This week, trade ministers from around the world were supposed to meet in Geneva to discuss a number of pressing trade issues, including new disciplines to rein in government subsidies in the fishing and agricultural sectors, and to develop a path forward to liberalize trade in areas such as environmental goods and e‑commerce. These meetings are now postponed due to the emergence of the Omicron variant. These face to face meetings are not only important for addressing multilateral issues at the World Trade Organization, but also provide an opportunity for countries to discuss other trade challenges. While trade commentators have been generally skeptical of international efforts to tackle modern trade problems due to the growing tide of protectionism and nationalistic industrial policy, we should not lose all hope. In fact, on one of the most pressing trade issues of the day—how to reconcile China’s place in the world trading system as a largely state‐run economy—there was some headway in trilateral talks between the United States, the European Union and Japan. This is a positive sign.
The trilateral dialogue between the United States, EU and Japan began under the Trump administration to find “ways to strengthen existing WTO rules on industrial subsidies.” The WTO defines a subsidy as measures that involve a “financial contribution” from a “government or public body” that confer a “benefit” on the receiving firm. China’s state‐led economic model has made it particularly difficult to push back against its heavy subsidies because current international rules don’t account for China’s unique form of governance, which is different than other forms of state capitalism. Law professor Mark Wu has labelled China’s model as “China Inc.” and explains it as follows:
What distinguishes China, Inc.? Contradictions pervade the Chinese economy today. While one might think of the economy as state‐dominated, private enterprises drive much of China’s dynamic growth. In addition, economic intervention does not always flow through the state. Alongside the state is the Chinese Communist Party (“Party”), a separate political actor that plays an active role in the management of state‐owned enterprises (“SOEs”). The economy embraces market‐oriented dynamics, yet it is not strictly a free‐market capitalist system. Networked hierarchies and embedded relationships exist among businesses, but not necessarily in the way they operate elsewhere in the world.
Essentially, unlike other state‐capitalist systems, it’s much harder to see how the hand of the government intervenes in various aspects of economic policy. This makes it exceedingly difficult to hold China to account for its unfair trade practices in the area of subsidies. Chad Bown of the Peterson Institute for International Economics and Jennifer Hillman at the Council on Foreign Relations have a detailed paper that outlines the problems with the current multilateral rules, which also spells out the various proposals that have been put forward to reform WTO rules in this space. One of the challenges, of course, is that it is difficult to negotiate new rules with so many voices at the table—the WTO has 164 Members—so other forums can be a useful place to begin dialogue.
Enter the trilateral discussions between the United States, EU and Japan. On November 30th, Katherine Tai, the U.S. Trade Representative, Hagiuda Koichi, Minister of Economy, Trade and Industry of Japan, and Valdis Dombrovskis, Executive Vice President of the European Commission, met virtually to discuss the problem of subsidies reform generally—without mentioning China. However, it’s fairly obvious that these talks are meant to serve as a brainstorming session between the three economies to build agreement on how to address the problem of China’s subsidies, with the intent of later bringing their ideas to the WTO. The Joint Statement released after their most recent meeting identify three specific areas on which they hope to advance dialogue:
1) Identification of problems due to non‐market practices
2) Identification of gaps in existing enforcement tools, and where further work is needed to develop new tools to address such practices, as well as discussing cooperation in utilizing existing tools
3) Identification of areas where further work is needed to develop rules to address such practices
These are all issues that have been identified by a number of trade experts as areas worth building more clarity in order to craft new rules. Furthermore, the fact that the Biden administration has resumed these talks with the EU and Japan is notable, and could open the way to a more concerted approach towards China’s unfair trade practices instead of engaging in tit‐for‐tat tariff battles that do nothing to address the actual problem at hand. It also may provide a way for the Biden administration to move away from the China Phase One deal, which has not been able to address longstanding complaints on China’s trade practices that my colleagues and I have described here, here, and here.
It’s not entirely clear how these discussions will unfold, and what impact the current administration’s own efforts to encourage industrial subsidies here at home will complicate the dialogue. What is important, for the time being, is that the United States is engaging with our allies on this issue, because they are just as impacted by China’s behavior as we are. It is important that the United States not go it alone, not least because having more countries on board that support overall reform efforts could encourage China to accept some difficult changes to its economy, if it intends to remain an active and rule‐abiding country in the global trading system. As my colleagues have catalogued, China’s track record at meeting its existing obligations at the WTO has been as good as any other country, and when brought into litigation, China has generally responded by changing its behavior. Updating WTO rules so that trade practices that currently sit outside of them can be effectively challenged will go a long way to addressing China’s subsidies regime, and also move us towards a more competitive international market.
Inu Manak is a research fellow at the Cato Institute.