The Biden government is in the midst of a review of its predecessor’s record of China, including its trade policies. The verdict will not be positive.
Former President Donald Trump’s tariffs on Chinese imports worth $ 550 billion and Beijing’s commitment to increased purchases of US products under the Phase 1 agreement signed in January 2020 – prime examples of the previous White House’s approach Negotiating trade policy bilaterally, punishing unilaterally – did nothing to change the most problematic aspect of China’s economic conduct: its subsidies to its state-owned companies. By creating unfair competition for US workers, these subsidies continue to jeopardize domestic equity. And by undermining multilateral rules, they weaken the World Trade Organization (WTO), through which the United States has traditionally pursued its interests in the global economy.
However, it would be a mistake for the Biden administration to abandon all of Trump’s trade policy towards China. Instead, the priority should be to revive and strengthen one element of Trump’s trade policy with promises: the trilateral USA-EU-Japan initiative to create new global trade rules.
The trilateral was launched with a joint declaration by the United States, the European Union and Japan following the WTO ministerial conference in Buenos Aires in December 2017. While there is no explicit mention of China, it is clear that it distorts economic behavior that the governments had in their sights.
In the sometimes dry language of trade negotiators, she shared the view that “serious overcapacity in key sectors exacerbated by government-funded and assisted capacity expansion, unfair competition due to large market-distorting subsidies and state-owned companies are serious concerns about the proper functioning of international trade , the creation of innovative technologies and the sustainable growth of the world economy. “They committed themselves to” improve trilateral cooperation in the WTO and, if necessary, in other forums in order to eliminate these and other unfair market distortions and protectionist practices by third countries “.
Since that first meeting, US, EU and Japan trade ministers have met five times, most recently in January 2020 when they issued a communiqué setting out a detailed path. The three sides proposed reforms to existing WTO rules that would add new types of subsidies and increase transparency on illegal subsidies, as well as a commitment to update the definition of a state-owned enterprise. This final effort is vital as the WTO Dispute Settlement System Appellate Body has made decisions more than once based on the current, misunderstanding of state-owned companies that have approved unfair Chinese industrial subsidies.
While the Trilateral’s talk looked promising, it was not followed by action. Instead of taking the next logical step – the introduction of joint economic diplomacy between the US, EU and Japan to update WTO rules – the Trump administration announced the unilateral, mercantilist phase the day after the January 2020 trilateral declaration -1 agreement with China. The back-to-back timing may be random, but it underscores the unproductive preference of the Trump administration to handle trade issues itself. The Trilateral was his flirtation with a cooperative approach to trade policy, nothing more.
The Biden government now has the opportunity to keep the promise made by the Trilateral. It also seems to have the slope. Two weeks after the election, President-elect Joe Biden insisted that the United States only accounts for 25 percent of the world economy: “We need to be reconciled with the other democracies, another 25 percent or more, so that we can set the rules of the road instead of having China and others, determine the results because they are the only game in town. “
This clear statement of its intention to work with allies in China explains the Biden team’s hope that the EU would wait for an opportunity to consult the new government before signing the comprehensive investment agreement they chose with Beijing has the end of December.
The EU-China investment deal, while sub-optimally planned, does include new commitments by China on trade rules, including subsidies and state-owned companies, which can serve as a building block for transatlantic and broader trilateral cooperation. In mid-November 2020, Japan and 14 other Asian countries signed the regional comprehensive economic partnership, which also includes China. While it will lead to greater economic integration among its members, the deal is mainly about tariff reductions, not about setting trade rules.
With China doubling its state-led approach to the economy and the EU and Japan signing their own trade deals with China, it is important for the Biden government to move quickly to advance a new and more effective trilateral agenda that has high priorities. Standard trading rules in favor of democratic, market-oriented economies. There are three immediate steps it should take.
First, US trade officials should work with their counterparts in Brussels and Tokyo to update the January 2020 trilateral declaration, in particular to fill in gaps such as the need for a common definition of state-owned companies and so-called “public entities” under WTO law . They also need to agree on a language that aims to skew Chinese subsidies while upholding the right to their own legitimate subsidies – something that has increased as governments tried to restrict their businesses and workers in the face of the coronavirus pandemic strengthen.
Next, the three sides must agree on a strategy to further develop the trading rules that they agree on. At the very least, it should involve entering into negotiations with one another that set a high bar that other market economies can emulate. Two central questions are whether this agreement should be pursued inside or outside the WTO and whether it should be extended to other like-minded countries from the start. While the ultimate goal is to bring the trilateral agenda into the multilateral framework, an agreement can be more easily reached if it is first negotiated outside the formal structures of the WTO. The same goes for the participants: the deal should be viewed as open to others from the start, but it would go faster if led by the three economies that have four years of experience working together.
Ultimately, the United States, the EU and Japan need to establish an enforcement regime for their trilateral agreement. Given that it can take years to negotiate China’s accession to such new trade rules, the trilateral countries should also consider applying their enforcement provisions to third countries that are not parties to the agreement. This would be a step towards greater constraint in the trading system – but unilateral action by the United States would be preferable.
It is important that a trilateral agreement on subsidy rules would not include new trade liberalization. So, not only would this be in line with the spirit of the Biden administration’s decision to postpone new trade deals until it has invested in the US workforce to compete in a globalized world. Doing so would reinforce that ambition by addressing one of the major causes of injustice in the trading system – the unequal playing field created by China’s economic misconduct.