To meet the China challenge, the US and Europe must look beyond the WTO

The European Union’s (EU) new trade policy includes a welcome call for greater transatlantic cooperation in response to the economic challenges posed by Communist-ruled China. The EU specifically proposes to revitalize the Trilateral process, a joint initiative by the United States, the EU and Japan to develop new World Trade Organization rules to check features of China’s non-market economy, most notably the inordinate role of industrial subsidies and state enterprises.

Building on the Trilateral work and bringing it to the WTO is certainly worthwhile. But it would be profoundly misguided to make expanding the WTO rulebook the exclusive, or even primary, focus of transatlantic cooperation on China. In fact, putting all our eggs in the WTO rulemaking basket would play directly into China’s hands.

Why the skepticism?

Developing new WTO rules to address the “negative spillover effects” of subsidies, the EU’s stated objective, too narrowly defines the problem. The Chinese economic system, with its unique melding of public, private and Chinese Communist Party (CCP) resources to advance industrial policy objectives, is incompatible with the WTO norms of transparency, non-discrimination, reciprocity and market orientation. This hard truth needs to be recognized.

A WTO-centric approach also assumes that the CCP feels compelled to follow international rules. Yet an abundance of evidence says otherwise: The failure of the CCP to abide by the prompt reporting requirements of the WHO’s International Health Regulations undoubtedly contributed to the COVID-19 pandemic. The CCP’s horrific actions against the Uighurs in Xinjiang are incompatible with the Universal Declaration of Human Rights. The CCP’s imposition of its national security law in Hong Kong violates the Sino-British Joint Declaration guaranteeing the city a high degree of autonomy. The expansive territorial claims advanced by China in the South China Sea contravene the Law of the Sea Treaty.  

We see this pattern repeated in trade. The Office of the U.S. Trade Representative has documented that China’s record of compliance with its WTO obligations has been poor. A major problem is China’s pervasive lack of transparency about its own trade policies and practices. China has also been quite willing to use its trade power as a cudgel: Witness China’s retaliation against Australian exports, presumably in violation of WTO rules, because Australia dared to call for an independent investigation into the origins of the pandemic. Japan, Korea and the Philippines have also borne the brunt of similar trade retaliation in response to actions considered unacceptable by Beijing.

Finally, the WTO-centric approach assumes the institution is capable of developing meaningful rules within reasonable timeframes. But the WTO’s consensus principle requires unanimous acceptance by all 164 WTO members before adopting a decision. At the WTO, China has vigorously objected to the development of new subsidy rules, viewing them as “a straight-jacket to constrain China’s development.”  Even if China engaged in a WTO negotiation, it could still enlist other WTO members to block consensus. Under the most optimistic scenarios, the end result will likely be a set of weak rules that largely accommodates CCP concerns.     

And don’t expect the negotiation to be completed soon. The one multilateral negotiation now underway at the WTO – designed to restrict subsidies for fishing – has been in the works for 19 years. Enforcing existing rules can take equally long: The Boeing-Airbus subsidies dispute lasted 16 years before reaching a final WTO resolution.

If we are on the cusp of a new era of transatlantic cooperation on China, it is reasonable to ask:  Do the U.S. and the EU share the same interests and objectives? Do we assess the challenges in the same way? Together, are we willing to impose costs on China to discipline bad behavior and encourage change, even if doing so also imposes costs on us? Answering these questions will help determine the ambition of any potential collaboration.

Today, the U.S. and the EU appear to be looking at China through different lenses. Hearing important European leaders invoke the discredited “change through trade” mantra is eyebrow-raising. The timing and substance of the recently-concluded China-EU Comprehensive Agreement on Investment also raises questions about whose interests the agreement is actually serving. At the WTO, the EU has so far taken an excessively cautious approach, refusing even to cosponsor a U.S.-crafted statement affirming the centrality of market-oriented conditions to the global trading system. The EU’s concern: the statement would somehow imply that China cannot be part of the organization.

Only time will tell if the desire for collaboration bears any fruit. But an effective transatlantic response to the China challenge would have many facets beyond new WTO rules. These include the joint imposition of sanctions against Chinese companies engaged in predatory or illicit behavior; common defense mechanisms in the face of retaliatory Chinese trade actions; a collective effort to improve supply chain resiliency for critical goods; the joint development of technical standards for the leading industries of the future; and, yes, tariffs too.

Source: The Hill