Is the era of so-called ‘unfettered free trade’ and multilateral trading system under the World Trade Organisation (WTO) regime coming to an end?

These challenges mostly come from developed countries trying to bend the rules to undermine competition or hamper the working of important organs, like dispute and settlement systems, to protect their business interests. Now, these powers seem to be drifting further away even from the principles of free trade and have started adopting protectionist policies, breaching the WTO regime, in the name of a green transition to protect the climate.

In recent years, the United States (US) has more often than not enacted policies to suppress competition in the name of national security, protect jobs and industry, and disrupt global supply chains. The US Congress, for instance, has passed the American Innovation and Competition Act, which offers $52 billion to boost domestic semiconductor manufacturing and $200bn for scientific and innovative research and development.

In 2022, Congress enacted the Chips and Science Act. Later that year, the Inflation Reduction Act (IRA) was passed. The enactment of the contentious IRA, a multi-billion-dollar subsidy programme for the country’s auto industry struggling to cope with looming competition from China’s cheaper electric vehicles (EV), is being seen as a fresh threat to the multilateral trading order.

The law explicitly excludes investors from benefiting from the subsidies for every new energy vehicle produced if they include so-called foreign entities of concern (FEOCs) in their supply chains, which clearly breaches the WTO rules.

The US and EU have started breaching WTO rules to suppress Chinese competition via discriminatory national policies

The IRA stipulates that the new energy vehicle tax credits save consumers $7,500 per unit. Still, an eligible clean vehicle must not contain any battery components manufactured or assembled by the FEOCs, companies or entities listed by the US. Thus, American car buyers are ineligible for subsidised EVs if certain components were produced by Chinese, Russian, North Korean or Iranian manufacturers.

China, which became the world’s largest electric car exporter last year and is believed to be the main target of this subsidy programme, has filed a complaint with the WTO to initiate consultation over the IRA.

China argues that the Act unfairly discriminates against cars that use Chinese battery components. “This move is not only to protect the interests of Chinese EV companies and promote a fair, competitive environment for the global EV industry but also to firmly uphold the rule-based multilateral trading system,” a Chinese official said after filing the complaint.

Beijing says the IRA has a serious negative impact on the stability of the global industry supply chain and the environment for fair competition, and its filing against the US at the WTO echoes the international community’s concerns.

However, wrapping up her China visit last Monday, US Treasury Secretary Janet Yellen says said a flood of below-cost Chinese steel into the global market over a decade ago “decimated industries across the world and in the United States”. She affirmed that Washington “will not accept” a situation where underpriced Chinese goods flood the global market again, battering industries elsewhere, adding that the US allies and partners share similar concerns.

Even though the IRA is a China-specific action, its impact is also being felt elsewhere. Initially, South Korea had considered resorting to the WTO against the IRA. The European Union (EU), Canada, New Zealand and other WTO members have also criticised the IRA.

In a letter sent to the US Treasury by the European Commission in November 2022, it argued, “If implemented in its current form, the Act risks causing not only economic damage to both the US and its closest trading partners, resulting in inefficiencies and market distortions but could also trigger a harmful global subsidy race to the bottom on key technologies and inputs for the green transition.”

Nevertheless, the earlier dissatisfaction of these countries has softened due to their shared fear of China’s growing dominance in new energy industries, including EVs, solar energy, etc. Also, threats of trade challenges have prompted the US to negotiate Critical Minerals Agreements with select countries to give them access to EV tax credits in the IRA. The EU seems to be joining the US in its crusade against the Chinese EVs.

A recent EU-US Trade and Technology Council meeting condemned the ‘threat’ posed by “third country use of non-market economic policies and practices”, an obvious reference to China’s state subsidies that the West says are causing a global glut of solar panels, EVs, and many other manufactured products. It also agreed to non-economic countermeasures to such (Chinese) policies, including export controls and investment screening, to ‘boost’ the EU and the US economic security.

Indeed, Beijing has engaged in discriminatory policy for several years, preventing non-Chinese companies from supplying EV batteries to Chinese car manufacturers, a European analyst wrote. The countermeasures the US and the EU have pledged to implement are like denouncing China’s non-market policies while supporting the same measures domestically.

On the face of it, the actions taken by the US to protect its auto industry are a breach of the Agreement on Subsidies and Countervailing Measures of WTO, which is why demand for WTO rule reforms is being voiced by American groups. The Chinese challenge to the IRA at WTO has prompted calls for a Climate Peace Clause to “stop WTO attacks on policies needed to fight climate change”.

Legally speaking, China does have a point — the IRA does violate WTO rules — and stands to win its case. But will the Chinese lawsuit succeed in preserving multilateralism as envisaged at the WTO’s inception? That seems highly improbable.

Published in Dawn, The Business and Finance Weekly, April 15th, 2024