State Ownership and State Investment

China’s trade restrictive actions against Australia — what they say about China’s compliance with notification requirements and the importance of market-economy conditions in global trade

· October 23, 2020 · China, industrial subsidies, non-market economy, State Ownership and State Investment, transparency, WTO reform · , , , , , , , , , , · No Comments

One of the challenges companies and trading partners of China have faced in having the global rules of trade actually honored by China has been the informal actions of China’s government at the central, provincial and local level which result in clear violations of WTO obligations as well as the fear of retaliation companies trading with China may face if specific examples of non-compliant actions are raised bilaterally or through dispute settlement.

In yesterday’s Global Business Dialogue TTALK entitled “China and Aussie Cotton,” the challenges that Australia’s cotton producers are facing in China are reviewed including apparent verbally communicated requirements to Chinese cotton purchasers not to buy Australian cotton. See Global Business Dialogue TTALK of October 22, 2020, “China and Aussie Cotton,” https://myemail.constantcontact.com/CHINA-AND-AUSTRALIAN-COTTON—-TTALK-FOR-OCTOBER-22.html?soid=1101547782913&aid=L4XRKbnPF_A. The post has links to various sources for the concerns raised in the post.

A good summary paragraph from the TTALK piece follows:

“All of that said, this has been a tense year for China-Australia trade, as China has taken aim at one Australian export after another to signal its displeasure with Australian policies. Australian barley, beef, and wine were hit with import restrictions earlier. Last week it was coal and cotton – what might be called Australia’s black and white exports to China. This time, though, China’s restricted policies were not in black and white. They were instead oral instruction to Chinese buyers of those products not to buy from Australia.”

As the WTO Members consider reforms needed to improve the functioning of the global trading system, the challenges Australian producers are facing in having access to the Chinese market should help inform some of the critical challenges and needs.

Obviously, there are transparency requirements on all WTO Members on actions taken that affect access to a Member’s market. It is unlikely that any of the non-written actions, policies or practices taken by the Chinese government at the central, provincial or local level that affect foreign goods or services or foreign investors are notified to the WTO. If so, this is a major problem in the third leg of the WTO structure – notifications and oversight. While similar problems may exist for other WTO Members, the Australia example is a clear instance where China has discriminated against products of a trading partner without formal notification or justification.

Similarly, the Australian example raises concerns about China using the influence of the state to distort trade outcomes. This is, of course, the core concern of the United States, Japan, Brazil and others that the global trading system is premised on market-economy conditions within WTO Members and that systems like that of China don’t fit well under existing global rules. The state directing companies not to purchase commodities like cotton from foreign suppliers is inconsistent with such market-economy conditions.

For any reform initiative to permit the WTO to ensure conditions of fair trade in the global market, state actors need to sit out the vast majority of trade actions involved in the production, sale, import and export of goods and services. There have been proposals to date to address some of the notification deficiencies that exist, but nothing really focused on informal actions of states. Similarly, the U.S., Japan and the EU have also identified a series of issues (industrial subsidies, forced technology transfer) where the existing rules of the WTO are inadequate to address some of the distortions caused by economic systems like that employed by China. It is unclear that the areas being considered deal with some of the distortions flagged in the Australian case or the issue of threats or acts of retaliation by a WTO Member against companies engaged in trading with the Member or who have invested in the Member. While China is certainly a Member where companies often complain privately about retaliation or threats, China is not alone in that regard.

Without serious reform to address these and other existing problems as well as update the rules to reflect 21st century trading realities, countries will need to increasingly look outside the WTO for tools to address the distortions created.

USTR Lighthizer’s Op Ed in the Wall Street Journal — How to Set World Trade Straight

· August 24, 2020 · Appellate Body reform, free trade agreements, industrial subsidies, non-market economy, rebalancing tariff bindings, self-selection as developing country, Special and Differential Treatment, State Ownership and State Investment · , · No Comments

Most countries and customs territories that are Members of the World Trade Organization (WTO) agree that the WTO is need of reform to make it more relevant and to address the challenges with the current system that the first 25 1/2 years of operation of the WTO have laid bare.

The United States has raised concerns for more than twenty years with the Dispute Settlement System and under the Trump Administration laid out detailed critiques of the Appellate Body and various deviations from the agreed text of the Dispute Settlement Understanding (DSU). The U.S. refusal to permit new Appellate Body members to be selected until its concerns were addressed led to the effective (temporary) shutdown of the Appellate Body from December 11, 2019 for new appeals. While trading partners put forward various proposals to address U.S. concerns, the U.S. has viewed it as critical to have Members discuss why the Appellate Body has been willing to depart from clear requirements in the DSU.

Similarly, the United States has been raising concerns about self-selection of developing country status with the resulting use of special and differential treatment provisions by some three quarters of the WTO Members. The basic U.S. position has been that there has been enormous economic development by many countries over the last twenty-five years such that a static system of designation is unwarranted. The U.S. has proposed various factual criteria to determine whether a given country should be eligible for developing country status. A few countries have indicated that they will not seek special and differential treatment in ongoing and future negotiations.

Similarly, the United States has argued that the WTO should reaffirm that the WTO rules envision Members who operate under market economy principles and that non-market economic systems (including so-called state capitalism economies) are not appropriate for WTO rules. The U.S. has also been working with the EU and Japan to develop a proposal on industrial subsidies, state-owned enterprises and forced technology transfer — all issues viewed as outgrowths of non-market economies.

While the U.S. has not presented a formal statement at the WTO on the subject, the U.S. has also raised concerns about the level of tariff bindings and the lack of progress in obtaining further liberalization over the last twenty-five years, suggesting a need for a rebalancing of tariff bindings.

USTR Lighthizer’s Op Ed in the Wall Street Journal, How to Set World Trade Straight

While the WTO is in the process of selecting a new Director-General with the current Director-General stepping down on August 31, much attention has understandably been on the eight candidates seeking to become the new Director-General.

Many government officials around the world are on holiday. In the U.S., the 2020 Presidential election process and campaigns are heating up with elections for the President and for the House of Representatives and a third of the Senate set for November 3. One would expect that various actions by the current U.S. Administration would be aimed at election political needs. The recently announced agreement between the U.S. and the EU to reduce tariffs on U.S. lobsters exported to the EU and a reduction of various tariffs that the US has on products of interest to the EU is likely one such example, with lobster fishermen in Maine in trouble with the loss of the EU market.

Last week, Ambassador Lighthizer, the U.S. Trade Representative, published an op ed in the Wall Street Journal entitled “How to Set World Trade Straight”. https://www.wsj.com/articles/how-to-set-world-trade-straight-11597966341. Whether the op ed is meant for domestic consumption during the election cycle or is an amplification of U.S. positions already taken in Geneva is not clear but is an interesting review of the current Administration’s concerns with the global trading system.

The piece by Amb. Lighthizer reviews the need for WTO reform, and notes various problems that he sees with the current WTO: (1) uneven tariffs; (2) the nonappicability of rules to some Members; (3) the huge number of free trade agreements which may lock in protectionism and by definition aren’t applied on a most favored nation (MFN) principle; (4) the shift in the system from negotiations to litigation because of the current dispute settlement system; (5) the inability to address distortions created by non-market economies.

Amb. Lighthizer then calls for WTO Members to recommit “to the principles of market reform and most-favored-nation status.” He then identifies five reforms that are needed:

  1. find baseline tariffs that all Members will apply with limited exceptions;
  2. limit Free Trade Agreements to those fostering regional integration;
  3. see that large and advanced economies are not eligible for special and differential treatment;
  4. adopt new rules to address economic distortions caused by China’s state capitalism system;
  5. overhaul the dispute settlement system to be more like commercial arbitration.

Amb. Lighthizer views that the two options for global trade are (1) “a WTO that is truly committed to most-favored-nation norms and focused on multilateral trade negotiations and (2) a system of bilateral trade agreements. While U.S. could go either way, it is willing to work with WTO Members to achieve the first outcome.

Analysis of the Five Proposals

Free Trade Agreements (FTAs)

Of the five proposals included in Amb. Lighthizer’s op ed, only the second deals with an issue (the increasing number of Free Trade Agreements) where the U.S. has not identified problems with the status quo at the WTO. Amb. Lighthizer’s concern about the hundreds of free trade agreements that have been created has a focus on the European Union where the EU has some 72 FTAs and works to include provisions that are not part of the WTO and that the U.S. views as simply protectionist, such as geographical indications on food, and which harm U.S. and other exporters.

While there is no question that FTAs have resulted in a fair amount of trade diversion and that countries negotiating FTAs often add topics not part of the WTO of interest to them, it is hard to imagine WTO Members agreeing to shut down the vast majority of FTAs that have been established. Looking just at the U.S., many of its existing FTAs would not qualify under Amb. Lighthizer’s test — those with Israel, Korea, Singapore, Australia, Oman, Morocco, Jordan, Bahrain, CAFTA, Colombia, Costa Rica and Peru (though the Central and South American countries could fit under regional integration if expanded beyond North America). Similarly, current negotiations with Japan, with the EU, with the United Kingdom and with Kenya wouldn’t qualify.

So it is hard to see how WTO Members agree to modify the right to establish Free Trade Agreements. And changing GATT Articles would be a very time consuming process even if there were interest among Members.

No one has brought a dispute at the WTO (or at the GATT before 1995) on whether a particular FTA meets the actual requirements of the WTO. Nor has any Member challenged aspects of an FTA that imposes conditions that adversely affect trade of other Members where the conditions are not part of a WTO Agreement and otherwise are inconsistent with WTO principles. Thus, there could be ways to address some of the concerns that Amb. Lighthizer has with FTAs. But disputes won’t return MFN to the primacy role Amb. Lighthizer is espousing.

Special and differential treatment

Amb. Lighthizer’s third proposal to limit which countries have access to special and differential treatment is consistent with the papers that the U.S. has presented at the WTO. In prior posts, I have reviewed both the U.S. proposal and the views of the eight candidates to become the next Director-General on the issue. See December 28, 2019, WTO Reform – Will Limits on Who Enjoys Special and Differential Treatment Be Achieved? https://currentthoughtsontrade.com/2019/12/28/wto-reform-will-limits-on-who-enjoys-special-and-differential-treatment-be-achieved/; August 13, 2020, The race to become the next WTO Director-General – where candidates are on important issues:  eligibility for special and differential treatment/self selection as a developing country, https://currentthoughtsontrade.com/2020/08/13/the-race-to-become-the-next-wto-director-general-where-candidates-are-on-important-issues-eligibility-for-special-and-differential-treatment-self-selection-as-a-developing-country/.

New rules to address economic distortions caused by China’s state capitalism system

Amb. Lighthizer’s fourth proposal reflects the ongoing U.S. concern about whether current WTO rules adequately discipline distortions flowing from the economic system of China (and other countries with similar systems). As reviewed above, the U.S. has sought reconfirmation of core WTO principles that rules apply to market economies and has worked with the EU and Japan to develop proposals (not yet presented at the WTO) on enhanced subsidy rules on industrial goods and new rules on state-owned enterprises and forced technology transfer. The fourth proposal is focused on new and modified rules.

In prior posts, I have reviewed both the U.S. proposal and the views of the eight candidates to become the next Director-General on the issue. See February 22, 2020, WTO Reform – Addressing The Disconnect Between Market and Non-Market Economies, https://currentthoughtsontrade.com/2020/02/22/wto-reform-addressing-the-disconnect-between-market-and-non-market-economies/; August 19, 2020, The race to become the next WTO Director-General – where the candidates stand on important issues:  convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 2, comments by the candidates, https://currentthoughtsontrade.com/2020/08/19/the-race-to-become-the-next-wto-director-general-where-the-candidates-stand-on-important-issues-convergence-vs-coexistence-of-different-economic-systems-possible-reform-of-rules-to-addre/; August 17, 2020,  The race to become the next WTO Director-General – where the candidates stand on important issues:  convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 1, background on issues, https://currentthoughtsontrade.com/2020/08/17/the-race-to-become-the-next-wto-director-general-where-the-candidates-stand-on-important-issues-convergence-vs-coexistence-of-different-economic-systems-possible-reform-of-rules-to-address-dist/.

Baseline tariffs that all Members will apply with limited exceptions

The first proposal from Amb. Lighthizer provides for the first time some content to his earlier comments that tariff bindings needed to be rebalanced. The proposal would seem to flow from Pres. Trump’s concern about trade deficits the U.S. runs with many countries, the lack of trade liberalization negotiations in the last twenty-five years, and the large variation in bound rates with developed countries typically having very low rates compared to large and advanced developing countries.

There has never been since the GATT’s start in the late 1940s an effort to rebalance tariffs like that envisioned by Amb. Lighthizer. His proposal would flatten tariff bindings for nearly all countries and would result in upward movement of tariff bindings for some products from developed countries. There has never been the view within the GATT or now the WTO that one tariff rate on a product fits all countries (with limited exceptions).

It will undoubtedly be helpful to have WTO Members focus on the imbalances that have arisen as multilateral trade liberalization has ground to a halt and advanced developing countries have typically not taken the lead in purusing tariff reductions among those with continued high tariff bindings. That said, it is hard to see how the proposal has actual legs in terms of any future WTO reform.

Reform of the dispute settlement system

The fifth proposal by Amb. Lighthizer deals with an issue, reform of the dispute settlement system, which has occupied a lot of time and attention at the WTO. However, the proposal put forward by Amb. Lighthizer is different from the problems that the U.S. has been chronicling in various statements and papers over the last several years.

The DSU has a two-tiered dispute settlement system – panel review with possible appeal of legal issues to the Appellate Body. Nearly all WTO Members actively support a two-tiered system and many have set up an interim multiparty appeal arbitration agreement to provide them with a substitute until the impasse created by the United States is resolved.

Amb. Lighthizer’s proposal reflects U.S. concerns with the apparent inability to limit the Appellate Body to the role it was given by the DSU and the general unwillingness of other Members, particularly the EU, to agree to the proper role of the Appellate Body. While the proposal from Amb. Lighthizer isn’t two tiered, it does have binding effect on the parties to the particular dispute between them without creating precedent.

As Amb. Lighthizer’s proposal would require a reworking of the DSU, if accepted by other Members as a road forward, resolution would likely be years away.

I have written extensively on the impasse on the dispute settlement system as well as reviewing the views of the eight candidates to be the next Director-General. See, e.g., August 10, 2020, The race to become the next WTO Director-General – where candidates are on important issues:  reform of the Appellate Body, https://currentthoughtsontrade.com/2020/08/10/the-race-to-become-the-next-wto-director-general-where-candidates-are-on-important-issues-reform-of-the-appellate-body/; August 9, 2020,  USTR Lighthizer on WTO dispute settlement – answers to Congressional questions from June 17 hearings, https://currentthoughtsontrade.com/2020/08/09/ustr-lighthizer-on-wto-dispute-settlement-answers-to-congressional-questions-from-june-17-hearings/; July 12, 2020, WTO Appellate Body reform – revisiting thoughts on how to address U.S. concerns, https://currentthoughtsontrade.com/2020/07/12/wtos-appellate-body-reform-revisiting-thoughts-on-how-to-address-u-s-concerns/.

Conclusion

Considering the timing of the op ed, it is hard to know if the intended audience is largely U.S. workers or is intended for an international audience considering WTO reform.

Some of the five proposals, regardless of intellectual merit, seem certain to be viewed as nonstarters, although potentially leading to discussion of key principles of the WTO in Geneva. If the intent is to have items that can be set aside if others are achieved, then Amb. Lighthizer’s five proposals may be a successful approach. To the extent that all five are must have issues for the U.S., one doesn’t need to worry about WTO reform during the next four and a half years as it is hard to imagine the circumstances when all are accepted by the WTO membership.

The race to become the next WTO Director-General – where the candidates stand on important issues: convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 2, comments by the candidates

· August 19, 2020 · industrial subsidies, non-market economy, State Ownership and State Investment, WTO reform · , , , , , , , , , , , , , , , , , , · No Comments

[Updated on August 27 to incorporate comments by Amb. Tudor Ulianovschi of Moldova at a WITA webinar held on August 26.]

In a post on August 17, I provided background on a group of issues that are important to various Members though opposed by some that for shorthand will simply be referred to issues surrounding WTO rules’ applicability to economies operating differently than market economies. See August 17, 2020, The race to become the next WTO Director-General – where the candidates stand on important issues:  convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 1, background on issues, https://currentthoughtsontrade.com/2020/08/17/the-race-to-become-the-next-wto-director-general-where-the-candidates-stand-on-important-issues-convergence-vs-coexistence-of-different-economic-systems-possible-reform-of-rules-to-address-dist/.

What follows is a review by candidate of his/her prepared statement to the General Council (Juy 15-17, 2020), my notes from the press conference for each candidate which followed immediately after his or her meeting with the General Council and my notes on each candidate’s webinar organized by the Washington International Trade Association (WITA) and generally also by the Asia Society Policy Institute (ASPI).

Dr. Jesus Seade Kuri (Mexico)

Dr. Seade did not in his prepared comments address directly any of the issues surrounding the question of compatibility of different economic systems with the WTO rules, or whether changes in rules to address some of the distortions perceived to be caused by economic systems which vary widely from market-economy structures are needed. Dr. Seade did include at the end of his prepared statement an indication of neutrality to all Members.

“All along my career I have worked with Ministers and legislators, often Heads of State. I present myself to you with my fullest energy, passion and experience, at a difficult time for the WTO. My commitment is to achieve with you the reform and restoration of a WTO back at the center of global governance for the benefit of world economic growth. My solemn commitment to you is to be an effective DG and interlocutor, close to all members north and south, east and west, and indeed fully equidistant from you all.”

During the press conference held after his meeting on July 15 with the General Counsel, Dr. Seade was not asked a question dealing with any of the issues surrounding different economic systems.

WITA had a webinar with Dr. Seade on July 7. https://www.wita.org/event-videos/conversation-with-wto-dg-candidate-seade/. During the webinar, Dr. Seade was asked several questions that dealt with U.S.-China tensions. My notes on Dr. Seade’s responses (and on at least one of the questions) follow.

The animosity between the United States and China in a way is understandable.  The hardest part of negotiations during the Uruguay Round for GATT Contracting Parties to conclude was not the agriculture negotiations or the negotiations on intellectual property but rather the negotiations on antidumping.  To simplify, the antidumping negotiations pitted the U.S. and EU against the Asian tigers who were excessively competitive and creating problems in world markets.  But the Asian tigers were much smaller in size than China is today and were much more market oriented than China is today.  So the chasm in the system was much smaller than what exists today   So it is not surprising that there is a big challenge today.  But challenges are there to be met and solutions found. Dr. Seade is convinced that China will want to respond to avoid chaos in the system.  Once they view the U.S. as serious about engaging, China will want to know what they need to do to get the WTO functioning again.  The same question should apply to the U.S. and the EU.  So we should be able to save the system.

Question on the U.S.-China dynamic: USTR Lighthizer has indicated he has three criteria for next DG – he or she must support a robust reform agenda; he or she must acknowledge that the current system doesn’t adequately deal with China’s economy and state trading practices; he or she can’t have a “wiff” of anti-Americanism.  China may have a different set of priorities.  How do you get US and China to do business in the WTO? 

Dr. Seade response:  on the US-China conflict, how do you handle China?  One way is through dispute settlement.  To date there have been 44 cases brought by WTO Members against China.  This is a good way to address problems a Member has with another Member, and it has worked.  We have to resolve the problems with the dispute settlement system and make it work better. At the same time, there are initiatives that have been begun by the US (e.g., EU, Japan and US) on industrial subsidies.  Dr. Seade believes that it is really for US to work out with China how to incorporate more disciplines on industrial subsidies or other issues. This will likely require the U.S. and others to add items of interest to China to make negotiations more acceptable to China.  While China is a tough negotiator, China will not risk bringing down the WTO.  In Dr. Seade’s view, the most important thing China has done in last fifty years other than the start of the reform process back in 1978 was joining the WTO.  So we need to amend the dispute settlement system which would be a good starting point to helping address existing problems.  Dr. Seade agrees with the U.S. that there have not been real negotiations on most agreement areas in the last 25 years. As China was not part of WTO in the 1990s, there can be little question that rules need to be updated both to reflect changing trade realities and to incorporate China in the process and resulting rules.   

Dr. Ngozi Okonjo-Iweala (Nigeria)

Dr. Okonjo-Iweala in her prepared statement reflected that Members have differenting views on “new or enhanced rules” identifying state-owned enterprises (SOEs) but by implication including industrial subsidies.

“Members’ views differ on a number of fundamental issues, such as special and differential treatment or the need for the WTO to tackle new issues and develop new or enhanced rules to deal with SOEs and agricultural subsidies, for example. Trade tensions among the membership have flared up, threatening the fundamental architecture of the MTS. With all these, the WTO, unfortunately, is now perceived by some as an inefficient organization that has failed to keep abreast of developments in the global economy.”

Her prepared statement goes through a range of issues that need to be addressed by the WTO but does not include in that list any of the issues flowing from different economic systems. Dr. Okonjo-Iweala does link being able to renew the WTO to getting Members to recall core objectives and principles. The objectives and principles to many would be understood to require updating rules so that different economic systems are subject to effective rules to eliminate or minimize distortions.

“Renewing and improving the organization will require recalling the core objectives and principles on which the MTS was built – the value of open trade, competition and non-discrimination, security and predictability of market access, and transparency. These principles have contributed to economic growth and development and will continue to do so if Members renew their commitment to them.”

During the press conference on July 15th after Dr. Okonjo-Iweala had met with the General Council, she was asked one question about what she would say to the U.S. about staying in the WTO. The question doesn’t directly address different economic systems, but concerns about U.S. staying in the WTO are generally understood to reflect U.S. problems with many aspects of the WTO including rules which do not effectively address distortions created by non-market economies. My notes on Dr. Okonjo-Iweala’s answer to the question are provided below.

On the question of why the U.S. should stay in the WTO, Dr. Okonjo-Iweala indicated she would communicate to the U.S. that the WTO delivers for all Members. The GATT and WTO have provided shared prosperity which has lifted millions of people out of poverty. Where the trading system is not working, Members need to fix the problems. Peace, security and stability are needed now just as they have been over the last decades. These are what the WTO rules-based system provides. If we didn’t have the WTO, we would need to invent it.

WITA had a webinar with Dr. Ngozi Okonjo-Iweala on July 21. https://www.wita.org/event-videos/conversation-with-wto-dg-candidate-dr-ngozi-okonjo-iweala/. During the webinar, Dr. Okonjo-Iweala was asked a number of questions that resulted in answers that touched on tension between the U.S. and China, industrial subsidies and more. My notes on Dr. Okonjo-Iweala’s responses and to some of the questions follows:

Q: On the important issue of building trust between Members, there are major differences between the U.S. and China, including (for the U.S.) whether existing WTO rules adequately discipline Chinese policies and (for China) whether US is abiding by the rules.  What do you see to be the main challenges to building trust among Members to permit a reform agenda to move forward?

A:  Dr. Okonjo-Iweala noted that building trust between the Members is critical.  When developed countries bring an agenda item to the WTO, developing countries may view the issue as not in their interest (and vice versa) because of a lack of trust.  On the conflicts between the U.S. and China, we need to find areas of common interest for the two Members. We are used to looking at what are the differences between the Members, but we should be looking for common interests among Members. If we can use those common interests to accomplish incremental progress, that will help build trust..  You build trust negotiation by negotiation (using the issue of special and differential treatment as example).  If we can solve any problem, it helps build trust.  Another way to build trust between developed and developing Members is to conclude the fisheries subsidies negotiations taking into account the needs of individual Members.  If the WTO Members can wrap up those negotiations, the success will start to build trust. 

Q: On resetting of tariff commitments (comment from USTR Lighthizer as a problem within the WTO based on changing economic development of many countries), would this be in the best interest of the system? 

A:  This is a critical question and issue.  Renegotiating any agreement would require consensus building that would be very difficult to achieve.  That would certainly be true on bound tariffs. The balance of rights and obligations raised by the United States flows from the concerns about state-led economies and state-owned enterprises and whether such economies belong in the system.  Dr. Okonjo-Iweala stated that the WTO is not there to comment on the economy of any Member.  In her view, the key question is what disciplines does the WTO have around any issue that arises.  Are the disciplines sufficient to address the imbalances in rights and obligations that may arise?  We need to start there.  What are the fundamental issues —  state-owned enterprises (SOEs), public body.  Can we come to agreement on the meaning of the term public body?  Can we tighten subsidy disciplines that already exist or can we negotiate new subsidy or other disciplines to address the concerns that arise from these types of economies? That is the approach all Members should be pursuing. 

Q: On industrial subsidies, China has signaled that they will oppose tightening disciplines.  The U.S., EU and Japan have been working on a proposal and discussing with some Members.  How can the Director-General help the membership navigate these issues? 

A:  If Dr. Okonjo-Iweala becomes the next Director-General, she would encourage that proposals from the U.S., EU and Japan be tabled so all Members can see what they are and how acceptable they are to other Members (including China).  Let’s start to work with an actual proposal.  Sometimes countries are not as far away as one might think.  Members need to work on a specific proposal and see what happens.

Mr. Abdel-Hamid Mamdouh (Egypt)

Mr. Mamdouh in his prepared statement to the General Council on July 15 made only one reference to the issues pertaining to differences in economic systems when he acknowledged that addressing industrial subsidies should be a priority.

“Reviving the built-in agenda of agriculture and services must be a priority because WTO Members agreed on this, and it has not happened. Trade distorting subsidies, both agricultural and industrial, will also be a priority.”

During Mr. Mamdouh’s press conference on July 15 after his meeting with the General Council, Mr. Mamdouh was asked one question about the U.S.-China conflicts. My notes on his response to the question are provided below.

A question was asked on what should be the role of the US and China in the new WTO. Mr. Mamdouh responded that the role of these two Members is to engage in the WTO. Start from the point that bilateral disputes should be resolved in the WTO. Since we all believe in the multilateral process, Members must keep in mind that bilateral disputes and solutions have effects on other Members. Moreover, bilateral solutions are less likely to be effective and are likely to be short lived.

WITA had a webinar with Mr. Mamdouh on June 23. https://www.wita.org/event-videos/conversation-candidate-hamid-mamdouh/. During the webinar, Mr. Mamdouh was asked various questions that dealt with the U.S.-China conflicts, need for better rules on industrial subsidies, state-owned enterprises and more. My notes on Mr. Mamdouh’s response and to some of the questions follows.

Q:  Why are you well suited to deal with the deep and potentially ruinous conflicts between US, China, EU?  How would you get these big powers to do business with each other?

A:   Mr. Mamdouh responded that this issue is the first frontier for a new Director-General.  The key is to have the right attitude toward the conversation (less political).  The types of problems that Members face deal with noncompliance and with inadequacy of rules.  Both need to be handled. The issues must be addressed in an intellectually honest and politically courageous way if there is to be progress.  In the past, reform occurred at the GATT when there was a perceived threat to the survival of the system.  Mr. Mamdouh believes that the WTO is facing such a threat now.  Do WTO Members have a common purpose?  Do Members need a WTO?  If the answer to the latter question is no, the conversation among Members has nowhere to go.  It is in everybody’s interest to have the answer to the question be “yes”.  For progress, the Director-General needs to bring the players to the table to identify problems with the current system.  The system needs more transparency.  For progress, it is important to keep the conversation at the level of looking at the contract and whether the contract adequately addresses the problems identified.  If the contract is not adequate to the current needs, then WTO Members must modify the contract.

Q:  is the near death experience the WTO is experiencing now an opportunity to move to a meaningful reform agenda?

A:  Mr. Mamdouh responded that yes the current crisis can lead to a meaningful reform agenda, if there is the political will of the Members.  But political will can only be generated if there is a common purpose. 

The WTO needs to address issues of interest to Members, including those raised by the US (e.g., e-commerce, SOEs, forced technology transfer).  Increasingly, the WTO is facing complex issues that go beyond simple trade liberalization but also deal with regulatory objectives. In these complex areas, such as e-commerce, the WTO Members need to find ways to accomplish differing regulatory objectives in a least trade restrictive manner. That can only be accomplished if there is a thorough discussion of the regulatory needs and development of factual information on possible trade options that can be taken back to capitals for review and for negotiation.  Unfortunately, the deliberative function has nearly died at the WTO. To address the increasingly complex issues of importance to Members, the WTO needs to restore the deliberative function.

Amb. Tudor Ulianovschi (Moldova)

Amb. Ulianovschi’s prepared statement that he provided to the General Council on July 16 doesn’t contain direct reference to any of the issues dealing with different economic systems. Amb. Ulianovschi does indirectly reference the need to address other important issues through negotiations.

“In terms of immediate priorities for the future Director General of the WTO, the following should be considered (including in the preparation process for MC12): * * *

“3. Facilitating dialogue with Members regarding on-going negotiations on the remaining and other important issues.”

During the July 16th press conference following Amb. Ulianovschi’s General Council meeting, Amb. Ulianovschi was asked a question about U.S.-China conflict and how he, as Director-General, would be able to reduce tensions. My notes on his response to the question are provided below.

On the question of how he would use the role of Director-General to ease tensions between U.S. and China, Mr. Ulianovschi responded that this topic had been discussed with Members during his meeting with the General Council. In his view, the role of the Director-General is to be an honest broker between WTO Members. The Director-General must be able to listen to concerns with a view to using his offices to engage Members involved in a dialogue process. At the same time, the Director-General is not there to impose a solution but to listen and raise awareness of the impact of actions on the larger organization and to mitigate harm to others. The next Director-General needs to engage in talks both in Geneva and in capitals and see that any outreach is transparent and inclusive.

WITA held a webinar with Amb. Tudor Ulianovschi on August 26, 2020, https://www.wita.org/event-videos/conversation-with-tudor-ulianovschi/. During the webinar, Amb. Ulianovschi was asked several questions where answers dealt with some aspect of the U.S.-China conflict, differences in economic system, need for improved rules, etc. My notes on the questions and responses from Amb. Ulianovschi follow.

Q:  How important is it to have a reform agenda, and how can you convince the major Members to agree on a common agenda?

A:    Amb. Ulianovschi stated that reform is absolutely necessary.  In his view, cosmetic reform is not sufficient, a fact made clear by major Members.  Amb. Ulianovschi believes that political experience and dialogue by the Director-General will be key to get those who have put forward proposals to get into a discussion that is inclusive and transparent.  There are a large number of issues that are affecting the environment at the WTO.  For example, the current situation between the U.S. and China is affecting the system. 

Q:  US-China relations and how it affects the WTO.  Amb. Lighthizer says he is looking for a Director-General who recognizes that the current system doesn’t address Chinese trade practices and that changes need to be made.  Do you agree?  There has been some work done by the U.S., EU and Japan on industrial subsidies and other topics.  Would you support improving industrial subsidies?

A:  Amb. Ulianovschi believes that the topic has to be of priority for the next Director-General.  The Director-General can provide his/her good offices to the U.S. and China to take up any issue, but such discussions must be consensual.  Based on Amb. Ulianovschi’s conversations with the broader membership, he knows that there is interest by many on the spillover effects on other economies from the US-China conflict.  Having said that, Amb. Ulianovschi reiterated the need for the organization to have a Director-General with political experience not to politicize the organization but to reach out to the decision makers and raise awareness of the concerns of the larger membership and encourage the two Members to sit down and discuss issues they consider appropriate.  On industrial subsidies and other issues, we need to have more indepth discussions at the WTO to have a better understanding of the issues, coverage of the current rules and the existing situation.  As a member driven organization, the incoming Director-General will have to see whether the membership is willing to move to more discipline on industrial subsidies.  Amb. Ulianovschi also believes  that a review of transparency and notifications could be useful.  An open, sincere dialogue based on timely and full information would lead to a better understanding of the issues of concern and then lead to a better decision making process to address the issues.

H.E. Yoo Myung-hee (Republic of Korea)

Minister Yoo included a general reference in her July 16 prepared statement to the General Council to “sensitive” proposals for reform which presumably include the U.S. proposal on non-market economies and the efforts by the European Union, Japan and United States to tighten disciplines on industrial subsidies.

“I am well aware of the proposals that Members have put forward on WTO reform. I also know how sensitive these issues can be to individual Members. A high degree of trust among Members must be the starting point in exploring cooperative solutions.”

Minister Yoo was not asked a question during her press conference that dealt with different economic systems or distortions flowing therefrom.

WITA had a webinar with Minister Yoo on August 11.  https://www.wita.org/event-videos/candidate-h-e-yoo-myung-hee/. Minister Yoo was asked some questions on how she would address the U.S.-China conflicts and the U.S. view that the current WTO rules don’t adequately address the market distortions caused by the Chinese economic model. Below I provide my notes on the questions and Minister Yoo’s responses.

Q: In prepared statement you mention you can serve as a bridge between US and China.  Please elaborate.  Second, Amb. Lighthizer is looking for a Director-General who recognizes that current rules don’t adequately discipline China. Do you agree there is a problem in terms of adequacy of WTO rules for China’s policies?

A:  On the first issue of serving as a bridge, Minister Yoo believes that the WTO can provide a good place for US-China issues to be addressed if the negotiating function is working.  In her view, part of the problem which has led to actions outside of the WTO has been the lack of progress on negotiations.  Thus, Minister Yoo believes WTO Members need to revitalize the negotiating function, so Members will use the WTO to ensure adequacy of rules in an evolving world.  Minister Yoo believes the next Director-General needs to engage in dialogue with the U.S. and China to find and understand the real issues between them.  Minister Yoo reviewed that she has done negotiations with both the United States and China.  She believes that she can use that experience to engage in dialogue with each country and find commonalities between them among the real issues.  By focusing on commonalities, Minister Yoo believes that one can find a path forward to achieve a negotiated success, even if small, and build trust.  After finding small successes, the Members then move forward to address the more challenging issues.

On the second question relating to Amb. Lighthizer’s concern that current rules are not sufficient to discipline China’s practices, Minister Yoo believes one needs to look at the rule book.  In her view, all policies adopted by governments can have spillover effects on trade.  If policies do have such spillover effects and are not covered by existing WTO rules, one needs to evaluate whether the policies are consistent with WTO principles (fair competition, nondiscrimination, etc.).  If a policy is not consistent with WTO principles and has spillover effects on trade, one must determine if current rules can be used to address the policy. If not, then the WTO needs to look at whether modifications to existing rules or the addition of new rules are needed.  Minister Yoo believes Members will need to be willing to engage in this type of process.

H.E. Amina C. Mohamed (Kenya)

Like other candidates, Minister Mohamed didn’t directly address the issue of different economic models reflecting the conflicting positions of some major Members. Rather, Minister Mohamed acknowledged that there were different reform priorities for different Members and that Members needed to get past the challenges in current negotiating approaches. The following four paragraphs from Minister Mohamed’s prepared statement to the General Council on July 16 provides some general comments on the road forward which can be viewed as applicable to differing economic models and many other contentious issues.

“12. You do not all share the same reform priorities. This makes it essential to work together for convergence around elements that all can support. We need to break the cycle of despair and enter into a new phase of hope and realism.

“13. Renewal has to start with facing up to the defects that have weakened the system in recent years: the inability to update rules to reflect the changing realities of how trade is conducted; the sterility of ideological standoffs; the retreat into defensiveness; and the sense of the benefits of trade not being equitably shared.

“14. The WTO has to engage again in good faith negotiations, and this means openness to change and to new ideas, within a culture of inclusiveness and transparency.

’15. Renewal should also build upon the WTO’s core values and achievements. Trade has been transformational. It has helped to lift close to 1 billion people out of poverty and facilitated the attainment of higher living standards in countries at all levels of development. These successes were possible because Members did not see trade as a zero-sum game. They understood that trade-offs were needed to produce outcomes. All Members should contribute to trade opening and facilitation efforts, especially those most in a position to do so.”

During Minister Mohamed’s press conference on July 16 after her meeting with the General Council, she received two general questions about how she would work with major players to resolve trade tensions. Below is my summary of the questions asked and her response.

Q: If selected as the next Director-Generaly, will you be more engaged in resolving trade tensions between major players? If yes, what tactics would you use?

A: Minister Mohamed reviewed the types of powers that a Director-General has to work with Members. For example, the Director-General has engagement powers and can encourage members to consult, to use the good offices of the Director-General. So while the Director-General has only limited powers, those powers ca be used effectively by a Director-General to help Members to use the WTO system to resolve differences.

When asked what her approach would be to deal with trade tensions between US and China, Minister Mohamed stated that she would encourage all members to resolve their trade differences within the WTO rules.

WITA had a webinar with H.E. Mohamed on August 6. https://www.wita.org/event-videos/ambassador-amina-mohamed/. During the webinar, Minister Mohamed addressed briefly the rise of China as a major trading nation and was asked about whether current WTO rules adequately address distortions that flow from China’s policies. My notes from Minister Mohamed’s comments follow.

Minister Mohamed stated that since the WTO was set up in 1995, new and powerful players have emerged onto the trade scene, in particular China.  The resulting tensions with the United States have fed the dysfunction within the WTO.  Minister Mohamed believes that to address the tensions, the WTO needs to pursue reform.  However, governments don’t share the same reform priorities.  The WTO needs to identify issues all can support if reform is to move forward. 

Q: Amb. Lighthizer has raised his concern that the current WTO rules are not capable of disciplining conduct of non-market economies, particularly China.  Do you agree?  How would you go about finding common ground?

A:  Minister Mohamed’s response was that one needs to start by looking at the existing rule book.  The rule book is outdated in some cases.  Moreover, some rules are weak and are being circumvented.  If you have candid discussions with WTO Members, you will find the problems are with the adequacy of the rules.  If the rules are inadequate, WTO Members need to address them to achieve modifications or new rules.  For example, the U.S.-EU-Japan effort on industrial subsidies is potentially important.  If Minister Mohamed becomes the next Director-General she would urge the U.S., EU and Japan to table their proposal, so all WTO Members can discuss what are being raised as the real issues.  It is important to understand what conduct is driving up the tension between Members.

H.E. Mohammad Al-Tuwaijri (Saudi Arabia)

Minister Al-Tuwaijri was the first candidate the General Council met with on July 17. In his prepared statement, Minister Al-Tuwaijri did not directly address the issue of different economic systems and the potential distortions created by non-market economies. Rather he indicated that any negotiating agenda would work only where all Members view the agenda as including items of interest to them. Applied to different economic systems, this would suggest that for negotiations to occur on the topic it would have to be part of a larger package of issues of interest to those Members (like China) who would potentially perceive themselves the target of the industrial subsidies issue or the differing economic systems issue.

“Concerning working together through negotiations, I believe that Members will participate in negotiations when they are convinced that the agenda includes an incentive for them to participate. Therefore, in order to have a successful multilateral negotiation, the agenda needs to be balanced – it needs to include something for everyone.”

At the press conference after his meeting with the General Council, Minister Al-Tuwaijri was not asked any questions dealing with the issue of differing economic systems or on industrial subsidies.

WITA had a webinar with H.E. Al-Tuwaijri on August 5. https://www.wita.org/event-videos/director-general-candidate-he-mohammed-al-tuwaijri/. During the webinar, Minister Al-Tuwaijri was asked several questions dealing with the relationship between some of the major trading Members (U.S., China, EU) and specifically whether he supported negotiations on industrial subsidies to address U.S. concerns that existing rules don’t discipline the policies of China. Below are my notes on the questions asked and answers provided.

Q: Can you have a successful launch of a reform agenda if the leaders in key Members (China, US, EU) aren’t committed to help you make it work?  In the first six months as the new Director-General if selected, how would you get these Members to buy into a reform ageanda?

A:  Minister Al-Tuwaijri started his response by noting his involvement in working with G20 countries where the major WTO Members are involved. He noted that one of the issues G20 countries have supported is engaging in reform at the WTO.  Individual countries may have different views on reform — how, when, and what — but all agree reform is needed.  Minister Al-Tuwaijri believes that six-months is too long a period to determine if there is support among the major Members for a reform initiative.  He believes that within the first two – three months of becoming the next Director-General he should know if the intent of the major Members is to support reform or not.  He would reach out with a specific set of questions (e.g., here are top five issues for reform discussions) and seek input on where Members are on a willingness to address the issues.  Minister Al-Tuwaijri has the ability to reach out to the major Members and be viewed as an honest broker.  Saudi Arabia has always been a neutral country and has been serving as President this year in the G20. 

Q:  On China, Amb. Lighthizer is looking for a candidate to be the next Director-General who understands that the current WTO rules don’t discipline China.  Do you agree that the current rules don’t adequately discipline China?  Would you support efforts to improve disciplines on industrial subsidies?

A:  Minister Al-Tuwaijri supports all efforts of WTO Members to engage in negotiations.  China is a major country and major trading nation.  He believes that the more that is done to promote negotiations and promote timely resolution of issues, the better it is for restoring the negotiation function.  He believes that the U.S. and China should bring all of their issues with each other to the table.  He knows that there are many.  But WTO Members need to move the negotiating process forward to ensure rules are adequate.

The Rt Hon Dr. Liam Fox MP (United Kingdom)

Dr. Fox was the last of the candidates to meet with the General Council and the second candidate who met on July 17. His prepared statement talks about the array of issues likely to be addressed heading into the twelfth Ministerial Conference in 2021 and the agreed need for broader reform. However, he does not mention in his prepared statement the issues surrounding different economic systems or the need for revised rules on industrial subsidies.

During Dr. Fox’s press conference on July 17, he was asked one question that was broad but fairly did include the U.S. effort to address non-market economies (how would you deal with the broad U.S. concerns with the WTO). Dr. Fox viewed the main U.S. concerns as being with the Appellate Body and limited his remarks to that issue.

He was asked a different question on why the multilateral trading system is important to large parties. My notes on his response are provided below.

Q: Why is the multilateral trading system important to the large parties?

A: Dr. Fox indicated that he viewed the Director-General position to not be one of taking sides in bilateral disputes but to maintain the international trading system. If Members don’t enforce what currently exists, what is the credibility of new rules signed onto later? He stated that all Members have benefited from the multilateral trading system. The alternative to a rules- based system is not acceptable. That is true for most countries, not just smaller countries. He used the examples of the 4th and 5th largest economies, Germany and UK, for whom global trade is a major component of their economies.

WITA had a webinar with Dr. Fox on July 30, 2020. https://www.wita.org/event-videos/conversation-with-dr-liam-fox/. During the webinar, Dr. Fox was asked several questions about China, including whether existing rules adequately discipline China’s policies and whether new negotiations on industrial subsidies are needed. My notes on the questions asked and Dr. Fox’s responses are provided below.

Q:  USTR Lighthizer has indicated there are three factors he is looking for in considering candidates for the Director-General post: (1) no anti-Americanism; (2) a belief that there is a need for broad reform at the WTO; and (3) someone who understands that the current WTO rules don’t adequately discipline China’s policies.  Do you agree with Amb. Lighthizer’s last point on the need for new rules to address Chinese policies?

A:  Dr. Fox’s answer dealt with all three factors including that he is not anti-America. He also believes there is a need broad-based reform.  In Dr. Fox’s view, the reform needed is both internal at the Secretariat as well as in changing the rule book.  For example, Dr. Fox had had dozens of meetings by the time of the webinar with WTO Members. Many countries felt that if you weren’t a large Member or a squeeky wheel, your voices were not heard.  In Dr. Fox’s view, the next Director-General needs to review the operation of WTO Secretariat to be sure all Members can be heard and improve the outreach to all Members and listening to their views and concerns.   Dr. Fox believes that there is also a need to reform how the WTO operates during negotiations.  He used the example of the fisheries subsidies negotiations. He opined that better outreach to NGOs and other groups about the negotiations and encouraging their engagement with Members would help constituencies better understand that the WTO is engaged in issues that are importance to them. The failure to have such engagement can undermine the concept of shared endeavor which is important to forward movement at the WTO.  So different forms of reform are needed at the WTO.

On the question about whether rules adequately discipline the policies of China, Dr. Fox stated that reform is not about focusing on any one country.  He stated that, of course, all Members must comply with the existing rules.  In his view, Members need an effective dispute resolution system to ensure such compliance.  Beyond that, the question is how do WTO Members take forward and address common challenges (e.g., e-commerce).  The key for the WTO is to bring the rule book up to date with the changing commercial realities.  Up-to-date rules and getting all Members to comply are the main objectives of reform.

Q:  what about industrial subsidies.  Is this an area that needs to be updated.

A:  Dr. Fox indicated that WTO Members have a lack of trust in each other.  One way to improve trust is to improve transparency.  Dr. Fox used as an example, efforts by the OECD to quantify subsidies to aluminum producers around the world. He had visited the OECD recently and heard from them about the extraordinary efforts they went to to make up for a lack of available data on items like production capacity and production. The efforts undertaken were both expensive and time consuming.  The example of aluminum indicates that it is important to improve objective data that are provided by Members to the WTO.  If WTO Members want improved transparency and improved accuracy of information provided, the WTO also will need to find better ways to verify data submitted.

Conclusion

The question of whether non-market economies or state-directed economies or state-capitalist economies properly fit within the WTO Agreements was not addressed by any candidate, though Dr. Okonjo-Iweala took the position that the nature of the economic system of any Member was not an issue for the WTO to consider.

On whether the current rules of the WTO adequately discipline the policies of China (and more broadly other non-market economies), candidates generally were of the view that the reform process should permit an evaluation of the changing global landscape and developments and where issues were not addressed or inadequately addressed by current rules, Members should consider what changes would be appropriate. Dr. Seade noted that since China was not part of the GATT in the 1990s during the Uruguay Round negotiations, with all the change that has occurred in the first 25 years of the WTO and limited update of rules, there is little doubt that rules need to be updated both to address practices of new Members and to incorporate their views on needed updates. Minister Yoo suggested a somewhat similar approach.

On the question of the need for an update to the rules on industrial subsidies, Minister Mohamed and Dr. Okonjo-Iweala were of the view that the proposal being worked on by the U.S., EU and Japan should be tabled in Geneva so all Members could start the process of understanding the concerns and appropriateness of the approaches recommended to address. Mr. Mamdouh included updating industrial subsidies rules as one of the priority issues to be addressed by the WTO.

The race to become the next WTO Director-General — where the candidates stand on important issues: convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 1, Background on issues

· August 17, 2020 · industrial subsidies, non-market economy, State Ownership and State Investment · , , , , , , , , , , , , , , , , , , , , · No Comments

Background

When China acceded to the World Trade Organization in 2001, it had had a long working party process as WTO Members focused on the wide array of changes to laws, regulations and practices that China would need to undertake to have an economic system and policies that were consistent with WTO norms. China made many changes to its policies ahead of accession. However, the extent of modifications needed to the Chinese system that were still not accomplished by 2001 meant that the Protocol of Accession and the Working Party Report that China and WTO Members agreed to were unprecedented in terms of the number of additional changes that needed to be made for China’s system to be compatible with WTO norms. Indeed, periodic reviews over a decade were included of China’s actions to permit other WTO Members to understand the extent of compliance with the wide ranging modifications still needed. As China was moving from a state-controlled economy towards a market economy, WTO Members insisted on special rules to address some of the likely distortions a large economy like China with significant state controls was anticipated to create. A country-specific safeguard and special recognition of nonmarket economy provisions in trade remedies were included in the Protocol of Accession. While China accepted all three provisions to obtain membership in the WTO, China always expressed its views that these additional provisions were discriminatory and an effort to hold China back in terms of economic growth.

While China continued to make progress in its reform program for a number of years after acceding to the WTO, beginning with the financial crisis of 2008-2009 China reversed direction and increased the importance of state-owned and state-invested enterprises, state planning and state control of a wide array of factors of production. A former Director-General of the WTO and former EC Trade Commissioner reviewed the challenges for market economy countries in dealing with a country with a large share of its economy controlled by the state. See July 27, 2020, Pascal Lamy’s recent comments on the challenges facing the WTO, https://currentthoughtsontrade.com/2020/07/27/pascal-lamys-recent-comments-on-the-challenges-facing-the-wto/.

Many major trading partners have worked with China since its WTO accession to address perceived distortions flowing from its economic system and to help China handle the obligations it had undertaken upon joining the WTO. Many commitments for change were made by China with limited actual forward movement achieved in the views of at least some trading partners. Members like the United States undertake their own annual review of China’s compliance with WTO obligations in an effort to chronicle China’s changing economic system and whether there are distortions of concern to China’s trading partners. See, e.g., U.S. Trade Representative, 2019 Report to Congress on China’s WTO Compliance (March 2020)(embedded below). As stated on page 4:

“Over the past nearly two decades, a variety of bilateral and multilateral efforts were pursued by the United States and other WTO members to address the unique challenges presented by China’s WTO membership. However, even though these efforts were persistent, they did not result in meaningful changes in China’s approach to the economy and trade.

“In our past reports, we identified and explained the numerous policies and practices pursued by China that harm and disadvantage U.S. companies and workers, often severely. We also catalogued the United States’ persistent yet unsuccessful efforts to resolve the many concerns that have arisen in our trade relationship with China. We found that a consistent pattern existed where the United States raised a particular concern, China specifically promised to address that concern, and China’s promise was not fulfilled.

“The costs associated with China’s unfair and distortive policies and practices have been substantial. For example, China’s non-market economic system and the industrial policies that flow from it have systematically distorted critical sectors of the global economy such as steel and aluminum, devastating markets in the United States and other industrialized countries. China also continues to block valuable sectors of its economy from foreign competition, particularly services sectors. At the same time, China’s industrial policies are increasingly responsible for displacing companies in new, emerging sectors of the global economy, as the Chinese government and the Chinese Communist Party powerfully intervene on behalf of China’s domestic industries. Companies in economies disciplined by the market cannot effectively compete with both Chinese companies and the Chinese state.”

2019_Report_on_Chinas_WTO_Compliance

The 11th Ministerial Conference and a Joint Statement by EU, Japan and the United States

The challenges of China’s economic system have been felt in many global industries in a number of ways. There has been massive excess capacity created by China’s policies (and those of some other countries). Efforts to address excess capacity in steel proved unsuccessful. But literally dozens of industries faced excess capacity in China which has resulted in flooded global markets and harm to competing producers in other countries.

At the same time there have been major concerns about forced technology transfers for companies wanting to operate in China, a myriad and changing set of barriers (formal and informal) discriminating against imports and foreign owned enterprises in certain sectors.

By the 11th WTO Ministerial Conference, the United States, European Union and Japan had decided more formal action was needed to address the ongoing distortions being created by China and other countries emulating the Chinese model of economic system. At the end of the Conference, the three WTO Members issued a joint statement which stated in large part,

“We shared the view that severe excess capacity in key sectors exacerbated by government-financed and supported capacity expansion, unfair competitive conditions caused by large market-distorting subsidies and state owned enterprises, forced technology transfer, and local content requirements and preferences are serious concerns for the proper functioning of international trade, the creation of innovative technologies and the sustainable growth of the global economy.

“We, to address this critical concern, agreed to enhance trilateral cooperation in the WTO and in other forums, as appropriate, to eliminate these and other unfair market distorting and protectionist practices by third countries.”

https://ustr.gov/about-us/policy-offices/press-office/press-releases/2017/december/joint-statement-united-states

There have been a series of meetings of the three trade ministers since then providing an update on their joint efforts. A joint statement in January 2020 outlined the types of industrial subsidies where the three major WTO Members believed greater disciplines were needed and outlined other areas where joint efforts were underway. The 2018, 2019 and 2020 joint statements can be found here, with the 2020 statement embedded after the links. See Joint Statement on Trilateral Meeting of the Trade Ministers of the United States, Japan, and the European Union, 09/25/2018, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/august/statement-meetings-between-united; Joint Statement of the Trilateral Meeting of the Trade Ministers of the United States, European Union, and Japan, 05/23/2019, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/may/joint-statement-trilateral-meeting; Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States, and the European Union, 01/14/2020, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/january/joint-statement-trilateral-meeting-trade-ministers-japan-united-states-and-european-union.

1-14-2020-Joint-Statement-of-the-Trilateral-Meeting-of-the-Trade-Ministers-of-Japan-the-United-States-and-the-European-Union-_-United-States-Trade-Representative

U.S. Section 301 Investigation of Certain Chinese Policies, U.S. imposition of tariffs and Chinese retaliation

In August 2017, the U.S. Trade Representative initiated an investigation on certain of China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation. 82 Fed. Reg. 40,213-40,215 (Aug. 24, 2017). The investigation resulted in a determination by USTR on March 22, 2018 that various Chinese acts, policies and practices violated Section 301 of the Trade Act of 194, as amended. The President authorized the imposition of additional duties to encourage China to address the problems raised. China retaliated and through a series of further escalations, the U.S. has imposed additional duties on some $350 billion of imports from China and China has imposed additional duties on the vast majority of U.S. exports to China. The 301 report and supplement are embedded below.

Section-301-FINAL

301-Report-Update

The United States viewed the Section 301 investigation as necessary to address practices of China not addressed by WTO rules or not adequately addressed. China viewed the investigation as not permitted under WTO rules. The trade conflict and efforts to find a solution, resulted in a Phase 1 Agreement between the United States and China with most additional duties remaining in place, some substantive changes made on some issues of concern to the United States and a Phase 2 negotiation to resolve outstanding issues which has not begun as of mid-August 2020.

China’s effort to be treated as a market economy under trade remedies

China has long felt that nonmarket economy methodology employed by trading partners discriminated against China and was unjustified. On December 12 2016, the day after certain language in China’s Protocol of Accession became ineffective, China filed requests for consultations with each of the European Union (WT/DS/516) and the United States (WT/DS/515). China has not actively pursued the action against the United States. On the action against the European Union, after the matter was fully briefed at the panel stage and it was understood that an interim panel report was released to the parties, China requested on 7 May 2019 the panel to suspend its proceedings in accordance with Article 12.12 of the DSU. The panel proceeding was suspended on 14 June 2019. On 15 June 2020, the Secretariat released a note indicating that the panel’s authority in the dispute had lapsed since China had not requested the resumption of work within one year.

Thus, China remains subject to nonmarket economy methodologies by certain of its trading partners.

Proposed General Council decision submitted by the United States

The United States has raised an issue for WTO Member consideration in the form of a proposed General Council decision. The issue goes to whether the WTO is predicated on market-oriented economic principles and rests on the concern that some large WTO Members (including China) have economic systems that are characterized as non-market and that create various distortions in the global marketplace including creating massive excess capacity and other issues. While the issue has been raised by the United States for the last several years within the WTO, the U.S. permanent representative to the WTO made a strong case at the General Council meeting (Dec. 9, 2019), raised the matter again along with the draft General Council decision at the March 3, 2020 General Council meeting and raised it again at the July 22-23, 2020 General Council meeting. The proposal was opposed by China at each General Council meeting. Many Members provided comments either supporting, opposing, raising questions with the proposal or indicating the matter was being considered in capital (minutes for the July General Council meeting are not yet available). Members besides the U.S. and China who spoke include the European Union, Japan, Canada, Australia, United Kingdom, Switzerland, Norway, Mexico, Brazil, Colombia, Chinese Taipei, Uruguay, Indonesia, Nigeria, South Africa, India, Pakistan, Russian Federation, and Sri Lanka. See, e.g., Minutes of General Council Meeting, 9-10 December, 2019, WT/GC/M/181 at 59-64 (24 February 2020); The Importance of Market-Oriented Conditions to the World Trading System, Draft General Council Decision, Communication from the United States, WT/GC/W/796 (20 February 2020)(embedded below); Minutes of General Council Meeting, 3 March 2020, WT/GC/M/182 at 35-44 (16 April 2020); General Council Meeting of 22-23 July 2020, Proposed Agenda, WT/GC/W/802 (item 11)(20 July 2020).

WTGCW796

Conclusion

The crisis at the WTO has many elements but a central concern of many is whether the current WTO can be effective in ensure competitive markets when one or more major Members have an economic system largely at odds with that of most Members. The tensions created by the distortions caused by different systems has led both to increasing use of trade remedies, efforts to identify changes or additions to rules needed if convergence is not required of Members, and actions outside of the WTO where long term discussions have not resulted in the level of changes needed by countries working from market-oriented economies.

While the U.S. has reviewed provisions of the WTO that indicate the system is premised on market economy principles, a number of Members disagree that the WTO can address different economic systems. One of the Deputy-Directors General has identified core principles of the WTO and opined that the system supports convergence not coexistence. See Remarks before the Korean International Trade Association. 27 May 2020, https://www.wto.org/english/news_e/news20_e/ddgaw_27may20_e.htm back to text

It is against this complex background that candidates for the Director-General post of the WTO will be evaluated by many Members. In the next post, I turn to how the eight candidates have addressed these complex issues in terms of their prepared statements to the General Council, press conference after the General Council meeting and in the WITA webinars.

Stay tuned.

Pascal Lamy’s recent comments on the challenges facing the WTO

· July 27, 2020 · COVID-19, industrial subsidies, Pascal Lamy, State Ownership and State Investment, U.S. - China relationship · , , · No Comments

Pascal Lamy is a former Director-General of the WTO (2005-2013) and former European Commission Trade Commissioner (1999-2004). He is President emeritus of the Jacques Delors Institute. As one would expect, he is a frequent speaker on trade matters. Two events in the last several months presented some thoughts on the challenges for the WTO moving forward.

Mr. Lamy was interviewed by the Lowy Institute in Australia in early July on their COVIDcast addressing the future of globalisation. See The Interpreter, July 3, 2020, COVIDcast: The future of globalisation, https://www.lowyinstitute.org/the-interpreter/covidcast-future-globalisation. Similarly, on June 17, 2020, he and Robert Zoellick (former President of the World Bank and former U.S. Trade Representative) participated in a Peterson Institute for International Economics Trade Winds program, What future for the global trading system?, https://www.piie.com/events/what-future-global-trading-system.

Below are some of my notes on points made by Mr. Lamy I thought were of interest along with my commentary.

globalization vs. deglobalization

On the future of gobalization, Mr. Lamy is of the view that the next few years will be a period of more obstacles for trade and investment. These obstacles will change the speed of globalization but won’t lead to broad scale deglobalization. There will be some onshoring to address fragility of supply chains. However, the clamor for onshoring will be “more bark than bite”.

In the United States both the Administration and parts of the Congress have called for onshoring production of medical equipment. There has been some utilization of the Defense Production Act by the Trump Administration to get producers to use facilities to produce needed equipment. Many U.S. industries and unions have urged the government to take action to permanently reshore production of various medical equipment. See Joint Statement on Policy Objectives for Reshoring and Safeguarding Domestic PPE Manufacturing (embedded below).

joint-statement-of-reshoring-of-PPE-production

However, the U.S. has not entered into long-term contracts to support significant reshoring efforts, possibly supporting Mr. Lamy’s prediction of “more bark than bite”.

precautionism

Efforts by countries to recover from the economic damage caused by COVID-19 will be complicated by what Mr. Lamy called “precautionism” (governments protecting people from risk) and which he distinguished from protectionism (protecting producers from international competition). In Mr. Lamy’s view, protectionism can be addressed by eliminating restrictions or other obstacles. Precautionism involves risk profiles which will differ among Members and possibly may differ among issues being considered and hence will be much more difficult to address to achieve a level playing field. Mr. Lamy in the Trade Winds program used the example of the tourism sector which has been devastated by governments’ efforts to control the spread of COVID-19 and noted that there are a number of different initiatives by countries to get some reopening of tourism (e.g., nonessential air travel) between particular countries, but that there isn’t a common approach which in his view reflects differing risk profiles of countries.

I would note that precautionism is not limited to the response to the COVID-19 pandemic. The WTO’s Sanitary and Phytosanitary Agreement and the Technical Barriers to Trade Agreement both recognize the right of Members to take measures to protect their populations at such level as is deemed appropriate by the Member although encouraging use of international standards.

To the extent the aftermath of the COVID-19 pandemic is a more cautious risk profile for major trading nations, recovery will likely be slower and more fragmented.

Borrowings during the pandemic to lessen the economic collapse

Mr. Lamy made several points on the massive amounts of stimulus funds being provided by certain governments to limit the economic challenges being faced from efforts to slow the spread of COVID-19.

His first point is that the size of the government programs will necessarily distort trade and create a playing field that is not level. Rescue plans for companies or industries, subsidies provided, increased state ownership are all elements of the distortions that he sees occurring. He believes countries will have to come to grips with the emergency needs and see that markets return to their proper role with reduced government involvement.

The second point is that only a few countries are positioned to provide this type of financial assistance because of the inability for most countries to borrow huge amounts of money for such stimulus activities. Hence the north-south divide is growing according to Mr. Lamy. While this point is certainly true, multilateral organizations like the IMF and World Bank and regional development banks are working to provide debt forgiveness and other financial assistance to some developing and to least developed countries to provide some greater flexibilities.

WTO reform — U.S.-China tensions

Mr. Lamy views the WTO as weaker today than it was ten years ago. He attributes the main source of the weakened situation of the WTO to the growing divergence between the United States and China. In his view, the tension between the two has prevented convergence on a range of issues.

Because the world has changed so much over the years, the WTO rulebook must be updated. China’s state capitalism economic system is creating significant problems for the world trading system. China’s trading partners are concerned about the high level of state ownership (30% for China) and the government support to the state-owned sectors. These facts lead to conflict with partners both in terms of market access in China and in terms of Chinese competition in other markets. Mr. Lamy notes that the WTO’s rules on state aid are weak. He doesn’t believe one can coexist with China in the WTO if rules on state aid are not toughened (what he describes as achieving “competitive neutrality”). Even with new rules, the geopolitical rivalry between the U.S. and China will remain.

Mr. Lamy agrees with the United States that the current WTO rules do not constrain China’s state capitalism practices which distort competition. He believes that China was making good progress on moving towards a market economy until the 2008-2009 financial crisis. China had lowered state ownership to 15% of the economy. With the financial crisis, China poured huge sums into the economy, including through state-owned enterprises. With the change in political leadership, the country shifted away from a convergence model and has continued to bolster its state capitalism model, now 30% of the economy. For the foreseeable future, the WTO will not be able to achieve convergence by China to a market-economy model, but will have to work on whether coexistence can be made to handle at least many of the distortions.

The Untied States has been pushing the WTO to come to grips with the fact that the WTO set of rules was created for market economies, and to recognize that such rules don’t work for large state capitalism economies. One of the WTO’s Deputy Directors-General, Alan Wolff, in a speech earlier this year, in reviewing principles that undergird the WTO identified convergence, not coexistence, as one of the core principles. See DDG Wolff: “There can be no permanent retreat from what has been created,” 10 June 2020, https://www.wto.org/english/news_e/news20_e/ddgaw_11jun20_e.htm (“Of necessity, the WTO is about convergence, not coexistence”)

In his comments during the Peterson Institute’s Trade Winds webinar, Mr. Lamy indicated that coexistence is possible if there are strong state-aid rules and reviewed the ability of Germany and France to work together in the EC despite France having had relatively high state ownership (around 15%) in the early years. The ability to work with a country with significant state-control was due to stringent state aide rules. The U.S., Japan and EU have been working to pull together improved disciplines on industrial subsidies, action that China has already indicated it will not accept. Mr. Lamy is of the view that China can be brought to the table by parties seeking “competitive neutrality” and by indicating to China that China will not gain additional market access without agreeing to new rules on state aid.

In a post last week, I reviewed an opinion piece by Peter Carl, a former EC Director General for Trade. His take on the same situation was that the EU, US and others should pursue improved disciplines on state aid but when such efforts are rejected by China, the EU and others should leave the WTO and start a new organization without China where convergence would be possible. See July 25, 2020, A new WTO without China?  The July 20, 2020 Les Echos opinion piece by Mogens Peter Carl, a former EC Director General for Trade and then Environment, https://currentthoughtsontrade.com/2020/07/25/a-new-wto-without-china-the-july-20-2020-les-echos-opinion-piece-by-mogens-peter-carl-a-former-ec-director-general-for-trade-and-then-environment/.

Mr. Lamy also reviewed how a functioning WTO is very important for developing and least developed countries. Trade and investment is a big lever for such countries in their development efforts. Thus, if the WTO continues to weaken, it is these countries that will be most hurt. Similarly, these same countries are likely most adversely affected by the trade and economic fallout from the COVID-19 pandemic.

WTO agenda

During the Peterson Institute’s Trade Winds program in June, Mr. Lamy indicated that proponents of open trade were in for a difficult time. He listed five issues of concern. Three were dealt with above (precautionism, government infusions to address COVID-19 pandemic, deglobalization/onshoring). He also reviewed the weaponization of trade, citing both the Trump Administration’s actions and the dispute between Japan and the Republic of Korea, and new forms of protectionism citing investment controls and new instruments.

Mr. Lamy believes that the WTO agenda needs to be looked at in two stages. The first or short term involves finding a new Director-General, and needs to include a cooling down period. My understanding of the cooling down period is to have governments who have poured trillions of dollars into their economies back out of such increased state involvement and permit reestablishment of a level playing field. This period will be a few years and will permit some increase in trust through small steps. He believes there will be a coalition for open trade and that the EU will be the leader depending on the outcome of the upcoming Presidential election in the U.S.

Longer term, Mr. Lamy believes that the WTO must go back to dealing with the big problems:

coexistence with China as long as China has 30% of its economy state-controlled; will require improved rules on state aid;

dealing with the trade and environment nexus; issue keeps rising on the global agenda; EU planned global carbon tax will be important issue;

around the challenge of precautionism, the world will need a new effort to level the playing field possibly similar to prudential rules in the finance system.

EU role in the WTO during the US-China tensions

The EU is serving as a stabilizing force in the WTO. Indeed, the more U.S.-China tensions increase, the more the EU will step in to provide stability. Mr. Lamy states that many WTO members want the EU to be a shield to protect them from having to pick sides with either the U.S. or China. This is a big role for the EU. If EU comes out of the COVID-19 pandemic stronger, it will bolster the role that the EU can play in the WTO to maintain stability.

Mr. Lamy cited the Appellate Body crisis as one where the EU by creating the multi-party interim arbitration agreement took the lead to maintain stability in the organization and got many countries to follow.

Conclusion

Mr. Lamy paints a picture of a challenging time for the world trading system in the coming years. He agrees that the WTO rules do not adequately address distortions that flow from China’s state capitalism economic system. His proposed solution is to coexist but work on obtaining stronger rules on state aid. While the U.S., Japan and the EU agree such improved rules are needed, there is a certain irony in his recognizing the need for stronger rules on state aid, as it was the EU, among others, who pushed for weaker subsidies disciplines during the Uruguay Round.

Mr. Lamy also paints a bleak picture of distortions created by countries’ efforts to stem off economic collapse as countries impose shutdowns to try to control the COVID-19 spread. His argument is from 30,000 feet and is conclusory – the introduction of such huge amounts of money necessarily distorts competition. My own view is that while the question of whether there are distortions is an important one, large parts of the funding don’t increase manufacturing or production but rather form a safety net under employers, employees and state and local governments dealing with an extraordinary situation that doesn’t reflect market forces. Of more use would be agreeing on identification of outcomes that are viewed as distortive versus those outcomes which simply offset the economic fallout from the pandemic. Many industries will end up much smaller after the pandemic than before and any rescue funds provided will reflect an effort to address the extraordinary event of governments mandating closure of markets. Presumably such funding should be agreed to be nonobjectionable. Whereas if an industry in a country expands with government assistance to take advantage of the closure of competitors because of restrictions flowing from efforts to address the pandemic, presumably such subsidies would be problematic.

The longer term issues Mr. Lamy raises will certainly take center stage at some point, but his list does not include any of the large number of pending issues before the WTO where progress will hopefully be made in the coming next year or so – fisheries subsidies, electronic commerce, etc.

What is clear is that the next Director-General will face a very challenging landscape with fundamental differences among many Members that will make forward movement by the WTO and its Members a challenging undertaking.

Continued Stress in U.S.-China relations — Reduced Cooperation in Multilateral Fora

· May 22, 2020 · Selection of WTO Director-General, State Ownership and State Investment, U.S. - China relationship, U.S.-China Phase I Agreement · , , , , , , · No Comments

The two largest economies in the world view each other as competitors and potential adversaries. With significantly different political and economic systems and ideologies, the United States and China have had different perspectives on commitments and obligations undertaken in the economic sphere.

U.S. concerns

Specifically, the United States has viewed its bilateral trade negotiations with China and the later conclusion of China’s accession to the World Trade Organization (“WTO”) as having created a commitment by China to continue on market-based reforms with the eventual conversion of the Chinese economy into a market-economy consistent with the basic rules of the WTO. There have been high level dialogues between the two countries for years with a feeling in the U.S. that repeated commitments by China to fulfill commitments have not been honored and that the bilateral relationship had growing serious problems.

China concerns

China has had a different view of the world and its obligations to other countries through its joining the WTO. Reforms continued for a while but were replaced with a growing focus on state direction, state investment and heavy subsidization of a widespread number of sectors. China has viewed the United States as attempting to prevent its economic growth and global role and as not respecting its “right” to view itself as a developing country within the WTO and hence to have fewer obligations than a developed country.

Trump Administration changes approach

Under the Trump Administration, the United States has taken a more aggressive approach to dealing with what it perceives as distortions in economic competition and lack of meaningful reciprocity in the bilateral trade relationship. The U.S. has also looked at bilateral and multilateral approaches to address the problems it perceives China has created and is creating with the functioning of the global trading system.

Bilaterally, the U.S. has conducted its 301 investigation on a host of longstanding concerns of the U.S. business community on Chinese policies and practices. The adverse findings from the USTR investigation has led to the U.S. imposing additional tariffs on Chinese goods when resolution of the underlying issues was not achieved followed by retaliation by China and a series of additional rounds of more tariffs and more retaliation. The U.S. and China did engage in negotiations to see if they could resolve the underlying concerns of the United States. A phase 1 agreement was signed in January 2020, with a phase 2 process supposed to have commenced by May.

At the same time, the United States has pursued reform at the WTO (1) to address longstanding and bipartisan concerns with the WTO dispute settlement system, (2) to address rule changes to address some of the distortions that flow from China’s nonmarket economy, (3) to modify the self-selection nature of which Members are “developing” and (4) to improve transparency.

On transparency, many countries are not current on the various notification requirements, but major concerns have existed with China and India in terms of the number and dollar value of subsidy programs that are not being reported in their notifications to the WTO.

Some of the reforms of interest to the United States are being pursued as well by others, such as the EU and Japan on state-invested companies and industrial subsidies and various other countries on transparency.

But the WTO has been struggling to achieve forward movement on many issues of importance to different Members in part due to lack of consensus on issues and a lack of leadership/coordination among major players.

COVID-19 Complicates the Bilateral Relationship

The COVID-19 pandemic has complicated the situation for the WTO and for U.S.-China relations both because of the global reach of the health problem resulting in reduced functionality of the Missions in Geneva and the current inability to hold face-to-face meetings and the widespread use of export restraints on medical goods (including personal protection equipment like masks, gloves, shields, gowns, etc.) as demand in nations with significant number of infections has grossly exceeded existing inventories and production capabilities both in country and globally.

In terms of U.S.-China relations, the lack of complete transparency by the Chinese in the early months of the COVID-19 outbreak, some slowness of action by the World Health Organization, and both missteps on testing and slowness of initial action within the United States (and resulting massive unemployment, costs to the economy and multiple trillion dollar government response) has added finger pointing on the pandemic to the already tense bilateral relations. It has also resulted in the U.S. distrusting the WHO and temporarily suspending U.S. funding for the organization.

With the collapse in global trade, the pandemic has also made it far less likely that China will honor its increased import commitments from the U.S. in 2020 as contained in the Phase 1 Agreement. See U.S.-China Phase I Agreement – some progress on structural changes; far behind on trade in goods and services, https://currentthoughtsontrade.com/2020/05/12/u-s-china-phase-i-agreement-some-progress-on-structural-changes-far-behind-on-trade-in-goods-and-services/. That said, the U.S. continues to identify important advances being made at least in agriculture with China. See https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement.

On trade, the pandemic has crippled the economies of many countries with the resulting declines in imports and exports in the March-April time frame and likely going forward for some period, though China as the first country through the outbreak and a major producer of medical goods actually saw increased overall exports to the world in April.

United States Strategic Approach to The People’s Republic of China

Earlier this week, the White House forwarded to Congress a document required by the 2019 National Defense Authorization Act, United States Strategic Approach to The People’s Republic of China. On the trade/economic front, the paper repeats the concerns that the Administration has laid out in other documents most of which are summarized above (not including the COVID-19 issues). The U.S. views challenges from China to three broad areas — (1) economic challenges (largely failure to continue reforms to become a market economy, failure to honor commitments made to the US, use of predatory practices, insistence on being a developing country, etc.); (2) challenges to U.S. values; and (3) security challenges. The link to the document is here and the text is embedded below. https://www.whitehouse.gov/wp-content/uploads/2020/05/U.S.-Strategic-Approach-to-The-Peoples-Republic-of-China-Report-5.20.20.pdf.

U.S.-Strategic-Approach-to-The-Peoples-Republic-of-China-Report-5.20.20

Challenges for the WTO

The WTO remains able to move forward where issues are limited to a subset (the “willing”) as progress on e-commerce talks would support. But in a consensus based system, distrust between major players will paralyze large parts of any agenda. Indeed, with the large number of WTO Members (164) at various stages of economic development, there will almost always be a wide divergence of views on any issue. In such a situation, leadership and cooperation among major economies become important to develop a consensus. So it is hard to see how the WTO advances a reform agenda without improved relations between the organization’s two largest Members.

With the recently added challenge for the WTO of selecting a new Director-General, the sour relationship the U.S. and China will likely make finding a candidate who would be supported by a consensus of the Membership that much harder, suggesting at a minimum a process that takes the full six-month time for selection (versus any hoped for expeditious resolution in light of DG Azevedo’s departure at the end of August) and perhaps extended time lines. If the selection process breaks down into highly polarized camps (the existing procedures were developed to try to prevent such an outcome), the ability to move forward the WTO’s reform and existing negotiating agenda will be delayed by certainly months and perhaps longer.

Conclusion

At a time when the world is struggling with a global pandemic which continues to cause huge health challenges to many countries in the world and has devastated the global economy at least temporarily, costing tens of millions of workers jobs, and likely closing hundreds of thousand of businesses around the world while requiring government financial support that will likely exceed ten trillion dollars, there is an unfortunate lack of global cooperation between the major economic players and distrust at least from the U.S. of multilateral institutions viewed as either ineffective to deal with China’s economic system or not operating in an unbiased manner.

A major part of the challenge flows from the distrust that exists between the world’s two largest economies that precedes the pandemic but that has been worsened by the pandemic’s development and handling. The two countries have different economic systems which are essentially non-compatible, have different political systems and different ideologies and view each other as competitors and potential adversaries.

In a change of approach, the United States has decided to take a more aggressive approach to achieve reciprocity in fact with China and not merely on paper or from spoken promises. The change in approach has resulted in the U.S. acting unilaterally in certain situations. China has appeared unable to understand or agree with the concerns raised by the U.S. (and others) and harbors a belief that the real motive behind U.S. actions is “to keep China down”. This mutual distrust has resulted in both hard feelings and an inability to achieve cooperation on a large number of trade, economic and other issues.

The current U.S.-China relationship increases the problems for many multilateral organizations, but certainly for the WTO both in terms of selecting a new Director-General and in developing WTO reforms and moving ongoing negotiations forward.

Look for a challenging second half of 2020.

Oil and gas sector suffers declining demand, collapsing prices, expanded state involvement — skewed economic results damage much of the global economy

· April 26, 2020 · Oil and gas, State Ownership and State Investment · , , , , , , , , , , , , , , , , , , , , , · No Comments

The United States and many other countries view the World Trade Organization as the forum for global trade rules that support market economies. One of the challenges for the WTO going forward is what to do with the important Members whose economic systems are not anchored in market economic principles. While China is the most frequently mentioned WTO Member whose economic system is causing massive disruptions for market economies, there are other countries with important sectors that are state-owned, controlled and directed. The United States, European Union and Japan have been working on proposals for modifications of WTO rules to address distortions flowing from massive industrial subsidies and state controlled sectors that do not operate on market principles.

While WTO reform is not likely to see serious engagement by WTO Members before the COVID-19 pandemic is brought under control, the sharp contraction of economic activity in many countries is highlighting the importance for WTO Members actually addressing the role of the state in industry and rule changes needed to avoid the massive distortions that state involvement too often created.

Oil and Gas as an Example

Few industrial sectors have as much state ownership and control as the oil and gas sector. While there are countries with privately owned producers, much of the world operates with producers that are state owned or state controlled. Since the 1960s, a number of countries have engaged in cartel-like activity to collectively address production levels to achieve desired price levels. While many of these countries are part of the Organization of Petroleum Exporting Countries (“OPEC”), OPEC meets with other countries as well in an effort to achieve production and pricing levels. Current OPEC members include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela.

The activity has resulted in artificial pricing levels in export markets as compared to prices in home markets of OPEC members and periodic price shocks based on collective action. Large price increases in the 1970s led to high levels of inflation and rapid changes to manufacturing operations in some countries.

  1. Economic contraction as countries struggle to limit spread of the coronavirus

There has been a sharp contraction in demand for petroleum products in 2020 as countries have shut down movement of people in an effort to control the spread of COVID-19. Air travel has been decimated in many parts of the world and there are significant reductions in automobile travel. Manufacturing has also seen significant reductions. The contractions have resulted not only in national reductions in use of petroleum products but also international reductions both directly (reduced air traffic and ship traffic) and because of disruptions to supply chains which have reduced downstream production.

The U.S.-China Economic and Security Review Commission released a staff research report on April 21, 2020 entitled “Cascading Economic Impacts of the COVID-19 Outbreak in China” which reviews information on the wide range of economic impacts from the COVID-19 pandemic as felt in the U.S. https://www.uscc.gov/sites/default/files/2020-04/Cascading_Economic_Impacts_of_the_Novel_Coronavirus_April_21_2020.pdf. The report includes a section entitled “Turmoil in Energy Markets” which states,

“The standstill in Chinese production and halt in flows of goods and people has drastically depressed Chinese demand for energy products such as crude oil and liquified natural gas (LNG), adding pressure to an oil supply glut that had materialized at the end of 2019.99 In December of 2019, Institute of International Finance economist Garbis Iradian had forecasted a supply glut, pointing to high output from Brazil, Canada, and the United States.100 The COVID-19 outbreak exacerbated this challenging outlook. As the Organization of the Petroleum Exporting Countries (OPEC) reported in April 2020: ‘The largest ever monthly decline in petroleum demand in China occurred in February 2020.’101 Chinese oil demand ‘shrank by a massive 3.2 million barrels per day’ over the prior year.102 Research by OPEC forecasted China’s 2020 demand for oil will decrease by 0.83 million barrels per day over 2019.103 As the largest oil importer,104 Chinese oil consumption has a significant impact on global demand. In 2019, China accounted for 14 percent of global oil demand and more than 80 percent of growth in oil demand.105 Following the outbreak in China, the OPEC Joint Technical Committee held a meeting on February 8 to recommend new and continued oil production adjustments in light of “the negative impact on oil demand” due to depressed economic activity, “particularly in the transportation, tourism, and industry sectors, particularly in China.”106 In LNG markets, on February 10, Caixin reported Chinese state-owned oil giant China National Offshore Oil Corp. (CNOOC) requested a reduction of an unknown quantity in LNG shipments, invoking a “force majeure” clause due to COVID-19.107 S&P Global Platts, an energy and commodities analysis group, stated China’s LNG imports in January and February fell more than 6 percent over the same period in 2019.108

Prices have also dropped in this period. OPEC’s reference price index fell from $66.48 per barrel in December 2019 to $55.49 per barrel in February 2020, a drop of 19.8 percent.109 These price cuts are causing financially strapped* U.S. energy producers to cut back investment in oil and gas projects as profits erode. The U.S. Energy Information Administration forecasts that the current drop in oil prices will lead to lower U.S. crude oil production beginning in the third quarter of 2020.110″

The complete report is embedded below (footnotes 99-110 can be found on page 22 of the report).

USCC-staff-research-Cascading_Economic_Impacts_of_the_Novel_Coronavirus_April_21_2020

2. State-owned or controlled oil companies create further crisis

With a sharp contraction in oil demand, one would expect falling oil prices and reductions in global production over time. OPEC efforts to achieve reductions in production amongst themselves and Russia didn’t work out with Russia walking out of talks to reduce production to prevent further price declines. Russia and Saudi Arabia then engaged in a price war which resulted in further sharp price reductions in March and early April, large surpluses of oil in the market, with dwindling storage capacity for surplus production. See, e.g., https://en.wikipedia.org/wiki/2020_Russia%E2%80%93Saudi_Arabia_oil_price_war (and sources cited therein). Below is a graph of crude oil prices from 2015 through April 2020.

3. April Agreement to Reduce Production Beginning in May and June 2020

The United States, concerned with the collapse of oil prices and the effects on U.S. producers and oil/gas field companies, engaged in outreach to both Saudi Arabia and Russia to seek a solution. OPEC members, Russia and many others (including the United States) agreed to global production reductions of close to 10 million barrels/day beginning in May and carrying through June, with smaller reductions for later periods, in an effort to bring about balance between supply and demand. See, e.g., April 12, 2020, AP article, “OPEC, oil nations agree to nearly 10M barrel cut amid virus,” https://apnews.com/e9b73ec833e9a5ad304a69e3b9b86914. The U.S. Department of Energy has a webpage that reviews statements by members of Congress and others on the OPEC+ deal.

Because the agreement kicks in at the beginning of May, the continued production and reductions in available storage for oil resulted in further declines in oil prices, with prices on April 20 going negative for the first time in history. Prices have recovered somewhat in the last several days. https://www.cnbc.com/2020/04/24/oil-prices-could-remain-under-pressure-according-to-satellite-imagery-analysis.html; https://oilprice.com/Latest-Energy-News/World-News/OPECs-No3-Already-Started-Cutting-Oil-Supply.html.

WTO Challenges

Joint action during the global COVID-19 pandemic may be understandable and in keeping with the resort to extraordinary measures by governments during the crisis to preserve health and economies. Nonetheless, the extraordinary distortions that flow to global commerce from joint government activity limiting production of oil and gas products or establishing minimum prices for export have been ignored within the GATT and now the WTO for decades. This is unfortunate as the distortions affect both competing producers of the products in question in other countries and also downstream users and consumers more broadly. The overall distortions over time are certainly in the trillions of dollars.

GATT Art. XX(g) permits governments to enforce measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.” While there have been some cases where Art. XX(g) has been examined, actions by OPEC or OPEC+ countries to limit production (and hence exports) have never been challenged.

While there are national antitrust laws in many countries, such laws (such as those in the United States) don’t make government interference in the economy or government restrictions on export actionable despite the harm to consumers and to downstream manufacturers.

In a consensus based system like the WTO, the likelihood of obtaining improved rules on state-owned or state-invested companies or to restrict governments’ ability to unilaterally or jointly restrict production and exports seems implausible. This is especially true on oil and gas with Saudi Arabia and Russia as WTO Members. The US-EU-Japan initiative hasn’t yet fleshed out possible rule changes for state entities, so one may see some efforts in the coming years that could be useful if accepted by the full membership. But if there is to be meaningful WTO reform, agreeing on rules for the actions of governments that affect production and trade in goods and services is clearly of great importance. Without such rules, the WTO will not actually support market economies in critical ways.

Modifying antitrust laws is the other option, but one which legislators have been unwilling to address over the last fifty years. It is not clear that there are current champions of such modifications in the United States or in other major countries.

Conclusion

There are many sectors of economies that are being seriously adversely affected by efforts to control the spread of COVID-19. Governments are taking extraordinary actions to try to prevent their economies from collapsing under the strains of social distancing.

The oil and gas sector is one where there has been significant negative volume and price effects. Unfortunately the extent of the negative volume and price effects is driven in large part by the actions of governments who are preventing the global market for these products from functioning correctly, just as government actions have interfered in the functioning of these markets for the last fifty-sixty years.

The recent agreement to slash global production by nearly 10 million barrels per day was needed in light of the extensive government interference that has characterized the market and the actions by Russia and Saudi Arabia in March and early April.

More importantly, the long-term government involvement and interference with the functioning of the sector should cause trade negotiators and legislators to be looking at how to reform the WTO and/or modify national laws to prevent government ownership, control or cartel-like actions from distorting trade flows and economies. The need is pressing, but don’t hold your breath for action in the coming years.