From Aircraft to Rare Earths: What the WTO Can and Cannot Do in Big Trade Disputes

This week marks the winding down of one chapter in the history of international trade conflict, and the ramping up of another. On Monday, the World Trade Organization (WTO) reached its final ruling in a three decade-long dispute between the United States and the European Union over aircraft subsidies by confirming that Boeing, along with its European rival Airbus, was also a recipient of significant illegal government subsidies.

And then on Tuesday, President Obama announced the launch of a joint U.S.-European Union-Japanese challenge before the WTO aimed at forcing China to lift its restrictions on exports of rare earth and other minerals, which are key ingredients for a range of products such as smart phones, hybrid batteries, and wind turbines. The export restrictions lower the cost of rare earths for Chinese-based producers and raise costs for overseas competitors. The case is part of a larger push by the Obama administration to step up trade action against China, including the recent creation a new Interagency Trade Enforcement Center.

The U.S.-EU conflict over aircraft was a battle for the commanding heights of the industrial economy--control over one of the most sophisticated and lucrative of manufactured goods. Civil aircraft remains the single biggest export from the United States and one of the top EU exports. The conflict with China is over which countries will dominate production of the leading technologies of the future.  If the U.S.-EU dispute is any measure, the best outcome is likely a tense compromise in which each of the large economies must find a way to share.

The Airbus-Boeing battle is too complex to summarize easily, and has received serious book-length treatment by former New Yorker writer John Newhouse. But from a trade perspective, there is a reasonably simple conclusion--that global trade rules cannot dissuade powerful countries from pursuing their own economic and security interests. The European nations that make up the Airbus consortium were determined to create a globally competitive aircraft maker, and set about doing so systematically over the course of several decades. Government support was part, but only part, of the story. The United States, in turn, was determined to shore up Boeing as a dominant producer for both commercial and military reasons. Government support was similarly part, but only part, of the story.

After nearly a decade of legal wrangling before the WTO, the U.S. and EU are more or less back where they started. With both sides having lost before the WTO, there is little alternative but for the two governments to negotiate some arrangement--as they first did in 1992--that will do a bit more to restrain future subsidies while avoiding costly trade sanctions.

China is similarly determined to become a competitor in what it calls “emerging strategic industries,” from clean energy to biotechnology to next-generation information technology. The potential for trade disputes is much greater than it was between the U.S. and the EU because Chinese government support for these industries is broader and deeper.  But there are similarities too. The United States was always hobbled in any full-throated denunciation of subsidies for Airbus because, as the WTO decisions showed, Boeing also received extensive subsidies, even if they were determined to be less than one-third of the support received by Airbus. Similarly, in going after China on an issue like clean energy, the United States must concede that its own industries are also heavily subsidized, even if almost certainly much less than their Chinese competitors.

The WTO disputes system can be extremely valuable because the panels serve as a neutral arbiter in assessing violations and calculating harm to the industries. But they cannot impose a solution. In the aircraft case, the two sides now have little choice but to find a negotiated truce, one in which (per the panel decisions) the EU will likely have to agree to reduce subsidies by more than the United States.

With the United States now challenging China in the WTO on several fronts, the Obama administration should look for similar negotiating opportunities. China is not going to back away from its determination to succeed in these emerging industries, and is already threatening to push back hard in the dispute. But neither should the United States allow subsidized Chinese competitors to take a major bite out of U.S. sales, either domestically or overseas. WTO rulings could help in clarifying where trade rules are being violated, and by how much, and it is encouraging to see the Obama administration using that tool more aggressively. And in this latest case, the United States also needs to move quickly to develop domestic and other international sources of rare earth materials to help increase leverage over China.

But like the U.S. and the EU over aircraft, negotiated compromise with China is the only plausible way forward. Even as trade tensions ratchet up, both side should make sure to leave their doors open.