After applying provisional tariffs on Chinese electric vehicles (EVs) in July, the European Commission recently announced plans to impose definitive five-year import duties of up to 36 per cent that could come into force at the end of October.

In response, China has launched its own investigation into European subsidies for certain dairy products, notably cheese, milk and cream meant for human consumption. China’s Ministry of Commerce is also discussing higher tariffs on fuel-powered cars with large engines from the European Union.

Before that, China had already opened anti-subsidy investigations into French brandy and some pork products in January and filed a complaint with the World Trade Organization (WTO), arguing that the EU tariffs violated WTO rules and undermined global cooperation on climate change.

As the trade tensions intensify, the EU’s top diplomat Josep Borrell has warned that a trade war with China may be “unavoidable”. However, the window of opportunity is not closed yet.

To avoid a trade war, the EU and China are continuing discussions to find an alternative solution. The EV tariff dispute is a test case for China and the EU, and they should take this opportunity to find alternative solutions.

Discussions appear to be are focused on the technical details as the European Commission has adjusted the tariff rates after consulting Chinese EV producers. Another popular idea is to encourage Chinese EV companies to invest and produce cars in the EU, which would not only help to reduce transport costs and avoid high tariffs but also create jobs and tax revenue for the local economies.

However, such solutions are not sufficient to address the fundamental issue of subsidies, which is at the heart of the EV dispute as well as other trade disagreements between the EU and China. Subsidies are not an issue exclusive to China. For example, the United States and the EU are also using subsidies for their green industries to enhance their competitive edge.

The Biden administration’s Inflation Reduction Act includes US$369 billion of subsidies and tax credits for clean energy technologies. The EU’s Green Deal Industrial Plan contains measures to create a more supportive environment for scaling up the EU’s manufacturing capacity for net-zero technologies and products.

The issue around subsidies appears not to be whether to enact them but, rather, how and to what extent. Rather than accusing each other of providing unfair subsidies and taking unilateral protectionist measures to level the playing field, it is time to think about a long-term multilateral solution.

It is important to take a step back to understand the essence of trade policy. We can think of it as policymakers having two primary tools – subsidies and tariffs – to influence both imports and exports. This yields four potential policy scenarios: taxing imports, taxing exports, subsidising imports and subsidising exports. While export taxes and import subsidies are historically uncommon, the debates surrounding trade policy primarily centre on import duties and export subsidies.

Since the inception of trade multilateralism in 1947 in the form of the General Agreement on Tariffs and Trade and its transformation into the WTO in 1995, negotiations on reducing and eventually eliminating tariffs have been front and centre in the minds of trade negotiators focused on improving market access.

Despite the prevalence of export subsidies, there has been a notable absence of comprehensive multilateral discussions and negotiations on this issue. Although the WTO Agreement on Subsidies and Countervailing Measures (SCM) provides guidelines for government subsidies and remedies for subsidised trade, its scope is limited and its implementation has been ineffective.

The SCM agreement has struggled to keep pace with the evolving landscape of international trade in the 21st century. Therefore, it is strongly advisable for China and the EU to avoid a bilateral resolution to their EV disputes. Such one-on-one negotiations can lead to a zero-sum mentality where one side perceives itself as winning at the other’s expense.

Instead, seeking a resolution within the multilateral framework of the WTO is beneficial. A multilateral approach would not only foster a more collaborative and balanced resolution to the EV disputes but also provide an opportunity to update the WTO’s outdated rules and definitions on subsidies.

By leveraging their bilateral trade friction, China and the EU could contribute to the development of new, globally applicable subsidy rules that address the realities of modern international trade. This would help resolve their own dispute and benefit other WTO members who could face similar challenges in the future.

Many countries resolve disputes bilaterally, but China and the EU are no ordinary economic powers. As major stakeholders in the global economy and the multilateral trading system, they should adopt a more responsible approach. By handling issues with multilateral implications within a multilateral framework, they can advance their own interests while contributing to the collective well-being of other countries.

Shifting their EV negotiations from a bilateral to a multilateral setting is an opportunity for the two powers to demonstrate their commitment to upholding the rules-based liberal international economic order as responsible stakeholders. It is time for the EU and China to take this opportunity to kick-start the multilateral process.

文章来源：South China Morning Post