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Is the World Trade Organisation on its Last Legs? Experts Weigh In

 

Daily BBC

Is the age of so-called 'unfettered free trade' and multilateral commerce under the World Trade Organization (WTO) framework drawing to a close?

These issues are mostly the result of wealthy nations attempting to bend the rules to undercut competition or impede the operation of crucial organs, such as dispute and resolution mechanisms, in order to safeguard their corporate interests. Now, these countries appear to be moving away from the ideals of free trade and have begun to implement protectionist measures, violating the WTO rules, under the guise of a green transition to safeguard the planet.

In recent years, the United States (US) has frequently passed measures to restrict competition in the name of national security, safeguard employment and industry, and disrupt global supply networks. The United States Congress, for example, has enacted the American Innovation and Competition Act, which includes $52 billion to encourage domestic semiconductor production and $200 billion for scientific and inventive research.

In 2022, Congress passed the Chips and Science Act. Later that year, the Inflation Reduction Act (IRA) was approved. The implementation of the controversial IRA, a multibillion-dollar subsidy scheme for the country's auto sector, which is struggling to compete with China's cheaper electric cars (EV), is viewed as a new challenge to the multilateral trade order.

The regulation expressly prohibits investors from receiving subsidies for each new energy vehicle manufactured if they use so-called foreign entities of concern (FEOCs) in their supply chains, thus violating WTO norms.

The US and EU have begun violating WTO norms to discourage Chinese competition through discriminatory national policies.

The IRA states that the new energy vehicle tax incentives will save consumers $7,500 per unit. However, an eligible clean vehicle cannot contain any battery components made or assembled by the FEOCs, corporations, or entities specified by the US. Thus, American automobile owners are ineligible for EV subsidies if specific components were manufactured by Chinese, Russian, North Korean, or Iranian producers.

China, which became the world's top electric car exporter last year and is thought to be the primary target of this subsidy scheme, has filed a protest with the WTO seeking comment on the IRA.

China claims that the Act unjustly targets automobiles that employ 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 following the submission of the complaint.

Beijing claims that the IRA has a significant detrimental impact on the stability of the global industrial supply chain and the climate for fair competition, and its WTO lawsuit against the US echoes the international community's concerns.

However, when she concluded her visit to China last Monday, US Treasury Secretary Janet Yellen stated that a decade ago, a surge of low-cost Chinese steel into the global market "decimated industries across the world and in the United States". She underlined that Washington "will not accept" a situation in which underpriced Chinese goods flood the global market again, wreaking havoc on other industries, and that the US's friends and partners have similar worries.

Even though the IRA is a Chinese-specific measure, its consequences are perceived worldwide. Initially, South Korea contemplated using the WTO against the IRA. The European Union (EU), Canada, New Zealand, and other WTO members have all denounced the IRA.

In a letter to the US Treasury in November 2022, the European Commission 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 it could also trigger a harmful global subsidy race to the bottom on key technologies and inputs for the green transition."

Nonetheless, these nations' prior unhappiness has subsided as a result of their common worry of China's expanding dominance in new energy industries such as EVs and solar power. Threats to trade have also spurred the US to establish Critical Minerals Agreements with select nations, granting them access to EV tax benefits in the IRA. The EU appears to be joining the US in its campaign against 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," a clear reference to China's state subsidies, which the West claims are causing a global glut of solar panels, EVs, and a variety of other manufactured goods. It also committed to non-economic remedies to such (Chinese) policies, such as export bans and investment screening, in order to 'enhance' economic security in the EU and the United States.

Indeed, Beijing has been involved in discriminatory policies for several years, banning non-Chinese businesses from selling EV batteries to Chinese automakers, according to a European expert. The actions that the US and EU have promised to conduct are akin to condemning China's non-market practices while supporting the same ones domestically.

On the surface, the efforts taken by the United States to preserve its car sector appear to violate the World Trade Organization's Agreement on Subsidies and Countervailing Measures, which is why American groups are calling for WTO rule modification. The Chinese challenge against the IRA at the WTO has generated suggestions for a Climate Peace Clause to "stop WTO attacks on policies needed to fight climate change".

Legally, China has a point—the IRA violates WTO rules—and is likely to win its case. Will the Chinese case succeed in sustaining multilateralism as intended at the WTO's inception? That seemed extremely implausible.