Dr. Rebecca Harding
29th April 2019
For some time it has been clear that the US’s stance on trade is less about individual bilateral relationships than it is about recalibrating the world’s rules-based trade system on its terms. This will become ever-clearer this week, as trade talks between the US and China resume.
There is plenty to be discussed still between the two countries and the US’s stance towards China has not diluted. It sees the success of China as a direct threat to its national security. In reality it is an existential threat: how can a state-managed system out-compete a free market one? Intellectual Property, non-tariff barriers, services, reducing the US trade deficit with China and Chinese consumption of US agricultural produce are all at stake. These are common to the negotiating stance that the US takes with all its partners.
Of more interest is the fact that enforcement of the agreement is likely to be bilateral. The US has accepted China’s demands to make the process of dispute settlement mutual. In other words, the US can be in breach of the agreement from a Chinese perspective as much as China can be in breach from a US perspective. Neither side will need to use the World Trade Organisation’s dispute resolution processes. It is easy to see why China would want the enforcement mechanisms to be mutual. China promotes its own version of multilateralism and does not want to have rules imposed on it by the US.
But why would the US accede to that demand?
The US has not been authorising the replacement of WTO judges. Over time, the role of the WTO in dispute resolution will weaken as a result. There should be seven judges, but the US has blocked their reappointment and, last year, blocked one of the remaining four taking the number to the bare minimum of three. Any lower than that, and the WTO cannot pass judgements on a dispute. Against this backdrop, accepting China’s demands for mutual enforcement mechanisms in a bilateral deal now looks like deliberate policy on the part of the US to achieving the goal of reconfiguring world trade on its terms.
The result of a weaker WTO is unlikely to be a stronger relationship between the US and China, although it will be heralded as such if the mutual enforcement mechanism is agreed. Without a strong WTO that has authority over all trading nations, however big or small, there is a higher potential for a minor trade dispute to escalate into a full-blown trade war.
For the time being, it is likely that if there is a trade deal edging closer between these two countries, markets will be buoyed. This does not mean there is nothing to worry about. If the enforcement mechanisms on either side were ever challenged, there would be no ultimate court of arbitration. Instead, the two sides would be return rapidly to threats and counter-threats with the potential for escalation, not just in terms of rhetoric but also in terms of weakened diplomatic, even military, relations between the two, not least because the US regards China as a national security threat.
It remains the case that triggering a trade war is the economic equivalent of pushing the nuclear button. In a world where trade is strategic, and where conflicts are about economic systems rather than military ones, it is worth reminding negotiators that trade wars are not quick and they are not easy to win. The institutions of trade play an important role in ensuring that different economic systems can co-exist. Current momentum is towards ever greater fragmentation, and this is dangerous.
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