The past week was a busy one in trade. The NAFTA negotiations faltered and seem to have missed their U.S. domestic deadline. Hearings on the Section 301 action allowed scores of special interests to make their case for either imposing or not imposing scores of particular tariffs. Secretary of Commerce Wilbur Ross publically lamented that the U.S. has locked itself into complying with the fundamental principles of the multilateral trading system that the U.S. has developed over the past 70 years—Most Favored Nation (giving your best tariff offer to all members of the trade agreement; in this case the World Trade Organization) and living up to our obligation to not raise tariffs we have promised (“bound”) not to raise.
In the face of all this Sturm and Drang, two important events occurred that frame a fundamental question facing the community of industrial nations: what is appropriate State support for national industries. Those events are, first, the determination rendered earlier this month by the WTO Appellate Board on the epic-length saga of Boeing versus Airbus. In this ongoing dispute, the U.S. and EU are wrestling over subsidies to the world’s only two commercially relevant large civil aircraft producers. The second event is the introduction of the “Fair Trade with China Enforcement Act,” by Senator Marco Rubio, a member of the Senate Foreign Relations Committee.
The coming together of these two events highlights the dilemma the industrial nations face with the rise of China as a great economic power. Specifically, the striking contrast between how the great economic powers—in this particular case the U.S. and EU—are using the WTO mechanism to define the scope and acceptable limits of self-serving industrial policies in a rules-based, market-oriented trading system, and how to deal with those not so constrained.
The Boeing v. Airbus dispute is a 14-year saga of suit and countersuit under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) to define what constitutes appropriate state intervention into industry. Defining appropriate state intervention in turn defines the nature of competition between industrial competitors in a free-market system.
The U.S., representing Boeing, in 2004 challenged the direct subsidies provided to start up Airbus; followed immediately by the EU, representing Airbus, defining at least 29 forms of regulatory, administrative and contractual (primarily military) programs as forms of subsidy. What followed was a long series of decisions, appeals, more decisions and yet more appeals, including a raft of hearings to judge if steps taken to comply are actually compliant.
This is complicated stuff. In the latest decision, on March 10 of this year, the WTO Appellate Body agreed with the U.S. that EU’s “launch aid” for the A380 and A350 XWB models provided to France, Germany, Spain and the United Kingdom breached WTO rules. Specifically, Airbus got a below-market interest rate to finance the development of the A350 XWB, and that such below-cost financing constituted a subsidy within the definition provided by the SCM.
Among other findings, the decision reversed an earlier compliance panel finding that the remaining EU subsidies undermined U.S. exports of single-aisle aircraft. The U.S. lost its claim that the EU subsidies constituted prohibited import substitution subsidies.
EU reports that it will quickly comply with the Appellate Body ruling, even as it waits anxiously for yet another Appellate Body ruling later this year. In that matter, the EU appealed a 2017 compliance panel ruling that only 28 of 29 subsidy programs granted to Boeing by various U.S. agencies were not longer injurious to Airbus.
And so it goes with rules-based litigation qua negotiation. Developing the appropriate form and scope of state intervention in advanced economies is frustratingly slow, deeply complex, hard-fought, and intermittently disappointing and satisfying as the rules get hammered out.
Enter Made in China 2025, a detailed industrial strategy to catch up with rivals like the U.S., Japan and Germany in advanced manufacturing such as robotics, medicine and medical devices, and large civilian aircraft. The complex evolving analysis of appropriate state intervention, already hard, is now confounded by a massive new player eager and willing to do whatever it takes to become both self-sufficient and a global supplier in the critical technologies of the next half century.
“The root of the challenge,” Harvard Law Professor Mark Wu argues, “lies with China’s distinctive economic structure. Some commentators refer to this structure as Chinese state capitalism. This terminology suggests that the Chinese economy resembles other economies, such as Russia’s or Brazil’s, that are also labeled as state capitalist.” Professor Wu contends however, “that China’s economy is fundamentally different—even unique.” Professor Wu, instead uses “the shorthand reference of “China, Inc.” to describe the Chinese economy.”
The state is heavily engaged, but economic intervention does not always flow through the state. “Alongside the state,” Professor Wu notes, “is the Chinese Communist Party (“Party”), a separate political actor that plays an active role in the management of state-owned enterprises (“SOEs”). The economy embraces market-oriented dynamics, yet it is not strictly a free-market capitalist system. Networked hierarchies and embedded relationships exist among businesses, but not necessarily in the way they operate elsewhere in the world.”
ZTE is a good example of the complicated relationship between State and State-Owned Enterprises competing aggressively across the globe.
Enter Senator Rubio, whose Bill would, among other things, bar the sale of national security-sensitive technology and intellectual property, increase taxes on multinational corporations’ income from China, and impose duties on, and cap Chinese investor shareholding in U.S. companies producing goods targeted by China’s “Made in China 2025.”
Rubio’s hard-line Bill pushes Congress toward a tougher national response to China’s strategic industrial policy. Perhaps it is in part a reaction to the elusive “strategy” flowing from the White House. It is likely that the Bill as proposed does not get it all right. It is not clear that any single piece of legislation can. However, it is crystal clear that a vigorous and thoughtful national debate—indeed, an international debate– is needed on just how to get our existing institutional rules-based system to work constructively with “China Inc.” to ensure balanced and harmonious economic progress for all nations over the next several decades.
Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.