Can The EU And China Improve The Multilateral Trade System Without The US? – Analysis

By John Farnell

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 organisation 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, centred 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 liberalisation 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.

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