The European Union and China have to overcome a fundamental dilemma in their bilateral and multilateral trade relations. If successful, it would greatly deepen and intensify trade in goods and services between two of the three biggest traders in the world, whilst stabilizing and better codifying the WTO and its rules.

One can (rightly) argue that China has been restrictive and interventionist all along, yet also provided – once a WTO partner – selective but often good profit opportunities to EU companies. On the EU import side of goods, EU consumers (and especially poor consumers) have benefited from low-priced mass-consumption goods such as textiles and clothing, sport shoes and equipment, toys and light domestic appliances. However, the current combination of China’s restrictive trade policies (both goods and services), severe FDI restrictiveness (more restrictive than any other of the BRICS and of other G-20 countries) and the massive new industrial strategy Made in China 2025, has tested the patience of EU trade policy makers as well as European business for quite a while. Whereas the US has assumed a confrontational approach, and even a unilateral waging of a tariff war, the EU continues to seek a cooperative approach, rejecting unilateralism, as it has always done. Nevertheless, for the EU, the point has been reached when piecemeal bilateral trade diplomacy is likely to be superseded by intense cooperation on the fundamentals.

What is this fundamental dilemma for China and the EU? On the one hand, today, the EU is confronted – as is China and a number of other WTO partners – with an aggressive and unilateral trade policy by the US. China and the EU have been crystal-clear in their positioning: both stand for a WTO-rules based approach, and within that setting, attempts to solve problems bilaterally, with due respect to what can and cannot be done under WTO rules bilaterally. Both (rightly) reject the (old) unilateral US laws giving the US administration the excuses to act as it now does. The “justification” of a threat to US national security (art. XXI, GATT) is not credible and also a most dubious attempt to look “multilateral”. It is neither credible for steel given the miniscule importance of imported steel for US defense, nor because the closest US allies for many decades are hit by it (such as Canada, the EU, South Korea and Japan). It is dubious because it forces the WTO to eventually assess the national security threat of one of its members, which – by its very nature – can only be done by that country itself. Weinian Hu and I have pleaded strongly for joint EU-China trade policy leadership already in the early spring of 2017. This is not only the responsibility of big traders in the WTO, it is also expected by many smaller trading nations which would like to join a credible alliance to protect the rule-based system and – better still –act in unison against this major violation of WTO rules by a trading partner much bigger than they are. Acting in unison means that the alliance, led by China and the EU, would no longer accept the bilateral tactics of the US, in other words, the EU would be concerned by new US tariff threats to China – or for that matter Canada and other ones – and not only to itself, and China would fiercely object to threats of new tariffs not only to China but to other partners as well.

One “must” is to file a case in the WTO (which has been done) and make it a single joint case from the alliance. Interim negotiations with the US should not be done solely bilaterally but coordinated by such an alliance. The leadership approach suggested here is indispensable because the WTO has no “directorium” which can act promptly in case of such gross violations, for the period until the WTO case has run its course legally. Such a “directorium” significantly raises the “price” the US pays when taking such unilateral, irresponsible actions. Acting in unison would largely pre-empt the temptation to go “bilateral” for the US.

On the other hand, the EU has long had a fundamental problem with how China operates under the WTO since 2001. The EU was an advocate of China coming into the WTO at the time and has actively attempted to “mellow” the US opposition for years. In 2018, one may summarize the EU position as a combination of two features: China has broadly stuck to WTO obligations where these are clearly formulated (except for public procurement), yet, barely adjusted to the obligations which reflect the spirit of the WTO as governing trade between market economies. The WTO, and the underlying GATT rules, are sometimes drafted in general, or open-ended, wording, without much of a problem for partners, until a “socialist market economy with Chinese characteristics” in fact challenges the rules or their interpretation on a “systemic” basis.

The EU has published a fundamental policy report in December 2017 on the “systemic” problem of having a “socialist market economy with Chinese characteristics” in the WTO. This report is also a product of many years of attempting to address these issues on a piecemeal and cooperative basis with China, not to much avail. This long report (466 pages) shows abundantly clearly that China has not reformed in the spirit of the WTO (despite promises and the 60 reform proposals in November 2013 by the Party).

The solution is easy on paper but possibly much less easy in actual practice. Once China would implement the November 2013 reforms – reforms that are formulated by China itself – fully and in earnest, much of this systemic problem would melt away and China could position itself to further sharpen the WTO rules together with the EU and a WTO alliance.

Jacques Pelkmans  is Senior Fellow at CEPS in Brussels. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
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