G7 pressure on China over subsidies ‘doomed to fail’ even as Biden administration gathers coalition

Cissy Zhou
·7-min read

Pressure from the G7 to force China to change its economic behaviour is “doomed to fail”, and Beijing might simply choose to ignore it if external pressure continues to mount, experts said.

On Wednesday, trade ministers from the Group of 7 (G7) – the United States, Germany, Britain, France, Canada, Italy and Japan – pledged collective action against “harmful industrial subsidies” without naming China directly.

British Trade Minister Liz Truss, with Britain the current president of the bloc, had said before the inaugural meeting under the new G7 Trade Track that it was time for the group to “get tough on China and their behaviour in the global trading system”.

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Andy Mok, senior research fellow at the Centre for China and Globalisation, a Beijing think tank, insisted that China would not back down if the G7 statement is in fact an attempt to pressure Beijing, and that any moves would be “doomed to fail”.

I think some are just opting out, and some are only participating by providing verbal support. I think they may not follow as vigorously on actual action later

Andy Mok

“This of course is the US looking to maintain its supremacy. I think several of these other G7 countries are also caught in a bind, because on the one hand the US is pressuring them to form this united front, and of course they know that China does not want to see this ganging up against China and they know there will be consequences as China becoming much more assertive,” said Mok.

“I think some are just opting out, and some are only participating by providing verbal support. I think they may not follow as vigorously on actual action later.”

He added the trade tensions are long-standing and they will continue to exist as China’s economy becomes increasingly competitive across every part of the value chain.

The move by the G7 to pressure China comes at a time when the Biden administration is focused on creating a coalition to confront Beijing, with the alleged human rights abuses and forced labour issues in Xinjiang firmly in the spotlight.

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“Trade ministers will discuss the impact market-distorting practices, such as harmful industrial subsidies, including those causing excess capacity in some sectors, are having on our economies and chart a way to address these collectively,” the G7 said in a joint statement.

The West has long complained about China’s excessive state subsidies, with China striking back over support provided by the US and Europe to Boeing and Airbus, although trade issue have become more prominent due to the increased tension between China and the US-led Western alliance, said Shi Yinhong, an adviser to the State Council.

“There are no real substantive signs that China will make substantial changes to its industrial policy. Of course there will be partial changes, but it is difficult to identify them, as some of them are only verbal changes and some of them real changes without publicly addressing them,” said Shi, who is also a professor at Renmin University.

New World Trade Organization (WTO) director general Ngozi Okonjo-Iweala also took part in Wednesday’s talks, that also included discussions about exploring “reforms that can enhance the WTO as a forum of negotiations”.

Ngozi Okonjo-Iweala faces tall order to reform global trade body, Chinese experts say

In response to the G7 statement, Ministry of Foreign Affairs spokeswoman Hua Chunying said on Thursday that China “won’t accept any accusation” of its trade practice as it “has always honoured its commitments and safeguarded the multilateral trading system” since it joined the WTO at the end of 2001.

“Which country actually manipulated the WTO rules and paralysed the Appellate Body? The Western hegemony has been restricting the development of developing countries,” she said.

The WTO Appellate Body is the final court of appeal for trade disputes heard at the Geneva-based trade body, but after the US blocked the appointment of new judges under the Trump administration, it has not functioned since the end of 2019.

In a separate report on Wednesday, the Office of the United States Trade Representative (USTR) vowed to continue battling what it sees as significant trade barriers that are harming American companies and farmers, while singling out China as the“world’s leading offender” in creating overcapacities in several sectors.

China’s state-led approach to the economy and trade makes it the world’s leading offender in creating non-economic capacity, as evidenced by the severe and persistent excess capacity situations in several industries

USTR

It also vowed to work to address Chinese subsidies that have created excess capacities in the steel, aluminium and solar sectors, and could soon affect other industries.

“China’s state-led approach to the economy and trade makes it the world’s leading offender in creating non-economic capacity, as evidenced by the severe and persistent excess capacity situations in several industries,” the USTR said in a statement.

It said Beijing was “well on its way to creating severe excess capacity in other industries” by “doling out hundreds of billions of dollars” to support Chinese companies under its “Made in China 2025” industrial plan and requiring them to achieve preset targets for domestic and global market share.

Concerns had already been raised that the world might be heading towards another huge polarisation as the US is uniting its allies to confront China, while China is strengthening its own resolve.

In its latest tension with the European Union over the Uygur issue, China hit back against Swedish fashion chain H&M over its refusal to use Xinjiang cotton, resulting in the brand being removed from major e-commerce sites in China and its store locations vanishing from some digital maps.

Analysts said that there is still a potential to avoid it as there are people from both China and the US willing to continue engagement, but that if those voices are drowned out again by hardliners on both sides, an outcome of a polarisation will be more likely.

Last year, China signed the Comprehensive Agreement on Investment with the European Union, although the deal has not yet been rectified by the European Parliament yet.

As part of the deal, China agreed to open some of its restricted markets to European businesses and to ratify two international conventions on forced labour, but critics have said the deal lacks enforcement measures to ensure Beijing makes meaningful improvements for its workers.

The G7 statements as more illustrative of Joe Biden’s strategy in forging a common consensus, rather than necessarily realistically trying to use coordinated foreign pressure to get China to change economic policies

Nick Marro

“I read the G7 statements as more illustrative of Joe Biden’s strategy in forging a common consensus, rather than necessarily realistically trying to use coordinated foreign pressure to get China to change economic policies,” said Nick Marro, lead for global trade at The Economist Intelligence Unit.

“The trend in China right now is towards centralisation and towards elevating the state, even though we’re still seeing rhetoric of reform and welcoming foreign investments, the reality is the state is still the driver, still the main decider of everything, particularly economic policies.”

G7 trade ministers will meet again in May, ahead of the leaders summit hosted by Britain in June.

Additional reporting by Reuters

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