Reviving Trilateral Negotiations Key to China United Front and WTO Reform, Experts Say

The European Union and the U.S. working together have the leverage to change China's distortions in the world economy, experts speaking during a three-day series on EU-U.S. trade issues said. But it's not easy, with the economic interests of German manufacturers in China, the history of trade tensions across the Atlantic, and bureaucratic torpor on both sides, they said.

Peter Beyer, a member of the German parliament, spoke at the American Institute for Contemporary German Studies program on June 28 on how the U.S. and the EU can handle China's impact on the world economy. He said that European policymakers "need to understand. We do not need to be afraid of China. We are a superpower." He said he wasn't turning a blind eye to the fact that "German automobile makers more or less just survive because of the business they're doing in China."

But Beyer said the EU and the U.S. together have strength. He complained that they should be working more urgently to find a common approach. "My experience so far is that this super intensive interagency approach that the Biden administration is doing slows things down," he said. He said he's been on lots of video calls with Commerce, the National Security Council and the Office of the U.S. Trade Representative, and they tell him their policies are not completely formed yet.

Wendy Cutler, a former USTR career staffer and now Asia Society Policy Institute vice president, said the Trade and Technology Council announced after the EU summit in mid-June could be useful if it doesn't get bogged down in bureaucracy like some past trans-Atlantic dialogues.

“Hopefully we can find an offramp from the steel and aluminum tariffs [on Europe] by the end of the year," she said. "Once you get rid of that underbrush you can talk about the future. I think what’s going to be critical for the TTC to be successful is some early wins. Because I think you need to build some trust and momentum."

Cutler also said that the U.S. and the EU and Japan should go back to the table to try to finalize the Trilateral Agreement on disciplines on subsidies, state-owned enterprises and forced technology transfer. She said she's a big fan of what was accomplished there during the last administration, but said she believes it's been dormant for more than a year. She added, "We need to move! Time is not on our side here. If everyone waits for the perfect, then we end up not pushing forward anything."

After that's finished, Cutler said, she thinks it would be best to present the proposal at the World Trade Organization, to see if China would negotiate over the new disciplines. "If China says, 'We’re not interested' -- then we have our answer."

The European Commission's director-general on trade also said it's urgent to restart the trilateral dialogue. Sabine Weyand, who spoke at the AICGS program June 29 on reforming the WTO, said that the EU and the U.S. have a large degree of convergence on what needs to change at the WTO to deal with the emergence of China. When asked if the EU and the U.S. can find common ground on WTO reform, she said, "Can we afford not to find that common ground?"

Weyand said the approach to WTO negotiations needs to change, because it doesn't work to require that negotiations conclude only if all 164 members agree. She said the biggest issue is the reform of the dispute settlement system. "If we agree that we need trade to be rules-based in order to be fair, in order to be sustainable, then these rules need to be enforced," she said. She said that the U.S. and the EU can build on the Walker Principles, and the only red lines for the EU are that there is binding, two-stage resolution, and it is independent. "We are not saying let’s renominate appellate body members and then we are done," she said.

Rufus Yerxa, the retired head of the National Foreign Trade Council, also spoke on Weyand's panel on the WTO. He said that the U.S. will not accept a new approach at the WTO "if it doesn't address the divergences between our system and China’s system." While he said there have been tensions between the EU and the U.S. over the EU regulatory approach to agriculture and the internet, that gap is not the only challenge for the Biden administration. He said that the administration wants to use trade to underpin a social agenda that it thinks would add to societal stability, and wants to do the responsible thing for the environment.

He said there's a balancing act between achieving those goals and not adding to protectionism or "restrictions on commerce the business community will contest. How do we convince a broad universe of stakeholders that this agenda is balanced, is reasonable?"

The intersection between trade and the environment includes long-dormant talks at the WTO on trade in environmental goods, which Weyand called for reviving, but also the design of adjustment, which will be the topic of the third day of discussions at AICGS. But those measures were on the minds of the WTO panel as well. Weyand also said that transitioning away from fossil fuels will require government investment, which comes back to trade-distorting subsidies. She said that countries need to be careful not to engage in a competition on subsidies or creating overcapacity.

Gabriel Felbermayr, president of the Kiel Institute for the Global Economy, also spoke on the June 29 panel, and he said many on both sides of the Atlantic see the WTO as part of the problem when it comes to forming policies to fight climate change. "We need to make sure the decarbonization process doesn’t lead to deindustrialization," he said, and if the WTO doesn't think that EU carbon border adjustment measures are WTO-compliant, he doesn't think that should matter.

Weyand said the argument that the WTO will disapprove of a carbon border adjustment measure is sometimes a strawman from business interests that don't want one implemented. "If you look back, I don’t think you will find a genuine environmental measure that has fallen foul of WTO rules," she said.

Felbermayr said that the carbon border adjustment that could pass WTO scrutiny would be too weak to convince polluters to change their ways.

A carbon border adjustment mechanism "is one tiny element of climate policy," Weyand responded. "What really matters is that we agree amongst the major emitters … on carbon pricing."

Yerxa said, "I don’t think it’s realistic that the WTO becomes a forum for setting carbon pricing policy," but he also said the real barrier is internal politics in countries.

"The problem has been getting societies to agree to the trade-offs," he said, and said he doubts that the U.S. will pass legislation that will really move the country toward a lower carbon economy.

Even removing Section 232 tariffs may be too hard, he worries. "I think the Biden administration needs some political space and time because of their precarious politics at home," he said, such as very, very slim majorities in both chambers in Congress, "and a Republican party that unfortunately has walked away from multilateralism and open trade."