Trilateral trade deal would rein in China’s expanding power

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The European Union clearly had China in mind when it put into effect its new trade-defense legislation last Wednesday. The United States is also considering measures against Beijing’s market distortions, so the EU’s anti-dumping regulation apparently reconciles the European bloc with Washington after months of tensions over their trade relations.

Brussels has criticized US President Donald Trump’s “America First” doctrine from the outset. EU institutions, and many EU member countries, believe Trump is pursuing a protectionist agenda that is harmful to European commercial interests.

Trans-Atlantic convergence to challenge China’s unfair commercial policies got a boost on December 12 when the EU and the US, with the support of Japan, announced at a meeting of the World Trade Organization (WTO) that they would join forces to fight unfair trade. Though China was not singled out in their joint statement, the three powers evidently aimed at Beijing’s market-distorting subsidies, forced technology transfer and overcapacity in key sectors such as steel and aluminum.

EU’s new anti-dumping scheme

The US does not recognize China as a market economy. Washington is reviewing its trade policies toward Beijing and is investigating Chinese practices on intellectual property. For once, the EU has been quicker than its ally across the Atlantic and could have found a way to address Chinese dumping by remaining within WTO rules.

Brussels has eliminated the distinction between market and non-market economies when it investigates possible unfair trade practices by a member of the WTO. From now on, it will tackle dumped and subsidized imports from countries with “significant market distortions.”

The European Commission (EC), the EU’s executive body, will basically calculate dumping margins by comparing export prices with domestic prices or costs in the exporting country – which is the WTO standard. However, if prices and costs are distorted because of state interference in the economy, the EC will use other benchmarks such as prices and costs in a third country with a level of economic development similar to the exporting nation under scrutiny.

Beijing’s Ministry of Commerce accused the EU of wanting to impose ‘misleading’ standards for foreign enterprises, adding that China would take necessary actions to protect its legitimate interests in accordance with WTO rules

On the same day that its trade-defense rules came into effect, the EC released a report documenting Chinese state-induced distortions. This is the first of a series of “country reports” that European industries can rely on to require the application of the new legislation in anti-dumping probes. The EC said it first focused on the Asian giant because Chinese companies are by far the most targeted by EU anti-dumping measures – the next country report will scrutinize Russia’s trade system, Brussels emphasized.

Beijing’s Ministry of Commerce blasted the EU’s decision to enforce the new anti-dumping methodology, the state-run Xinhua News agency reported on Thursday. It accused Brussels of wanting to impose “misleading” standards for foreign enterprises, adding that China would take necessary actions to protect its legitimate interests in accordance with WTO rules.

A battle for global standards

Chinese words portend legal initiatives before the WTO Dispute Settlement Unit. This is the venue where the EU, the US and Japan will have to counter Beijing’s arguments. The problem is that this trilateral cooperation risks being unproductive if the Trump administration indulges in aggressive mercantilism.

Trump’s new tax code has drawn criticism from major EU countries. They say measures contained in the legislation – which the US president signed into law on Friday – go against WTO rules. Notably, the EU is concerned about a provision that favors US companies, as it reduces the tax rate on their export gains to about 13%. This could be considered an illegal subsidy by the WTO and challenged by its European members.

What’s more, in his first National Security Strategy, Trump pointed out that the US would focus on bilateral trade and investment agreements with countries committing to fair and reciprocal trade. The US president sank the Trans-Pacific Partnership on free trade and investment, of which Tokyo was the most important stakeholder after Washington, last January, while talks with the EU on the Transatlantic Trade and Investment Partnership have been mothballed.

In contrast, the EU and Japan are trying to advance Western values and standards in global trade relations. On December 8, Brussels and Tokyo finalized negotiations for a free-trade agreement. Regardless of the removal of trade barriers between the European bloc and Japan, the pact is designed to shape global trade rules in line with European and Japanese “high standards and shared values,” particularly as far as environmental, social and labor conditions are concerned.

If the EU, the US and Japan really want to limit China’s expanding geo-economic influence, they will have to move their cooperation to higher levels and work on a trilateral free-trade deal – something that is out of tune with Trump’s aversion to free trade and multilateralism.

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