By Daniel Pruzin | 23 October 2012
Mexico's World Trade Organization (WTO) challenge to Chinese subsidies for textile and clothing producers could be the most serious test yet to Beijing's activist industrial policies, according to trade diplomats and legal experts in Geneva.
The breadth of the Chinese measures being challenged makes it potentially the "mother of all dispute cases," commented one trade official to just-style.
Mexico initiated the proceedings on 15 October by requesting formal WTO-based consultations with China to address its claims that the Chinese government is providing subsidies through tax breaks, favourable loans, grants, and other support, that break world trade law.
Mexico has identified almost 100 measures at the central and regional government levels which it says have resulted in Chinese textile and clothing producers receiving prohibited subsidies, notably helping them undercut Mexican producers in their most important export market - the United States.
Under WTO rules, the two sides have 60 days to discuss Mexico's claims. If a settlement is not reached within that period - which is highly unlikely - Mexico can ask a WTO panel to rule on its claims.
Mexico has not been shy about challenging Chinese measures which it believes violate global trade rules. Mexico has now initiated four WTO dispute complaints against China, ranking only behind the United States and the European Union.
Two of the previous disputes targeted what Mexico charged were illegal Chinese state subsidies for exporting firms via tax breaks, loans and grants. In both subsidy cases, the Chinese government decided to withdraw the challenged measures rather than risk condemnation by a WTO panel - a move which some diplomats believe might give Mexico good reason to think that China could bend a third time.
However, Mexico also had the US as a co-complainant in the earlier cases. Whether Washington once again joins in may decide how determined Mexico will be in pursuing its complaint.
American trade officials have said they are reviewing the Mexican complaint and evaluating US interests in the matter. Diplomats in Geneva, however, said they see Washington's fingerprints all over the Mexican case.
Some of the available evidence cited by Mexico of China's alleged illegal subsidies comes directly from US government sources. And information on the specific Chinese regulatory measures may also have come from Washington - several of the cited measures were first brought to light by the US last year when it accused China of failing to meet its WTO obligation to notify all subsidies to the organisation's secretariat.
China so far has a decent compliance record in WTO dispute cases. But the number of new cases initiated against China has begun to pile up - half the 29 complaints lodged against China at the WTO were initiated in the past three years, and five were initiated in 2012 alone.
Mexico's wide-ranging complaint, targeting an industry that accounts for more than US$250bn in annual exports, may test China's patience to the breaking point. Should Mexico pursue the case and secure a favourable WTO ruling - a highly speculative scenario at this stage - China may opt to delay or obfuscate rather than dismantle its extensive state support.
The price to pay could be WTO-authorised trade retaliation in the form of higher tariffs on Chinese goods. That is something that China could live with for exports to Mexico, but far more painful should Uncle Sam join its southern neighbour in the proceedings, Geneva diplomats suggest.