RIETI-ANU-ERIA Symposium

Asia's Response to the Trade War (Summary)

Information

  • Date: 14:00–17:00, Thursday, December 6, 2018
  • Venue: Tekko Executive Lounge & Conference Rooms

As trade disputes between the U.S. and China escalate due to rising protectionism, Japan, Australia, and Southeast Asian countries are called to emphasize the importance of a rules-based free trade and investment environment. To respond to this development, the Research Institute of Economy, Trade and Industry (RIETI), the Australia-Japan Research Centre at Australian National University (ANU) and the Economic Research Institute for ASEAN and East Asia (ERIA) jointly held a symposium for the trade-policy experts in the region to meet and discuss strategies to improve the current international environment.

Summary

Opening Remarks

NAKAJIMA Atsushi (Chairman, RIETI)

Since the beginning of 2018, trade friction has intensified globally, especially related to the U.S. and China. Currently, the Asia-Pacific benefits greatly from the free trade and investment environment. Japan, Australia and Southeast Asian countries share views on maintaining and enhancing the rules-based free trade and investment environment that is vital to the world economy; I believe we have entered a phase where we must send a powerful message to promote this value.

Based on this recognition, we have invited Ms. Mari Pangestu, the former Minister of Trade of the Republic of Indonesia, Mr. David Gruen, G20 Sherpa of the Australian Government, RIETI researchers and METI officials to discuss strategic responses to improving the current international environment. This symposium is an official event associated with T20 Japan, which provides policy advice to the G20.

It is a great honor to be holding this symposium at this perfect moment, thanks to the cooperation of various stakeholders. I sincerely hope that the discussion and the speeches will deepen our understanding of what is at stake and help keep the international trade and investment environment open.

Special Remarks

MATSUO Takehiko (Director-General for Trade Policy, METI)

Today, more than a few countries, including the U.S. and China, are implementing trade-restrictive measures. To find a solution to this problem, we need to address the root causes of the current situation.

We believe that one cause is the adoption of market-distortive policies by some countries, which created massive excess production capacity. Another cause which is mentioned by developing countries, is that their many domestic industries have struggled to join the global value chain in vain. The anti-globalization movement currently seen among developed countries is also a testament to the fact that international trade and investment has not benefitted everyone.

We need to make trade and investment more sustainable and inclusive. However, governments cannot provide unlimited support. Thus, an ideal situation is one where businesses can earn profits not just for themselves but also for the benefit of their community and international society. In Japan, there is an old saying among merchants, "Sanpo-yoshi," which is the idea that a successful ongoing business can be built when all three parties, the seller, the buyer and the community, are satisfied." It is interesting how it fits our policy goals today.

Another method of promoting inclusive economic growth relates to digital trade. The internet and the growth of e-commerce made it easier for businesses in developing countries and small and medium businesses to participate in international trade. However, there are currently no international rules for e-commerce, and the proliferation of different national systems causes market fragmentation, which thwarts the growth of e-commerce.

Some of these issues should be resolved through the World Trade Organization (WTO). However, only a limited number of new rules have been agreed through the WTO framework in the last several decades and some point out that there is no effective system for monitoring whether WTO rules are being properly implemented. We need to find solutions for individual problems and start implementing whatever solutions we can, as they become possible.

This is another area where it is important to gain correct understanding of the root cause of these problems and find appropriate solutions to them. I have great hopes that this symposium can provide us with meaningful suggestions for further consideration by G20 members.

Special Speech

Responding to the Trade War: An ASEAN perspective

Mari PANGESTU (Former Minister of Trade, Republic of Indonesia/Professor, Faculty of Economics and Business, University of Indonesia)

The Trade War Landscape

The open and rule-based multilateral trading system has served the world well, especially in East Asia. In the last three decades, this has led to increased competitiveness, increased efficiency of resource allocation, and millions being lifted out of poverty. Presently, there are challenges to openness and protectionism and nationalism are on the rise. Causes include a worldwide increase in inequality, the rise of China and other emerging economies, and technological disruption.

The unaddressed problem of trade-induced inequality has also played a role. However, it is futile to speculate about President Trump's motivations which could be the United States trade deficits, or targeting China's non-market behavior, or it could be transactional in nature, simply intending to renegotiate better deals, but we should focus on what Asia should do. This trade war has been mainly with China, and the focus on China is obvious with specific sunset clauses that allow for partners to leave a partnership if other partners wish to deal with non-market entities. Some behaviors that China is being questioned on (such as state-owned enterprises or investments) are not yet in the World Trade Organization (WTO) rulebook. That is why reforming the WTO rules has become an issue. Geopolitical factors such as China's expansion of influence further complicate the issue.

Implications for U.S.-China Trade Conflicts

The U.S.-China trade war conflict is still in phase 1 with a current temporary peace clause. Contrary to Trump's argument, tariffs hit not only exporting countries but also U.S. consumers. Some argue that this trade war is only going to subside if it hits the U.S. economy and its consumers. This trade war is beginning to impact trade flows, the growth of trade, and investment decisions. The growth projections for the world are being revised downward. It is also affecting small and poorer countries more. There has been a mixed effect on business. Some countries like Brazil are benefiting from diversion of trade, but in many other countries investments have been changed to jump the tariff wall.

What Should Asia's Response Be?

Asia should continue what it can to ensure an open and rule-based trade and investment regime. Simultaneously, it needs to find ways to continue to engage the U.S. and China. To achieve this, a three-pronged approach needs to be followed: (a) unilateral reforms, (b) regional economic integration, and (c) upholding the multilateral trading system.

Unilateral reforms are still the key to continued development and increased competitiveness. Southeast Asia should be undertaking such reforms because it is important as part of its development strategy. Furthermore, regional agreements are important for bringing continued market expansion, shaping unilateral reforms, and addressing issues not yet being addressed by the WTO. There are different regional pathways for regional economic integration. Deepening and broadening the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) is crucial. Completion of RCEP (10 ASEAN plus six FTA partners) by next year is a priority. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is a more ambitious agreement, could be a potential benchmark for other regional agreements. The role of capacity building in regional cooperation is also important.

Lastly, the grand bargain is a renewed multilateral order. The U.S. has become the main threat after being the main supporter of the world economic order. Therefore, while endeavoring for regional integration, Asia should allow the rules to continue to work. While the recent G20 summit has provided a brief respite from the trade war escalation, the exit plan from this is unclear. Providing answers to the U.S.-China trade issues that are arising in a multilateral framework may be one exit pathway.

Here the window of opportunity is the recognition by the G20 leaders of the need for WTO reforms. Taking a pluralistic approach to the issues may be needed. Hopefully, Japan can play the leadership role that it has shown with CPTPP and in pursuing the RCEP completion, along with the EU and middle powers and small, open, like-minded countries. Finally, after the recent G20 summit, the hope is that the U.S. and China will be willing to engage.

Speeches

Collective Animosities or Cooperation?

Dr. David GRUEN (Deputy Secretary (Economic), Department of the Prime Minister and Cabinet/G20 Sherpa, Australian Government)

Why Trade Cooperation is Difficult: Some Standard Economic Reasoning?

Some recent tension over trade is a consequence of strong and sustained economic growth in our region. This has led regional economies to compete with more influential industries from advanced countries. In his last published paper, Paul Samuelson reveals that a positive technology shock in an industry in one country can sometimes lead to overall harm to another country that earns income from that industry. However, the positive income effect from the productivity shock in the first country will also raise national income of other countries. Hence, while some advanced country industries have undoubtedly been harmed by a rising Asia-Pacific, a rising Asia-Pacific means more demand for other goods and services from advanced countries.

Rather than an overall fall in national income, trade and technology are more likely to change the income distribution of advanced countries. Given the relative scarcity of factors, more income flows to capital owners and highly skilled workers, while some lower skilled workers' real incomes have stagnated or fallen.

Autor, Hanson, and Dorn's paper found that the "China shock" resulted in a long-lived loss of over 2 million U.S. mid-western workers. However, it was silent on the additional jobs Chinese demand and supply created in other parts of the country. Such disruption is likely to continue as technology disrupts trade barriers across borders and Asia-Pacific economies become more sophisticated. However, politically influential opposition to free and open trade is also likely to rise.

Implication of the Economic Transformation of the Asia-Pacific

In free trade, each country has an incentive to shift the cost of maintaining it to others. The U.S. shouldered that burden when it was the world's largest economy, but now the logic of continuing to bear that burden is less compelling.

Small or medium-sized open economies with limited power in global markets, like Australia, benefit from free and open trade. On the contrary, large economies can sometimes use tariffs to drive down their import prices improving their terms of trade and forcing other countries to pay some of the tariff. As a consequence, smaller countries with little bargaining power are negatively affected and so is the global economy. The fear is that we may move to a system of managed trade replacing open trade. That is why G20 leaders' commitment at the recent summit to improve the rules-based international order and acknowledge the need for WTO reforms are significant.

Some Poor Economic Reasoning behind Current Trade Tensions

Some current trade tensions are also due to poor economic reasoning. First, trade deficits are not a measure of country's weakness or it being unfairly treated by other countries. The current account deficit implies an economy investing more than its domestic savings can fund. Further, an overall trade deficit cannot be "fixed" by tariffs. Bilateral trade deficits can shrink due to tariffs, but at the expense of higher cost imports from, and increasing bilateral trade deficits with, other countries.

Second, intellectual property (IP) protection potentially stimulates investment by granting monopoly rights to IP owners. However, it can also reduce investment and economic growth by requiring others to pay for using the IP. Finding answers to IP rules that maximize global economic growth requires the help of economists and IP lawyers.

Third, appropriate rules for state-owned enterprises (SOE) are complicated. When SOEs are used to subsidize exports, consumers in other countries benefit while other domestic producers can be harmed. Distortions from subsidies risk cascading globally as inefficient industries are allowed to flourish. In fact, the main beneficiary from restricting state-backed subsidies may be the countries providing the subsidies themselves. Similarly, restricting special and differential treatment for developing countries in the WTO is likely to benefit those developing countries themselves. The misconception that keeping tariffs higher for longer is beneficial is causing damage to emerging countries and to the WTO itself.

In conclusion, Australia and Japan share common interests in managing changing national and diverse economic views. Hence, bilateral cooperation between the two countries in support of an open and multilateral trading system may be the key to resolving some of the trade tensions.

To read full speech:
https://www.pmc.gov.au/news-centre/pmc/keynote-speech-dr-david-gruen-collective-animosities-or-cooperation

Promoting the Rules Based Trade Regime: The role of Japan and East Asia

KIMURA Fukunari (Chief Economist, ERIA/Consulting Fellow, RIETI/Professor, Faculty of Economics, Keio University)

Problematic Trade Policy by the U.S. Administration

The present U.S. trade policy by the Trump administration is problematic. First, there are re-negotiations of existing free trade agreements (FTA) with many suspicious items in the agreement (new KORUS and USMCA). Second, trade measures are inconsistent with WTO policy discipline. The tariff war between the U.S. and China is based on Section 301 of the Trade Act of 1974 which imposes material restrictions if counterparts are engaging in unfair trade practices. There is a concern of direct loss from trade shrinkage due to such trade measures. Third, retaliation or rebalancing measures by counterparts also need to be checked for WTO consistency. Possibly both sides are destroying the system of rule-based trade.

The Anachronism of a Tariff War

Japan and the U.S. talked about a bilateral trade balance repeatedly in the 1980s and early 1990s. However, Trump's mindset is still stuck in the 1980s and has not been updated. There are various issues that need to be addressed and factors that need to be taken into account and a trade war distracts the global community from actually necessary reforms and improvements to international trade systems. Since the 1990s, the second unbundling, characterized by process-led or task-led international division of labor, has dominated, especially in East Asia, as seen in the global nature of current value chains, where it is observed that effects of interruption in value chains are unpredictable and wide-ranging. Moreover, new regulations for the digital economy, which has recently emerged, are critically lacking, and the issues related to the emergence of newly developed economies including China (with subsidies issues, SOE, IPR, etc.) should be the issues being addressed instead of engaging in tariff wars.

Japan's Mega FTA Strategy

Since 2013, Japan has started mega-FTA negotiations to push back against increasing protectionism. CPTPP and Japan-EU EPA are ground-breaking mega-FTAs for Japan. Both agreements support the second unbundling, particularly the value chain in machinery industries and also represent the starting points for rulemaking for the digital economy. They set standards for newly developed and developing economies. This could send a strong message in support of rule-based trading regimes and encourage the U.S. to come back on track.

The CPTPP covers 13% of the world's GDP. Tariff removal in terms of the number of tariff lines is 99-100%, but Japan is at 95% because of agriculture protection, and also incorporates services and investment with the negative listed approach as well as investment state dispute settlement (ISDS), both of which are not included in the Japan-EU EPA. The Japan-EU EPA covers 28% of the world's GDP, with high levels of market access, but does not include ISDS. The EU was concerned about "nontariff barriers" on automobiles and auto parts and government procurements, especially railways. Hence, additional agreements on those portions were completed.

Presently, it is important to bring RCEP to conclusion, particularly to support East Asian production networks. However, negotiations have been slow. The initial ambition of the China-Japan-South Korea (CJK) FTA was to lead RCEP negotiation in terms of timing and content, but little progress has been made due to difficulties in tariff negotiations.

Negotiation with the U.S.

Japan has been successful in earning time for ratification of CPTPP and the Japan-EU EPA. It has negotiated with the U.S. in the CPTPP, but is trying to minimize the scope of negotiations. Agriculture and automobiles are the major issues. The production cost of automobiles in the U.S. is increasing because of the new North American Free Trade Agreement (new NAFTA or United States–Mexico–Canada Agreement, i.e. USMCA), which has not been ratified yet. There are also uncomfortable statements in "new NAFTA (USMCA)" on non-market economies.

In conclusion, the U.S. trade policy seems dangerous in terms of both direct economic damage and in displacing the rule-based trade regime. Meanwhile, Japan is engaging in mega-FTA strategy as a way to stop rising protectionism. Further, newly developed economies have many trade issues, which must be solved by signing on to international rules rather than by imposing tariffs.

Panel Discussion

How Should We Respond to Trade Wars

TODO Yasuyuki (Faculty Fellow, RIETI / Professor, Faculty of Political Science and Economics, Waseda University)

A Cause of Trade Wars

Protectionism is rising recently. Although income inequality could be part of the reason, I would like to emphasize that it cannot fully explain the rise in protectionism. Based on a study looking at how people respond to globalization, in the U.S., Europe, and Australia, 30-40% of the people responded that international trade creates jobs, whereas about 40% says it destroys jobs. In South Korea and Indonesia, more than 50% supported globalization. In Japan, only 20% responded that trade creates jobs, and more than 35% responded that trade destroys jobs. Looking at Japan in particular, although more than 20% of the people are benefitting from globalization, they are still against globalization.

Studies have shown that one reason may be that people are intrinsically closed in nature. Ten thousand years ago, people were living in small groups of about a hundred or so. Within the group, people formed strong, trusting ties, and helped each other in order to survive. Beyond this small group, people were hostile to others and other groups, again, in order to survive. This history of closed behavior may now be somewhat intrinsic as a characteristics and this could be one major reason why people are against globalization outside its economic benefits.

Social Experiences Open Up Our Minds

Professor Yamamura from Seinan Gakuin University recently found that social experiences have profound effects on our minds. He found that people involved in team sports during childhood have improved non-cognitive skills, meaning that they tend to trust people more and value competition more, which actually leads to increased support for globalization and free trade principles. This study suggests that social experiences can enhance our recognition of the importance of globalization.

How to Respond to Trade Wars

Protectionism may lead to devastating consequences. If we look at what happened in the 1920's, many countries raised tariff rates after World War I, creating economic blocks. This segregated the world economy, and had devastating consequences, eventually leading to World War II. To mitigate such devastating consequences, several policies should be put in place. Policy that reduces income inequality is necessary. This can be achieved by re-education of workers in traditional sectors, allowing them to work in more modern sectors. For this purpose we also need flexible labor markets. Policy that will promote open-mindedness is also necessary. For example, we need to educate people on the benefits of globalization and promote social experiences. Experiences gained from exchange programs of students, businesspersons, researchers and policy makers can increase support for globalization.

Moderator

Shiro ARMSTRONG (Visiting Scholar, RIETI / Director, Australia-Japan Research Centre, ANU)

ARMSTRONG:
Has Japan been immune from the rising protectionism?

TODO:
There is a strong protectionism especially in agriculture, and there is a need to open up the agriculture market in order to be a real leader in trade negotiation.

ARMSTRONG:
Does Japan distribute gains from globalization and trade better than the U.S.? Does Japan have a better social safety net?

TODO:
In the U.S., imports from China harmed value added production as well as employment, whereas in Japan, the Chinese imports increased production and employment. The difference is the structure of trade with China. Japan imports parts and components from China and assemble them to high value added products and exports them to other countries. In Japan Chinese imports are largely beneficial, and China is not a huge economic threat to Japan.

ARMSTRONG:
Are trade investment complaints from the U.S. against China valid?

CHEN:
Personally, I do not think it is valid enough to be used as the reason/excuse to create trade wars or increase tensions. China has achieved remarkable economic growth in the last 30 years. It has significantly reduced the percentage of the population in extreme poverty. On the other hand, I am not convinced that intellectual property rights (IPR) violations and forced technical transfers are not at all happening. Anyway, there is room for improvement in further regulating the economic market, and China needs to improve their innovative capacity to support its long-term growth.

ARMSTRONG:
Regarding tariffs, is it just a matter of something affecting trade between the U.S. and China, or should we be more concerned?

ONODERA:
Effects of trade measures are not limited to the U.S. and China, and it is a global problem. The International Monetary Fund (IMF) World Economic Outlook in October and the Organization for Economic Co-operation and Development (OECD) Economic Outlook in November showed a decrease in GDP growth, mainly referencing trade tensions and changes in global environments.

ARMSTRONG:
Is there a risk that the two largest economies in the world being engaged in a trade war might be contagious?

TODO:
Tariff wars and trade wars are contagious. In international economics, if a country has a higher tariff, other countries will want to have higher tariffs as well to increase their own country's welfare. The possible consequence of the current trade wars could potentially be very bad and we need to stop them.

ONODERA:
Countermeasures to this point in time have been relatively restrained and there has been little spread. Once some countries start creating barriers, there will be a higher risk of it spreading. The reliability of the trading system to this point and the fact that we agreed to WTO reforms shows that we all collectively continue to have trust in the system.

CHEN:
The spread of U.S.-China trade tensions will depend on the behavior of the rest of the world, not just what the U.S. and China are doing. What is important is to push WTO Reform forward and improve the rule-based trading system globally. A comprehensive well-functioning trading system would be effective in stopping the current trade tensions.

ARMSTRONG:
What should countries do when hit by tariffs? Do nothing, weather the storm, do a deal or retaliate?

CHEN:
Doing nothing is certainly not an option. Determining the areas of common interest to the whole region and then making decisions based on the best outcomes for the region is important. We are in a new era of digitalization. The U.S. should understand that threats to employment and profitability will come from AI and robots instead of from China, Japan or other nations. The global trend of technical progress should be a driving force for countries to work together in collaboration.

ARMSTRONG:
What would Japan do if hit by tariffs on automobiles?

ONODERA:
The case is yet to be seen, and we must consider what to do at that point in time. The scale of effects of such tariffs on the Japanese economy would be on a different order of magnitude from tariffs on steel and aluminum. We have been engaging with the U.S. and holding discussions to avoid tariffs. Negotiations start in January.

CHEN:
My opinion is quite optimistic. In the past Japan dealt with tariffs by internationally fragmenting the production. In the near future, because of the changing nature of competition in the auto industry, which is now incorporating IoT and connected vehicles that share information etc., even if tariffs were to increase, the effect on the price change of autos could be less than what we assume today, and in fact the greater threat will come from non-tariff measures, such as those related to national security, etc.

TODO:
In terms of economic benefits and losses, the automobile industry is much bigger than agriculture, so we must avoid tariffs imposed on Japanese automobiles, but more could be done to open agricultural markets and perhaps Japan could benefit from such changes as it might improve overall efficiency.

ONODERA:
It is not accurate to say that Japan is not open to agricultural imports, and Japan is one of the largest importers of agricultural products in the world. Japan does maintain subsidies related to the issue of the role of agriculture in the multi-functionality of the regional economies. In the process of TPP, we have been opening up our markets gradually and need to continue to do so as part of an orderly transition which will include looking at agricultural exports as well.

ARMSTRONG:
Japan's agricultural sector and protectionism in the past has hampered Japan's ability to sign liberalizing FTAs internationally. TPP-11 further opens this up in stages.

CHEN:
In the automotive industry, new technology is driving the competitiveness. Japanese companies should accelerate innovation. Because of Japan's innovative advances in automobiles, if the U.S. imposes high automobile tariffs, it may in fact cut itself off from the technological frontier of the industry. This is a lesson for other developing countries to learn: innovative capacity could provide some ammunition in the event of trade tensions.

ARMSTRONG:
What can individual countries do together in response? Should a few countries act together as a coalition to hold the line?

TODO:
In addition to the previously mentioned efforts of FTAs and multilateral agreements, I would emphasize the importance of international exchanges among Asian Pacific countries. We could promote more exchanges of students. Actually, I would like to know what effect Chinese students may have had on Australian Universities.

Q&A

Q1: What impact do you expect on East Asia's intraregional trade and investment if the U.S. and China trade relations continue to worsen?

TODO:
Asian countries could benefit from trade diversion. At the same time, the world economy as a whole may shrink due to the trade wars.

CHEN:
On the one hand, there will be shrinking exports, and on the other hand tensions may create trade diversion which may positively affect other Asia-Pacific nations' balance sheets. But the larger effect of the trade tension is more about investment―in an uncertain environment, both the public and private sector will hesitate to invest, causing greater damage worldwide in the long term.

ONODERA:
With trade tensions, productivity may not be as high as before. The productivity advantages that Asia had in comparison to other regions may decrease somewhat. However, some state that those Asian countries with comparatively welcoming environments for investment may benefit from the situation.

Q2: What do American scholars think about free trade under the Trump Administration? Does a cultural difference between the U.S. and Japan affect free trade, and the closeness of China and Japan affect free trade?

ONODERA:
Educated people are more likely to be against President Trump. There is clear global evidence that educated people are more likely to support globalization than uneducated people, so most economists do not favor President Trump's initiatives. However, there are huge cultural differences between countries in terms of general openness, and even within the U.S. itself, so it is not universal and needs to be examined further. (later) However, many papers written by very famous economists in the U.S. examining Chinese imports find imports to have mostly negative impacts and actually seem to support protectionist measures.

ARMSTRONG:
There is a shift in Washington where less people are advocating for economic engagement with China and supporting Trump. Is there a danger that the trade war will develop into decoupling?

CHEN:
Many Chinese scholars believe Washington's policy will not change even after President Trump at least in the short term. All the U.S. Presidents while running for election have had a strong stance against China, but the current President took it to the extreme. China has many issues that need to be resolved/improved, but the important point is to keep China on track and moving forward toward a fair and open market. Trade wars or trade tensions are not the solutions.

ARMSTRONG:
If China strengthens IP laws, stops technology transfer policies and all the things the U.S. is worried about, will that calm tensions and attitudes in Washington, or is this also a part of fear of being overtaken as the number one economy internationally?

ONODERA:
China and the U.S. have very extensive trade relations, and even with a barrier, a considerable amount of trade would overcome tariff barriers. They are also interlinked with many other countries that have both the U.S. and China as major trading partners, and decoupling is not an easy task. Any decoupling would put significant strain on companies doing business with both U.S. and China, and therefore may increase costs and affect investment. Economically, due to the mutual stake that they have in each other, even with trade tensions, it would be difficult for the tensions to evolve into a decoupling.

Q3: Can Japan and the U.S. negotiate a win-win FTA, and what will Japan get out of it? Currently it is one sided and favoring the U.S.

ONODERA:
Any agreement is a win-win agreement at the end of the day.

ARMSTRONG:
The risk of agreement stalling is that Japan may get auto tariffs, but there is also a significant implication for Japanese security which relies on the security umbrella. Trump tends to integrate economics with security, and uses economic tools for security means. Is any deal a win-win because you avoid auto tariffs, even if it is a lop-sided managed trade deal?

ONODERA:
In terms of negotiating a trade deal, we come up with various objectives that we want to get and try to get a mid-ground in various issues and try to sell the deal to the constituents.

Q4: As the world works through tough issues such as trade wars, WTO reform and so forth, what are your expectations for China-Japan cooperation, which seems to be gaining momentum?

TODO:
It is important for China and Japan to cooperate. The Asian Development Bank (ADB) and Asian Infrastructure Investment Bank (AIIB) are cooperating with each other over several infrastructure projects. This type of cooperation can promote mutual understanding and have positive impacts on bilateral cooperation.

ONODERA:
The U.S. continues to be Japan's number one partner in terms of economy and security. However, China is a huge neighbor and we need to have good relationship. Historical issues were barriers to closer relationships, but even then, the economic relationship was relatively fine. Now, China seems to be open to more positive relationships in general. In essence, Japan needs to be friends with both sides and it is not an issue of taking sides.

ARMSTRONG:
The economic interdependence between China and Japan is remarkable.

CHEN:
China is still a developing economy and need support from countries like Japan and Australia for further domestic reform. It is very important for long-term cooperation bilaterally and regionally.

Q5: What are the priorities in Asia's interests in the WTO Reform?

ONODERA:
The lesson learned from Doha is that attempting to accomplish everything in a single undertaking is not possible. With the increased number of countries, the capacity to come to agreement on a consensus basis has decreased and we have been unable to respond to critical changes in the trade environment, so moving forward, we must use the G20 and APEC process in addition to work in Geneva to provide sufficient push to make incremental changes in a timely manner and advance specific areas with like-minded countries.

CHEN:
We should set priorities for reaching agreements based on the most important goals rather than being too ambitious in attempting to accomplish package agreements. Also, increasing public awareness of the issues, i.e. by improving publishing or engaging on social media, may be useful in advancing political efforts.

ARMSTRONG:
A lot of policy bandwidth has been taken up by negotiating bilateral or smaller agreements. We are approaching a big crisis in the international trading system, and with the G20, we can refocus more policy resources on easy early wins on transparency, trade policy review and continue to work on other issue on the list.

ONODERA:
Convincing China that it is in its own best interests to both undertake further significant internal-reform efforts and to contribute further to the maintenance of the system is key to moving forward with the WTO Reform.

Q6: Multilateral and Unilateral solutions for trade wars―When we are seeking solutions, how will multilateral negotiations help or hinder these urgent issues? Also, regarding Regional Comprehensive Economic Partnership (RCEP), is it important? How significant is it? Is it a lower standard? When seeking solutions, how will multilateral negotiations help or hinder the process?

ONODERA:
If we get the sense of urgency across the board within the WTO, then progress should be possible with small groups of countries working together, and we should be able to formulate something that is relatively balanced and can be implemented on a smaller basis, even if it only applies to a smaller group of major countries. Other countries would then be able to come on board after seeing how the rules are applied in practice. In terms of other reform, we hope RCEP will be a high level agreement going forward and will contribute to free and fair trade rules going forward.

CHEN:
RCEP is important for the global trading system, in particular for ASEAN and East Asia. If the longer time taken for the negotiation allows for smoother implementation, then it is worth being more patient. With regards to WTO, I agree with what was mentioned before, which is known as the plurilateral approach to multilateralism―some member states moving ahead to sign the agreement on deeper liberalization or liberalization on new issues, and leaving the door open to later participants so that they can join in their own time. This could be a flexible and pragmatic alternative.

Q7: What if the U.S. and China do a deal? What kind of deal might that be? What kind of damage might that do to the international trading system if it has significant preferential elements to it? What can the rest of us do to address that and unfold any deals that U.S./China make in multilateral terms?

ONODERA:
If there is an FTA, there are cases of tariff quotas, but if there is no FTA, managed trade in the form mentioned earlier is not permissible under the WTO. Whether we should use the WTO dispute settlement system in the current climate is something that policy makers will have to decide at that point in time.

ARMSTRONG:
Countries like Japan and Australia should be encouraging China to look for multilateral solutions. The response from China has been promising, opening up to WTO consistent Most Favored Nation (MFN) basis treatment.

Summary

ARMSTRONG:
We cannot lose sight of what we need to do at home in our various countries which is to address the very causes of rising protectionism. We need to make sure that gains from globalization are spread across society, to have functioning social safety nets, to educate the public on the benefits of globalization, and reeducate those that are not fortunate enough. Internationally, Japan has the presidency of G20 and will have to manage and navigate the temporary truce between the U.S. and China. Other middle powers of the world and especially in this region need to be mobilized and step up to the plate to help where they can.