Japan, EU, US Set Out Initial Joint Plan to Tackle Industrial Overcapacity, Forced Tech Transfers

7 June 2018

The top trade diplomats of Japan, the US, and the EU met in Paris, France, late last week to discuss joint measures to counter allegedly unfair competitive conditions caused by market-distorting subsidies, state-owned enterprises, and forced technology transfers by third countries. 

The meeting is the third in a series of trilateral talks, launched on the margins of the Eleventh WTO Ministerial Conference last December in Buenos Aires, Argentina. (See Bridges Daily Update, 13 December 2017

Officials say that their discussions aim to enhance cooperation to respond to trade-distortive practices with a view to fostering a more level global playing field. 

EU Trade Commissioner Cecilia Malmström, Japanese Trade Minister Hiroshige Seko, and US Trade Representative Robert Lighthizer led the dialogue, which took place on the sidelines of the Organisation for Economic Co-operation and Development (OECD) ministerial-level meetings.

“The Ministers confirmed their shared objective to address non market-oriented policies and practices that lead to severe overcapacity, create unfair competitive conditions for our workers and businesses, hinder the development and use of innovative technologies, and undermine the proper functioning of international trade, including where existing rules are not effective,” said the joint statement issued after the discussions closed.

Concretely, discussions sought to identify indicators that signal the presence of “non-market oriented policies.” The criteria dictate, among other features, that enterprises are held to international accounting standards and are free to make decisions with regard to prices, purchases, and sales, along with decisions on investments and capital allocation in response to market signals and without “government interference.” The parties agreed to continue talks in this area and to confer with other trading partners to advance the development of reliable indicators and “maintain market oriented conditions.”

Ministers also reaffirmed their commitment to addressing market-distorting measures by working together in other existing international coalitions, naming the G7, G20, and the OECD among them, as well as sectoral initiatives such as the Global Forum on Steel Excess Capacity.

New rules on industrial subsidies?

Furthermore, discussions focused on elaborating a road map to advance possible new WTO rules on industrial subsidies and state-owned enterprises (SOEs), included in the joint statement in the form of a scoping paper.

“The three partners share the view that the existing WTO rulebook on industrial subsidies should be clarified and improved to ensure that certain emerging developing members do not escape its application,” read the joint scoping paper.

The scope of any future negotiations would need to cover improved transparency, according to the scoping paper, with a view to establishing incentives for members to notify subsidies exercised in their jurisdictions in line with WTO transparency obligations. Ministers said that non-compliance could serve to obstruct the sound evaluation of the “trade effects” of “notified subsidy programmes” and undermine the performance of the trade body’s monitoring function.

Keeping pace with notification commitments has long been a concern among WTO members, many of whom have raised the issue in relation to subsidy programmes across different sectors, including non-industrial ones.

The scoping paper also called for discussion on the characterisation of public bodies and SOEs. “Such entities are the backbone and the distinctive feature of certain state-driven economic systems, through which the state decisively governs and influences the economy,” the paper reads.

Finally, ministers agreed on the need for more stringent rules on subsidies, urging the “outright” ban of the most harmful subsidies, along with calling for subsidising countries to be forced to demonstrate that the provision of state aid does not have negative economic ramifications for trading partners.

Other suggestions included crafting disciplines “that provide a targeted remedy” for state aid that supports excess capacity, along with improving WTO rules to facilitate better information collecting on subsidies and their implications.

The three sides pledged to initiate domestic steps before the end of the year, which they say could serve as a basis for future negotiations. They also highlighted the importance of securing the requisite political momentum by engaging a critical mass of major industrial subsidy providers in talks.

Forced technology transfer

The joint statement also communicates a shared view that technology transfers from foreign to domestic businesses cannot be made mandatory or pressured through the means of joint venture requirements, foreign equity restrictions, and administrative review and licensing procedures, among other examples.

Citing general “growing concerns,” the officials agreed to strengthen cooperation and the exchange of information and best practices to find mechanisms to address harmful forced technology transfer policies and practices of third countries and, in relevant cases, to pursue legal action at the WTO.

The joint statement issues a strong criticism of combat government measures that support unauthorised access to the computer networks and trade secrets of foreign businesses, the “systematic investment” in overseas companies for the purpose of acquiring intellectual property and transferring technology to domestic companies, and allegedly unfair licensing measures that give domestic entities an edge over foreign firms.

The EU this week launched a WTO case against China, citing forced technology transfers that the bloc says contradict global trade rules designed to protect intellectual property rights, among others. (For more on the EU-China case, see related story, this edition)

“We cannot let any country force our companies to surrender hard-earned knowledge at its borders,” Malmström said on Twitter on Friday.

The US recently raised a similar claim, proposing Section 301 measures aimed at providing “relief from unfair trade practices” in relation to China’s intellectual property practices. (See Bridges Weekly, 22 March 2018)

Japan, EU express concern over US steel, aluminium tariffs

In a bilateral meeting on Thursday, Minister Seko and Commissioner Malmström issued their own joint statement in response to the US tariffs on imported steel and aluminium, and the announced additional probe into auto imports, which will also be conducted under Section 232 of the 1962 Trade Expansion Act. That provision involves investigations and potential remedies for imports, using the justification of national security. (See Bridges Weekly, 31 May 2018)

“Both ministers concurred that the measures under consideration in the investigation on autos and auto parts, if imposed, would have a major restrictive impact affecting a very substantial part of global trade,” the EU-Japan joint statement reads. “This would cause serious turmoil in the global market and could lead to the demise of the multilateral trading system based on WTO rules.”

The two officials agreed to cooperate closely in broaching their concerns with the US and urged other countries to follow suit. Brussels has released in its own right a catalogue of US products that will be hit with duties if Washington does not rescind the metal tariffs.

The EU and the US economies combined account for approximately half of global GDP and nearly a third of world trade flows, according to EU estimates.

“If players in the world do not stick to the rule book, the system might collapse – and that is why we are challenging today both the US and China at the WTO,” Malmström said. “We are not choosing any sides, we stand for the multilateral system.”

ICTSD reporting; “Trump and Allies Set for Showdown Over Trade,” BLOOMBERG, 3 June 2018.

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