Brief on the Trade Dispute regarding Tariff Quota Administration between the U.S. and China

* This report has been published at AgManager by Department of Agricultural Economics of the Kansas State University. Please see the link to the published paper from here.

Suggested citation: 

Chen, B., "WTO Dispute Panel Report on China’s Administration of Grain Tariff-Rate Quotas". Kansas State University Department of Agricultural Economics Extension Publication. April 26, 2019.

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General background

In December 2016, the U.S. launched a dispute request against China at the World Trade Organization (WTO) over China's tariff quota administration for imports of maize, rice and wheat. Later in September 2017, the WTO established a panel to investigate this dispute, and the panel issues its final report today (April 19, 2019). This final report will become the ruling or recommendation within 60 days, unless a consensus rejects findings of this report (a rare case in the history).

What is tariff rate quota and tariff quota administration?

1. Tariff rate quota is a two-tiered trade tariff system: the first-tier tariff rate is applied to in-quota imports and the second-tier tariff is applied to out-of-quota imports. Currently, nearly 43 countries have a combined total of 1,425 tariff quotas for various agricultural commodities.
2. Tariff quota administration involves allocating the quotas among quota applicants, and it determines who has the quota and how many quotas can be used for importing at the in-quota tariff rate.

Key features of tariff rate quota policy in China

1. China implemented the policy in grain markets in 2001 when joining the WTO; 
2. The in-quota tariff rate for most grain products is 1%, and the out-of-quota tariff rate is 65%; 
3. The National Development and Reform Commission of China (NDRC, a government agency) administers the quota allocation and distribute quotas between two types of firms: State-trading Enterprises (STEs) and non-State-trading Enterprises (non-STEs). 
4. The majority shares of quotas, i.e., 90% for wheat, 60% for maize and 50% for rice, are reserved to STEs; 
5. Unused quotas of non-STEs shall be returned to NDRC and then reallocated to quota applicants. It is a matter of legal debate that whether the STEs shall return the unused quotas.

What is under dispute?

The U.S. claimed that “China’s administration of its TRQs for wheat, rice, and corn violates six obligations that China has committed: (1) administer TRQs on a transparent basis; (2) administer TRQs on a predictable basis; (3) administer TRQs on a fair basis; (4) use clearly specified administrative procedures; (5) use clearly specified requirements; (6) administer TRQs in a manner that would not inhibit the TRQ fillings.

The U.S. challenged China in six different aspects and provided evidence to support its claim from each aspect: (1) the basic eligibility criteria; (2) the allocation principles and the reallocation procedures; (3) public comment process; (4) the administration of STE and non-STE portions of TRQs; (5) public notice; and (6) the usage requirements. Table 1 at the end of the document summarizes the arguments of both the U.S. and China and the panel analysis in each aspect.

What is in the panel report?

The report by the WTO panel listed arguments of both the U.S. and China about the tariff quota administration. This report also provided the assessments of the WTO panel on the related disputed issues. As I learn from the report, the WTO panel has focused on two points. First, are the legal instruments concerning the TRQ administration issued by China consistent with China's legal obligations? Second, are the practices of the NDRC, the government agency administering the quotas, are in alignment with the legal instruments and with the China's legal obligations? The legal obligations are to administer TRQs on a transparent, predictable, and fair basis, to use clearly specified requirements, and to not inhibit the TRQ fillings.

What are the findings of the panel report?

The panel concluded that China’s administration of its grain TRQs are inconsistent with its legal obligations regarding tariff quota administration in all six aspects challenged by the U.S. except in the public notice aspect. In addition, the panel concluded that the way that China administers STE and non-STE portions and the usage requirements could inhibit the filling of TRQs. Based on the conclusion, the panel recommends the Dispute Settlement Body to request China to bring its TRQ administration measures into conformity with its legal obligations.

To what extent has the tariff quote administration reduced China’s imports?

The trade impacts of the tariff quota administration are not discussed in the panel report, but are extensively studied in my recent paper with Dr. Villoria and Dr. Xia. The paper is only available upon request since it is still under peer review. An outdated version of our paper is yet available online here.