How to manage ‘competitive interdependence’ between China and the West in trade

1. The new conflictual geo-economic trade environment between China and the US

We are living in a geo-economic environment. The United States and China are increasingly using their economies to shape international relations, as well as regional and global regulatory structures. In the United States, starting with the Trump administration, trade and investment have become a prime currency of international power, which the US is using to push for strategic interests in a variety of policy areas, most notably trade, investment, technology, and energy. China has been using geo-economics as the central anchor of its geopolitical approach for some time – particularly since the start of the Belt and Road Initiative. China’s geo-economic approach involves tying other countries into its overarching strategic goals through commodity agreements and major infrastructure projects, thereby creating economic dependencies.

Inevitably, this has led to rivalries between the two major powers. China is a rising economic power, which threatens US dominance in a number of key areas. In addition, it pursues an expansionary trade and investment policy, while keeping its own market relatively closed. The Trump administration has started a tariff war; but the ultimate goal was to decouple the two economies. This has not changed under the Biden Presidency.

The trade conflict between the United States and China is a severe threat to the world economy. This rivalry has also taken its toll on the work and relevance of international organizations, as well as informal groupings such as the G20. The more the two major players rely on their economic (as well as their technological) strength in order to pursue their interests, the less relevant multilateral organizations will become and the higher the risk of a military escalation as well (Taiwan).

The European Union has – for the most part – placed its hopes in a rules-based global economic order and trusted multilateral institutions for the resolution of tensions. It is now facing a fundamental challenge to this strategy due to the increasingly geo-economic environment. This is why Europe has started to put a new focus on trade enforcement, creating variety of new trade defense measures.

2. How to manage economic tensions and competition between China and the West?

The present goal to decouple China and the US (the West), is fundamentally flawed. The strategy will not work, because the economies are too deeply integrated through trade and investment flows. The disruption of value chains and the rising costs for intermediary goods – coupled with increased uncertainty – have already taken their toll on the global economy.

Bilateral deals like the “Phase One” Deal from January 2020 will also not solve the problem of competitive interdependence. While China has made some concessions – for example, regarding forced technology transfer – none of these provisions are legally binding and enforceable in a reliable way. It is unlikely that a US-China deal will address the underlying problems, rooted in China’s economic model. What’s more, it will not end the competition between the two superpowers for dominance in the international system.

The way forward is a system of cooperation on issues of common concerns (like e.g. global health, climate change), together with rules-based competition among the superpowers with the WTO as an arbiter. This double strategy was already embedded in the EU China strategy from 2019, which considers China as “a cooperation partner, an economic competitor, and a systemic rival.”1

However, as a prerequisite, cooperation as well as rules-based competition in trade can only be managed, if there are no coercive measures involved. An example are China’s arbitrary measures to block imports from European products, which are linked to Lithuania. Through these measures, China wants to pressure the country to change its relationship with Taiwan. The Commission has prepared a lawsuit at the World Trade Organization (WTO) against this behavior; but it should also consider moving the new European anti-coercion instrument forward.

2.1. Multilateral Level of the WTO

The only way to find lasting solutions to this competitive interdependence and to come to a level of rules-based competition is through the WTO. The emergence of China, which has not always played by the rules, has shown the limits of the WTO in the past years. This led to disillusionment by the United States, which created considerable damage to the organization by blocking the appointment of new members to the Appellate Body.

This urgently needs to change as international organizations, and in particular the WTO, play a key role in ensuring open and fair international competition. The WTO is a place, where different economic models exist. But it is only sustainable if everyone has the same rights and obligations. Therefore, the goal must be to establish a level-playing field under the roof of the WTO. Market-distorting practices – such as state subsidies, forced technology transfers, and intellectual property rights violations, – need to be addressed within the WTO. As such, the WTO can change the present conflictual competitive environment towards competitive neutrality. The way to proceed is (1) through a reformed dispute settlement system and (2) through binding new rules – either on a multilateral or a plurilateral level.

2.1.1. The Success of the Dispute settlement system (2001-2019)

The most pressing issue is the reform of the dispute settlement procedure. The current blockade prevents a final, and enforceable decision in the event of a dispute. The EU already established an interim arbitration solution (MPIA), but the long-term solution must be the re-establishment of a functioning and binding dispute settlement.

Contrary to public perception, the United States and Europe both have been quite successful in addressing market distortions relating to China. Between 2001 and December 2019 (the end of the functioning dispute settlement system), the United States filed 23 dispute settlement cases against China. Of these cases, ten involved violations of Article VI GATT (anti-dumping remedies) and the Agreement of Subsidies and Countervailing Measures (illegal subsidies and countervailing). From these 23 cases, the US won seven, ten are still in consultation, and five were resolved by mutual agreement. China only won one case.

In the same timeframe, the EU initiated nine cases against China, four of which relate to anti-dumping and subsidies and countervailing duties. The US was a third party to two of the anti-dumping disputes. The EU won three of these trade remedy cases; one is still in consultation. In addition, three disputes related to Chinese export restrictions of raw materials and rare earths. The US is a third party to all of these. Two of these have finished dispute settlement proceedings and were decided in favor of the EU (US).2

These cases show that the United States, the EU, and China have a long history of WTO disputes, which precede current trade tensions. They also show that the United States and the EU were quite successful in dealing with specific concerns regarding China’s trade distorting measures in the framework of the WTO system.

Therefore, the dispute Settlement System needs to be reinvigorated and WTO members need to agree on a clear work program. The EU has made very concrete proposals in February on how to reform the Appellate Body, thereby addressing US grievances (no precedent, address only of legal issues raised on appeal, mandatory timelines, etc.). If the US enters into meaningful discussions, the conflict could be solved. Re-establishing the dispute settlement mechanism is also a prerequisite for taking joint action against unfair trade practices by China, solving conflicts at the multilateral level.

Despite common perceptions, the WTO can therefore also deal with economic competitiveness, if a binding dispute settlement system is connected to stronger rules, particularly regarding the the Agreement of Subsidies and Countervailing Measures.

2.1.2. The necessity of new WTO rules

In addition, the WTO needs updated trade rules. This relates to a variety of topics, such as e-commerce (digital trade), trade and health issues, sustainability issues, as well as industrial subsidies. Particularly the latter topic is highly relevant for the dealing with the current competitive interdependency between China and the West. Industrial subsidies are nothing new, but they increasingly pose a threat to fair competition on world markets and distort international trade. They can also result in excess capacities, e.g., in the steel sector.

The rules of the present WTO Agreement on Subsidies and Countervailing Measures are too weak and incomplete. Therefore, as part of the Trilateral Initiative, the EU, the USA, and Japan advocated a broader definition of subsidies, the coverage of additional types of subsidies, (especially those flowing through state-owned enterprises) as well as stricter reporting requirements and sanction mechanisms. The Initiative was revived at the end of 2021.

Stronger rules on industrial subsidies at the multilateral or plurilateral level are only possible with the cooperation of China. So, the question remains how to get China on board. The EU and the US need to engage China. China has realized how important the multilateral rules-based trading system is for the development of the country. In return for a binding dispute settlement system and a new commitment by the US and the EU, it needs to be willing to accept serious changes and new rules on subsidies and SOEs as well as on forced technology transfer. Even though China is not willing to give up its developing country status, it is already showing some willingness to have more flexible implementation rules on new agreements, including stricter deadlines and more concessions regarding market opening. If the United States consequently gives up blocking the reform of the WTO dispute settlement procedure, this could clear the way for further substantial WTO reform.

2.2. Other international organizations

In addition, frictionless trade between China and the West is also dependent on norms and standards. China tries to incorporate its standards into its Belt and Road Strategy, thereby creating economic dependencies in Eurasia and Africa. As a consequence, countries are dependent on China as a supplier, effectively blocking out Western products and technology. This development leads to competing standards between Western countries and China, creating the potential of further global friction and decoupling.

The goal must be for China and the US/EU to agree to commit to the use of international standards in the future. Here the International Organization of Standardization (ISO) and the International Electrotechnical Commission (IEC) are particularly important. The EU and the US should try to engage China (depending on certain conditions) to avoid a scenario, which involves more global economic tensions and competition.

3. G20: Cooperation at the regional level to manage competitive interdependence

All these issues are global in nature and are also on the agenda of the G20. After the financial crisis, this informal group declared itself to be the premier forum for international economic cooperation, which includes developed countries (US, EU) as well as emerging market economies such as China. The informality of the G20 provides an opportunity to exchange views, establish trust and possibly find landing zones on topics relating to competitive interdependencies.

The G20 should therefore promote discussions on issues such industrial subsidies, excess capacities, the role of SOEs as well as technology transfer under the G20 Trade and Investment Working Group (TIWG) to initiate and lead discussions within the WTO. The creation of the Global Forum on Steel Excess Capacity in December 2016, bringing together 33 economies – the G20 members and some OECD countries - has been an important precedent in this regard. Here, members exchanged information on steel overcapacity, subsidies, and other support measures, which led to the establishment of actions points to address the current problems. Unfortunately, since 2019, China, India and others have disengaged from the work of the forum.3 This needs to be resolved urgently.

In 2022 and 2023 Indonesia and India, two leading Asian democracies and emerging market economies, have the presidency of the G20. This provides an important opportunity to mediate between the East and the West, as well as between industrialized and emerging market economies, and to address many of the concerns relating to competitive interdependencies in a constructive manner.

4. Conclusion

In order to manage competitive interdependence between China and the West, efforts to decouple or to negotiate bilateral deals are bound to fail. The way forward lies in rules-based competition through international bodies such as the WTO, which are able to provide for competitive neutrality, once the binding dispute settlement system is restored and stronger rules are agreed upon. In addition, informal groups like the G20 are well-suited to establish dialogue and trust and to find common landing ground on disputed topics.