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Only a Strong WTO can Keep China in Line

Trade negotiations between China and the U.S. are apparently going into overtime. U.S. Trade Representative Robert Lighthizer told a Senate panel that both sides were closing in on an agreement. Interesting, Chinese President Xi Jinping is skipping a meeting with President Trump this month on his way back from a much-anticipated EU trip. Hopes were initially high that Xi and Trump would meet sometime in March to finalize their trade deal and end mutual tensions. But apparently Xi would like to avoid the optics of a photo-op unless substantial progress is being made.

The world’s two biggest powers have been locked in a damaging dispute on goods worth hundreds of billions since early 2018. And although an end to the hostilities is desirable, it may come at the price of weakening one of the main pillars of the current international system: the World Trade Organization (WTO). Trump regards it as a shackle on U.S. power that hands advantages to China, despite the fact that Washington, were it to follow the example of its traditional allies the EU and Japan, could reform the WTO in such a way that most issues with China, such as illegal subsidies to its heavy industry, could be resolved.

WTO under pressure

The problem lies in Trump’s maverick approach to obtaining an elusive China trade deal, which, if it indeed materializes, is bad news for the WTO. Trump prefers to settle trade and compliance disputes unilaterally, by threatening to unilaterally impose sanctions. Washington is thereby setting a precedent for resolving trade compliance issues outside the WTO rule book through punitive enforcement, breaking with the organization’s long-standing policy of multilateralism.

It’s an act that could mark the death-knell for the WTO, an organization the current White House has been bent on sabotaging since coming into office. The Trump administration has blocked new appointments of judges to the Appellate Body, the WTO’s main dispute appeal chamber, sparking a crisis in the arbitration system for global disputes. The mercurial American president wrongly believes Washington has always gotten the short end of the stick in trade disputes with other countries. Never mind that the record says otherwise and that the body has always included at least one American representative.

The bullish U.S. approach means that trade policy would degenerate into the wild west replete with the vagaries of lobbying and power plays – as opposed to a scheme based on common procedural mechanisms built on the rule of law. The WTO’s dispute settlement system is specially designed to be independent of outside influence so that richer, more powerful states like the U.S. cannot arbitrarily throw their weight about without consequences.

China’s rule-flouting

America’s perspective contrasts markedly with that of its allies. The view in Brussels is that the trade organization is pivotal in keeping China in check, and America’s sabotage of the WTO is observed with dismay. Ironically, the EU and Japan share Trump’s view that China is abusing WTO trade rules for unfair trade gains. But while the U.S. responds by trying to destroy the organization, Brussels seeks to reform it.

The bone of contention is the “special and differential treatment” (S&D) clause China uses to justify overcapacity production and massive subsidies in domestic steel, aluminum, and other industries. The clause compels developed countries to treat developing ones favorably – a point China uses to provide market-distorting advantages to at least 10 industries with overcapacities like coal, cement, and the aforementioned aluminum.

Last year alone, Beijing announced $350 billion in subsidies to state-owned enterprises (SOEs). The WTO requires to give immediate notice when a subsidy program is created, but China discloses only a tiny fraction of such initiatives, citing its “state secrets” law. In response, Brussels was able to get the U.S. on board to submit a proposal to the WTO’s Council on Trade in Goods in 2018 to address China’s state support for SOEs through a system of escalating administrative sanctions that would curb the offending member’s influence in the WTO.

In a clear swipe at Chinese excess aluminum flooding European markets, which a 2019 OECD study identified as “a genuine concern,” Brussels will also likely hope to include the U.S. in efforts to prevent government subsidies in some industries from expanding capacity “beyond commercial consideration.” However, as it stands now, Beijing will not go for any reform that diminishes its ability to exploit existing trade rules. Beijing’s position paper on WTO reform makes it clear that any reform must safeguard the interests of developing members and allow flexibility to use appropriate “policy instruments” for the promotion of economic development.

The EU as a broker?

Still, Brussels can occupy a special role in advancing WTO reform in a way that may persuade Washington to join the cause while getting China to accept important compromises in certain areas. Trump’s vicious attacks on the organization demonstrate the importance he attaches to the institution, and despite his rhetoric, he is very unlikely to leave it.

This gives Brussels a straw to grasp because as far as China’s policies are concerned, both the U.S. and the EU share the same goal of getting China to end its unfair trade practices. If EU diplomats manage to argue their case that to rein in China, the WTO and new rules are needed, they could succeed in pulling their American counterparts to their side – supporting reform rather than destruction.

As for China, the one thing Beijing really fears is “the prospect of possible joint measures” involving the U.S., EU and perhaps Japan. In other words, if China hopes to prevent the WTO from becoming dysfunctional, it’ll have to show goodwill, reach out to Europe and provide some support to European reform proposals.

Indeed, China has cooperated with Brussels and other member states on a reform proposal that included provisions like annual meetings between WTO members and the Appellate Body, and that only matters needed to resolve a dispute must be discussed. The proposal proves that Beijing is able to compromise.

Obstacles remain

A negotiated U.S. deal with China may well bring an end to the current dispute, but it risks dismantling the rule of law on which the global trading system is based. Ultimately, only a strong WTO will stop China from abusing trade rules, clamp down on overcapacity and bring Beijing into line.