“NATO for trade”: a bad answer to a good question?

Geopolitical rivalries have re-emerged in the 21st century and international trade is a key battleground. Trade coercion is one of the most prominent, and most worrying, expressions of this trend.

China’s behaviour has attracted the most attention. In the last decade, it has deployed coercive trade restrictions against eight countries during diplomatic disputes (see figure 1). China was not alone, however. The Trump Administration widely engaged in the practice: invoking ‘Section 232’ national security provisions to impose tariffs on several partners [1]; and threatening both Japan [2] and Korea [3] with tariffs to force the negotiation of trade balancing deals. Japan’s removal of Korea from its export controls whitelist in 2019 is similarly understood to be motivated by diplomatic rather than trade administration considerations [4].

Impunity for trade coercers

Coercive trade policies are a vexing problem. They breach core non-discrimination principles of the WTO, impose serious economic harm upon the targets, and undermine the integrity of rules-based approaches to managing trade relations. However, existing dispute resolution processes are not fit-for-purpose when dealing with trade coercion and give aggressors wide latitude to deploy the tactic.

In 2020, five governments – India, the US, the EU, Saudi Arabia, Indonesia, and Korea – have made use of the “appeal into the void” strategy [8]. Until the Appellate Body is restored, an aggressor can easily exploit this gap to escape WTO discipline for acts of trade coercion.

A NATO for trade to the rescue?

In this context, a new mechanism has emerged – colloquially labelled as “NATO for trade”. Such a configuration has been proposed to respond to the trade coercion challenge. The name is a deliberate reference to the ‘collective defence’ provisions of the NATO treaty and reflects its origins as a western idea specifically aimed at deterring Chinese behaviour.

While the proposal remains embryonic, its core premise is the need for a collective defence mechanism that can rapidly respond to instances of trade coercion. A group of likeminded countries would form an agreement to defend each other. If any of its members were subject to politically motivated trade barriers the group would collectively and promptly respond to the aggressor.

For example, if China applied spurious anti-dumping duties to Australian farm exports as a diplomatic punishment – as it did repeatedly in 2020 [9] – the bloc would collectively respond in kind with retaliatory tariffs.

In principle, a mechanism like this could help address the problem of trade coercion in several ways. It could

• Raise the costs of trade coercion for potential aggressors
• Provide faster response (measured in weeks rather than years) than a WTO dispute
• Remove the impunity that an ‘appeal into the void’ currently offers
• Enable small and medium economies to respond more effectively to a larger aggressor

In practice, however, it is a western proposal, aimed squarely – if not solely – at China.

Consider the proposal’s trajectory. The idea originated in Washington policy circles during the latter half of 2020, in response to China’s campaign of trade coercion against Australia that began in May that year. Several think tank experts – largely drawn from the strategic and defence circles rather than the trade policy community – penned essays arguing in favour of the proposal [10]. Its putative members exclusively comprise liberal democracies with deteriorating relations with China, including the US, UK, Japan, Australia, and EU member states.

No governments have yet to officially endorse the proposal. But informal discussions regarding collective means to counter Chinese economic coercion are mounting, most prominently at the G7 Summit in June this year [11]. It remains to be seen if these discussions will proceed and lead to more concrete proposals.

The perils of trade vigilantism?

To be clear, a NATO for trade is an extremely radical way to address the problem of trade coercion. Fundamentally, it amounts to a system of extrajudicial “trade vigilantism”, under which a small number of self-appointed western countries takes the dispensation of justice into their own hands. Any actions by the group would be in clear breach of both the spirit and law of the WTO, and, if challenged through a formal WTO dispute, would be found non-compliant [12].

More broadly, it would mark an existential threat to the integrity of a global rules-based trade system. The defection of a group of western countries to form their own remedies bloc would mark the end of political consensus behind longstanding norms and agreements over the settlement of trade disputes. China would justifiably protest that it was being unfairly targeted, and could rightly point to US hypocrisy given similar practices by the Trump Administration. Other countries would swiftly lose confidence in the WTO disputes process and the integrity of the global trade system.

Is such a development likely to come to fruition? Beyond the question of whether defecting from the WTO is appropriate, the creation of a NATO for trade also faces formidable organisational hurdles:

• Who would be the members, and how would they enforce discipline? Even if potential members agree to its desirability, free-rider and compliance issues would be plentiful.
• How would members determine a politically motivated trade sanction from a normal technical dispute? A complex and precise triaging mechanism would reproduce the bureaucracy of existing WTO processes. A lightweight and politically negotiated one would be prone to manipulation.
• How would internal disputes be resolved? If one of the members deployed coercive measures against another, how would the group resolve it?

Credible answers have yet to emerge. It remains to be seen whether they even exist. The practical implementation of a Trade NATO is a long untravelled road.

A better solution: A fit-for-purpose disputes system

The NATO for trade proposal is a bad answer to a good question. Coercive trade practices are clearly becoming more common. The inability of existing mechanisms to respond in a timely and effective manner is a real problem that undermines the integrity of the global trade system. But equally, vigilante justice dispensed by a self-appointed group of western countries is equally problematic, as it further undermines the rules-based system the proposal seeks to protect.

However, the proposal does have utility in focusing political attention on a serious problem and sparking debate for more responsible solutions. Some of the better responses include:

• Getting our own house in order. Proposals to counter Chinese trade coercion are unlikely to gain broad traction if the proposers themselves engage in the same practice. At a minimum, the negotiated settlement of many of the trade battles commenced under the Trump Administration would restore confidence in the US as a responsible leader.
• Deploy more appropriate tools. Tariffs are a poor way to counter tariffs. Governments should respond to trade coercion in a way that is supportive of rules-based trade. Representations to China by the Biden Administration – which has highlighted trade coercion as a top US concern [13] – illustrate a wider range of available diplomatic tools.
• Get serious about WTO reform. Trade coercion is made much easier by breakdowns in Geneva. Policy discussions should focus on making progress on WTO reform. Targets should include both restoring the normal function of the disputes process (ultimately by achieving a US-EU modus vivendi on Appellate Body reform [14]), as well as efforts to expedite the panel process to enable more decisions [15].

These steps alone will not end the practice of trade coercion, which originates from the broader geopolitical contests that are emerging today. But they can buttress the rules-based trade system to better manage the problem when it occurs. While a NATO for trade is a poor solution to trade coercion, it can hopefully sharpen political attention on the need for better responses.

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[1] Scott Lincicome and Inu Manak, ‘Protectionism or National Security? The Use and Abuse of Section 232’, Cato Institute, 9 March 2021, https://www.cato.org/policy-analysis/protectionism-or-national-security-use-abuse-section-232

[2] Aurelia George Mulgan, ‘The ‘Trump Factor’ in the US–Japan trade deal’, East Asia Forum, 13 October 2019, https://www.eastasiaforum.org/2019/10/13/the-trump-factor-in-the-us-japan-trade-deal/

[3] Wall Street Journal, ‘Trump’s ‘Great Deal’ With South Korea Jeopardized by Car Tariff Dispute’, 7 August 2018, https://www.wsj.com/articles/trumps-great-deal-with-south-korea-jeopardized-by-car-tariff-dispute-1533637804

[4] Aurelia George Mulgan, ‘Is Japan weaponising trade against South Korea?’, East Asia Forum, 22 November 2019, https://www.eastasiaforum.org/2019/11/22/is-japan-weaponising-trade-against-south-korea/

[5] Per Article 20 of the Understanding on Rules and Procedures Governing the Settlement of Disputes, https://www.wto.org/english/docs_e/legal_e/28-dsu_e.htm#20

[6] James Bacchus and Simon Lester, ‘Trade Justice Delayed Is Trade Justice Denied: How to Make WTO Dispute Settlement Faster and More Effective’, Cato Institute, 20 November 2019, https://www.cato.org/free-trade-bulletin/trade-justice-delayed-trade-justice-denied-how-make-wto-dispute-settlement

[7] The Economist, ‘It’s the end of the World Trade Organisation as we know it’, 28 November 2019, https://www.economist.com/finance-and-economics/2019/11/28/its-the-end-of-the-world-trade-organisation-as-we-know-it

[8] Peter Ungphakorn, ‘Technical note: Appeals ‘into the void’ in WTO dispute settlement’, TradeBeta, 13 February 2021, https://tradebetablog.wordpress.com/technical-note-appeals-into-the-void-in-wto-dispute-settlement/

[9] Jeffrey Wilson, Adapting Australia to an era of geoeconomic competition, 2021, https://perthusasia.edu.au/our-work/adapting-australia-to-an-era-of-geoeconomic-compet

[10] Examples include Giles Merritt, ‘The case for an 'economic NATO' to clip provocative China's wings’, Friends of Europe, 20 April 2021; Anthony Vinci, ‘How to Stop China From Imposing Its Values’, The Atlantic, 2 August 2020; Robert Atkinson, ‘China’s reaction to the pandemic shows why the U.S. and its allies need a NATO for trade’, Washington Post, 21 May 2020; South China Morning Post, ‘British, US China hawks call for ‘Nato for trade’ against Beijing’, 28 June 2021.

[11] Sydney Morning Herald, ‘G7 offers rebuke to China over Beijing’s economic coercion campaign against Australia’, 14 June 2021.

[12] Per Article 3.7 of the Dispute Settlement Understanding, retaliation against a non-conforming measure is allowed only after non-implementation of a DSB ruling, only with the explicit prior approval of the DSB, and only by the affected party.

[13] Thomas Wright, ‘The US and China finally get real with each other’, Brookings Institution, 22 March 2021, https://www.brookings.edu/blog/order-from-chaos/2021/03/22/the-us-and-china-finally-get-real-with-each-other/

[14] Mark Linscott, ‘For WTO reform, most roads lead to China. But do the solutions lead away?’, Atlantic Council, 17 March 2021, https://www.atlanticcouncil.org/blogs/new-atlanticist/for-wto-reform-most-roads-lead-to-china-but-do-the-solutions-lead-away/

[15] Bacchus and Lester, ‘Trade Justice Delayed Is Trade Justice Denied’.

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