Last week’s formal WTO challenge of certain Chinese tax laws by the United States should obviate an important reality. If China is running afoul of its commitments and the United States expects China to make amends, the United States must lead by example. That brings us to the zeroing dispute, with its latest twists and turns.

After much internal deliberation, the Commerce Department announced late last year that it would alter its antidumping calculation methodology by no longer “zeroing” dumping margins under the average-to-average comparison methodology in original investigations (described in this post). This decision was in response to a WTO indictment stemming from a complaint filed by the EC in 2003. January 17, 2007 was to be the effective date of the change, but implementation was postponed at the request of Sen. Max Baucus (D‑MT) and Rep. Charles Rangel (D‑NY), chairs of the Finance and Ways and Means Committees, respectively, who wanted more time to educate Congress about the ruling, the change in practice, and its implications.

Just before the announced postponement, another indictment was issued by the WTO Appellate Body concerning the zeroing practice in a complaint lodged by Japan in 2004. That ruling was much broader in scope, condemning zeroing under almost every conceivable comparison methodology and in both investigations and administrative reviews.

As a result of that latest ruling, the Ways and Means Committee has been soliciting comments from interested parties on how the United States should respond. Congress and the administration are said to be working closely, exploring U.S. options, one of which is simply NOT to comply.

Noncompliance is a legitimate option, and that is part of the beauty of the rule of trade law within the WTO. Contrary to the view of some of its detractors, the WTO is not world government. It does not impose the will of some faceless bureaucracy on powerless countries. It does not usurp national sovereignty. On the contrary, the WTO is powerless as a stand-alone entity. Its rules are the product of the consensus of its members, and to establish new rules, consensus among all of its 150 members is required. (This helps explain the slow going of the Doha Round and the eight-year duration of the previously-concluded round of multilateral trade talks — the Uruguay Round). Members do not have to comply with rulings, which are always framed in the benign, “sorry-to-trouble-you” tone that “recommends” that rules or laws or measures be brought into conformity with this or that WTO agreement.

Despite this comply-if-you-will approach, the dispute settlement system has endured 12 years and 358 disputes with compliance or mutually-agreed resolution achieved in every case concluded thus far. One reason for this record of success is that, should members choose not to comply, the complainant whose gripe goes unresolved is often entitled to retaliate or “suspend concessions.” This retaliation often takes the form of raising tariffs, but could include other measures.

Another incentive to comply is that noncompliance could be contagious. It’s nice to have the theoretical option of disregarding the verdict, but exercising that option can be costly and risky. If the United States chooses to ignore the Appellate Body’s findings in the Japanese zeroing case and fails to revise its zeroing practice, the Chinese may be more inclined to take this approach if and when its tax laws are found to violate its WTO commitments. One of the major justifications for encouraging and welcoming China’s membership in the WTO was that membership would improve prospects that Chinese policies going forward would be transparent, predictable, and fair. And that would encourage greater commercial engagement. If China comes to view its WTO obligations as optional, the economics of the trading system and the political support for it will suffer immensely.