The coronavirus pandemic has complicated the already Herculean task of negotiating multilateral rules on industrial subsidies targeted at China, former Trump administration trade official Kelly Ann Shaw and Hinrich Foundation research fellow Stephen Olson said on Wednesday.
The U.S., European Union and Japan outlined potential changes to the World Trade Organization’s Agreement on Subsidies and Countervailing Measures back in January. Any changes to the ASCM would have to be adopted by consensus, meaning other members will have to convince China to undertake the proposed reforms, something Shaw and Olson suggested was unlikely.
The coronavirus pandemic, they added, has made the already longshot prospect of reforming WTO rules even less likely.
In the “post-COVID” world, countries will continue discussing ways to onshore production and shorten supply chains as part of plans to rebuild critical industries, Shaw noted. “I do think that there might be some tension there, between pursuing aggressive and strong disciplines on subsidies versus the immediate need to restart economies,” she said during a webinar hosted by the University of Nebraska’s Clayton Yeutter Institute of International Trade and Finance.
“There may be a bit more of a runway before those conversations really get legs in the WTO as those countries try to come back online,” she said.
The trilateral proposal garnered some momentum soon after its release, Shaw said, with some enthusiastic about discussing it at international fora like the World Economic Forum in Davos or at meetings of the G7 and G20. But the coronavirus pandemic may have sapped the initial momentum behind that proposal, Olson said.
“I do wonder though how much momentum there will be behind it. You know the COVID pandemic is impacting every aspect of our lives so we shouldn’t be surprised that COVID is also impacting, potentially, how we’re dealing with subsidies,” he said. “One thing that we’re seeing in the aftermath is so many countries have really been forced to resort to subsidization in different forms to counteract the economic slowdown. In that type of environment I think countries will be a little bit more reticent [and ask] ‘Is now really the right time to try to increase disciplines on subsidies when we might find ourselves in a position of having to expand our subsidies program?’”
China has criticized U.S. attempts to negotiate stronger disciplines on industrial subsidies. Shaw acknowledged the biggest obstacle in negotiations would be getting China on board. Olson was even more dour on the prospects of China’s participation.
“So many of the provisions of that proposal were very deliberately targeted to problems that have arisen specifically because of China’s state-directed capitalist system and are directed and intended to address those issues,” Olson said. “I think … this is so fundamental to China’s economic system, that I think they would be very leery of agreeing to economic disciplines in that area.”
Beijing has “no incentive” to agree to tougher subsidy disciplines, he continued. “There really isn’t any overwhelming external pressure that can be brought to bear except to the extent that if countries want to get very, very, very aggressive and expand their use of countervailing duties and other trade remedy laws,” he said. “I don’t know if at some point you hit a tipping point where China does come to the conclusion it would be better to negotiate some new disciplines. If that point is at some point in the future, I don’t think we’re anywhere close to it.”
“I don’t disagree,” Shaw added. “There is a scenario in which you build a large enough global consensus around China that they feel sufficient pressure to change. But that’s a challenge because as much as our allies talk about being on the same page as us, when push comes to shove the United States has often stood alone on these issues and countries have just not wanted to make that choice. Unless that happens, or something cataclysmic happens in the global economy, or there’s some other external event, it’s really challenging to see why China would change course.”
Even the development of a broad coalition pressuring China to change its subsidy practices would present a challenge to negotiations because each country would want certain carveouts for their own industries, Olson said. “The more countries that you take into that unified front, each one of them has their sacred cows,” he said: “’Yes, yes, we want to push China on subsidies, but we have these types of programs that we want to keep so we cannot push China [on those].’ As the size of that coalition grows, you have an increased number of carveouts and you’re left at the end of the day with a ‘where is the commonality here?’”
Prompted by a request for a “hopeful note,” though, Shaw said she believed the global community would rally around the unique challenges created by the coronavirus crisis. “What I have seen time and time again is that crisis breeds opportunity,” she said. “The G7 was founded out of crisis. The G20 was founded out of crisis. The [General Agreement on Tariffs and Trade] was founded out of crisis.”
“So while it looks bleak in terms of addressing the subsidy issue based on the information we have right now and the tools in front of us, I do believe in creativity and I’m optimistic for the future,” she said. “Something that we haven’t seen yet I think will emerge at some point.” – Brett Fortnam (email@example.com)