US-China trade war hawks are right on one count: the WTO is in sore need of reform (just not in the way they imagine)

Rather than seeking to counter export competition from China’s state-owned enterprises – as espoused by the US and some EU nations – the WTO should fundamentally rethink its rules to accommodate different economic systems

Anthony Rowley

Published: 3:00am, 8 Jul 2019

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In US President Donald Trump’s economic world, just about anything goes, it seems, and the attitude towards competitors in international trade is, “if you can't compete, hobble them”.

That is what proposals to counter export competition from China's state-owned enterprises against businesses in the US and other major trading partners amounts to. The World Trade Organisation is being asked to consider new trade rules to penalise the strongest competitors.

What irks Trump, and some of his European counterparts, is not so much the visible subsidies paid to Chinese and other (such as Vietnamese) exporters, but the “hidden” ones seen to accrue to SOEs financed by governments.

Alarmed by the simplistic and destructive Trumpian tactic of levying tariffs as a kind of “Mexican wall” against subsidised imports, Western nations have united behind a call to reform the WTO rule book to deal with trade competition from state economies, and other issues.

“We need a trading system fit for today’s world which means addressing gaps in the international rule book, including areas like agricultural and industrial subsidies, services and e-commerce,” said International Monetary Fund managing director Christine Lagarde at the recent G20 summit in Osaka, Japan, in calling for “accelerated reform” of the WTO.

It is true that WTO rules need overhauling but, before any changes are made to keep Trump and his trade hounds at bay, some very careful thought needs to be given to the fundamental economic issues involved. This might reveal the need for different priorities.

Any country is, or should be, free to choose its own economic system, be it a state-controlled or command economy at one extreme, or a fully marketised and laissez-faire model at the other — or something in between, for example, as many European economies are.

It is only when the products of all economies enter the arena of international trade that questions arise about whether free and fair trade rules are being observed. If an overt subsidy is involved, trade competitors can levy countervailing duties on imports or subsidise their own exports.

Why Trump’s tariffs should not be the WTO’s concern

But things get messy and contentious when implied subsidies to state-owned exporters are opposed by importing countries, such as the US in the case of China. Even if these alleged subsidies are measurable, they represent the price China is prepared to pay to be competitive internationally.

Tariffs on imports punish consumers, who often absorb higher prices rather than go without, especially in a consumption-driven economy such as America. But this argument does not seem to impress US exporters, who often complain about being undercut by China.

Perhaps they should ponder instead whether their economic system really serves the interests of business and the national economy as well as an economy like China's, which takes a more holistic view of allocating production costs and pricing the benefits of trade.

For a glimpse of how Trump’s trade war ends, look at the War of 1812

Probably the best we can hope to see are patch-up remedies applied by the WTO to appease trade hawks, according to Hung Tran, a non-resident senior fellow at the Atlantic Council and former executive managing director at the Institute of International Finance in Washington.

“To address the core problem presented by SOEs (state-owned enterprises), it might be useful to revamp and strengthen WTO provisions for countervailing duties to compensate for subsidies granted to SOEs or specific export industries and products,” he wrote.

The “burden of proof could be shifted from the importing countries to China to show that it has not provided unfair subsidies”, he added. Tran admits such ideas are “drastic” but given “US unilateralism, every trading nation, including China, should be interested in exploring ideas to reform the WTO,” he wrote.

However, that would also dodge the need for a fundamental rethink on how to “accommodate the coexistence of two different economic systems” in the global economy, according to Tran. Trump’s actions may have sparked an overdue debate but they have done nothing to supply answers.

China halts WTO battle over market economy status

A more important issue for the WTO is the implications for global trade of the proliferation of manufacturing supply chains throughout the world. Not least in China's case, these supply chains render methods of export price and tariff calculations almost meaningless.

The simplistic arguments of populist politicians more adept at rabble rousing than constructive thinking seem to be taking hold in global forums such as the G20 and even in multilateral institutions such as the WTO. An intellectual dark age is an attractive prospect only to the benighted.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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