The Trade and Technology Council meets in Washington on Monday. It is a diplomatic forum set up last year to coordinate policy between the US and the EU in these areas. And there is much to discuss. Last summer, the US Congress passed the Inflation Reduction Act, a massive package of measures that includes $369 billion in climate investments.
According to Peter van den Bosche, Belgian research director at the World Trade Organization in Bern, Switzerland, it’s an adrenaline rush disguised as environmental policy for US manufacturing. This leads to gnashing of teeth at the European Commission, which sees it as a barrier to trade and distorting competition.
After all, the U.S. is going to provide billions in subsidies and tax breaks for electric cars and renewable energy, among other things, where major parts come from North America and assembly takes place there. In addition, companies wishing to establish themselves in the United States receive subsidies up to ten times higher than those allowed in Europe.
One possibility to smooth the folds is for the US to allow the EU to come under US regulations. So the fiscally favorable policy applies to parts from Europe, for example, electric cars manufactured here.
Van den Bosch predicts that America will never agree to that. “The deflationary act was such a complex political compromise that it’s unthinkable to recapture it. And that package is precisely aimed at achieving competitive advantage. Not only towards China, but also towards Europe. So why exclude them?’
There is a logical legal way to do something about that classic American policy. One of the main tasks of the World Trade Organization (WTO) is to call countries that violate international trade rules to order. Because, for example, they prevent imports of foreign goods out of protectionism or because they pay their own industry to compete unfairly in the world market.
Van den Bosse explains that only that street is currently a dead end. The WTO can no longer pronounce condemnations. Countries can sue against unfair practices, and the right is ruled by a panel of WTO judges. But after that, the losing country always has the option to appeal. And that’s where the sandal pinches.
Close the gaps
As of December 2019, the WTO Appellate Body does not have enough judges to administer justice. The United States refuses to appoint new judges, which requires unanimity among the WTO’s 164 members, resulting in the suspension of dispute settlement.
The US has defended its position under the presidency of Donald Trump with a principled sales pitch. The WTO Appellate Body is said to be guilty of interpreting the ‘judicial function’ and its powers too broadly. “We cannot accept that we are making policy in an area where there is no agreement and this Appellate Body suddenly makes a decision about it,” the Trump administration said at the time.
There is a truth in that. Agreements made since the establishment of the WTO in 1995 are outdated or obsolete. Today, for example, international trade in services was very limited, and the Internet was still in its infancy. As a result, judges were sometimes forced to close loopholes in trade laws.
However, the larger reality is that it is more convenient for the US to freeze dispute settlement in the WTO and thus avoid penalties. Trump has waged dubious trade wars with the likes of China and the European Union.
Good talk about international cooperation
In early 2021, something changed with the arrival of Joe Biden. A self-confident fan of multilateralism, the Democratic president will once again make the United States an active participant in international trade negotiations, rather than an obstacle. It was a vain hope. Biden continued the trade war with China and refused to appoint new WTO judges.
Van den Bosse says Joe Biden is more protectionist than Donald Trump. Trump had a “Buy American” policy, but Biden turbocharged it. It may be overlooked because he speaks well of international cooperation. But in the field of trade and investment they are empty words.’
Therefore, it makes no sense for Europe to bring a case against the US at the WTO. Nevertheless, Brussels should do it, says van den Bosse, who was one of the WTO’s highest-ranking judges from 2009 to 2019. “This is diplomatic pressure. Also, resolving this trade conflict of political and economic importance is taking time. By the time the case reaches the Appellate Body, if stuck there, you have another year. Until then no countermeasures need to be taken.’
Existential crisis WTO
What can the EU do if it ultimately decides to retaliate against the US’s unfair practices? Van den Bosse predicted the commission would introduce targeted tariffs on products from states in the US where political support for anti-inflation legislation is high. “The commission has experience in that. Think of tariffs on imports of steel, textiles, fruit juice or Harley Davidsons.
Let’s hope it never comes. If this conflict continues, it will grow. Europe could force its own car industry to work with domestically produced parts and compete with each other with subsidies. You risk ending up in an incredibly expensive subsidy battle. We have to wait and see if it can be avoided’ he said.
Will the WTO survive this existential crisis? A reform of the dispute resolution system is being discussed. ‘I have heard from several WTO members that the US has invited them to give their views on how things can be improved. But when they ask to the contrary what America is proposing, it is always deafeningly silent. I understand that too. It’s a toxic topic in America. Nothing is going to happen to it.’
Europe is bound by trade rules
WTO expert Peter van den Bossche notes that it is more difficult for Europe to take unilateral trade measures than the US. In 2020, the EU, along with China, Canada, Brazil, Australia and Mexico (but certainly not the US) created an alternative mechanism for appeals within the WTO, a ‘temporary’ replacement for the now-defunct Appellate Body. This alternative mechanism allows WTO dispute settlement to continue to work among the approximately fifty participating WTO members.
As a result, disputes about the compatibility with WTO law of planned European trade measures, such as a border tax on CO2, will be resolved with legally binding rulings. Something America doesn’t care about, for example, is deflationary legislation.
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