Amid criticism that its phase one trade agreement with China does not address some of the core issues that gave rise to its Section 301 tariffs on imports from that country, the U.S. has agreed to work with the European Union and Japan to strengthen World Trade Organization rules on one such issue, industrial subsidies. It is conceivable that sufficient progress in this direction could essentially take this issue off the table in future U.S.-China negotiations and thus increase the prospects of successfully concluding a phase 2 agreement.

Stating that the current list of prohibited subsidies in Article 3.1 of the WTO Agreement on Subsidies and Countervailing Measures is “insufficient to tackle market and trade distorting subsidization existing in certain jurisdictions,” a thinly-veiled reference to China, trade ministers from the three trading partners said the following new types of unconditionally prohibited subsidies should be added to the ASCM: (1) unlimited guarantees, (2) subsidies to an insolvent or ailing enterprise in the absence of a credible restructuring plan, (3) subsidies to enterprises unable to obtain long-term financing or investment from independent commercial sources operating in sectors or industries in overcapacity, and (4) certain direct forgiveness of debt.

The ministers also said that for particularly harmful types of subsidies the burden of proof should be reversed and the subsidizing WTO member should have to demonstrate that there are no serious negative trade or capacity effects. Examples of these types of subsidies include those that are excessively large, prop up uncompetitive firms and prevent their exit from the market, create massive manufacturing capacity, or lower input prices domestically in comparison to prices of the same goods when destined for export. The ministers said that if such a subsidy is found to exist and the subsidizing member cannot demonstrate an absence of serious negative effect it should have to withdraw that subsidy immediately.

Other changes to be sought include (1) adding to Article 6.3 a type of serious prejudice linked to capacity, (2) adding to Article 25 a new, strong incentive to notify subsidies properly that renders prohibited any non-notified subsidies that were counter-notified by another member, (3) describing the circumstances in which domestic prices can be rejected and how a proper benchmark for subsidies can be established, and (4) amending the interpretation of the term “public body,” which the WTO Appellate Body has determined is one that possesses, exercises, or is vested with governmental authority.

While the U.S.-China trade agreement does include provisions on forced technology transfer, the trade ministers said they plan to address this issue as well. In particular they discussed possible elements of core disciplines that aim to prevent such practices, building consensus with other WTO members on the need to address this topic, and ways to stop harmful forced technology transfer policies and practices, including export controls, investment review for national security purposes, enforcement tools, and the development of new rules.

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