With Beijing’s trade practices becoming more aggressive day by day, Western countries — especially the US and UK — are looking for ways to secure national interests and reduce dependence on China. In order to do so, Clyde Prestowitz, founder and president of the Economic Strategy Institute, advocated for the establishment of an ‘Economic Nato’, or ‘eNato’ during testimony before the US–China Economic and Security Review Commission.

The recent launch of the US’s Indo-Pacific Economic Framework is just another indication of how serious it is about curbing China’s economic dominance in the region. It has become increasingly important for the rest of the world to talk about the implications of the steps the US is taking as they could have deep impacts on international trade and foreign direct investment.

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Article 5 of Nato’s treaty enshrines that “an armed attack against one or more of them in Europe or North America shall be considered an attack against them all”. Just like Article 5 deters countries from taking military action against Nato members, an eNato would serve as a warning to those engaging in rogue economic actions. 

Before the Ukraine war, it was difficult to imagine an eNato, as countries have seldom agreed upon economic sanctions. However, the latest invasion has increased uncertainties around the world and has made countries more vigilant.

On a principle level, an eNato would help mitigate growing economic tensions in some ways. It proposes to form a unified front against trade coercion that, in turn, would make coercion a very expensive mistake, as heavy sanctions would be imposed on them by all eNato members. Secondly, it would protect the interest of small and medium-sized economies against big bullies like China.

However, an eNato is still practically a way for the US to dominate over others and take matters into its own hands. It is a very radical approach to the problem at hand. Such actions would also amount to a breach of World Trade Organization (WTO) law, and a loss of confidence in the investment treaties and the WTO disputes process. 

So, an eNato is not an appropriate solution. Economic sanctions have seldom deterred countries in the past. Several steps have been taken in the past by the US, India and the EU against the unfair trade practices employed by China. Instead of looking for new solutions, the best way forward is to strengthen the existing, widely accepted dispute resolution processes.

Coercive trade and investment practices have indeed become more common. To tackle such actions, we need rule-based trade and put in place incentives for countries to adhere to those rules. Instead of one or a few countries acting unilaterally, there should be a global level partnership through the pre-existing trade monitoring institutions. A political stance against trade malpractice is not a viable solution and only showcases an outdated mindset.

Julien Chaisse is professor of Law, City University of Hong Kong and President, Asia Pacific FDI Network. Twitter: @JChaisse

This article first appeared in the August/September 2022 print edition of fDi Intelligence. View a digital edition of the magazine here.