US-China trade war: Is WTO reform the way forward?

Trade policy consultant Stephanie Honey, who travelled to China on a Track II visit in early September, reflects on the escalation of the US-China tariff war and the implications for the multilateral trading system.

OPINION: Trade policy, along with its arcane vocabulary (“tariffs”, “subsidies”, “Section 301”), has traditionally been the domain of geeky types who like nothing more than an all-night debate over the placement of a comma. But we are living in the age of disruption – trade has come out of the shadows into the glare of the global spotlight.

This year’s Track II visit to China took place against a months-long barrage of media stories about the US-China “trade war”.

So it was no surprise to find that the escalating trade dispute dominated discussions. This year has seen a steady ratcheting up of both rhetoric and action from the Trump administration, focused on stamping out “unfair trade”, with China a particular (though by no means the only) target.

We found Chinese colleagues simultaneously fuming at US tariff actions and dismayed about where it might all end.

At the time of our visit, US President Trump’s new tariffs on US$200 billion of Chinese imports were looming (and subsequently came into effect on 24 September), supplementing around US$50 billion of tariffs imposed in July.

“It may be that WTO reform offers a way to seek a path through the current trade impasse and to shore up a multilateral system that has faced strong headwinds for over a decade.”
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While scathing about these “illegal and unjustified” new imposts, Chinese colleagues noted with asperity that China had its own list ready to go (and indeed China has now retaliated, to the tune of US$60 billion of US imports). If US actions went unanswered, they contended, that would in itself undermine the World Trade Organization (WTO). 

A number of commentators noted China had plenty of policy levers at its disposal, to undermine US competitive position in the market. We got no sense that China was in the mood to back down.

President Trump’s critiques of China turn on a complex blend of concerns over industrial policy (notably the ‘Made in China 2025’ programme, aimed at making China the global leader in robotics, AI and other digital technologies, as well as subsidies to state-owned enterprises); intellectual property (allegations that US companies are being forced to share proprietary know-how with Chinese partners); and a general sense of injustice over a purported lack of reciprocity.

But quite what President Trump sees as the end goal is less clear. “It’s not about trade,” was the comment from more than one contact. A couple of people alluded to the risks of the ‘Thucydides trap’ for a rising power – China is on track to surpass the US as the world’s largest economy by 2030.

That left our Chinese colleagues at a loss about how best to navigate towards solutions. If the US ultimately seeks the dismantling of the “socialist market economy with Chinese characteristics”, this would be unacceptable. But, they worried, it was not even evident how China could demonstrate its reform bona fides: China has been progressively liberalising since its 2001 WTO accession, President Xi had earlier this year announced further loosening of rules on foreign investment including in financial services, and had offered to increase imports significantly from the US. But none of this had worked. To the critiques of forced technology transfer, we heard the defence that no Chinese law explicitly required this, but also a grudging acknowledgement that there were issues that merited further examination.

A number of our interlocutors noted with dismay that they would not want to see a trade war degenerate into a financial war (the renminbi has fallen steeply this year – ironically at least in part as a result of the trade war), a new Cold War, or into a fighting war. One commentator noted that if anybody wanted to draw China into a boxing fight, “we will respond with taichi”.

The tariff war’s main casualties have been at home, with pain increasingly being felt by US business, farmers and consumers and a sharp drop in inwards investment. More worryingly, the story is also one of collateral damage, including to non-Chinese suppliers into global value chains, but also potentially for others (including New Zealand agriculture exporters, for example) as global markets become increasingly disrupted by displaced product. The IMF has forecast that the trade war could knock 0.5 percent off global GDP by 2020.

Most of our contacts recognised the value of ongoing engagement with the US, but many were also bemused at how to achieve this meaningfully, given that President Trump had several times countermanded the “deals” struck by his representatives a matter of days later. It appears that at least there is a lively two-way traffic among academics and commentators – underscoring the value of Track II-style programmes – complementing explicit support from Chinese leadership for continued bilateral dialogue.

Global solutions: The WTO path?

As for what this all might mean for the WTO, our contacts shared our sense of anxiety about the implications for a system that has underpinned 70 years of global prosperity.

We heard strong, resolute affirmations of support for and commitment to the WTO in all of our meetings. In fact, it was striking how much more prominent in our discussions were the WTO and other more traditional trade architecture such as FTAs, rather than the Belt and Road Initiative which had dominated similar discussions last year.

It may be that WTO reform offers a way both to seek a path through the current trade impasse and to shore up a multilateral system that has faced strong headwinds for over a decade. WTO reform is actively being discussed in a variable geometry of concerned parties, including by China and the EU (several of our contacts mentioned this hopefully); a trilateral process involving the US, EU and Japan, and a separate process that will be convened by Canada in October of a group of like-minded countries (including New Zealand but not the US or China).

The focus is around how to improve and modernise existing WTO rules, which are now over 20 years old. This could help to clear up ambiguity around subsidy rules (including those being used by China and Chinese SOEs), transparency (including potentially around Chinese practices) and most urgently saving the dispute settlement system (currently also in crisis thanks to US obstructionism – but which ironically will be called on to arbitrate over measures in the trade war, including complaints tabled by both the US and China).

That said, a reform process that looks like it is exclusively targeted at extracting more concessions from China is not likely to play well in Beijing. Chinese colleagues were also quick to point to unfinished business from the WTO Doha Round – including making rules “more fair” for developing countries, and reforming developed-country trade-distorting agriculture subsidies, a salient reminder of which has just been given by President Trump’s US$12 billion aid package to mitigate the impacts of the trade war on US farmers.

So it seems likely that the WTO path will not be an easy one, albeit crucial for all economies. And it is also clear that the tariff-shaped elephant in the room will ultimately have to form part of the truce if a lasting peace is to be found.

Stephanie Honey is a trade policy consultant and associate director of the New Zealand International Business Forum. Honey travelled to China in August as part of an Asia New Zealand Foundation Track II delegation.

– Asia Media Centre

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