EU, USA, Japan agree on proposals to limit subsidies

The EU, US and Japan put forward on Tuesday (14 January) a proposal to limit industrial subsidies among WTO members and explored ways to address forced technology transfers, two issues at the core of ongoing trade frictions with China.

The joint statement was concluded after two years of talks launched by the EU, US and Japan trade chiefs on the margins of the World Trade Organisation conference in Buenos Aires.

The conclusion of the negotiations came during the visit of the EU’s trade Commissioner, Phil Hogan, to Washington to address some of the EU-US trade conflicts, including the Airbus-Boeing dispute and an escalation of the tit-for-tat tariff war.

“This joint statement is an important step toward addressing some of the fundamental issues distorting global trade,” said Hogan.

“The EU has been arguing consistently that multilateral negotiations can be effective in resolving these problems,” Hogan added.

The three partners considered that the current list of prohibited subsidies, which only includes two categories, is “insufficient” to tackle market and trade-distorting practices. They proposed to add to the list four new types of “unconditionally prohibited subsidies”.

These are: unlimited guarantees; subsidies to an insolvent or ailing enterprise in the absence of a credible restructuring plan; subsidies to enterprises unable to get long-term financing or investment from independent commercial sources in sectors or industries with overcapacity; and certain direct forgiveness of debt.

The WTO rules currently only prohibit subsidies linked to export performance and contingent on the use of domestic over-imported goods.

In regards to other subsidies with a “harmful effect”, the joint statement proposed a reversal of the burden of proof, so the subsidizing country must demonstrate that there are no serious negative trade or capacity effects.

Some of these “harmful subsidies” include excessively large subsidies, public aid to save uncompetitive firms, subsidies that create massive manufacturing capacity, or those lowering input prices domestically in comparison with prices of the same goods destined for export.

In addition, the EU, US and Japan want to improve transparency in regards to trade and market practices. “This is important with China” and EU source said, adding that Beijing operates in a “very opaque” manner in regards to its trade and market practices.

To that end, they want to add a mechanism to impose “severe consequences” to countries that are not transparent about their subsidies. It would imply that subsidies will be banned if they are not notified but are known by third countries.

Forced technology transfers

In regard to forced technology transfers, a practice often denounced by foreign firms operating in China, the trade chiefs discussed possible disciplinary measures, including export controls, foreign investment reviews on the grounds of national security, enforcement tools and, potentially, the development of new rules.

Amid the ongoing trade dispute on various fronts with the US, EU officials highlighted that this trilateral format was “very successful”, and allowed for a continuous engagement with the US administration.

Before taking the proposals to the multilateral level with all WTO members, the three countries will discuss the joint statement with around 10 or 15 countries that have expressed their interest over the past two years and with some of the big subsidisers, including China.

China committed to discussing industrial subsidies and the forced transfer of technology in the context of the EU-China joint declaration signed last April.

“We expect that China will honour that commitment,” an EU official said.

The EU and China, however, made little progress in discussing these two issues over the second half of last year.

WTO crisis

The Business federations of the EU, US and Japan supported the proposals and urged the three partners to discuss them with other WTO members.

“Currently, the WTO is facing its deepest crisis since its establishment,” Business Europe, the US Chamber of Commerce and Keidanren, the Japan Business Federation, said in a statement on Tuesday.

The primary reason for the WTO crisis is the suspension of the activities of its appellate body.

“A dysfunctional dispute settlement system could severely undermine efforts to address trade-distorting measures,” the business federations warned.

The US became the main bone of contention on this issue after it blocked the nomination of new members that would have allowed the appellate body to continue functioning.

Meanwhile, the EU found more support in China as Beijing expressed its interest in joining an ad-hoc system proposed by the Europeans to settle trade disputes.

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