The Biden administration is in the middle of a review of its predecessor’s record on China, including its trade policy actions. The verdict won’t be positive.
Former President Donald Trump’s tariffs on $550 billion worth of Chinese imports and Beijing’s commitment to increased purchases of U.S. products under the Phase One agreement signed in January 2020—prominent examples of the previous White House’s “negotiate bilaterally, punish unilaterally” approach to trade policy—did nothing to change the most troublesome aspect of China’s economic behavior: its subsidies to its state-owned enterprises. By creating unfair competition for U.S. workers, these subsidies continue to threaten equity at home. And by undermining multilateral rules, they weaken the World Trade Organization (WTO) through which the United States has traditionally pursued its interests in the global economy.
It would be a mistake, however, for the Biden administration to abandon the entirety of Trump’s trade policy toward China. Instead, it should make a priority of reviving and strengthening the one element of Trump’s trade policy with promise: the U.S.-EU-Japan trilateral initiative to create new global trade rules.
The trilateral was launched with a joint statement by the United States, the European Union, and Japan on the heels of the Buenos Aires ministerial conference of the WTO in December 2017. While China is not explicitly mentioned, it is clear that its distorting economic behavior is what the governments had in their sights.
In the sometimes dry language of trade negotiators, it put forward the shared 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 … are serious concerns for the proper functioning of international trade, the creation of innovative technologies and the sustainable growth of the global economy.” They committed themselves 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.”
Since this initial gathering, U.S., EU, and Japanese trade ministers have met five times, most recently in January 2020, when they issued a communiqué that charts a way forward in considerable detail. The three sides proposed reforms to existing WTO rules that would add new types of subsidies to be covered and increase the degree of transparency about illegal subsidies, as well as pledging to update the definition of what constitutes a state-owned enterprise. That last effort is crucial, as the appellate body of the WTO’s dispute resolution system has on more than one occasion made rulings based on the current, flawed understanding of state-owned enterprises that have given a pass to unfair Chinese industrial subsidies.
While the trilateral’s talk was auspicious, it was not followed up by action. Instead of taking the logical next step—launching joint U.S.-EU-Japan economic diplomacy to update WTO rules—the day after the January 2020 trilateral statement the Trump administration announced the one-sided, mercantilist Phase One deal with China. The back-to-back timing may be coincidental, but it highlights the Trump administration’s unproductive preference for dealing with trade issues on its own. The trilateral was its flirt with a cooperative approach to trade policy, nothing more.
The Biden administration now has the opportunity to make good on the promise of the trilateral. It also appears to have the inclination. Two weeks after the election, President-elect Joe Biden made the point that as the United States makes up only 25 percent of global economy, “we need to be aligned with the other democracies, another 25 percent or more, so that we can set the rules of the road instead of having China and others dictate outcomes because they are the only game in town.”
This clear statement of its intention to work with allies on China explains the Biden team’s hope that the EU would wait until there was an opportunity for consultation with the new administration before signing the Comprehensive Agreement on Investment with Beijing, which it opted to do at the end of December.
While the EU-China investment accord was not optimally timed, it does include new commitments from China on trade rules, including on subsidies and state-owned enterprises, which can serve as a building block for trans-Atlantic and broader trilateral cooperation. For its part, in mid-November 2020, Japan joined 14 other Asian countries in signing the Regional Comprehensive Economic Partnership that includes China. While it will lead to greater economic integration among its members, the agreement is mainly about reducing tariffs, not establishing rules for trade.
With China doubling down on its state-driven approach to the economy, and the EU and Japan striking their own trade deals with China, it is important for the Biden administration to move fast to advance a new and more effective trilateral agenda that prioritizes high-standard trade rules benefiting democratic, market-oriented economies. There are three immediate steps it should take.
First, U.S. trade officials should work with their counterparts in Brussels and Tokyo to update the January 2020 trilateral statement, in particular filling in gaps such as the need for a common definition of state-owned enterprises and what are called “public bodies” under WTO law. They will also have to agree on language that targets distorting Chinese subsidies while preserving the right to engage in their own legitimate subsidies—something that has increased as governments have sought to bolster their firms and workers in the face of the coronavirus pandemic.
Next, the three sides need to agree on a strategy for advancing the trade rules they agree on. At a minimum, it should include launching a negotiation among themselves that will set a high bar that other market economies can emulate. Two key questions are whether to pursue this agreement inside or outside the WTO and if it should be extended to other like-minded countries from the start. While the ultimate goal is to bring the trilateral agenda into the multilateral framework, an agreement may be more readily achievable if it is first negotiated outside the formal structures of the WTO. The same can be said for who participates: The deal should, from the start, be considered open for others to join but would go faster if led by the three economies that have had four years of experience working together.
Finally, the United States, the EU, and Japan will have to decide on an enforcement regime for their trilateral agreement. Given the fact that it may take years to negotiate China’s accession to such new trade rules, the trilateral countries should also consider making their enforcement provisions applicable to third countries that are not party to the agreement. That would be a step in the direction of greater coercion in the trading system—but it would be preferable to unilateral measures imposed by the United States.
Importantly, a trilateral deal on rules governing subsidies would not involve any new trade liberalization. So not only would it be consistent with the spirit of the Biden administration’s decision to put off new trade agreements until it has invested in the U.S. workforce to help it compete in a globalized world. It would reinforce that ambition by tackling one of the most important sources of unfairness in the trading system—the unlevel playing field created by China’s economic misbehavior.
