How Should the EU Get Tough with China? Unilateral Action vs. WTO Complaints

I've seen several recent calls for the EU to get tougher in its economic relations with China, along with arguments that it has been too slow to act against the Chinese economic threat. Writing for The Wire, Grzegorz Stec of the Mercator Institute for China Studies (MERICS) has a piece entitled "The EU Must Confront China’s Trade Challenge." Along the same lines, Piotr Arak of the Atlantic Council says "Europe has had enough of China’s export surge." And as already mentioned on this blog, economists Sander Tordoir and Brad Setser argue that "Berlin and Brussels must either bolster their trade defences and industrial policy or prepare to offset the social and economic costs of deindustrialisation at China’s hand."

These writers point to a range of actions that could be taken: A greater use of AD/CVD/safeguards and the Foreign Subsidies Regulation; new instruments on diversification/overcapacity; some kind of Section 301-like instrument; and domestic industrial policy such as Buy European requirements.

What these suggested actions all have in common is their fundamentally unilateral nature, and my sense is the people proposing them see this as the tough approach. If the EU imposes trade restrictions unilaterally, the view may be, China will take Europeans concerns more seriously, and either change its own policies or be faced with more limited access to the EU market.

But how tough is this approach? What if it is tough in the way you feel inside when you do it, but not in its effectiveness? If you don't achieve your desired result, are you really being tough?

It may be, of course, that of the two objectives, changing China's policies is less important than limiting accessing to the EU market, and thus limiting market access is, in fact, the desired result. If keeping Chinese products out is the real goal, then yes, these import restrictions will do the job. You may end up with retaliation that hurts your exports and consumers who are paying more, but it is certainly true that import restrictions will restrict imports. However, my sense from at least a few people is that they would actually like to see China change its policies, and if that's the case the calculation is more complicated.

In thinking about how to induce a change in China's policies, one question to ask is, how different is the proposed approach from what has already been happening for a while now? While the approach is portrayed as a new one to some extent, I think it could also be described as a more intense version of the same thing. To illustrate this, you can see past EU anti-dumping/anti-subsidy actions here. There are a lot of them! Essentially, the new approach takes the existing approach and goes harder with it.

Of course, maybe it's the case that the existing approach just hasn't been implemented strongly enough. Perhaps turning it up to 11 is sometimes the right strategy rather than a punchline. But it may also be that the existing approach simply isn't an effective one, and it's time to think about other possibilities.

One possibility here is WTO complaints. There has been a lot of talk about Chinese subsidies as part of the Chinese economic threat to the EU, and if I were thinking about possible WTO complaints, I might start with this. In particular I would focus on complaints under the SCM Agreement, including those (1) based on the Article 5 "adverse effects" provisions and (2) against export credits that are not justified under item (k) of the Illustrative List. But there are other possibilities too, and people can put whatever specific concerns they have on the table and see where enforcement of WTO rules might be able to help.

Now, I know some people don't think changes to these Chinese policies are possible these days (if they ever were). That may be true, as some of these measures will be sensitive for China domestically, and I can't say for sure how these WTO complaints will play out. However, it is important to note here that even if China doesn't come into compliance, the authorized retaliation that comes with a successful WTO complaint gets you to the rebalancing of trade obligations many people seem to want, and does so within the rules.

Just to spell everything out clearly, when I say "authorized retaliation," that probably means tariffs. So regardless of whether we have a unilateral or a multilateral approach, there may be tariffs involved. But tariffs authorized through WTO dispute settlement can be distinguished from unilateral tariffs in an important way: If China is hit with the authorized tariffs, it can't complain that the EU is just being protectionist, as countries often allege in response to unilateral tariffs or similar measures. The problem with unilateral tariffs is that, no matter how much a government imposing these tariffs wants to believe it is doing so in good faith and for legitimate reasons, that is almost never how it comes across to the people being hit with the tariffs. Instead, the reaction is to accuse the government imposing the tariffs of protectionism. By contrast, with tariffs authorized through the WTO dispute settlement process, while you may hear a bit of whining about the reasoning of the panelists/arbitrators, you won't get much sympathy or support if you argue that the tariffs are protectionist.

Having said all this, I do acknowledge that there may be a perception problem here: For the reasons stated above, WTO complaints may be the most effective approach, but do they feel sufficiently tough? This approach involves getting permission to impose tariffs, and to some people that may seem like a touchy-feely way to do things. If you are following the rules and asking politely, are you really being tough?

It seems to me that it's difficult to measure the "toughness" of any particular course of action, though, and I try to focus more on outcomes and avoid vibes-based policymaking. What is it that Europeans are looking for from China? What I would be looking for is how to induce more market-oriented behavior from China. I would then ask, what is the most effective way to achieve that?

You could, of course, argue that the time for WTO complaints was back in, say, 2018 (when these conversations first started picking up steam), and we are eight years too late for this approach. Perhaps. But on the other hand, if people don't start the WTO complaints now, we could be having the same discussions in 2034.