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I. Trilateral Proposal for Strengthened Regulations on Industrial Subsidies
Ⅱ. U.S. Anti-Subsidy Measures to Regulate Currency Manipulation and Non-Market Economies
Ⅲ. Implications on U.S-China Strategic Rivalry and the Multilateral Trading System
I. Trilateral Proposal for Strengthened Regulations on Industrial Subsidies
Early this year, the trilateral group comprised of the U.S., EU and Japan released a joint statement calling for the initiation of discussions in WTO to strengthen rules on industrial subsidies. While the type of subsidies that are subject to strengthened regulation are seemingly ‘neutral’- such as subsidies that are provided to insolvent or ailing firms that lack any credible restructuring plans or subsidies that create massive manufacturing capacity without private commercial participation, or subsidies that lower input prices domestically in comparison to prices of same goods when destined for export – they are, in fact, at the heart of the ongoing and intensifying U.S.-China strategic rivalry which has been extending beyond the realms of commercial trade.
The current WTO regulations on subsidies are limited in scope, only covering subsidies directly linked to exports and import substitution, thus lacking discipline on domestic subsidies that do not affect competition abroad. Furthermore, if any trade disputes involving financial support programs are raised by WTO Member governments, the party that brings the complaint is responsible for providing the evidence of subsidization practice which is at best opaque or inaccessible most of the time. WTO Members have also been long non-compliant with their obligations to notify their subsidization programs, further undermining the transparency mandate of the WTO.
The suggested changes to the current WTO disciplines on subsidies aims to extend the scope of prohibited subsidies to include such subsidies that are provided to ‘zombie’companies not eligible for financing based on market principles, and facilitate the ‘criminalization’of subsidies (by reversing ‘burden of proof’) that help companies gain excessive manufacturing capacity or to benefit from favorable manufacturing conditions (i.e. low input prices). The proposal does not shy away from mentioning outrightly the need to address the interpretation of ‘public body’by the Appellate Body, which is criticized for “undermining the effectiveness of WTO subsidy rules.”The trilateral statement goes further to address forced technology transfers, and tries to legitimize reaction through export controls and enforcement tools, which may themselves be inconsistent with current WTO rules.
The trilateral proposal, therefore, appears to be a valid attempt to renew efforts at making the subsidy rules more relevant and effective. But, for whom and to what effect?
In fact, the type of subsidies that are subject to strengthened regulation may also include genuine policy measures for industrial policy purposes in countries pursuing free-market capitalism. While the subsidization of insolvent companies and for increased capacity that may distort markets could be identified as the characteristics of state capitalist countries such as China, they are also policy measures used by state capitalist countries that are led by democratic governments. Financial support for insolvent companies may be part of legitimate restructuring plans by the government, while financial support for strategic industries to increase manufacturing capacity are also legitimate forms of domestic policy measures. The tightening of international rules that do not serve the interests of domestic industrial policy of member countries may lack legitimacy and could undermine the sustainability of international rules in the long-term.
Ⅱ. U.S. Anti-Subsidy Measures to Regulate Currency Manipulation and Non-Market Economies
While not tied to the schedule for releasing the trilateral proposal on industrial subsidies, the U.S. has been engaged in a separate effort to regulate currency manipulation practices of its trading partners by strengthening its enforcement tools. Through revision of its countervailing regulations, the U.S. Commerce Department finally succeeded in making into law the treatment of currency manipulation practices by foreign governments as illegal subsidies that could be effectively offset with countervailing duties. Since the early 2000s, Congress has become increasingly dissatisfied with U.S. policy and international arrangements to ‘combat widespread currency manipulation and their impact on U.S. trade and current account balances’.
The modified regulations (“Modification of Regulations regarding Benefit and Specificity in Countervailing Duty Proceedingsm,”19 CFR Part 351) appear to be a result of extensive efforts to provide legal ground for making deemed currency manipulation practices illegal. The much debated issues of ‘specificity’and ‘benefit’, which are key elements in determining whether the measure is subject to WTO subsidy rules, have been addressed by broadening the scope for satisfying the ‘specificity’criteria for one part. While a subsidy has to be provided to a specific enterprise or group of enterprise, or a specific industry or group of industries in order to be determined ‘specific’, the Commerce Department introduced a strange criteria that an ‘enterprise that buys or sells goods internationally’may be considered as a ‘group of enterprise’that can be subject to countervailing measures under the WTO subsidy rules. As to the calculation of ‘benefit’from the currency exchange rates, the modified rules propose to compare the ‘real effective exchange rate (REER)’and the equilibrium REER, and use the gap between the two rates to calculate the amount of the countervailing duty. The new rules also propose to consider the degree of ‘transparency’related to currency exchange practices in determining whether there exists ‘government action’in the first place, which would serve as evidence of currency manipulation by the government.
The U.S. has also started to use its enforcement tools in creative ways to more effectively address ‘unfair trade practices’by its trading partners. In particular, it has begun to apply its anti-dumping measures on subsidies, presumably because price differences are easier to prove than the existence of subsidization practices of other governments. The modified Trade Preferences Extension Act (TPEA) of 2015 provided the legal basis for imposing higher level anti-dumping tariffs when the domestic market of the exporting country is considered to be distorted, especially in the case of non-market economies. Such modification was considered to be a move against the possibility that the U.S. would no longer be able to apply the non-market economy (NME) status to China in accordance with the relevant provisions in China’s WTO Accession Protocol when calculating anti-dumping margins. Against this background, it was quite a surprise when the ‘particular market situation (PMS)’provision in TPEA was first applied to South Korea’s Oil Country Tubular Goods (OCTG), imposed with higher definitive anti-dumping margins of up to 46.37%. In reaching this decision, the U.S. Department of Commerce initiated investigations based on allegations that there exists a ‘particular market situation’in Korea’s market where the production cost of Korean OCTG products were distorted due to subsidized production costs. In particular, Korea’s use of cheap China-made hot-rolled steel plates as inputs, alleged government control of electricity prices, and overall financial support by the government through industry-wide restructuring efforts were all considered as evidence that the Korean government provided subsidies to the related industries, creating a ‘particular market situation’that warranted higher anti-dumping duties. In conclusion, what was considered to be U.S. policy measures aimed directly at China as a non-market economy had actually been applied to Korea for the first time, despite the fact that Korea is not a non-market economy.
Ⅲ. Implications on U.S-China Strategic Rivalry and the Multilateral Trading System
Industrial subsidies are indeed at the heart of the U.S.-China trade war which has evolved to become a strategic rivalry between different values and systems. This is because industrial subsidies are perceived to play a central role in China’s state-led capitalism, as subsidies are the main policy tools used to directly or indirectly finance state-owned enterprises (SOEs) in China, deemed to pursue state goals over genuine commercial interests. The timing of the release of the trilateral statement on industrial subsidies also sheds some light, as it came one day before the ‘Phase One deal’was announced, which implies the relevance of the issue of industrial subsidies in the U.S.-China trade war. Indeed, the Phase One deal lacks any substantive agreement on issues regarding state-owned enterprises and subsidization practices by the Chinese government due to China’s refusal to include them in the agreement. Seen from this perspective, the sudden announcement of the trilateral statement on strengthening WTO subsidy rules is quite understandable, as it appears to be a desperate move to assure U.S. constituents and Congress that its administration is still working on China’s SOEs and forced technology transfer despite its failure to do so in the Phase One deal.
In the aftermath of the COVID-19 pandemic, the U.S. and other major economies have begun to introduce domestic industry support measures with the objective of overcoming potential economic crises as a consequence of lock-downs and tightened border controls on goods and services. There is even movement within the U.S. top economic policy group to reinstate strategic industry growth models as a means to counter the growing performance and increasing influence of Chinese state capitalism. Unless the U.S. is not concerned about showing inconsistency in its policy approach by trying to reign in on other countries’industrial subsidies while promoting its own industrial policy, it does not seem likely that the trilateral drive for instituting strengthened rules on industrial subsidies could be realized any time soon, at least until the devastating effects of the COVID-19 pandemic have been overcome.
In the meantime, the U.S. government will be able to wield its sword of ‘currency manipulation countervailing measures’and anti-subsidy enforcement tool in the form of anti-dumping duties in accordance with its revised domestic law when the protection of its domestic industries from foreign countries’unfair trade practices is considered necessary. The problem lies in the fact that what was considered to be policy measures aimed against ‘non-market economies’are actually being applied to ‘market economies’as well. This is not good news for the multilateral trading system either, which has been facing challenges on multiple fronts with the growing trade tensions between the U.S. and China. The attempts for the extensive use of ‘national security exceptions’under WTO rules to justify the export controls and quantitative restriction measures of several member countries are not helping the multilateral system maintain its balancing role between the demand of sovereign states and the need for public goods.
The inability to resolve the problem of industrial subsidies within the WTO is likely to deepen not only the trade war between the U.S. and China but also the ‘perceptional gaps’among member countries within the WTO. The U.S. and China will further drift away from each other, making it more difficult for the WTO to reach any consensus on the issues that are being negotiated with aim of establishing new multilateral trade rules. This in turn will put more stress on the WTO reform issues, which are critical for reaching any agreement on what to do about the WTO dispute settlement system that has been the ‘crown jewel’of the current multilateral trading system. In the meantime, new rule-making may only be possible through plurilateral or bilateral approaches, which means that the U.S. and China will live with different rules and act upon them with no international body to mediate future trade conflicts. Perhaps the COVID-19 crisis may make us realize that legitimate industrial policy measures should not be unnecessarily restricted to the extent that sovereign states could no longer act upon their economic problems. While it may be difficult to strike the right balance between sovereign economic policy rights and the provision of public goods through optimal rules, countries should at least refrain from supporting the efforts that go against this direction to the extent that stringent rules become unnecessarily burdensome to lose relevance and legitimacy.
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