The Rule Book is the Winner in the China Trade War

Visiting Fellow, RIETI

China’s economic weaponisation was blunted by a system with the WTO at its core. The task now to embed Beijing further into multilateralism.

Australia’s faith in global trade rules is paying off as China looks to back away from trade sanctions.

The World Trade Organisation (WTO) panel decision on Chinese restrictions on imports of Australian barley worth around $1.5 billion a year was due in a matter of days when agreement was reached for Canberra to suspend its appeal, and Beijing to expedite a review of the measures. This is how the WTO is supposed to work – resolve cases through negotiation, with the trade umpire as a backstop.

The diplomatic solution that gets Australian barley back into the Chinese market more quickly is in the national interest of both countries. The WTO case can resume if the restrictions aren’t lifted, with China expected to lose the case.

But a panel ruling would need to be appealed to make it enforceable, and that takes time. Those wanting to go all the way to punish China fail to understand the system, and in any case would be disappointed by a simple panel ruling that would not mention coercion, sanctions or anything other than simply a trade measure inconsistent with WTO obligations.

There are important lessons from this episode. The trade embargoes were another in the list of Chinese efforts at economic coercion that have failed thanks to an open, rules-based trading system. In every case Beijing’s actions backfired economically or politically.

And note too, that Australia’s appeal to global trade rules to resolve the dispute demonstrated China’s adherence to, and stake in, the system.

From May 2020, Beijing blocked the import of a dozen or so Australian goods worth around $20 billion annually including coal, wine, barley and lobsters where China was the major market. The trade sanctions caused Australian exporters, especially wine and lobster exporters, huge losses. But most exporters quickly found other markets as Chinese imports of barley, coal and other commodities did not slow and opened up other demand in markets that were previously served by China’s new suppliers.

Flexible markets in Australia helped, but the crucial external source of resilience was an open multilateral trading system which ensures that trading options remain open. Beijing’s economic weaponry was blunted by that system with the WTO, despite all its weaknesses, at its core.

A Chinese economy and society that is much less integrated into the global economy is one with far fewer constraints on it politically

A WTO ruling in favour of Australia would be enforceable because China has signed on to an interim arrangement (the Multi Party Interim Arbitration Arrangement, or MPIA, process) even while the United States holds the system hostage with its veto of the appointment of WTO appellate judges.

All of Europe, Australia, Singapore and two dozen other WTO members, including recently Japan, have signed on to MPIA so WTO rules are enforceable.

As the world’s largest trader, China has a huge stake in the existing multilateral trading system. It has a track record at least as good as Europe and the United States in abiding by major rulings, such as its loss to Japan in the rare earth metals dispute less than a decade ago.

Beijing’s trade sanctions were costly, causing a fracture in trust with Canberra and other capitals as they threatened economic security. But retreat from openness and economic engagement is not the answer. That’s a pathway to a poorer and much less secure world.

China accounted for over 40 per cent of Australian goods exports at the time of the sanctions and exports grew in 2021 and 2022, helping Australia weather the economic effects of the pandemic.

When China doesn’t observe the spirit of multilateral trade rules (as the United States recently has not) and games the system, that’s no reason to give up on the WTO or economic engagement with China. A Chinese economy and society that is much less integrated into the global economy is one with far fewer constraints on it politically and presents many more political risks.

Small and medium-sized powers are protected by international rules and markets.

Nowhere is this understood better, and is it exercised more instinctively, than in South-East Asia’s ten-nation ASEAN grouping. There’s an opportunity to reinforce that and to keep the region free and open through working with ASEAN to build economic security through intensifying economic cooperation, including with China.

Open, contestable markets importantly constrain big powers who wilfully choose to skirt established rules and use economic leverage for political purposes, with too little thought for the ramifications.

The strategic interest in China is to lock it further into rules, norms and markets. Australia and regional partners should take China’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to serious negotiation, defining the milestones in Chinese reform that are needed for it to attain membership. CPTPP membership can be expanded without eroding the partnership’s rules or standards.

Russia’s strategic use of gas supplies against Europe is sometimes used as an argument against interdependence. But Russia was not integrated into European supply chains; European energy dependence on Russia is qualitatively different from the complex economic interdependence in East Asia, underpinned by multilateralism that diffuses risk instead.

April 12, 2023 Financial Review

October 25, 2023

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