Can a trade war correct China’s economic approach?

THE European Union, Japan and the US met in Paris last month as part of the trilateral talks launched in 2017 to address trade distorting practices and how to strengthen the existing international trade rules, writes Antonella Teodoro.

The EU and Japan, who do not want to be seen as unwanted victims of the US-China trade war, aimed to persuade the US to create alliances. Rather than punishing China with tariffs or imposing bans on countries that start business discussion with Huawei, the EU and Japan are proposing to President Donald Trump to form a coalition to force China to reform its trade model, which is commonly recognised as distorting patterns of world trade.

The EU and Japan also have a strong interest in persuading Mr Trump to revisit his approach towards international trade policies, both having been hit by tariffs imposed by the US on their exports of steel and aluminium, with the US leader now threatening to extend this measure to the automotive sector.

The EU and Japan have also been hit indirectly by the US-China trade war: European carmakers in the US have seen their exports to China impacted and the Japanese companies that rely on China to assemble their final products for the US market have also been affected.

Unsurprisingly, the talks were filled “with common concerns, but not much agreement over what to do about them” as Lourdes Catrain, a partner in the trade practice at the law firm Hogan Lovells in Brussels, told the Financial Times.

To complicate the matter on how to make China change its trade model is the increasing frustration among the members of the World Trade Organisation with its three main functions: monitoring member states’ trade policies, providing a forum to negotiate new trade agreements and arbitrating trade disputes.

The major failures of the WTO are recognised as the following:

• WTO’s member states, including major trading powers such as China and India and some of the richest countries in the world, such as South Korea, Saudi Arabia, etc., inappropriately claim the status of “developing country”, taking advantage of certain benefits not granted to advanced economies;

• The difficulty of WTO members reaching a full consensus, which is required to agree new agreements, new obligations and changes – with some members (including China), taking advantage of this limitation and succeeding in maintaining discriminatory barriers against imports, in supporting state-owned enterprises, and not reporting subsidies accurately;

• The WTO dispute settlement system, which is the main process to resolve trade conflicts between members (Appellate Body), is criticised for having exceeded its original mandate in decision-making and arbitration power.

In the last few years, various proposals have been put forward including recommendations for improving transparency and notifications to the WTO, stronger punitive measures against repetitive or intentional non-compliance by member states, and updates to the rules on self-classification of developing country status.

Should reform proposals fail to address member states’ requirements, one or more major economies could decide to leave the WTO, as Mr Trump has already threatened.

Following a collapse of the WTO, bilateral and regional trade agreements could emerge, which might be better suited to some countries’ needs.

However, an acrimonious ending of the WTO could cause commercial tensions and generate lack of trust between countries which could fall in the Hobbesian trap of pre-emptive strikes.

Countries could decide they want to become self-sufficient and isolated, rejecting engagement and integration. This would then lead to the return of more trade barriers, loss of certainty for multinational companies and organizations, and the absence of a forum to facilitate and resolve trade disputes.

All of this would come at a cost to the global economy and to global growth and economic stability.

Although that first meeting in Paris did not achieve much, it should be seen as a ‘kick-off’ meeting for a constructive series of talks to persuade China to recognise the virtue of ‘fair-trade’ agreements and the need to reform the WTO.

First published on Lloyd's List website June 2019