Chinese Hypocrisy?

China launches a WTO case against the US; USTR's barriers to trade report and trade defence methodologies

The US and China accusing each other of discriminatory subsidies

Last week, China initiated a WTO dispute against the US, claiming that certain tax credits under the US Inflation Reduction Act to promote the production of electric vehicles and renewable energy projects discriminate against goods of Chinese origin.

The first thing to say is that this is very very funny.

The second is that China is probably right.

Here’s a description of the IRA’s Clean Vehicle Credit, taken from China’s request for consultation [emphasis added]:

A. The Clean Vehicle Credit

7. Section 13401 of the IRA establishes the Clean Vehicle Credit for qualifying electric vehicles ("EVs"). To qualify for the Clean Vehicle Credit, final assembly of the qualifying vehicle must take place in North America. The North American assembly requirement is a condition for obtaining either or both of the two components of the Clean Vehicle Credit: (1) the critical minerals component, worth $3,750 per vehicle; and (2) the battery component, worth an additional $3,750 per vehicle.

8. To qualify for the $3,750 critical minerals component of the Clean Vehicle Credit, a percentage of the value of applicable critical minerals contained in the vehicle battery must (i) be extracted or processed in the United States; (ii) be extracted or processed in a country with which the United States has a free trade agreement; or (iii) have been recycled in North America. Applicable percentages increase from 40 percent prior to 2024 to 80 percent after 2026. Qualifying critical minerals include, inter alia, aluminium, cobalt, lithium, nickel, and graphite.

9. In addition, after calendar year 2024, a clean vehicle will not qualify for the critical minerals component of the Clean Vehicle Credit if it contains any critical minerals that were "extracted, processed, or recycled by a foreign entity of concern". A "foreign entity of concern", or "FEOC", is defined to include, inter alia, a foreign entity that is "owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation…". A "covered nation" includes the People's Republic of China.

10. To qualify for the $3,750 battery component of the Clean Vehicle Credit, a certain percentage of the value of the battery components in an EV must be manufactured or assembled in North America. Applicable percentages increase from 50 percent prior to 2024 to 100 percent after 2028. In addition, after 31 December 2023, a vehicle does not qualify for the battery component of the credit if any "components" contained in its battery are "manufactured or assembled by a foreign entity of concern" as specified above.

Sounds pretty discriminatory to me!

The third is that the US obviously doesn’t care, and won’t change anything about the IRA even if it loses a dispute, which it could then appeal into the void, regardless.

Except, it kinda does care. Or at least people sympathetic to the Biden administration definitely care and are annoyed at the alleged Chinese hypocrisy.

Isn’t it the case that China doles out huge amounts of subsidies, reserved for the most part for Chinese companies?

YES!

In a recent substack post, Mary Hui of

a/symmetric

lists some of these subsidy programs. Here’s an example relating to rare earths:

A carefully calibrated tax system helps China maintain its dominance over global rare earth value chains, essentially giving Chinese industry a built in 13% cost advantage over foreign competitors.

“…foreign magnet firms, which almost certainly rely on Chinese feedstocks of oxides, metals, and/or alloys, will produce magnets that are at least 13% more expensive than their Chinese counterparts.” — US Department of Commerce, February 2023

Here’s how it works.¹ The standard VAT rate is 13%; this applies to buying rare earth products in China (including oxides, metals, and magnets). A foreign buyer purchasing raw rare earth materials from China pays the international market price, including the 13% tax. When that buyer exports the rare earth materials from China (say, to a magnet factory overseas), the VAT isn’t refunded.

But here’s the catch: Chinese exports of rare earth magnets—which have more value added than raw rare earth materials—do get a VAT refund. That means Chinese rare earth magnets automatically enjoy a 13% raw material cost discount. This ensures China’s grip on the downstream segments of the rare earth industrial chain—from which it can exert leverage over the upstream.

But the fact China can stand up and credibly launch a WTO challenge, which most other countries quietly agree with¹, against the US is distinctly a US policy failure.

Or to put it another way, the US can’t take the moral high ground on rules-based trade at a time when it is demonstrating, repeatedly, that it doesn’t care at all about rules-based trade.

It might not seem fair that the US is being judged more harshly than China … but that’s because the US isn’t, or isn’t supposed to be, China.

It’s meant to be better.

---

Trade barriers are actually good

On the subject of US trade policy, last week also saw the launch of this year’s USTR barriers to trade report. [Note: my favourite report.]

Generally speaking, this is my go-to resource to find out which trade barriers are most bothering companies in every country in the world, other than the US. (Annoyingly, but not surprisingly, it doesn’t list US trade barriers.)

More interesting than what is listed in this year’s report is what isn’t.

The 2023 report lists the following eight pieces of EU digital legislation as problematic:

• Proposed EU Cybersecurity Certification Scheme for Cloud Services (EUCS)

• GDPR

• The Digital Services Act

• The Digital Markets Act

• The Data Act

• The Artificial Intelligence Act

• Digital Services Taxation

• Network Usage Fees

The 2024 report just lists three:

• Proposed EU Cybersecurity Certification Scheme for Cloud Services (EUCS)

• Digital Services Taxation

• Network Usage Fees

Brussels wins again, I guess.

---

Change the methodology

I didn’t intend for this edition to be exclusively US-focused, but here we are.

**Another** interesting thing the US did last week is publish a new regulation updating how the Department of Commerce conducts anti-dumping and anti-subsidy investigations.

Dan Ikenson has a good rundown on his blog Ikenomic Insight [emphasis added]:

In these new regulations, DOC is – among many other things – asserting authority under the Antidumping Law and the Countervailing Duty Law to render judgment about whether different norms, practices, rules, regulations, laws, and enforcement standards in a foreign country constitute a cost of production advantage for their manufacturers and, if so, to measure the value of that advantage and adjust accordingly the costs and prices considered in AD/CVD cases when determining the level of “remedial” duties.

The logic here is that if a foreign government’s commission of a subsidy to a company or industry confers a cost advantage vis-à-vis unsubsidized domestic or foreign firms, then a foreign government’s omission of requirements (failure to enforce, etc.) that producers respect intellectual property rights, curb greenhouse gases, or grant certain labor rights confers a cost advantage, too. I think there’s merit to that argument; commission and omission both can confer discriminatory benefits. But whether and how to do something about such “omission benefits” are entirely different questions.

The reason I think this is interesting is that I’m pretty certain that other countries will go in the same direction.

For example, it is entirely plausible — to me at least — that a Labour government in the UK would push the UK Trade Remedies Authority to consider factors such as [lack of] labour rights and environmental protections in anti-subsidy investigations.

---

Best wishes,

Sam

1. Lots of other countries have considered bringing this case. The EU and UK, for example, didn’t go for it because they decided it a) wasn’t is their interest to pick this fight with the Biden administration and b) because the optics of ganging up with China against the US aren’t great. It will be interesting to see which countries *do* back China …