Are the US and EU losing their faith in global trade rules?



Stephen Olson | Hinrich Foundation

While neither the WTO nor multilateral trade rules will disappear, the US and EU are becoming more proactive in asserting their capacity to take unilateral actions in cases where the global system comes up short. Despite the risks of abuses, expect these actions to continue and intensify in the years to come.

After 25 years of putting their faith in multilateral trade governance, both the US and EU are increasingly taking matters into their own hands. The US Trade Representative, Katherine Tai, has reported to Congress that multilateral trade rules in the World Trade Organization (WTO) have proven insufficient to adequately address China’s unfair trade practices and lack of compliance. She is calling for new, unilateral US trade tools to get the job done.

Across the Atlantic in Brussels, the EU has recognized that existing mechanisms in the WTO cannot respond effectively to increasing cases of economic coercion. The EU has proposed and is currently considering an Anti-Coercion Instrument (ACI), which would give the EU unilateral authority to take action against trade partners that apply various forms of economic coercion to get their way.

What is going on? The US and its European partners have historically been stalwart advocates for the principle of multilateral trade governance, first in the General Agreement on Tariffs and Trade (GATT) and then through its successor organization, the WTO. The change in course to more unilateral approaches can be attributed to a growing recognition that our existing global trade architecture is simply not capable of addressing a wide range of predatory or otherwise unfair trade practices that are being increasingly employed. In many instances, this means China, but China is by no means the only offender.

What went wrong?

When the WTO came into being more than a quarter-century ago, the expectation was that the forum and its robust dispute settlement mechanism would be up to the task of addressing any such practices or problems. Individual members would have little need for recourse to unilateral trade tools. There was a new sheriff in town, and the WTO would ensure peace and good order.

Why hasn’t it worked out this way? For starters, the WTO rule book has been essentially frozen in time, with no major updates since its inception in 1995. The world of business and trade has been fundamentally transformed in ways too numerous to count since then, but our trade rules are a polaroid snapshot of a bygone era.

The existing rule book, for example, was put into place long before China became an economic and trade powerhouse through its system of state-directed capitalism. Current rules are based on the assumption that all major trading nations would be market driven economies. There are few if any provisions which can adequately cope with the unique distortions created by non-market economies.

It has also become clear that we overestimated both our ability and our willingness to adequately enforce trade rules and trade agreements. Questions about China’s compliance with the terms of its WTO accession agreement are not new. They have been raised since shortly after its admission to the WTO in 2001 and the expiration of the initial 5-year transition period. And yet, more than 15 years later, the system and the individual members which comprise the system have failed to compel China’s compliance on a variety of issues, ranging from notification of subsidies to market access and non-tariff barriers. This reflects both intuitional shortcomings in the dispute mechanism itself – cases can drag on without definitive resolution – as well as a lack of sufficient willpower to forcefully and effectively press the case.

New trade tools for a new era

Patience with multilateral channels is now running thin and different approaches are needed. In calling for new trade tools, USTR’s report to Congress stated the case succinctly:

“WTO rules do not, and cannot, effectively discipline many of China’s most harmful policies and practices. There is a growing awareness that it may be necessary to pursue some solutions outside the WTO in order to avoid the severe harm that will likely continue to result from China’s state-led, non-market economic and trade regime. It is also apparent that existing trade tools need to be strengthened, and new trade tools need to be forged.”

It is unclear exactly what these new tools might look like. However, it’s a safe bet that they will vest greater discretionary authority in the executive branch to determine when commitments have not been implemented or predatory practices have been employed. Presumably, if subsequent consultations failed to yield progress, there would be a “stick” of some kind, be it tariffs or other forms of restrictions, barriers, or sanctions.

Unlike existing US trade remedy laws, which were crafted for a previous generation of trade abuses, any new tools would be tailored more directly to current day realities. According to the USTR report, “China pursues unfair policies and practices that were not contemplated when many of the U.S. trade statutes were drafted decades ago, and we are therefore exploring ways in which to update our trade tools to counter them.” As a practical matter, that means they would be designed to address the distortions created by non-market economies.

The EU gets serious about coercion

The EU ACI is intended to deter trade partners from blocking or restricting trade or investment in order to coerce a policy change in the EU. In the words of the EU Executive Vice-President and Commissioner for Trade:

“At a time of rising geopolitical tensions, trade is increasingly being weaponised and the EU and its Member States becoming targets of economic intimidation. We need the proper tools to respond.”

The ACI will empower the EU, “to apply trade, investment or other restrictions towards any non-EU country unduly interfering in the policy choices of the EU or its Member States.”

Although no country is explicitly referenced, it would be hard not to notice that China engages in many of the practices the instrument purports to address. China’s efforts to economically coerce Australia for suggesting an inquiry into the origins of Covid-19 or trade restrictions applied to Lithuania over its relations with Taiwan are only two recent examples.

A sign of things to come?

At the founding of the modern global trade system in 1948, and even more so with the establishment of the WTO, the international community envisioned a single set of global trade rules enforced by an effective multilateral dispute settlement system. That simply hasn’t happened.

The US and EU wholeheartedly placed their faith in global trade governance. They now recognize the need for a somewhat different approach. Although neither the WTO nor multilateral trade rules will disappear, the US and EU are becoming more proactive in asserting their individual prerogative and their capacity to take unilateral actions in cases where the global system comes up short. In many instances, this will be exactly what is needed and should be welcomed. There remains the danger that the ability and willingness to take self-judging unilateral actions could lead to abuses. Despite the risks, expect these actions to continue and intensify in the years to come. 

Stephen Olson is a Senior Research Fellow with the Hinrich Foundation. Mr. Olson began his career in Washington DC as an international negotiator and served on the US negotiating team for the NAFTA negotiations.

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