Japan has taken up the G20 presidency at a key time in global economic affairs and has the opportunity to shepherd the global economy through a period of greater uncertainty than there has been in many decades. But the task is tough. Not only are the issues on which progress must be made substantial, but also the G20 presidency will effectively be one of the shortest ever, with Leaders meeting in the middle of 2019.
If the goal of Japan's G20 presidency is merely to get through a successful summit in June with a business as usual approach, at best it would be a lost opportunity. At worst, Prime Minister Abe and Japanese officials could find the global economic order collapsing around them on their watch, or throwing a hospital pass to the next G20 hosts, Saudi Arabia.
Tensions between China and the United States, the world's two largest economies, are disrupting the global economy. Even if the two reach some kind of bilateral settlement there's likely to be systemic damage. Managing the rise of China is difficult enough for the global community but with the multilateral order under threat from President Trump's America First agenda, it is worse.
Japan is the world's third largest economy, one of America's most important allies. It shares one of the world's largest bilateral economic relationships with its neighbour China. That puts Japan in a unique if excruciatingly difficult position to navigate the defining challenges the global community faces today.
Simply getting by at the Osaka G20 Summit is hardly likely to be enough.
Saving the multilateral order
Already the World Trade Organization (WTO), which is the core of the multilateral trading system, is in crisis. With only three out of its seven possible appellate body judges, the WTO's dispute settlement body's appellate court is already down to the minimum number of judges needed to function. If one of the three judges has to recuse themselves from a case or becomes unable to serve, the enforcement mechanism of the multilateral trading system ceases to function. By the end of 2019, the terms of two of those judges come to an end. This is the system that holds countries accountable to the world trade rules and, without it, a core function of the WTO will collapse.
It's the United States that is vetoing the appointment of new judges because it says it wants changes to the system.
The importance of the multilateral system and dispute settlement mechanism is more hardwired into Japanese strategic thinking perhaps than that of any other country. Japan was shut out of international oil and raw materials markets during the interwar period, giving Japanese expansionists the upper hand in leading Japan down a devastating wartime imperialist path. Japan's post war reconstruction and rapid rise was made possible by reliance on open international markets underpinned by the WTO's predecessor, the GATT. The WTO entrenched the dispute settlement process that has effectively avoided much conflict over trade issues. Recently, for example, the dispute over the slowdown in Chinese exports of rare earth metals to Japan and other countries was resolved in a WTO dispute settlement case with China accepting the ruling against it. Japan did not retaliate and the dispute was settled peacefully. For Japan and other countries the WTO dispute settlement system works.
The multilateral trading system has allowed many countries in Asia and beyond to open up and grow out of poverty into prosperity through confident engagement in international commerce.
But the WTO, of course, is far from perfect and is in need of some reform. The failure to conclude the Doha Development Round—the most recent multilateral liberalisation round whose negotiation started in 2001—has meant that some rules are out of date or do not exist for new commerce that's relevant for the 21st century but was of no significance a few decades back. Some of the gaps in the rules have become issues of contention between the major trading powers.
The leaders of the G20 recognise the importance of this and, for the first time, the leaders' communique from last November in Argentina committed ‘to work together to improve a rules-based international order that is capable of effectively responding to a rapidly changing world.’
There is now an opening for G20 leaders to set the strategic direction of reform for the WTO. Different groups of countries, stakeholders and interest groups will have lists of reforms that have priority. Many of the issues are well known. As the president of the G20, Japan has a responsibility to develop a framework to help prioritise reforms and catalyse action on those that are most urgent. A clear direction needs to be set during Osaka's G20 summit, or else momentum will be lost.
Changing the WTO will take time but clear strategic direction for change would help alleviate some of the tensions between the world's two largest economies and help the WTO address areas in which there are obvious inadequavies. Change will require commitment on the part of the major economies, represented by the G20, and deep engagement with China and the United States. Singling out and forcing change on China will not work where many emerging market countries share the same interests as China, and where China is the world's largest trading nation. Entrenching a process for change in a multilateral setting will have more chance of success and will deliver better global outcomes.
Of all the areas in which the WTO needs to change, the priorities must deal with those that help to settle the trade tensions between China and the United States. Japan will need to garner support, but among all the G20 countries, it is best placed to lead this task.
Navigating great power competition
Fears about China's rise have caused the United States to shift from engagement to strategic competition with China. But President Trump's version of strategic competition is disruptive and holds the global trading system hostage.
The trade war between China and the United States has already affected global trade and shaken confidence in global markets, disrupting investment and reorganising some supply chains. Confidence in the multilateral trading system is at stake. Trade wars can easily spread as countries incurring direct or collateral damage seek to ‘protect’ themselves or retaliate by putting trade barriers up.
A G2 deal between the United States and China that eases trade tensions may seem a positive outcome but will do little to calm the now bipartisan push in the United States to contain the rise of China. There is also a real chance that a bilateral deal would undermine the multilateral trading system. The proposed packages of massive Chinese purchases of US energy and agriculture may temporarily ease bilateral tensions but will likely be outside of the established rules and potentially divert trade from others.
The global economy will be much better served by a US-China deal that is done within a multilateral framework, extending market opening in China to other countries on a most-favoured-nation basis. That would serve Chinese interests as well, even though the instinct will be to do a deal to appease the Trump administration. This is where countries like Japan will be crucial for marshalling support from other countries to encourage China in particular to avoid a narrow, bilateral settlement.
Led by Prime Minister Shinzo Abe, Japan has thus far played a deft game at managing its difficult and intersecting relationships with the United States and China. Japan relies on the US nuclear umbrella for its security and Mr. Trump has repeatedly questioned the worth of the alliance. The important US economic relationship is also at stake. After stalling for over 18 months since Mr. Trump came to office, Tokyo acquiesced to US demands for bilateral trade negotiations last year. It's a defensive move that has for now secured a stay on US Section 232 tariffs on Japanese automobiles—under the guise of US national security concerns—that would hit Japan's most important and internationally competitive industry hard.
The China-Japan relationship is as important as it is complicated. The two Asian giants share one of the largest economic relationships in the world, an unresolved history, disputed territory and competition for leadership in Asia. Prime Minister Abe's visit to Beijing in October 2018 was the first state visit in seven years and set the relationship on the mend.
Success in managing relations with both the United States and China may not be enough as competition between them escalates. Japan and others will find it easier to deal with both the major powers, and the relationship between the two of them, if all these relationships are managed multilaterally. Even for Japan the tendency to deal with each country bilaterally is fraught with huge risk.
Japan has the ability to mobilise and work with like-minded countries in Asia and around the world to preserve the open, liberal rules-based order, and to set a direction going forward on strengthening it. Such an approach will make it easier to avoid a bilateral game of divide and conquer played out of Washington or Beijing.
It is easier to work with China on common interests in the global system, such as trade and climate change, together with other like-minded countries. That will make it easier to engage China in embedding it in more rules and international markets, and to engage on issues such as the Belt and Road Initiative. Working with coalitions of countries, including US allies such as Australia, with an interest in protecting open markets, will help withstand the pressure from Trump's America First agenda.
A time for global leadership, Japanese style
Japan has played an until-recently unfamiliar leadership role in Asia Pacific affairs, filling some of the vacuum in leadership since the rise of Mr. Trump. Very few thought the US-led Trans-Pacific Partnership would survive the American-sized hole in the middle when Mr. Trump took the United States out of it. But Japan stepped up to lead its conclusion as the 11 member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11).
Japan also concluded an economic partnership agreement with the European Union. Both the EU deal and TPP-11 sent the world a message on the region's commitment to rules-based openness. Japan is also playing a more proactive role in a larger agreement in East Asia, having hosted the first ministerial meeting outside of ASEAN for the Regional Comprehensive Economic Partnership (RCEP) agreement last year. That agreement being negotiated by the 10 ASEAN members as well as Australia, China, India, Japan, New Zealand and South Korea will be a regional and global game changer.
There will be plenty of distractions for Japan as it negotiates its own bilateral deal with the United States, manages a successful G20 summit and continues to improve its relations with China while managing all the attendant risks. Brexit and Europe's troubles will also impact on Japan. But all these challenges will be made easier if Japan works with a coalition of middle powers that share the same core interest in an open, rules-based multilateral order. The success or failure of the G20 presidency ultimately depends on whether that is the defining strategic outcome of the Osaka Summit next June.