More than six months since its outbreak, there is no indication of a let up in the trade war. There is a glimmer of hope that a meeting on the sidelines of the G20 Summit at Buenos Aires between president Donald Trump of the United States and president Xi Jinping of the People’s Republic of China, on November 30, 2018, may lead to a truce. However, the harsh words exchanged between the two sides during the recently concluded APEC Summit at Port Moresby have dimmed the prospects.
And yet, given the stakes involved, it is unbelievable that world leaders would allow the opportunity to pass by without at least making a beginning to resolve the formidable challenge that confronts them. If no agreement is reached, the rules-based multilateral trading system will be in tatters. President Trump has repeatedly professed his distaste for multilateral agreements and preference for bilateral ones. In a world in which there are only bilateral trade agreements, world trade will be guided unfairly by the economic and military strength of partners and not by multilaterally agreed rules.
Expecting anything more than making a beginning will be overly optimistic. There are three issues between the two main protagonists: Forced transfer of technology, industrial subsidies and state-owned enterprises (SOEs). Many of the issues that the US Trade Representative (USTR) has raised on the transfer of technology in its investigation under Section 301 of the US Trade Act, 1974, are not based on the WTO Agreement. For instance, in its findings in Section 301 investigations, published on March 22, 2018, the USTR has found fault with the Chinese practice of inducing transfer of technology from foreign countries by means of joint venture requirements or foreign equity limitations. Similarly, it has deplored the practice of acquisition of foreign companies for transferring technology to domestic companies.
The US is well within its rights to seek to protect its rights and interests on transfer of technology owned by its citizens and corporates, but the fact remains that these practices are widespread, and there are no extant rules in the WTO Agreement that specifically address these. We know that the US concerns are shared by the EU and Japan, and the three have had trilateral meetings to discuss the subject. In fact, in the context of the discussions for possible reform of the WTO Agreement, the EU has circulated a concept paper in which it has called for developing disciplines on transfer of technology. But, in order to secure its objective of persuading China to desist from these practices, the proper course is for the US and its allies to first engage China in negotiations to develop norms and disciplines, for which the EU concept paper can be a good starting point. What we need as the next step is an international accord on the subject, before sovereign countries can be asked to discontinue their policies and practices.
It is true that bilateral contacts have been ongoing between the two countries at the level of the US treasury secretary and president Trump has tweeted favourably on the reported offers from China. But the current status of negotiations between the two nations is under wraps. Going by the bitter exchanges at the APEC Summit, it does not look as if an agreement is imminent. The first task that needs to be accomplished by the US and its allies at Buenos Aires is to obtain a commitment from China for constructive engagement in the negotiation of an agreement that imposes disciplines on inducing transfer of technology.
There are a number of other issues on which major trading nations are in conflict. Some of these involve developing nations and include old issues such as the unfinished Doha Development Agenda and new issues such as e-commerce. However, for economy of space, we deal only with those on which war drums are becoming louder. The US and its allies have called for stronger rules to govern industrial subsidies and state-owned enterprises. These aspects will also involve detailed rule making and the first attempt here, too, should be to obtain an agreement at Buenos Aires to address the subject within a fixed time frame. The WTO Agreement on Subsidies and Countervailing Measures (ASCM) already contains a number of provisions that have a bearing on industrial subsidies, and which could be elaborated in the course of a new exercise to develop disciplines.
There were some significant ASCM provisions relating to subsidies to cover operating losses and direct forgiveness of government debt that had a limited life and lapsed at the end of five years of the entry into force of the WTO Agreement. These could be reviewed. On state-owned enterprises, the Trans Pacific Partnership (TPP) and its current incarnation, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), seek to define SOEs and ensure that they do not hamper the functioning of enterprises. Although these are not new areas for developing international norms, reaching an agreement on specific disciplines is not going to be easy.
The issues listed above have been raised by the US in the context of its confrontation with China, to some extent with the support of the EU and Japan. But the current trade crisis is not a matter only between the US and China. There are two serious issues on which almost all major trading nations are ranged against the US. The first is the US intransigence in not allowing the appointment of members to vacancies in the Appellate Body (AB) of the WTO. The US has a number of concerns regarding the functioning of the AB, including the inability of the AB to adhere to the 90-day deadline stipulated in the rules for it to submit the report. If the vacancies are not filled in, the AB is likely to become non-functional in a year, and with it, the dispute settlement function of the WTO as well.
The second is the use by the US of the national security exception in the WTO Agreement to impose restrictions on imports of steel and aluminium. Section 232 of the US Trade Expansion Act of 1962 authorises the president to impose restrictions on imports that threaten national security. Predictably, the US trading partners have taken retaliatory action and raised disputes in the WTO against the US action. The US, too, has raised disputes against the WTO members that have taken retaliatory action, and warned that it would exit the WTO if the verdict goes against it. It argues that the WTO member concerned has to be the sole judge of whether an action is justified on security considerations, and the matter cannot be adjudicated under the dispute resolution machinery of the WTO. The stand-off on Section 232 tariffs has put the WTO members on the horns of a dilemma. If the verdict goes against the US, the WTO is likely to lose the membership of the world’s largest economy. On the other hand, if the US wins, the gates will be open for any WTO member to adopt virtually any trade restrictive measures, claiming protection of essential security interests and then take the stand that only the member taking the action can determine its security interests. The US has already given notice that it could take further action under Section 232 and restrict worldwide imports of automobiles and auto parts to protect its essential security interests.
While we suggest that, at the Buenos Aires G20 meeting, a beginning should be made to work towards a resolution of some elements of the trade crisis, world trade today is beset with several issues, some of which may defy immediate solution. Circumstances seem to point towards a situation in which things could get worse before they start getting better.
(Author is Professor at ICRIER)