European trade commissioner Phil Hogan (right) addresses a media conference after meeting French finance minister Bruno le Maire (left) in Paris, France, January 7 2020. Picture: REUTERS/CHARLES PLATIAU
European trade commissioner Phil Hogan (right) addresses a media conference after meeting French finance minister Bruno le Maire (left) in Paris, France, January 7 2020. Picture: REUTERS/CHARLES PLATIAU

Geneva — China came under greater international pressure to reduce industrial subsidies after the US, Europe and Japan agreed to push for stronger World Trade Organisation (WTO) rules against market-distorting government aid.

The top trade officials of the US, the European Union and Japan struck a deal on Tuesday in Washington to expand the kinds of subsidies prohibited by the WTO. The announcement came on the eve of a planned signing ceremony at the White House for phase one of a US-China trade deal, which does not address Beijing’s support for domestic companies that compete internationally.

The subsidies accord — a breakthrough after years of deliberations — targets Chinese practices that have been a source of growing tensions between China and the rest of the world including the US, the EU and Japan.

This “is an important step towards addressing some of the fundamental issues distorting global trade”, EU trade commissioner Phil Hogan said in a statement. The accord “is also a symbol of a constructive strategic collaboration between three major players”.

Trade truce

The joint initiative may signal a path for de-escalating international commercial tensions triggered by US President Donald Trump’s trade war against China, curbs on imports from the EU and assault on the WTO system.

The Trump administration is gearing up for negotiations with China on a second-phase trade accord following the initial deal due to be signed on Wednesday. Meanwhile, the EU is scrambling to bolster the multilateral trade order underpinned by the WTO by seeking to address US concerns.

Under the agreement among the US, the EU and Japan, the list of subsidies unconditionally outlawed by the Geneva-based WTO would be broadened.

In addition, the deal would make it harder for countries to justify a range of other types of subsidies by reversing the burden of proof. The subsidising nation would have to show that the aid in question has no serious negative trade effects.

Broader support

If ultimately enacted, the agreement could represent the most significant upgrade of the global trade rulebook in more than a decade.

About 64% of global exports must compete with subsidised rivals, according to researchers at the Global Trade Alert, which tracks global subsidies. In 2017, that trade would have been worth $11.3-trillion.

Ultimately, the US, EU and Japan want to win support for their deal among a group of like-minded WTO members so it can become a wider agreement. That would allow members to sidestep a WTO requirement that all accords must be made by a consensus among its 164 members.

A key question is how to win over China.

Since 2001, China’s steel production capacity has grown by more than 500% and now accounts for more than half of global output of the metal, the US said during a 2019 WTO meeting in Geneva. In the aluminium sector, four of the world’s top five recipients of government support are Chinese companies, according to a 2019  Organisation for Economic Co-operation and Development  report.

Trump administration officials have pledged to tackle the issue in phase two of their trade talks with Beijing.

Bloomberg