Collective Restraint vs. Unilateral Action vs. Collective Action in the Face of Overcapacity/Non-Market Policies

There was an interesting exchange at last week's WTO General Council meeting, as Korea submitted a communication entitled "Preserving the spirit of open and predictable trade: Collective restraint against actions undermining trade liberalization." In this communication, Korea raised concerns about the response of other governments to "structural challenges such as overcapacity." At the outset of its argument, Korea said:

There is a growing trend toward using tariff increases and modifications of concessions to address structural issues. While these may serve as short-term tools to protect specific domestic industries, they risk triggering a chain reaction of retaliatory actions.

Korean then made the case for "collective restraint" here:

If this trend is not managed early, such measures could become normalized as a routine policy instrument, thereby weakening the rules-based system. Korea emphasizes that collective restraint and a cautious approach are necessary to prevent an uncoordinated expansion of trade barriers.

What would Korea do instead of tariffs?

Korea believes that responses should not rely primarily on tariffs. Instead, we must focus on direct and sustainable solutions, such as enhancing transparency of subsidies and tackling root causes. We should prioritize these discussions within WTO reform and other relevant bodies to ensure a level playing field.

It then reiterated its concerns with tariffs, noting that "the proliferation of tariff-based responses risks undermining decades of trade liberalization."

We'll get the full rundown of Member comments on this issue when the meeting minutes are published in a few weeks. China is never mentioned by name, but of course this is about China. When we get the meeting minutes, I'll be curious what China has to say here, as well as other countries caught in the middle of the China-U.S. rivalry.

In the meantime, though, we have the U.S. and EU views, as these governments post their statements to the General Council online. Let's see what they had to say.

First up, in its statement at the meeting, the U.S. responded that "[w]e think this view misjudges the serious and urgent situation that many Members face." The trading system, it says, "has been severely undermined by the beggar-thy-neighbor policies driving persistent overcapacity in steel and other industrial sectors, not by the actions Members are forced to take to address the crisis." It further stated: "The idea that the countries damaged by persistent overcapacity should resign themselves to 'collective restraint' fails to grasp the gravity of the situation."

In the view of the U.S., "[o]ver the past few decades, we have seen increasing global imbalances caused in part by persistent structural excess capacity in steel and other industrial sectors." In response, the U.S. said, "[w]e tried to work within the international trading system to correct these challenges," but "the current system has proven too inflexible, slow-moving, and ineffective." Systemic issues "have persisted and even worsened over time, leading the United States to conclude that a new approach is needed to properly account for and protect our market from the global market distortions emanating from sources of excess capacity."

As for the EU, its statement argued that "the current WTO rulebook was not designed to address the challenge of structural overcapacity." It further stated:

Non-market overcapacity is one of the pressing realities that remain unaddressed because of gaps in WTO rules. Its root causes are State interventions that artificially sustain or expand production beyond market demand. This gap undermines the predictability and fairness of global trade. 

It then called for an expansion of the existing rules: "we believe that WTO Members should work together as part of the WTO reform work to address the shortcomings in the rules related to State intervention in support of industrial sectors in the WTO rulebook." It later noted that "we do believe that the rules need to be updated and completed."

The EU also emphasized that its own tariff actions are within the rules, which is a fair point:

The republic of Korea has referred to modification of concessions and has asked that Members exercise maximum restraint and try to calibrate the measures they take. The European Union is taking measures within the boundaries of the WTO rule book. The proposed EU steel regulation aims at tackling the negative trade-related effects of global overcapacity on the EU steel market.

This is something that the rules-based international trading system allows protecting, and this is why the EU is exercising its right of modification of concessions under Article XXVIII of the GATT 1994.

By using Article XXVIII, the EU is demonstrating its respect for the multilateral trading system and giving other WTO Members the opportunity to engage on this matter and to exercise their GATT rights in this respect.

In reaction to all this, I have a couple thoughts.

First, while overcapacity, on the one hand, and non-market policies and practices, on the other, may be tied together, non-market policies and practices are the underlying problem here and those should be the focus. (The EU describes these as "State interventions that artificially sustain or expand production beyond market demand"; the U.S. talks about "beggar-thy-neighbor policies".) Generally speaking, WTO rules can discipline state actions better than they can directly influence production capacity.

Second, something that I feel is missing from this debate is a discussion of how existing WTO rules apply to the non-market policies and practices at issue. There may be some "gaps" and "shortcomings" in "the current WTO rulebook," and it's certainly worth considering tweaks to these rules or adding new rules (or "updating and completing" the rules, as the EU put it), but I think people are underestimating the scope and potential of existing rules. For example, there are some good arguments that rules such as the SCM Agreement Article 5 "adverse effects" provisions could have an impact on these practices; and then in the context of China specifically, Accession Protocol rules such as paragraph 46 of its Working Party report, addressing the behavior of state-owned enterprises, could play an important role. How much progress could the existing rules achieve? We won't know for sure until we have tested the boundaries by trying to enforce them.

Third, the focus of the debate above between the governments seems to be on collective restraint versus unilateral action. But what about some kind of collective action? Mona Paulsen and Dan Ciuriak used that term here, arguing for a situation complaint in the context of recent U.S. trade policy moves, but I'm thinking of WTO complaints brought jointly by multiple Members against China based on the obligations noted earlier. The U.S. says it "tried to work within the international trading system to correct these challenges" but that did not produce results. However, that effort mostly involved domestic trade remedy cases or other unilateral tariffs, and, in my view, that approach is not likely to achieve long-term solutions.

Korea's communication mentions "tackling root causes." Does that encompass my suggestions for WTO complaints? I'm not sure what Korea had in mind, but I think it could.

Finally, let me throw in a related point here, as I came across something I wanted to comment on but I'm not sure it merits a separate post. In a new piece for The Wire, Bob Davis says the following about the proposed "Board of Trade" that has been mentioned in the context of U.S.-China economic relations:

But for Washington, the plan, if sealed, would pack a broader message: The United States has given up trying to change China’s economy through outside pressure or inducements. Instead, the U.S. accepts the state-dominated Chinese system as it is, and will from now on look to cut trade deals within the new framework. 

The “Board of Trade” plan reflects the frustration of many U.S. administrations that pressing China to liberalize its system, so that it can focus more on domestic consumer demand and less on subsidized exports, hasn’t worked. After decades of hectoring by the U.S. and others, China still relies on an undervalued currency and subsidies to power an export sector that has ravaged many U.S. industries and deepened voter cynicism that Washington can meet the Chinese challenge.

A lot of what is said here feels like the current conventional wisdom, but I think the conventional wisdom is a bit off.

First of all, pressuring China to "focus more on domestic consumer demand and less on subsidized exports" links two things that are not as closely related as people seem to think. China does have lower consumer demand than other industrialized countries; and it does have subsidies that benefit exports. But these are two very different issues. Maybe people have in mind that if China would stop providing subsidies at such high levels, consumer demand would then somehow shoot up, but I don't think that's likely to be the case. Keep in mind that complaints about foreign countries not consuming enough go way back, and this isn't a China-specific issue. From what I can tell, China's consumption levels are mainly a function of things other than its subsidies. (To be clear, I do think China should reduce its subsidies, an issue I'll get to next; I just don't think doing so will necessarily lead to much of an increase in consumer demand in China.)

Second, turning to those subsidies, I think people overestimate the "outside pressure or inducements" to liberalize that the U.S. has undertaken. Over the years, there have been U.S.-China dialogues and there have been unilateral actions by the U.S. But it has always seemed to me that neither approach was likely to accomplish much in terms of change in China. In my view, as noted above in the context of the General Council meeting, if the goal is to pressure China to change its economic policies, these are weaker alternatives to the approach that did have an impact when used, which was WTO complaints. My sense is that these weaker approaches may have been chosen in part because the priority was something other than pressuring China to change, but I'm not totally sure about that. If we ever do decide to make pressuring China to be more market-oriented a priority, however, we could actually see some progress.