The US, Japan and Europe used last week’s trade policy review to better coordinate a shared approach to reforming the organization.
Behind their effort, the big question is how to deal with China?
By Jamil Chade, with Philippe Mottaz
Thursday, October 28, 2021
In September 1999, on his very first day on the job, Mike Moore, the newly elected D-G of the World Trade Organization (WTO) made a pitch before the assembled Geneva press corps: “Every member of the WTO, and outside, wants China to sit at the table as she should. China is a superpower,” he enthused. Two years later, as China had all but secured its membership—after more than thirteen years of arduous negotiations, greatly helped by the US which had granted the country its “most-favored-nation” status—the New-Zealander wrote in what was then the International Herald Tribune, “When historians reflect on China's entry into the WTO they will rate this as one of the most significant events of the 21st century.” He was indeed right. But the consequences of that event turned out to be quite different from what he—and Washington—had expected.
Five years after the creation, in 1994, of the WTO—an organization built on the promise that it would raise global “standards of living” while “allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development”—the hope was that by welcoming China into the global trading system, Beijing would liberalize its economy and eventually become a more democratic country. Over the last twenty years, China has become the second largest economy in the world, and has benefited hugely from its membership of the WTO. However, it has achieved its success by following its own rules.
China’s economic policy and industrial strategy remain at odds with the West’s idea of a level-playing field. From a lack of transparency, to a weak IP protection system, to still claiming special treatment reserved for emerging economies to favor its mostly state-owned enterprises, to using forced labor, China, its critics argue, is engaging in practices that are inconsistent with WTO’s principles.
As for the WTO itself, it has not been able to reach a significant trade agreement in many years, its dispute settlement mechanism is crippled, and it faces a serious legitimacy crisis.
TIME TO ACT
And so, with an important ministerial meeting—the so called 12th Ministerial Conference (MC12)—coming up in a few weeks’ time, the US, Japan, Europe and their allies and partners have decided that the moment is ripe to better coordinate their respective positions and stand up, once again, to what they consider China’s objectionable practices, with the eventual aim of establishing a working agenda for a comprehensive reform of the organization. “This is the result of several consultations between the US, Japan, and Europe,” a Western diplomat told The Geneva Observer.
“This is as close as possible to what one could call a ‘refoundation’ of the WTO,” one of his Latin American colleagues added. The countries have used China’s trade policy review (TPR) to restate their objections and offer an outline of what a “new WTO” should look like. (The TPR is a WTO mechanism to promote transparency, allowing trade partners to question each other’s policies.)
The US stressed that when China joined the WTO, its members expected that it would result in the permanent dismantling of “existing Chinese policies and practices that were incompatible with an international trading system.” Instead, according to Washington, China has used its membership to become the WTO’s largest trader, while doubling down on its state-led, non-market approach to trade—to the detriment of workers and businesses in the United States and other countries.
“China uses these measures to secure dominance in global markets, which undermines US economic interests,” the US representative stated, stressing that rules would be needed to tackle market access limitations, investment restrictions, and massive subsidies that lead to severe and persistent excess capacity (in steel, for example).
There is also a tacit agreement amongst developed countries that the WTO provisions that allow China to continue to claim the status of an emerging economy should no longer be applicable. Currently, WTO membership is basically divided between developing and developed economies, with 123 WTO members (including China) in the first category, and 41 in the second—a situation at odds with reality, given the size of the Chinese (or Indian, for that matter) economy. China should relinquish its access to special and differential treatment, the Australian representative said, adding that since “its last trade policy review in 2018, China has increasingly tested global trade rules and norms by engaging in practices that are inconsistent with WTO commitments.”
Against the backdrop of heightened tensions between the two countries following the announcement of the new AUKUS security pact between the US, Australia and the UK, Canberra accused Beijing of having increasingly “implemented trade-disruptive measures, targeting a wide range of Australian products, including arbitrary border testing and inspection, unwarranted delays in listing and readiness to export establishments, issuing import licenses and other restrictions, the imposition of unjustified anti-dumping and countervailing duties, and others.”
The practice described by Australia amounts to what is now referred to as “economic coercion.” The US denounced it, explaining that when another WTO member speaks out against or otherwise offends China, Beijing increasingly uses its economic clout to exert pressure on that country.
A DEMAND FOR MORE TRANSPARENCY
The renewed push for transparency was also evident in many of the statements made during China’s TPR. In a state-controlled economy, the lines of ownership are blurred, if not outright inscrutable. A fair trading system can only properly function if transparent; currently it is not. Switzerland joins the chorus of voices for the push: “Transparency is a fundamental principle of WTO rules, as it ensures the predictability of trading, particularly in the context of state-owned enterprises. For such enterprises, which are very numerous and important in the Chinese economy, China should make sure that market-oriented principles are followed.”
It also urged China to live up to WTO notification requirements, especially on key topics such as subsidies and quantitative restrictions (the practice of limiting the quantity of goods that can be imported or exported).
Japan, meanwhile, raised concerns regarding China’s lack of transparency when notifying trade-related measures. It requested that Beijing address issues that impact the market—such as trade-distorting measures and state-owned enterprises—and the lack of clarity in laws and regulations in this respect.
WILL THE DEADLOCK OVER THE APPELLATE BODY BE BROKEN
One of the most pressing issues remains the deadlock over the WTO’s Appellate Body (WTOAB). The Trump administration blocked the selection process for filling vacancies on the WTOAB, WTO’s supreme arbiter for ruling on trade disputes. It was widely expected that in its stated objective to reengage with the multilateral system, the Biden administration would reverse that decision, a move supported by the European countries. Yet it did not.
Several successive US administrations have had issues with the Appellate Body. In her speech at the Graduate Institute, Katherine Tai laid out Washington’s rationale by explaining that WTO members have increasingly gotten around “the hard part of diplomacy and negotiations by securing new rules through litigation. (…) Dispute settlement was never intended to supplant negotiations,” she argued. “It is essential to bring vitality back to the WTO negotiating function,” she claimed, adding that the reform of these two core WTO pillars is intimately linked.
Some WTO watchers have remarked that by extending the Appellate Body’s paralysis, the US administration is ensuring that Beijing can’t use it. Others also speculate that the US ambivalence towards the Appellate Body might be explained by Washington’s reluctance to have legally binding decisions rendered by a multilateral instrument. “The Biden administration may prefer the bilateral way for settling some its commercial disputes, particularly with China,” a long-time WTO watcher told The G|O.
The discussion to launch a broad reform of the WTO, and what should be included in the roadmap, will be on the agenda of the next ministerial conference which will convene in Geneva at the end of November. It will offer a good indications of the ability of the organization to show that it can deliver on issues such as a long-awaited agreement on fisheries or move forward on issues related to trade and health.
WTO’s Director-General, Dr. Ngozi herself has recently expressed a growing frustrations about the trade-body inertia, even, according to Bloomberg, floating the idea of her resignation.
Dr. Ngozi is the head of a Secretariat whose role is to serve a membership that for the past twenty years has really struggled to agree on what to order for lunch, let alone on how the rules of international commerce should evolve.
“I don’t think anybody could blame her for her frustrations,” a former trade diplomat told The G|O. “I don’t think she was expecting to single-handedly unlock some of the huge issues, the twenty-year-old issues like agricultural subsidies. But to hear that we now have some troubling news coming from the fisheries negotiations, that would be really frustrating. One also has to be realistic: she is not the Queen of Trade. She’s just the head of a Secretariat, whose role is to serve a membership that for the past twenty years has really struggled to agree on what to order for lunch, let alone on how the rules of international commerce should evolve. And on the broader question of China, there is a legitimate conversation to be had in the WTO about China’s compliance with its rules as they exist today. But in my view, it is highly unlikely that you could change these rules unless China and others agree to it. China is simply far, far too large and powerful to be strong-armed into agreeing to rules it doesn’t feel comfortable with.”