Lessons from a no-win US-China trade war

In recent times, the US-China trade dispute has provided much fodder to the bogey of deglobalisation and mercantile calls for ‘beggar thy neighbour’ policies. It is in this context that the recently published Panel Report of the World Trade Organization (WTO) on the United States — Tariff Measures on Certain Goods from China (DS-543) has generated quite a bit of excitement among various stake-holders.

To recall the timeline, ever since Donald Trump was formally named the US President on January 20, 2017, the heat on the US-China trade was on. On June 15, 2018, stating that “The United States can no longer tolerate losing our technology and intellectual property through unfair economic practices,” Trump declared, “In light of China’s theft of intellectual property and technology and its other unfair trade practices, the United States will implement a 25 per cent tariff on $50 billion of goods from China that contain industrially significant technologies.”

Subsequently, at China’s request, the WTO Dispute Settlement Body (DSB), formed a panel to deal with the disputes between the US and China on January 28, 2019. Much water flowed down both the Potomac and the Yongding. Finally, the Panel Report was circulated to members on September 15, 2020, which ruled that the imposition of US tariffs on Chinese goods in 2018, triggering a trade war, was “inconsistent” with international trade rules.

No major impact

In normal times, such a ruling could have culminated in the resolution of a dispute. But contemporary multilateralism is in a different state of hiatus. A closer look at the report suggests that while China appears to be a winner, the actual verdict is more nuanced. It seems that neither the US will be too bothered about the Panel Report, nor would China rejoice too much.

First, the US is allowed to go to the WTO Appellate Body against the Panel Report. However, thanks to the US’ inactions, the Appellate Body is presently dysfunctional, and if the US wants to stall the process, it can appeal to the non-existent Appellate Body against the Report! The Panel Report itself seems to be aware of this helpless situation as it, in a rare ‘Concluding Comments’ section, almost apologetically suggests that the two parties should try to resolve these issues mutually.

Second, the Panel Report also says that the US government has not taken China to the DSB for similar retaliatory measures imposed by the latter on American goods. The Report hints that similar verdicts would have been given against China if this had happened. Therefore, the Panel Report is not a clear win for China, as some reports may be suggesting.

Blow to multilateralism

But while this Report is unlikely to have any perceivable impact on global trade, it highlights the difficult times the multilateral regime is going through. A global slowdown, coupled with the meteoric rise of China, is threatening the hegemony of the major advanced countries. The reaction to this challenge has been two-fold. On the one hand, there is a strong protectionist and mercantilist retaliation from the US and some other developed nations, leading to increased trade barriers.

On the other hand, there is a strong tendency to move away from multilateralism towards trade blocs. As these trade blocs are often dominated by incumbent economic powers, decision-making is much easier than in a consensus-based model like the WTO.

Both these moves are weakening the multilateral trading system, where developing countries generally have more voice.

Another factor that is having a substantial spillover on global trade is the growing tussle between the US and China in the area of technology, a field they both dominate. But increasingly, the dominance of US firms is being challenged by upcoming Chinese companies. The US is retaliating by using its trade policies to counter China’s threat. It frequently cites China’s violation of Intellectual Property Rights, and its ‘harmful technology practices’ to defend its unilateral actions.

In this war between the two superpowers, India has been caught between a proverbial rock and a hard place. The US’ move away from multilateralism does not suit India. In the WTO, India has opposed the US on several issues and has been criticised by Washington for blocking WTO deals. But given the present geopolitical scenario, it will be even more difficult for India to support China in a multilateral forum.

All said and done, the WTO remains a rule-based organisation that is more democratic in its functioning than either the IMF or the World Bank. It will be in India’s interest to look beyond the US-China trade war and work for the revival of the WTO and its dispute settlement system.

This no-holds-barred trade war is making erstwhile critics of WTO like Nobel Laureate economist Joseph Stiglitz appreciate the virtues of a rule-based multilateral trading system. In a recent interview to CNBC, he said, “Many of us who were critics of the WTO, …. didn’t really appreciate the virtues of the WTO until we actually confronted the reality of a world without rules”. The sheer ineffectiveness of the present WTO Panel report highlights the concerns raised by Stiglitz even more.

The writers are Professors of Economics at IIM-C