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U.S., EU, Japan Push for Pact to Rein in China's State Subsidies

Date: January 14, 2020
Source: Bloomberg

The U.S., EU and Japan are pushing for an agreement on measures to curb state-support of industries with the goal of eventually limiting how much China backs its private companies, according to people familiar with the negotiations.

The move on industrial subsidies is expected to top the agenda at meetings between trade ministers from the three economies in Paris this week. It’s part of an effort to modernize global trade rules that the U.S. and others claim have failed to address China’s rise as a global economic power.

If the talks advance, people close to the discussions say, they would become the most significant attempt to rewrite WTO rules since the ultimately unsuccessful Doha Round of trade negotiations was launched in 2001.

U.S. Trade Representative Robert Lighthizer is due to meet his European Union counterpart, Cecilia Malmstrom, and Japan’s Hiroshige Seko on the sidelines of an OECD meeting Thursday. People close to the negotiations caution that the three have not yet fully agreed on how to proceed or on when and whether to include China in the discussions.

But they have agreed to begin opening the discussions to other World Trade Organization members with Australia, Canada, Norway and Taiwan, with all said to be interested.

A deal on industrial subsidies would provide a rare example of U.S.-led trade collaboration in an administration that has largely relied on punitive tariffs to against America’s allies and foes alike. President Donald Trump is threatening to put tariffs on all Chinese imports and is considering duties on automobile imports in a move that could provoke retaliation from the EU and Japan.

The industrial-subsidy measure that’s been hashed out between the U.S., Japan and EU over the past 17 months seeks to restrict the market-distorting behavior of state-owned enterprises and confront harmful subsidy practices, including low-interest loans by state-owned banks. It also would tackle unfair government investments and subsidies for so-called “zombie enterprises” that would not exist without government support.

The goal, according to people close to the discussions, is to pursue a negotiation among a small group of nations that might eventually be opened to the WTO’s broader membership. Such “plurilateral” negotiations have become common at the WTO in recent years and are seen by some members as a way around the institution’s cumbersome negotiating rules, which require consensus among all 164 members.

Industrial subsidies can take on many forms ranging from cheap or free electricity given to factories by local governments, to tax credits and access to cheap capital. They have been one of the most contentious areas of trade law and have been at the center of some of the longest running battles at the WTO, such as the EU and U.S.’s spat over the various forms of government aid given to Airbus and Boeing.

Wide Impact

An agreement on industrial subsidies, though it could still take years to negotiate, would be consequential. According to researchers at the Global Trade Alert, which tracks subsidies around the world, roughly 64 percent of global exports have to compete with subsidized rivals. In 2017 that trade would have been worth $11.3 trillion.

About 17 percent of trade around the world has been hit by tariff increases as a result of tariff wars of the past year.

“If the Trump administration hit all Chinese exports with tariffs and China retaliated in kind, then the scale of global trade facing subsidies would still be larger,” said Simon Evenett, who oversees the Global Trade Alert team, which documents subsidies and other trade distortions from the University of St. Gallen in Switzerland.

The U.S., EU and Japan published a scoping paper a year ago that called for “clarified and improved” WTO rules on industrial subsidies to “ensure that certain emerging developing members do not escape its application.”

Among their goals is crafting new rules that would require timely notification of subsidies to the WTO and a clearer definition of what constitutes a “public body,” with the U.S. eager to see state-owned banks included.

A key question is whether and how to encourage the participation of China. Targeting Beijing’s state-led industrial policies has been a priority for the Trump administration, which blames China for the decline in America’s manufacturing base over the past decade and a half.

Excess Capacity

“China provides massive, market-distorting subsidies and other forms of state support to its domestic industries, which too often leads to severe excess capacity,” Trump’s ambassador to the WTO, Dennis Shea, said last year.

Since 2001, China’s steel production capacity has grown by more than 500 percent and now accounts for more than half of global steel production, the U.S. said during a recent WTO meeting in Geneva. In the aluminum sector, four of the world’s top five recipients of government support are Chinese companies, according to a recent OECD report.

In its latest review of the Chinese economy, the WTO said the state retains a majority share in all but one of China’s 100 largest publicly listed companies.

The U.S. argues that current WTO rules aren’t sufficient to address China’s state-led trade and investment policies and have sought to tackle the issue in bilateral talks with Beijing. But that approach faced a serious setback this month, when the U.S. said China reneged on its promises and refused to change its laws to adhere to the Trump administration’s demands.

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