The US – and other relatively market-oriented economies (such as the EU and Japan) – would probably start from the premise that the status quo is not an option. That has failed and something needs to change. China and no doubt some others might, on the other hand, consider that they paid a high price to join the WTO in its current form and that the goalposts cannot be moved now. If the US forms a coalition in the WTO to try to constrain China with a new set of rules, is that likely to be a formula for a new modus vivendi or will it plunge the multilateral trading system into another crisis?
A key issue, because it is at the heart of China’s state-led economic model, is the question of industrial subsidies. In January 2020, a joint statement issued by the trade ministers of the US, EU and Japan called for WTO rules to be strengthened. They canvassed several propositions, including the addition of new types of prohibited subsidies, measures to address distortions of industrial capacity, a reversal of the burden of proof so that subsidizing countries would have to demonstrate that there are no serious negative trade effects, and reinterpretation of what constitutes a “public body” in WTO law.
This trilateral initiative was to have been broadened into a wider coalition and launched at, or in the margins of, the WTO during the course of last year. The pandemic and the strong preference of the Trump administration for unilateral tariff measures (not only with respect to China but also US allies) inhibited early action, however. The plan remains on the books and awaits US Trade Representative-designate Katherine Tai’s attention.
China has seen this initiative coming for some time and has been sending negative signals. US sallies in the WTO during 2020, backed by Japan and Brazil, on the importance of market-oriented conditions to the world trading system have been batted away as “scene-setting” for the expected push on subsidies. It has been pointed out that there are no intrinsic WTO rules requiring market orientation and that developing countries should remain free to adopt whatever development model they prefer. The adoption in many democracies of massive subsidy programs to cope with the economic fallout of the pandemic has also not gone unnoticed.
Some eminent trade economists think that existing WTO rules on subsidies are no longer fit for purpose because they emphasize mechanical modalities of intervention rather than reflect policy objectives. Piecemeal efforts in some preferential trade agreements, or through the trilateral initiative, might be a basis on which to build but are too narrow in focus. Geopolitical and economic tensions call for international cooperation, especially among trade superpowers such as the US, EU and China, to revise and develop rules to guide both the use of domestic subsidies and responses by governments to the cross-border competition spillover effects. As a first step, they should cooperate in compiling and sharing information and analysis of subsidies with a view to resolving conflicts.
Sensible as this prescription is, questions remain as to whether the main protagonists are indeed prepared to cooperate in such an exercise, and whether they have the necessary political headroom and patience.