The disruptive approach of the United States towards international economic relations has changed the way that China and the EU talk to each other about the rules of trade. This is not surprising: international trade is more important to these two mega-economies than to the United States.
They
have already presented joint proposals (jointly with other WTO members but not
the United States) to resolve the Appellate Body dispute in WTO and have held
high-level bilateral discussions on WTO reform since the April 2019 EU-China
Summit.
But how
far can EU-China cooperation help to save multilateral trade? Analysis of the
EU and Chinese priorities for WTO reform suggests that they are convergent but
with a handful of important exceptions.
Political obstacles to closer cooperation on multilateralism, however,
may be too tough to shift.
On the
plus side
There is
striking convergence between the EU and China on procedural issues of WTO reform,
such as the organization of the WTO’s work and, in particular, dispute
settlement. Both sides offer similar solutions: greater transparency and
notification of national economic policies, sanctions for non-compliance with
notification obligations, improvement of the efficiency of WTO committees and
specific measures to re-activate the WTO Appellate Body, which heads up dispute
settlement.
On more
substantive issues, too, China or the EU may be ready support each other’s
ideas. China, for example, wants to tighten WTO disciplines to curb abuse of
the national security exception; this may appeal to the EU, whose motor vehicle
sector is facing the threat of unilateral US tariff increases that invoke
national security. After its experience over Iran sanctions, the EU may also
support China’s proposal for WTO to curb unilateral measures such as economic
sanctions and “secondary sanctions” on the business activities of third-country
nationals or companies. China may offer qualified support to the EU proposal
for the development of new WTO agreements through plurilateral negotiations,
open to all Members and whose results will be applied on an MFN basis, at least
in the areas where China wants to make rapid progress, such as E-commerce
rules.
Even
where there are policy differences between the Chinese and EU approach,
compromise seems possible in some areas. A first example would be Special and
Differentiated Treatment (SDT) for developing Members. China insists on
safeguarding SDT rights as a general rule, including for new WTO agreements,
but also proposes to “encourage developing Members to assume obligations
commensurate with their level of development and economic capability”.
This
goes some way towards addressing the EU’s objective of limiting SDT rights to
countries that really need them, although the EU would prefer an automatic
slimming-down of SDT rights as beneficiary economies develop. WTO rules on
trade-related aspects of E-commerce may be another example. Although China
focuses on the need to protect the interests of developing Members and the
public interest (i.e., the right of states to limit data flows), while the EU
seeks to remove unjustified barriers to trade by electronic means, both sides
see E-commerce as a priority area for trade and economic growth where the WTO
needs to demonstrate its relevance. This may make compromise easier.
On the
minus side
There
remains a hard core of issues on which the two sides take fundamentally
different positions, centered on the development of further WTO rules on:
the
treatment of state-owned enterprises (SOE’s) in international trade and
investment;
subsidies;
barriers
to services trade and investment, including forced technology transfer.
These
issues touch on the most politically sensitive issues in EU-China economic
relations.
Differences
between the two sides are most stark regarding the treatment of SOE’s. According
to the EU, SOE’s often benefit from large-scale and targeted government support
and constitute a significant risk for global trade as they may distort
competition in both export and domestic markets. The EU aims not only at
transparency of subsidies granted to SOE’s but also subsidies granted by them
where they perform a government function or promote government policy.
Extending
WTO rules to “better capture” SOE’s is therefore a key component of rebalancing
the international trade system and levelling the playing field. For China, by
contrast, WTO reform should remove any discrimination between enterprises on
the basis of their ownership and allow free competition between enterprises of
different ownerships, respecting the diversity of national development models.
China’s starting position (
“in discussion on subsidy disciplines, no special
or discriminatory disciplines should be instituted on SOE’s in the name of WTO
reform”) is a solid roadblock.
On other
aspects of WTO rules on subsidies, too, the EU and China seem to be
diametrically opposed. The EU wants to extend restriction of subsidies under
WTO rules, by subjecting subsidies that are currently permissible (so-called
“non-actionable” subsidies) to stricter control in order to prevent the creation
of overcapacity. It also proposes to
improve notification of subsidies by WTO members.
China,
on the other hand, proposes that the coverage of WTO provisions on
non-actionable subsidies should be expanded (i.e., more subsidies should be
tolerated than today) and argues that the special situation of developing
Members should always be taken into account.
Regarding
rules to address barriers to services trade and investment, including forced
technology transfer, the EU is calling for a major expansion of WTO rules on
investment. These should cover all sectors and address restrictive measures
such as prohibitions or limitations on foreign ownership (joint venture
requirements or foreign equity limitations), discretionary administrative
processes and licensing restrictions, poor enforcement of trade secrets and
failure to assure national treatment.
China
has no proposals for WTO action on these issues, although it has announced
further liberalization of its own services sector and inward foreign direct investment
policy to come into effect in 2020. While these measures may go in the same
direction as the EU proposes for WTO rules the EU will insist on the need to
agree on enforceable multilateral disciplines.
To sum
up, the priorities of the EU and China for WTO reform contain important areas
of convergence, other areas of possible compromise and a third group of more
intractable issues. The key advantage of any EU-China agreement on WTO reform,
even if restricted to the first two areas, is that as a compromise promoted by
two very large developed and developing economies it might provide a useful
starting point for reaching a wider consensus within WTO. Such a limited
agreement, however, would not address the most important shortcomings of the
current WTO system for developed countries, such as inadequate multilateral
disciplines on subsidies, direct investment and technology transfer, that have
been highlighted by China’s rise.
Political
obstacles
There
remain political constraints on the margin of manoeuvre of both the EU and
China in talks about the future of WTO.
Even if
the EU believes that US disruption of WTO will continue for some years,
especially if President Trump is re-elected, it will be cautious about
disregarding the US position on WTO reform entirely. Given the size and
diversity of transatlantic trade and investment links, and the significant
obstacles to achieving comparable trans-Eurasian links, there is no question of
the EU choosing China as its preferred partner in the immediate future.
China
still has to prove that it is a sincere multilateralist in the eyes of the EU
and other international partners. It has
disappointed many of them by its failure to open up its market further since
its accession to WTO nearly twenty years ago. Economic reform in China appears
to have slowed down under President Xi. Serious WTO reform implies that China
is ready to accept that certain aspects of its economic model should be subject
to international scrutiny and constraint. There is little evidence that it is
ready to do so.
*** By
John Farnell, EU-Asia Centre: The EU-Asia Centre aims to fill a void and
establish itself as the leading, Brussels-based research policy think tank on
EU-Asia relations, covering developments in Asia and relations between the EU
and Asia.
Website:
http://eu-asiacentre.eu