EU must not join the US in ripping heart out of global trade system

The US move to form what would be a ‘critical minerals buyers’ club’ goes against the WTO principle of non-discrimination
As an advocate and beneficiary of free trade, the EU has a huge stake in preserving the multilateral trading system

Zhou Xiaoming

Published: 3:30am, 16 Mar 2023

Why you can trust SCMP

Amid disagreements between the United States and the European Union over the Inflation Reduction Act, the Biden administration has come up with a solution of sorts. In a recent interview, US Treasury Secretary Janet Yellen suggested that the US and the EU form “critical minerals free-trade agreements that would enable Europe to qualify as a free trade partner”.

The White House is also reportedly prepared to explore the possibility with Japan and the United Kingdom.

The Biden administration’s move is intended, first of all, to soothe concerns in Europe and its allies in Asia. Some have complained that the new law discriminates against their companies in violation of global rules and have called for the EU to take the US to the World Trade Organization.

The act provides that for electric vehicles to be eligible for the full tax credit, a portion of the minerals for making the batteries that power them must come from countries that have free-trade agreements with the US. Concluding narrowly focused trade pacts on critical minerals would, the White House hopes, qualify firms from these countries for the subsidies under the plan.

The other issue that the Biden administration wants to solve with the proposal is to create a “critical minerals buyers’ club” with allies that revolves around the US.

For some time now, the White House has been on a quest to restructure the global supply chains in chosen sectors in a way that best serves US interests. The new push is part of Washington’s effort to shift global supply chains away from China.

03:29

US President Joe Biden vows China “will not win this race” amid electric vehicle rivalry

The proposal looks like a good deal for Washington, but the same thing can hardly be said for the multilateral trading system and the EU. WTO members are free to conclude trade pacts. However, for these pacts to qualify as free-trade agreements, strict conditions have to be met.

According to Article XXIV of the General Agreement on Tariffs and Trade, an annex to the WTO Agreements, “a free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories”.

The key words are “substantially all the trade”. As Inu Manak, fellow at the Council on Foreign Relations, argues, “sectoral agreements – such as that proposed by Yellen on critical minerals – do not count as a free trade area”. Pushing narrowly focused trade agreements as free-trade agreements amounts to selling horse meat as beef steak.

Biden’s move violates the cardinal WTO principle of non-discrimination. The principle obliges its members to treat each other equally. Whatever a WTO member offers to one or more members, favourable or otherwise, it should do for all other members.

A member should not discriminate between its trading partners. In the absence of a free-trade agreement, making its subsidies available only to firms from the countries that have a free-trade agreement with the US discriminates against other members.

This could set in motion a process of dismantling the multilateral trading system by spurring other members to follow it. Smaller trade deals could soon mushroom and dominate the international trade scene. Such a trend could lead to the breakdown of the multilateral trading system.

World Bank and bodies like it need reform, but still play critical role

Moreover, giving favours to some members but not others is the surest way to create resentment among the members discriminated against. In turn, this would create division among members and lead to the fracturing of the organisation.

By bringing the EU on board, the Biden administration is making it an accomplice in dismantling the WTO. Will the EU go along with Washington’s aspirations?

The EU sees itself as an advocate of free trade and multilateralism. It would find it difficult to justify joining the US if it cares about its reputation. Without making changes to the Inflation Reduction Act, what the EU sees as a protectionist trade policy cannot morph into a pact in line with WTO rules.

The fact that the EU will benefit from the US proposal will not change the nature of the legislation. Protectionist trade policy will be so regardless of the EU’s participation. There will surely be questions around the interests of the other 160 or so WTO members who are excluded from the proposal.

US President Joe Biden (let) speaks to French President Emmanuel Macron while they make a toast at a state dinner at the White House in Washington on December 1, 2022. Macron and other European leaders have expressed concerns over Biden’s Inflation Reduction Act and its potential effects on European businesses. Photo: Reuters

More importantly, the EU has a huge stake in preserving the multilateral trading system. It has benefited enormously from the WTO. Its sustained prosperity hinges on a robust multilateral trading system that provides a stable and predictable environment. Joining the White House’s pact would be akin to crippling the EU itself and dimming its future economic prospects.

The US has time and again shown its readiness to sacrifice the multilateral trading system to achieve its political or geopolitical objectives. It paralysed the WTO’s appellate body in 2019 and it has repeatedly refused, on national security grounds, to comply with unfavourable rulings by the WTO panels and appealed them. Its latest move represents a stab at the very heart of the WTO.

All this indicates that the White House is determined to take the world back to the rule of the jungle despite its professed commitment to the WTO. The question is whether the EU – as well as other US allies – understand on which side their bread is buttered.

Zhou Xiaoming is a senior fellow at the Centre for China and Globalisation in Beijing and a former deputy representative of China’s Permanent Mission to the United Nations Office in Geneva