at least in the Republican party that economic security is our national security.

Rob Atkinson: We did an event a number of years ago on The Hill on Exim Bank reauthorization. It was actually a debate. And so there's two of us and two opponents. And the two opponents were conservative, free market Republicans. And I always remember this, one of the opponents said, "Well, look, if for some reason we get rid of the bank," which in their view they wanted to get rid of the bank, "And it turns out that Boeing were to go out of business, what difference does it make? We'll just pay more for tanker planes for some other company, we'll play more for bombers." There was no sense that there was this dual use technology. They just didn't care.

Dennis Shea: Yeah, there was very little appreciation or not sufficient appreciation, I think now there's greater appreciation, that you need a manufacturing base to innovate. People say, we'll, just innovate, but you can't really innovate effectively if you don't have a manufacturing base. And the linkage between manufacturing and innovation, I think is much more recognized.

Rob Atkinson: Yeah. My friend and co-author Mike Lind says, "You can't win a war on patents."

Dennis Shea: Exactly. Exactly. Was it Ben Stein who said, I'm paraphrasing this, "If we give away our manufacturing, we'll just write poetry." I mean, there's a famous line about that. That's our comparative advantage, poetry writing.

Rob Atkinson: Poetry writing and waste paper export. We'll drown them in waste.

Jackie Whisman: Many people have argued that the WTO has failed to adequately enforce rules against the Chinese and their unfair trade practices. What's your view? Do you agree?

Dennis Shea: Well, I spent my time in Geneva basically making that point. I mean, whether it's the intellectual property theft that's on a monumental scale, it's just incredible to me that we continue to allow, but we allowed it to go on for so long, the forced technology transfer practices and policies, the massive subsidization, total lack of transparency and reciprocity. So you can read this for our listeners, if the USTR does an annual report on China's compliance with its WTO obligations, and you can just find it on the USTR website. And I think Rob and Jackie, Stephen Ezell of ITIF has done a great job. I've read some of his work providing a scorecard on China's compliance with this WTO obligations. I think that's a great resource for your listeners to take a look at because that kind of outlines it in very succinct manner.

When I was there, I was trying to persuade my colleagues that that's important for us to reaffirm that the WTO is an organization rooted in fair and free trade around common market orientation of its members' membership. It's supposed to be a market oriented collection of entities, some more so than others, but everybody basically swimming in the same direction, maybe in different lanes, but a general market orientation among its members. And that's one of the things I try to do is to sort of reaffirm that fundamental norm at the WTO. And it was difficult to get even some of our friends and allies to support that proposition.

Rob Atkinson: I mean, I understand it and I don't understand it. Why there was so much "Oh, it's okay, it's all right. They're going to get better, we shouldn't really do anything." Because by and large, until you got there, Dennis, and again, I don't want to say that as a Republican or a Democrat, until President Trump got in office, there really wasn't much pushback. Now, you could argue it was rising, and if Clinton had gotten elected, there would've been pushback then. I'm not going to make that argument either way. But the reality is there really wasn't much pushback until 2017. And yet a lot of our allies seem to be in la la land and still, they're not doing anything.

Dennis Shea: No, that is true. I remember very vividly the first major statement I made at the general counsel was pushing back on China's accusations against the US with respect to the 301 investigation that we had initiated. And you could literally hear a pin drop in the floor after I finished speaking. No one had ever spoken that way, that bluntly, and that directly about China or maybe any other member at the WTO. And I had a couple of members come up to me, representatives and saying, "That was really important that you did that." And I have had people affiliated with the WTO after my service at the WTO saying, "Everything you said when you started is right, is turning out to be true. Everybody recognizes that now."

Japan, I would have to say was the closest friend we had at the WTO. They weren't necessarily enamored with the rough and tumble manner in which we went about things. I didn't think it was that rough and tumble, but according to stage Geneva standards, it was. But they were the closest we had to sort of standing with the United States was Japan. I remember we circulated a paper early on in my tenure outlining the trade disruptive impact of China's non-market economic model. It was like a 12 page paper that we circulated to the general membership and we put it on the agenda, the general counsel and just outlined how China's system, non-market economic system is simply incompatible with WTO norms of reciprocity, transparency, market orientation, how they weren't complying with their WTO obligations.

I remember giving this paper to the top EU bureaucrat in charge of trade policy, the WTO he was visiting, and I said, I just want to give you a heads up in a couple of days. We're going to circulate this paper and we're going to put it on the general counsel agenda. And his comment was, "Why are you doing that? Why are you doing that?" And I was like, well, we feel this is at the heart of the problem of the WTO and we need to educate the WTO members about this. But to get the Europeans to concede that the WTO is rooted in market orientation, that was what the GATT was all about. That was what we insisted on some of these command economies in the post-Cold War period who were trying to transition and wanted to become WTO members. They had to inject more market orientation into their economies. That's what the Marrakesh declaration said upon the founding of the WTO.

But to get the Europeans to agree to that, they felt that that would imply, I mean that's what imply, put that in air quotes, that China could not be a member of the WTO. And so they were very reluctant, well, were reluctant to sign on to anything or endorsed that market orientations at the heart, a fundamental norm of the WTO.

Rob Atkinson: When you really think about that, I mean, if you just step back and look at that, it is really fundamentally bizarre. So it's like you have a club, and the club is for, I don't know, people who like to play bridge and there's a person in the club who cheats on bridge, they always cheat on. And well, we don't want them to be kicked out of the club because we have a bridge club. The whole purpose of the WTO is to enforce rules. It's only purpose is to get countries to commit to these rules. And so you hear China not doing it, and nobody even has the guts except you and Lighthizer and the president, president Trump. And to be fair, there were comments by the US government before that. And the Japanese are good, but the Japanese whole mentality or culture is to not really pick conflicts at least publicly. What the heck?

Dennis Shea: Yeah, there was an element I think thinking that, well, there's a liberal wing in the Chinese government that we need to cultivate more and potentially not alienate, which was wrong back then when I heard it. But it's become glaringly wrong today. But also I think there's just financial interests. I don't want to be too direct here. Well, I guess I'll be direct. I mean the EU trade policies run by, I think my perception is by a lot of large European, mostly German car companies and other multinationals that are heavily invested in China. And as a result, they exercise a great deal of influence over European Union trade and economic policy. And they don't want to ruffle feathers. They're making money, at least in the short term, they don't see the longer term issue of being so closely integrated with China. I think that was a big, big part of the EU reluctance is that they were heavily influenced by German and maybe some French large economic interests.

Rob Atkinson: When Airbus sales start to crater in China, at least in the next 10 years, and when the Volkswagen sales start to crater because they're going to get rid of Volkswagen, there's no question about, they're going to shift to their own Geely and BYD, whatever, they're going to shift to their own EVs. And then the Europeans will be like, "Oh, geez, that didn't work out the way we thought."

Dennis Shea: I heard Bob Lighthouse who spoke to the US Select Committee on China early this week. He called it the big con, I mean the big con is bringing Western investment into China. We'll use it as we need it to build up our own indigenous or domestic manufacturers. And once we don't need you anymore, adios.

Rob Atkinson: Well, it's the big con, but it's also behind it is force. I don't know if you remember that one of the wolf warriors said, complaining about what Sweden did on something like, "For our friends, we bring fine wine. For our enemies, we have a shotgun."

Dennis Shea: I do remember that.

Rob Atkinson: And there was this case that I remember I wrote about, because we wrote a long analysis of the Chinese strategy to win in 5G and telecom equipment. There was a EU trade commissioner, I forget his name back in 2012 or something, and he wanted to bring a case against China for unfair subsidies and other practices on Huawei. The Chinese went to the head of Ericsson and basically said, "If you allow this to happen, your sales will go to zero. We'll just go to Nokia or somebody else, Samsung." And so the Ericsson pressured the commissioner and the commission to abandon the case.

Dennis Shea: No, I do remember that. Is that Peter Carl? Is that the EU…

Rob Atkinson: I don't recall.

Dennis Shea: But yeah, I remember that case with Ericsson basically. And it was sort of amazing with the Europeans when the US made a push, particularly during the Trump administration and into the Biden administration. Don't use Huawei. It's not secure. Use your own. We weren't asking them to use an American supplier for 5G. We're asking them to use Europeans, Ericsson Nokia, use your own suppliers, not an American company. But that even fell on some deaf ears in certain capitals in Europe.

Jackie Whisman: There was a lot of turmoil about President Trump blocking the appointment of judges to a key WTO appeals court. What's your take on that?

Dennis Shea: Well, I'm going to correct your language a little bit, Jackie.

Jackie Whisman: Okay.

Dennis Shea: I mean, appellate body members are not judges and the appellate body is not a court.

Jackie Whisman: Okay, sorry.

Dennis Shea: That's quite all right. But that was the impression that many members of the WTO or some members of the WTO had, particularly the Europeans, they viewed the appellate body as an international court of law that would create binding precedent, fill in gaps between the various WTO agreements, create an international common law of trade. And that was definitely not the US position, has never been the US position. My colleagues, that was the biggest concern that they had when I was over there. What are we going to do about the appellate body? And we made our case extremely clear about the deficiencies of the appellate body. I won't go into length. We wrote a major report. USTR wrote a major report on this outlining all the concerns, which can't be papered over with a word tweak here or there because the words are very clear in the dispute settlement understanding, which is the agreement which created the appellate body very clear. And the appellate body was ignoring the clear words of the dispute settlement understanding.

But I made the point to my colleagues that this is not a Republican issue. This is an American issue. So I've been intrigued and pleasantly surprised, not surprised, that the Biden administration has essentially in the two and a half years since I left, have basically taken the same position as we took in the Trump administration. But in the Trump administration, "Oh, these people are barbarians, they're terrible at what they're doing, they're tearing down the international trading system." Biden administration takes the same position, you don't hear that at all. But I'm pleased that they're taking the same position. And I guess there's ongoing talks in Geneva about what to do about dispute settlement and how to fix the dispute settlement system. So we'll see where that leads.

Rob Atkinson: So one of the things I find striking is that the Europeans in particular, but certainly Xi Jinping has made this point and people have actually believed him, is that we're the cause of this growing protectionism around the world and this decay of the belief in liberal globalism and free trade. And in reality, the decay was all from China. They were the ones that were really violating the spirit and the letter and the core soul of this whole system. They were the ones that were doing that. And yet the narrative is we are the bad guys. And I just feel like I don't think the Trump administration did enough to push back on that. And I certainly don't think the Biden administration has done enough to push back on that. We need to change the entire narrative really to be focusing on China started this, they need to end it. They won't end it, but they should.

Dennis Shea: I totally agree. I mean, I agree with you. I mean, the Chinese have been engaging in at least economic warfare against the United States for many years now. I mean, the amount of intellectual property theft, cyber espionage is truly staggering if you believe the estimates put out by various government agencies, including I believe the ITC and then there's the Huntsman Commission, hundreds of billions of dollars of annual theft that we've put up with this for so long and continue to, I think is pretty staggering. This issue of decoupling, the US should not decouple, well, I mean the Chinese frankly have been decoupling before the United States has been sort of reassessing its economic relationship with China with things like made in China 2025, I mean document number nine, which warned of the evils of sort of Western liberal thinking, the internet, the great firewall. I mean, the fact is that China started the decoupling process way before the United States even considered it. So I agree with your general point, Rob.

Rob Atkinson: So Dennis, maybe as a last question just to, we're going to finish up. There are people who argue that it's time to create a WTO for free trading or countries. And you could think about ways to do that, like if there were a TPP that was transatlantic, kind of just get the top 30, 40 countries that are willing to commit to more or less open markets, free trade, intellectual property, respect for IP and the like. And then I'll eventually just sort of let the WTO atrophy. That's one option. The other option is try to reform the WTO, which I don't think is frankly possible and just continue along and have to do unilateral and bilateral efforts. That's a big, big question. What are your thoughts?

Dennis Shea: Sure. I mean, the WTO operates by consensus. What does that mean? That means that you have to get acquiescence at least of all 164 members. So if you're to create all these new rules on industrial subsidies, state-owned enterprises, forced technology transfer, even intellectual property theft, do you think China will go along with it? And even if you go, they're not going to go along with these new rules. I think when you have the second largest economy in the world playing a completely different ball game, type of game than the other significant largest members of the WTO, then it's really tremendously problematic.

I like the idea that you have raised, Rob, of creating a, what's it? A defense organization that economic focused democratically allied trade organization. I think that's a very intriguing concept where like-minded, market-oriented economies work together when they're the victims of mercantile list practices and they help each other out and they act in a united way. I think that's really good.

I mentioned Peter Carl, he was a EU trade official. He recommended that we start all over with the WTO and just create a new one without China as a member. I mean, even CSIS, one of the most establishment think tanks in Washington recommended a couple of years ago that we create a parallel organization to the WTO with a smaller group of members that are more market oriented. And hopefully that would force the real WTO to up its game in terms of trade liberalization and high standard agreements. So look, US should stay in the WTO. I'm not saying we should get out of the WTO. It's a place where people can come together to discuss trade matters, maybe deal with problems, negotiate some things, but for no member of in the United States government in authority should outsource US economic security to the WTO and rely on the WTO to protect United States economic security. That's crazy too. Does that answer your question?

Rob Atkinson: That's a great answer. We could clearly go on for a long time. Super interesting and super complex, but we do have to stop. So Dennis, that was really fantastic. Thank you so much. Also, thank you for your service when you went over there. I know that was not always an easy effort when you're rooting up, bringing up your family, going to a whole new place and starting a job where you weren't necessarily the most popular person in the room.

Dennis Shea: Well, thank you, Rob, I appreciate that. And thanks for all the great work that you do at ITIF. And your team, your team does fantastic analysis. And thank you for, I remember your very valuable testimony to the China Commission at least two or three times you came in and talked to us. So thank you as well.

Rob Atkinson: Thanks.

Jackie Whisman: And that’s it for this week If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to podcast@itif.org. You can find the show notes and sign up for our weekly email newsletter on our website itif.org. And follow us on Twitter, Facebook, and LinkedIn @ITIFdc.

Rob Atkinson: And we have more episodes of great guests lined up. We hope you'll continue to tune in.

Jackie Whisman: Talk to you soon.