The G20 and the challenges confronting the global trading system

Global Trade Reform Roundtable: Summary*

T20 Roundtable hosted by the Research Institute of Economy, Trade and Industry, Japan; the Asian Bureau of Economic Research, The Australian National University; and the Institute for International Trade, The University of Adelaide held on 28 February 2019, Chancelry, The Australian National University. For more details click here

Introduction

The global trading system is under threat and investment and economic growth are being affected globally. The Leaders’ Declaration from Argentina’s G20 presidency in 2018 acknowledged that while the multilateral trading system has driven growth, productivity, innovation and job creation, the system is currently falling short of its objectives and there is room for improvement. Japan’s G20 Presidency provides an opportunity to help set the strategic direction of WTO reform and help defend the multilateral trading system.

The urgency of global trade reform

Reform of the WTO and global trading system has entered a crucial phase. How can leaders grasp the strategic opportunity at the 2019 G20 Osaka summit in June?

Reform of the WTO has been an ongoing issue that now has urgency with US unilateralism undermining the rules-based trading system and the WTO dispute settlement system at a crisis point.

The United States has been the guarantor of the global trading system but is now the cause of great uncertainty and loss of confidence in the rules, norms and sustainability of the system. US leadership has been taken for granted and the leadership vacuum can only be filled if other countries are prepared to act collectively to defend it while ensuring the US remains a key player in an open rules-based global economy.

Trade tensions between the world’s two largest economies threaten stability. With the Chinese current account balance having shrunk, the likelihood is for a deal between the United States and China that will bring some temporary stability to the global economy. But many of the underlying issues that are at the heart of China-US trade tensions are unlikely to be addressed and any deal is likely to bring only temporary stability. The failure of the WTO’s Doha Round and other global negotiations are part of the underlying context that is compounded by US unilateralism fuelled by populism and an anti-globalisation backlash. These tensions are complicated by US-China geopolitical rivalry. 

The G20 has long advocated global trade openness and completion of the Doha Round but its pronouncements have lacked political conviction and follow up. The credibility of the G20 rests on recognising systemic problems and mobilising political will to deal with them. The G20 has been most effective when the global system was at risk, in the wake of the global financial crisis. The global economy now confronts a systemic crisis in the form of a breakdown of the rules-based system. The G20 summit sent a message to governments at Buenos Aires that the multilateral system is in need of reform.

The G20 needs to identify WTO reform as a priority — this will help alleviate uncertainties in the international economy and give prominence to the urgency of shaping a multilateral agenda to deal with issues that the global rules now need to cover. The Buenos Aires leaders’ declaration asked members report on progress. The challenge before Osaka is to mobilise a sense of urgency in follow up on the immediate problems and to establish a multilateral framework for dealing with the reforms that will take longer.   

The G20 is not the forum for detailed negotiation. It can give strategic direction, offer a framework for moving forward and develop momentum in carrying agendas forward. The G20 has broader remit and interests than the WTO but the rules-based multilateral trading system is of systemic importance to the global economy and now is the time for strategic intervention by the G20.

Progress will be limited in WTO and on global trade reform if ways are not found to engage China — now the world’s largest trading nation — in deeper integration into the global trading system. Dealing with industrial and other subsidies in China, while finding ways to deal with subsidies in the rest of the world as well, is most likely to succeed. There is a growing bipartisan consensus in Washington that views China as the problem. For many countries China is the subject, not the problem.

Middle powers need to assist with the response that extends trade rule-making around the continuing engagement of China in the multilateral system. There has been progress in dealing with some sensitive and difficult issues in regional processes, for example with China having made commitments to rules around investment, and intellectual property rights protections in the RCEP negotiations. Regional and bilateral agreements still need the multilateral system to provide a benchmark to which regional and bilateral agreements converge, instead of diverge, in design and rules. Asia depends fundamentally on the rules-based system and can play a key role in its further development. But this will require ambition and leadership.

The threat to the multilateral trading system has reminded many countries and societies of the importance of the rules and confidence in those rules to avoiding a world similar to that before World War 2 where larger countries used market power to dictate terms of engagement with smaller powers. This has elevated anxieties in the policy community about the threats to the current system and increased commitment to helping to remedy some of its problems. But the sense of urgency and political will at the leaders’ level is less obvious. The task is to set the strategic direction of reform of the WTO while recognising that the issues are complex and will take time. The agenda will have to be a continuing one. But there need to be clear signs of commitment and progress.

The most immediate priority is in commitment to system preservation. There are also pressure points on the need for new rules around the high value-added industries of data, technology and e-commerce where working through the issues to define a strategic direction forward will be hard but essential to alleviate tensions between major powers. Finding ways to open up and depoliticise discussion of other issues currently in stalemate, such as the developing country issue, is also a priority. Many of these issues cannot be resolved in the short term but the G20 can provide leader-level strategic direction and help frame multilateral solutions.

The dispute settlement system

The highest priority is to resolve the crisis around the WTO dispute settlement system. The WTO Appellate Body will be unable to hear new cases after the 11 December when the terms of two of the remaining three judges end unless the stalemate on appointing new members is dealt with. The dispute settlement system is the crown jewel of the WTO and is one of the world’s most successful dispute settlement systems that middle and small powers, as well as large powers, rely on to ensure that commitments under WTO rules are honoured. It is the backstop against full scale protectionism and a credible mechanism that helps avoid a broader prisoners’ dilemma outcome in global trade.

There are legitimate problems with the dispute settlement system that have been the subject of discussion for decades. Criticisms include the sense that the appellate body has gone beyond its mandate; it does not report back within 90 days; and has filled in gaps in international trade law that members have not agreed to through negotiation.

The United States has picked the point in the WTO system where consensus is needed to continue to function — the appointment of appellate body judges — and has succeeded in applying pressure to bring the system to breaking point. This has at least succeeded in getting the attention of policymakers globally. While resolution is far from guaranteed, there is now an opportunity to address some of the more problematic aspects of how the system has evolved. Ideas have been proposed and negotiations are continuing.

The United States has won as many critical cases in the WTO as it has lost and may return to being a more constructive player when winning disputes. If the United States can be satisfied with amendments to the current system, there may be a chance for resolution by December. If the US opposition is to the automatic nature of the system and the second-tier review mechanism, there may be no fix within the existing set of agreements and the entire dispute settlement system will require rewriting.

This post hoc assault on the WTO dispute settlement arrangements is hardly consistent with respect for a rules-based system but other countries may have to prepare for this contingency. If US concerns are addressed, there is a moral hazard problem and nothing that would stop other WTO members from similar behaviour. Members proposing alternative solutions in the event there is no resolution by December 2019 could threaten US membership in the system. The WTO and rules-based trading system will be at crisis point if the dispute settlement system ceases to function after December. The priority is to find a way forward in reforming the system to avoid its collapse while preparing alternative fall-back options — both require political will and leadership, including in the event of failure of reform by December, in standing up to the United States.

Emerging issues

Can the G20 facilitate a more open digital economy alongside service-sector trade liberalisation?

Reducing barriers to commerce must also be informed by a new benchmark — the free-flow of data — building a consensus benchmark just like that of the free-flow of goods. A more open digital economy provides a platform to accelerate inclusive economic growth. But government policies aimed at regulating the digital economy remain underdeveloped and fragmented. There are significant country-to-country disparities on political philosophies, legal oversight, procedures of market intervention and the accommodation of data-flows and digital trade.

Through a stocktake of supportive policies for a more open digital economy, however, the creation of new rules and disciplines for adoption by the WTO and other agreements might be progressed. Working from the benchmark of the free-flow of data, policymakers should aim to facilitate smoother data flows in data-intensive industries. But reform will be difficult. Governments need to be mindful of the costs to personal privacy and industrial as well as state security in a more open digital economy, despite the high value and attractiveness of data as a resource. Successfully reconciling privacy and sovereignty with economic efficiency will be critical to ensuring broad public support for a more open digital economy.

On supportive policies, members of the G20 must aim to liberalise cross-border e-commerce further. For example, member nations could minimise the application of duties on digital transactions and roadblocks in electronic authentication. Additionally, governments could renew attention on consumer protection and firm competition in the digital economy with the aim of correcting market failures.

Facilitating a more open digital economy cannot be achieved without trade reform in services trade. Indeed, almost one third of global services trade is digitally-enabled and, in aggregate, trade in services accounts for a significant component of global trade at more than half of the exports from members of the G20. Despite this, significant roadblocks to services trade remain. Apprehensiveness among some policymakers for fear of fuelling further protectionism has held back advocacy for services trade reform in the WTO. Therefore, in reducing barriers to trade, G20 members should champion a liberalisation agenda for services in the WTO.

Research on the reforms needed in services trade is in its infancy, with a paper on the issue only recently presented to the WTO. Insufficient research stymies the ability of policymakers to define reform priorities. Clearly delineating outstanding areas for reform and appropriate policy responses will be central to widening the focus of multilateral rulemaking to include all forms of services trade. But there are positive movements, with some headway made on rulemaking for service sector trade liberalisation in the recently negotiated Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Plurilateral agreements will increasingly be where the liberalisation and rule-setting action will be in the WTO and the broader global trading system. Reform of the WTO rules is needed to facilitate plurilaterals that are MFN and open to membership.

Leading and advancing reform

Can coalitions of like-minded nations foster a recommitment to multilateralism and reform of the WTO?

Japanese leadership through its 2019 G20 presidency will be essential to extend multilateral rulemaking across services and the digital economy — especially in the wake of the emerging bilateralism and disengagement from a leadership role in multilateralism by the United States — and to deal with the crisis in the global trading system.

Japan is well placed to play a leadership role as the world’s third largest economy and demonstrating leadership in the conclusion of the CPTPP and EU-Japan EPA in 2018. It is a US ally and major economic partner of China. But solidifying leadership will be difficult. The task is system-defence and creating new rules — an urgent task is in system preservation and sustaining a multilateral approach to trade rules. The WTO has underpinned the basic rules of trade and 98 per cent of global trade is conducted within the WTO framework.

Japan will not be able to set the strategic direction of reform of multilateral trade reform and alone. It will be constrained and distracted by the short timeline to the Osaka summit, its own bilateral negotiations with the United States and running a successful G20 summit at a particularly difficult time of global uncertainty. US leadership has underwritten the multilateral rules-based order in the past, but with US commitment to international institutions waning, the primary focus of Japanese leadership must be to advance a coalition of like-minded nations committed to upholding the mandate of the WTO.

Europe, Canada and economically open G20 members will be crucial to preservation and reform of the WTO but a disproportionate responsibility will likely fall on Asia that has been a major beneficiary of the open rules based economic order and is however wrongly now seen as an over-privileged beneficiary of the system. Key countries that benefited from the rules-based trading system will need to do more.

Without regional agreements like NAFTA or the EU, Asian value chains and integration into the global economy have relied heavily on the multilateral trading system. And the trade and economic growth that has disrupted many established markets has been primarily from Asia — centred on China but not on China alone. Other emerging markets are likely to cause disruption in the future.

Countries like Australia, Indonesia and South Korea can play a central role in coalition building alongside Japanese leadership, beginning within the G20. As the leading member of ASEAN, Indonesia plays a particularly important role and its government has been actively engaging other ASEAN members on G20 and WTO reform issues. Proactive support from other Asian countries can create space for Japanese leadership that might otherwise be significantly constrained by its dealings with the United States, alongside continued commitment to multilateralism from China.

Leadership in Asia will require opening up difficult issues and making commitments to continuing domestic reform. Increased transparency and monitoring, as well as starting discussions on the issue developing country status (special and differentiated treatment) will help break deadlocks between G20 members. Collective action driven by Asia’s strategic interest in the multilateral trade system include will give the G20 process momentum in setting the trade reform agenda. Key players include Australia, China, Indonesia and Japan.

Advocating reform WTO rules that will help alleviate China-US trade tensions will restore confidence to the system. China and the United States may do a deal but if they do, whatever deal they do will not obviate the need to prioritise global trade system reform. It will, on the contrary, elevate its importance. Finding ways to advocate for and use the multilateral system will also strengthen it. The United States may be implementing measures outside of the established rules, and China and others will be inclined to do a deal with the United States outside of the rules. Countries should be using the system and encouraging resolution to issues within the multilateral system, alongside setting the agenda for WTO reform that will address those issues currently not covered.

It will be important for policymakers to remember that the case for trade and openness is a domestic choice but the domestic case can be reinforced by regional and global efforts. Domestic policy and trade policy are intertwined, and rebuilding a commitment to and advancing multilateralism must begin at home. Sharing the benefits of trade and technological change across society, strengthening social safety nets and getting domestic policies right are necessary to underscore public support for sustaining openness in economies. Reforms will be harder with a hostile external environment with international markets closing and uncertainty about the rules.

The challenge of Japan’s G20 presidency in dealing with the threat to the global trading system, given all the impediments in carries, is large. But if this issue is shirked, the Osaka summit will be almost certainly judged a major failure.