Why trade penalties and economic coercion aren’t working

Trade tensions have flared up again after a Chinese Foreign Ministry Spokesperson took aim at Australia’s business dealings with China.  

“We will not allow any country to reap benefits from doing business with China while groundlessly accusing and smearing China and undermining China’s core interests based on ideology,” said Zhao Lijia at a press conference on Tuesday. 

Zhao referenced Australia’s allegiance with the US, remarking that “…when a certain country acts as a cat’s paw for others, it is the people that pay for misguided government policies.”

After the Foreign Ministry Spokesperson’s comments, Treasurer Josh Frydenberg defended Australia’s approach to trading with China. “We are living with a different China than what we have seen in years prior,” he told reporters.

These revelations come off the back of Australian Prime Minister recently calling for the World Trade Organization (WTO) to strengthen its dispute settling power. Tensions came to a head on 23 June, when China filed a complaint with the WTO accusing Australia of anti-dumping and countervailing measures on imports such as stainless-steel sinks. This followed Australia asking the WTO to challenge Chinese anti-dumping tariffs on our wines four days earlier.

The ‘tit for tat’ is the latest in a long line of instances where the countries have taken each other to the WTO. I argue that the Australian Prime Minister and Treasurer will have to try a new approach if they are to change course in the country’s relationship with China.

History of fragile relations

In May this year, China’s National Development and Reform Commission indefinitely suspended bilateral trade talks with Australia, blaming Australia for its “Cold War mindset”. Two months earlier, Australia formally requested the WTO establish a dispute panel to resolve their claim that China, their largest trading partner, breached trading rules by imposing additional tariffs on Australian barley in May 2020.

This action by China, in turn, followed a push by the Foreign Minister Marise Payne a month earlier for an international probe into COVID-19. The review, aimed at identifying the “genesis of the virus”, exacerbated a rift with China that stems from Australia’s ban of Huawei’s 5G network equipment in August 2018.

Despite the conflict between these two WTO member nations, the irony lies in their prior willingness to formalise dispute settlements.

Standing treaty only protecting customs tariffs

Through the China–Australia Free Trade Agreement (ChAFTA) that came into force in December 2015, both signatories committed to an Investor-State Dispute Settlement (ISDS) mechanism. This is designed to provide exporters the opportunity to be heard by arbitrators if a country fails to deliver on its investment obligations.

ISDS provisions are not limited to ChAFTA and are included in nine other FTAs with Australia. However, the recently signed Regional Comprehensive Economic Partnership (RCEP) is not one of them. Comprising of 15 members, the Association of Southeast Asian Nations (ASEAN) and their six FTA partners, Australia, China, India, Japan, New Zealand and South Korea, the agreement does not include an ISDS at this stage but provides a process for parties to incorporate it down the track.

Although ChAFTA is a currently-binding treaty that covers agricultural produce such as beef, barley, seafood and wine – the subject of China’s current claims – the ISDS does not apply to anti-dumping tariffs that can range for example, from 116.2% to 218.4% on imported Australian wine. Until China’s action in June to impose anti-dumping measures, Australian wine enjoyed a 0% tariff.

Of course, if Australia played its hand right, ChAFTA would have significant future benefits for Australian exports such as the elimination of beef tariffs of 12 to 25% by 1 January 2024.

Morrison’s international “call to action”

This is not what we’re seeing. In the case of Australia, it’s what’s happening outside the agreement that is impinging on progress between the duo. Even though everything’s potentially eligible for preferable treatment under ChAFTA, from a tariff perspective, affected producers and the Australian economy are suffering significant damage from China’s penalties right now and the foreseeable future – with 167% anti-dumping duties being imposed on exporters for the next five years – notwithstanding the free trade agreement.

The only vehicle empowered to prosecute trade breaches is the WTO, but this tiger has shown itself over many years to be toothless, without power to enforce its remedies.

In response to this vacuum and Australia’s own unresolved conflict with its trade adversary, the Prime Minister Scott Morrison recently called for the WTO to take a tougher stance on dispute resolution.

Ahead of the G7 summit in Cornwall Morrison told the Perth USAsia Centre on 9 June that restoring the WTO’s binding dispute settlement system was the most practical way to address China’s trade pressure. He appealed to G7 countries who, unlike Australia, have official contact with China to support his proposal.

The Prime Minister invoked a more strident WTO to set clear rules and arbitrate disputes objectively to ensure there are consequences for “coercive behaviour”, in Australia’s case, China.

His appeal fell on deaf ears by WTO member nations. Perhaps their own questionable history with the WTO precluded their open support?

Although no explicit support for Australia’s motion was forthcoming in the final G7 Summit Communiqué, the member group did pledge to advance “the proper functioning of the WTO’s negotiating function and dispute settlement system, requiring addressing long-standing issues”.

Diplomacy is the answer

The problem with even a successful WTO ruling is there’s nothing to make a country pay the fine or make it change its behaviour. It doesn’t matter who is right, if you can’t enforce it. No matter how hard Morrison pushes, the net outcome is still punitive tariffs on Australian exports.

By pointing the finger at China and its anti-dumping penalties, he’s clearly missing the mark. The “economic coercion” that Morrison wants to stop needs to be solved diplomatically. This is not about trade.

The intrinsic value of the anti-dumping measures is to combat countries’ attempts to flood your market with their low-cost goods. However, they have been used as an avenue to punish their neighbours for unruly behaviour and exert political grunt.

Now more than ever there needs to be a new solution to the increasing abuse of anti-dumping measures whose original purpose was to ensure fair trade. Given the proliferation of free trade agreements exists due to the limitations of the WTO to reach agreement, perhaps bolstering our bilateral and regional integration agreements to deal head on with anti-dumping and competition disputes is an option to effectively regulate dispute resolution.

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