The Trade and Technology Council is meeting in Washington on Monday. This is a diplomatic forum set up last year to coordinate policy between the US and the EU in these areas. And there is a lot to discuss. Last summer, the US Congress passed the Inflation Reduction Act, a gigantic package of measures that includes $369 billion in climate investments.
According to Peter Van den Bossche, Belgian research director at the World Trade Institute in Bern, Switzerland, this is an adrenaline rush for American manufacturing, disguised as environmental policy. It leads to gritting of teeth at the European Commission, which sees it as a barrier to trade and a distortion of competition.
After all, the US will provide billions in subsidies and tax breaks for electric cars and renewable energy, among other things, provided major parts come from North America and assembly takes place there, too. Furthermore, companies that want to establish themselves in the United States receive subsidies that are up to ten times the maximum of what is allowed in Europe.
One possibility to smooth out the kinks is for the United States to allow the European Union to fall under American terms. The tax-friendly policy would then also apply to parts from Europe, for example, and to electric cars manufactured here.
Incorrect practices
America will never accept this, predicts Van den Bossche. “The Inflation Reduction Act was such a complex political compromise that it is unthinkable to toy with it again. Furthermore, this package is precisely aimed at achieving competitive advantages. Not only towards China, also towards Europe. Why should they exclude them then?’
There is a logical legal way to do something about that stubborn American policy. One of the main tasks of the World Trade Organization (WTO) is to bring to order countries that violate the rules of international trade. Because, for example, they hinder the importation of foreign products out of protectionism, or because they give money to their industry so that it can compete unfairly on the world market.
Only that road is a dead end at the moment, explains Van den Bossche. The WTO can no longer condemn. Countries can sue unfair practices and be judged right by a panel of WTO judges. But after that, the losing country always has the option to appeal. And this is where the shoe pinches.
Close the gaps
As of December 2019, the WTO Appellate Body no longer has enough judges to administer justice. The US refuses to appoint new judges and as this requires unanimity among the 164 WTO members, the dispute settlement has consequently been halted.
The United States defended its position under the presidency of Donald Trump with a principled sales pitch. The WTO Appellate Body is said to be guilty of “judicial activism” and interprets its powers too broadly. “We simply cannot accept that we are making policy in an area where there was no agreement and that this appellate body is suddenly making decisions about it,” the Trump administration said at the time.
There is a grain of truth in this. The agreements entered into date back to the establishment of the WTO in 1995 and are often outdated or obsolete. Back then, for example, international trade in services was much lower than it is today, and the Internet was still in its infancy. As a result, judges have sometimes been forced to plug holes in commercial laws.
The bigger truth, however, is that the US was simply adapting to paralyze dispute settlement at the WTO, thus avoiding convictions. Trump has waged dubious trade wars with China and the European Union, among others.
Nice speeches on international cooperation
At the beginning of 2021, something seemed to change with the arrival of Joe Biden. A self-proclaimed proponent of multilateralism, the Democratic president would again make America an active player in international trade negotiations, rather than a hindrance. It was a vain hope. Biden has continued the trade war with China and also refuses to appoint new WTO judges.
Joe Biden is much more protectionist than Donald Trump, says Van den Bossche. Trump had the “Buy American” policy, but Biden turbocharged it. Maybe it’s not so obvious because he speaks well of international cooperation. But in the field of trade and investment, these are empty words.
So it seems little sense for Europe to file a case against the United States in the WTO. Yet Brussels should do it, says Van den Bossche, who himself was a top WTO judge from 2009 to 2019. “It’s diplomatic pressure. politically and economically. When the case reaches the Appellate Body, and then gets stuck there, it will take another year. Until then, you must not take any countermeasures.”
WTO existential crisis
What can the EU do if it finally decides to take revenge for the unfair practices of the United States? Van den Bossche expects the Commission to then introduce targeted levies on products from US states where political support for the Inflation Reduction Act is greatest. ‘The Commission has experience in this area. Think of levies on imports of steel, textiles, fruit juices or Harley Davidsons.’
Let’s hope it never comes to this. If this conflict continues, it will only grow. Europe can also force its car industry to work with locally produced parts and compete with each other with subsidies. You risk ending up in an incredibly expensive subsidy war. Whether this can be avoided remains to be seen.”
Will the WTO survive this existential crisis? Discussions are underway to reform the dispute settlement system. ‘I have heard from several WTO members that America has invited them to give their opinion on how to make things better. But when on the contrary they ask what the United States itself is proposing, it is always a deafening silence. I understand that too. This is a toxic topic in the US. Nothing will happen to him.’
Europe is bound by trade rules
It is much more difficult for Europe to adopt unilateral trade measures than for the United States, notes WTO expert Peter Van den Bossche. In 2020, the European Union, together with China, Canada, Brazil, Australia and Mexico (but obviously not the United States) established an alternative appeals mechanism within the WTO, as a ‘temporary’ replacement of the now crippled Appellate body. This alternative mechanism allows WTO dispute settlement to continue to function between the approximately fifty participating WTO members.
As a result, disputes over the WTO compliance of envisaged European trade measures, such as the CO2 border tax, will be settled in legally binding rulings. Something the US is not bothered about, for example, with the Inflation Reduction Act.
