(Bloomberg) -- On his first overseas trip as president, Joe Biden’s plans for an international coalition that can stand up to Beijing are starting to come into focus.
The settlement on aircraft subsidies sealed Tuesday ahead of his talks with senior European Union officials in Brussels not only parks $11.5 billion of tariffs for the next five years, it also includes a commitment for the U.S. and the EU to tackle, together, “non-market practices of third parties” which could threaten Boeing (NYSE:BA) Co. and its European rival Airbus SE (OTC:EADSY).
That’s code for China. Officials in Washington and Brussels say that Beijing has exploited the gaps in the World Trade Organization’s rulebook to deploy as much as $500 billion of state aid to give its companies an unfair advantage in global trade. And Biden made clear that he aims for this to be just the start.
“It’s a model we can build on for other challenges posed by China’s economic model,” the president said in an emailed statement after the deal.
U.S. Trade Representative Katherine Tai told reporters that the deal includes a commitment for “concrete joint collaboration to confront squarely the threats that we experience and will experience from China’s ambition to build an aircraft sector on non-market practices.”
The EU signed up to the deal despite its reluctance to match Washington’s assertive line on China. The bloc’s approach to China has been hardening since the spring when a tit-for-tat sanctions fight with Beijing over its alleged human-rights abuses in Xinjiang left their landmark investment deal in limbo. The EU also agreed to a deal with Canada on Wednesday to secure supply chains for critical raw materials that don’t rely on China.
Read More: Canada, EU in Raw Materials Pact to Cut China Reliance
In an interview with Bloomberg Television, EU trade chief Valdis Dombrovskis listed a whole series of flaws in the global trading system that the U.S. and the EU want to attack together, including opaque subsidy regimes, unfair competition from state-owned companies and “forced technology transfers.”
“Many of those elements stem from the structural model of China,” he said. “The EU is definitely very much willing to discuss and cooperate with the U.S. specifically on China -- that’s not an issue here.”
The aircraft truce comes as U.S. and European officials recognize that China’s state-sponsored aerospace manufacturer Commercial Aircraft Corp. of China, or Comac, is on track to become a serious rival to Boeing and Airbus by the end of the decade.
It’s been a beneficiary of the Made in China 2025 program, Beijing’s industrial plan to become a global leader in advanced technologies including robotics, aircraft and electric cars. A 2020 U.S. report said Beijing’s industrial plans will “likely result in oversupply, leading to loss of jobs and production,” for Western companies.
“What we are talking about with respect to China are the kinds of support that are available to Chinese industries that the Chinese government has decided are going to be priority sectors that they are going to put all their muscle and all their resources into,” said Tai. “How are we supposed to compete with that? On the spectrum of harm and distortion to competitive terms that is so far away from what either of us have been doing and fighting about.”
Hardball Tactics
The Biden administration’s focus on China has been a clear theme running through days of geopolitical talks starting with the Group of Seven summit in Cornwall, England, from Friday and leading up to a face-to-face meeting with Russian President Vladimir Putin in Geneva on Wednesday.
Chinese Foreign Ministry spokesman Zhao Lijian criticized Biden’s efforts during a news briefing in Beijing before the summit. The U.S.-led coalition “exposes the bad intentions of the U.S. and a few others to create confrontation and estrangement and expand differences and disagreements,” he said.
The U.S. and, to a lesser extent, the EU are aiming to build a broad coalition of Western democracies to challenge China’s hardball tactics in the economic sphere.
They plan to update WTO trade rules to include more effective measures to push back on industrial subsidies and other unfair behavior from state-owned enterprises.
“Washington and Brussels need each other to deal with China, particularly at the WTO, and neither derived any meaningful leverage from wielding retaliatory tariffs,” said Marc Busch, a non-resident senior fellow at the Washington, D.C.-based Atlantic Council.
But the U.S. and EU also have other issues to resolve in their trading relationship.
A key next step will be an agreement to withdraw U.S. tariffs on European steel and aluminum, which were ostensibly aimed at curbing a surge of cheap, subsidized metals coming from China. Those tariffs remain popular with U.S. industry and Commerce Secretary Gina Raimondo has said they are “effective” in countering cheap exports from abroad.
“Have the U.S. and EU achieved peace in our time?” Busch asked. “Don’t bet on it.”
(Updates with comment from USTR Katherine Tai in fifth paragraph)
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