Don’t just blame Trump or China for this trade war

Originally published in the South China Morning Post.

In a significant shift in American trade policy, the proposed Fair and Reciprocal Tariff Act would allow the US president to raise tariffs without congressional consent and bypass international rules.

To be clear, there are problems galore with global trade regulations. We now have a trade architecture that is no longer perceived as capable of delivering mutually beneficial trade, and vulnerable to be gamed by powerful players smart enough to use its outdated provisions to their advantage. In that sense, the Trump administration is not the cause of the current dysfunction in the global trade system, it is a symptom. But the US administration’s approach to these shortcomings is no less broken, and is unlikely to help in any way.

The tariffs now being imposed on China, based on US concerns about intellectual property rights, illustrate the structural weaknesses in the current trade architecture. US trade officials have essentially conceded that at least some of their complaints against China’s intellectual property rights practices are not really violations of the WTO. This doesn’t mean that the US complaints are baseless and that China’s practices are not discriminatory. Quite the opposite. If one starts with the proposition that the rules of international trade should foster open commerce and competition across borders, and minimise or eliminate practices that put foreign companies at a disadvantage, then China’s policies would have to be regarded as contrary to that spirit and counter to the overarching objective of a rules-based trade system.

The fact however that many of these practices do not violate specific WTO rules highlights the extent to which the organisation has failed to keep pace with the policies that regulate trade. Under the existing rules of trade, a variety of discriminatory and even predatory practices either fall under “grey areas” of the WTO that are difficult to enforce, or in areas that are left entirely uncovered by the global trade referee, giving countries wide berth to distort trade.

Take intellectual property. Many of China’s practices are arguably in technical compliance with its WTO obligations but are implemented in ways that subvert the intention of the provision. For example, Section 7(3) of China’s Protocol of Accession to the WTO requires China to “ensure that … any means of approval for importation or investment … is not conditioned on … the transfer of technology”. Taken at face value, this seem entirely clear. However, it leaves sufficient scope for government officials to utilise the variety of levers at their disposal to exert very strong “encouragement” to multinational corporations to transfer technology.

Foreign companies wishing to do business in China are required to obtain various licences that are administered by non-transparent and highly discretionary government regulatory bodies, which essentially hold the “keys to the kingdom”. Not surprisingly, many multinationals evaluate “requests” or “suggestions” for technology transfer in light of these stark regulatory realities, and cave in.

Aside from subtle and not so subtle pressure exerted through the regulatory regime, the Chinese government also utilises its often preponderant market position to influence the decision making of foreign companies. For instance, the three largest airlines in China are all state-owned. Foreign aircraft producers have come to understand that their chances for success in winning purchase orders will be closely linked to the extent to which they establish joint ventures in China, localise production, and transfer technology.

In cases such as these, are technology transfers formally required or written into contracts, which would clearly violate the Protocol of Accession? By and large, no. But as a practical, “real world” matter, are foreign companies essentially being required to transfer technology? In many instances, yes.

In fairness to China, it is effectively utilising the existing framework of rules to pursue its legitimate economic development objectives, as one would expect any country to do. China’s State Council Information Office has recently released a report which argues that China has faithfully complied with its WTO obligations. Many of its points are entirely valid. But that is precisely the problem. Any system of rules which permits parties to be in technical compliance while allowing them to subvert the intent of the rules, is a system that will eventually end up being ignored. This is the road we’re on. The “Fart Act” suggests that we might be further down that road than many of us feared.

The US administration has correctly diagnosed the malady – the trade system is not working – but its prescription might end up killing the patient. This is not a time for finger-pointing. All of the major trading countries share responsibility for allowing the multilateral trade system to atrophy. But seven decades of a rule-based trade system – although far from perfect – has also produced an unprecedented period of global peace and prosperity. That’s worth fighting for.

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