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4 December 2020

By Crippling the WTO, Trump Paved the Way for China’s Trade War on Australia

Edward Alden

Australia is suddenly facing a broad economic assault from China, by far its largest trading partner. Last week, Beijing imposed tariffs of more than 200 percent on imports of Australian wine, essentially shuttering the industry’s largest export market. China has halted shipments of Australian coal, leaving ships stranded off China’s coast, and has blocked or restricted imports of a dozen other products, including Australian beef, sugar and timber. The sanctions so far have affected one-third of all Australian exports to China.

It’s all Chinese retaliation for moves by the Australian government that have irritated Beijing, which presented Canberra with an extraordinary list of 14 grievances last month. They included Prime Minister Scott Morrison’s call for an impartial international investigation into the origins of COVID-19, which first emerged in the Chinese city of Wuhan, as well as Australia’s ban on procurement from Chinese telecoms giant Huawei and restrictions on Chinese investment acquisitions.

Over the weekend, Australia’s trade minister announced the government’s response: He will bring a case against China at the World Trade Organization. And not against the whole of Chinese actions, but against one small piece—China’s 80 percent tariff on imports of Australian barley. Asked to explain the rather modest move in the face of massive Chinese provocation, the trade minister, Simon Birmingham, said that, “Australia stands by the rules-based system for international trade, and if you stand by the rules-based system, you should also use that rules-based system.”

Such a statement should not sound so feckless. For a quarter-century, the WTO stood as a bulwark—a rickety one at times, to be sure—against economic warfare. Indeed, that was its whole point. The creation of the rules-based trading system after World War II was intended to prevent the sort of economic aggression that too often leads to the real thing.

China’s actions against Australia, and similar politically motivated trade sanctions against imported canola from Canada and salmon from Sweden, show why the Trump administration was so shortsighted in crippling the WTO. As long as countries respected and mostly abided by its trade rules, the WTO restrained their willingness to use economic aggression for political ends. But in the post-WTO world, the fuzzy line between international trade rules and power politics has been obliterated.

The Trump administration has nevertheless defended its decision to neuter the WTO, with U.S. Trade Representative Robert Lighthizer spending the past several months on a valedictory tour touting it. Breaking free of WTO rules allowed the U.S. to impose new tariffs on hundreds of billions of dollars in Chinese imports, reducing the U.S. trade deficit with China (though it has grown with the rest of the world) and forcing some companies to shift operations out of China. China also recently increased its purchase of U.S. goods to try to meet the terms of the “phase one” trade deal reached last January, though it will still fall far short.

In the post-WTO world, the fuzzy line between international trade rules and power politics has been obliterated.

Lighthizer has argued, rightly, that WTO rules did far too little to constrain China’s trade-distorting practices, particularly its massive industrial subsidies, but also matters related to intellectual property and the forced transfer of technology from foreign investors in China. But it was a big leap from recognizing the WTO’s deficiencies to breaking the system entirely, as the U.S. did when it imposed unilateral tariffs on China, shut down the disputes settlement mechanism by killing the WTO’s Appellate Body, and tried to block the appointment of a new WTO director-general because it objected to the candidate.

And how has this new rules-free system been working to constrain China? It is hard to recall now, but after it joined the WTO in 2001, China had a reasonably good record of complying with adverse WTO decisions. Indeed, up through 2018, China had complied with all WTO rulings against it, though it did drag its feet on several of them. Scott Kennedy of the Center for Strategic and International Studies likens WTO rules to speeding laws: Drivers do not always obey, but they are less likely to speed with such laws than without them. The Chinese government believed—and still claims to believe—in the benefits of a rules-based international system. Adherence to those rules made China more attractive to foreign investors and helped to protect China against arbitrary import restrictions from the West, especially the United States. And the Chinese government does not like to be seen as an international outlaw; as long as other countries were adhering to WTO rules, China sought to do the same.

Today, the incentives if anything work in the opposite direction. By blocking imports of agricultural products from Australia and Canada, China has freed up room for increased purchases from the U.S., getting closer to meeting its “phase one” targets. Rather than fearing that Washington will side with traditional U.S. allies like Australia, China has been confident that it won’t, since Trump has made it clear he is delighted if the U.S. gains export share even at the expense of America’s once-close allies. If China later removes the tariffs on Australia, it will have still sent a strong message that will make smaller countries wary of crossing Beijing in the future. Since China, too, has been a victim of arbitrary U.S. trade sanctions under Trump, Beijing sees little moral high ground to lose.

This is why mending the WTO needs to be an urgent priority for Joe Biden’s incoming administration. It is far from clear that the system can be restored, but it can certainly be patched up.

The list of needed actions is clear. First, the new administration should immediately engage with other WTO members to restore the Appellate Body, which is short of the number of judges it needs to operate, and to reestablish a functioning system for resolving trade disputes. The Biden team could spell out that the U.S. is continuing to demand reforms of that dispute settlement system, which has been roundly criticized, but would still immediately permit the appointment of new judges to the Appellate Body in exchange for negotiations against a firm deadline. Second, the U.S. should join other countries and support the appointment of Nigerian-American Ngozi Okonjo-Iweala as the next WTO director-general, and get her in place as quickly as possible. Finally, the U.S. should sign on as a third party to Canada’s existing WTO case against China on canola exports, and the coming Australian case on barley. WTO rules permit countries to join cases even where their own economic interests are not targeted if those cases raise larger issues about the overall integrity of the trading system.

Such measures probably wouldn’t force China to change course in the short run, so the Biden administration must make clear its willingness to stand behind Australia and other allies through stronger diplomatic and strategic ties. But restoring a system of international trade rules would make future actions costlier for China. The alternative, we have learned, is much worse.

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