The EU, China and the WTO

The World Trade Organisation is in crisis, with its two core functions – managing multilateral trade negotiations and resolving trade disputes – paralysed. This crisis is rooted to a large extent, though not exclusively, in deteriorating relations between the West and China. Differences in views on the role of the WTO also features in the transatlantic relationship. This contribution gives an overview of the EU’s China trade and WTO strategy, maps the potential for transatlantic cooperation and scopes its likely effectiveness. It complements a recent Chatham House paper on the (un)sustainability of the EU’s geopolitical strategy on China by focusing on the particularities of the global trade tensions and the WTO regime. 

Western economies and China blame each other for having shown too little willingness to compromise in the Doha Round of multilateral trade negotiations, thereby causing the collapse and failure to modernise global trade rules. In turn, the outdated nature of these motivated the WTO’s Dispute Settlement Body (DSB) and its Appellate Body (AB) to step in and develop WTO law through jurisprudence to meet the modern trade challenges. This judicial activism caused considerable US irritation. All recent US governments have rebuked the WTO DSB and AB for overstepping their mandates, for being biased against US interests, and for being ineffective in harnessing China’s state capitalism and unfair trading practices. Washington, in short, thinks that the DSB and AB have illegitimately reduced US regulatory space yet enabled continuous Chinese malpractices. It thus seeks to remove – at least partially – the WTO and its DSB and AB as constraining factor and legal-judicial shield for China to hide behind and to force negotiations on the future of the global trade regime. It has done so by vetoing the appointment of new appellate judges, which ultimately in late 2019 resulted in the AB losing its quorum to hear and conclude cases.

EU preferences and strategy regarding the China challenge and WTO crisis

The EU and the Member States share many US concerns regarding China’s state capitalism and trading practices underlying the WTO crisis. They have been voicing their concerns for many years in the WTO and bilateral discussions with Beijing, though to little avail. Europeans are slowly accepting that China clings on to opaque state capitalism rather than reforming. Beijing rejects these criticisms. It maintains that Chinese policies are legitimate, legal and refuses to engage in new negotiations. It points to China’s unusually strenuous WTO accession conditions and developing country status to deflect critique.

While Europeans and Americans – and indeed other liberal capitalist democracies – share concerns over China’s state capitalism and trading practices, they nonetheless disagree over how to handle the situation and notably the role of the WTO. The EU sees itself as a defender of multilateralism, rules-based global governance and judicialised dispute settlement and therefore criticises the USA for its unilateral and heavy-handed approach. Rather than weakening the WTO regime, the EU wants to strengthen it. They see the WTO as a key to easing tensions with China. The EU’s strategy on China and the WTO can be summarised as follows:

• Modernising global trade rules: The EU sees an urgent need to update global trade rules in view of the trading realities of the 21st century. While multilateral negotiations remain the preferred option for Europeans, they have accepted that this course of action is currently unlikely to be effective. Hence, they have turned to bilateral trade and investment deals – such as the Comprehensive Agreement on Investment agreed with China in late 2020 but ratification of which is currently on hold – as well as so-called plurilateral agreements to modernise trade rules. Plurilateral agreements, such as the Trade Facilitation Agreement or so-called Joint Statement Initiatives on Investment, E-Commerce and Domestic Regulations, are particularly promising in that regard as they are agreements that bring together a sizeable group of WTO members willing to move forward in a particular domain of trade governance. Other WTO members may join these if they see it in their interests, including possibly China and the USA that has shown more hesitance on certain plurilateral projects than the EU.

• Safeguarding judicialised dispute resolution: The EU is leading efforts to reactivate the DSB and AB. The EU has proposed the so-called Multi-Party Interim Appeals Arrangement (MPIA). Some 30 countries have signed up to this mechanism that replaces the defunct AB through an ad hoc arbitration procedure for appeals. China, despite its aversion to international courts and tribunals, has joined the MPIA in an attempt to signal to the world that unlike the US it aims to play a constructive and stabilising role in the global trade regime – a claim that many observers would qualify.

• Putting into place unilateral instruments: While the EU remains committed to the WTO and its DSB, it has recognised the need to defend itself against unfair and illegal trading practices in times of WTO paralysis. As part of its new ‘open strategic autonomy’ paradigm, it has put in place a number of unilateral instruments that aim to maintain the EU’s economic openness yet enable it to push back against unfair trading practices. These include regulations on retaliation if WTO members breach their commitments and recourse to the WTO DSB is impossible, a mechanism to screen investments in view of national security, and a proposed mechanism to tackle distortions in public procurement, mergers and acquisitions stemming from third country subsidies.

How effective and sustainable is the EU’s strategy?

In a nutshell, the EU seeks to preserve the WTO while adjusting to an increasingly confrontational global trade regime. This leaves the question how likely it is that this strategy will ease tensions with China or resolve the WTO crisis. It is unrealistic to assume that the EU – or indeed the US – will be able to trigger the type of large-scale reforms in China’s political economy that would address the heart of current tensions. That being said, the EU has managed to maintain a dialogue with China and may through its newly devised unilateral instruments incentivise some reforms in China.

The EU’s strategy to modernise the WTO is promising in principle but practically ill-fated. Multilateralism as we used to know it seems to have outlived itself due to the new heterogeneity of WTO membership and the ever more intrusive nature of modern trade rules. The EU’s proposition to pursue WTO reform inter alia through plurilateral agreements is thus timely. Unfortunately, the potential for reforms to increase the effectiveness of the WTO itself is limited due mainly to the transatlantic disagreements. While the EU perceives the WTO as key to ease current tensions, the USA still sees the WTO as a part of the problem. Until the US changes its approach, real progress on the WTO and realising its potential to tackle controversial trading practices seems unlikely. This does not mean, however, that there is no potential at all for transatlantic cooperation through for instance coordinating demands and building broader coalitions. The new EU-US Trade and Technology Council – designed to promote discussion and agreement on salient issues of AI, semiconductors and alike – seems to be a step in the right direction. It is just not likely to lead to a restoration of a multilateral global trade regime driven by the transatlantic partners.

By Dr Johann Robert Basedow, Assistant Professor in International Political Economy, European Institute, London School of Economics and Political Science

Article category: Trade and Investment