|Date||July 13, 2016|
|Speaker||Ricardo MELENDEZ-ORTIZ (The International Centre for Trade and Sustainable Development (ICTSD))|
|Speaker||Sean DOHERTY (Head of International Trade & Investment, World Economic Forum (WEF))|
|Speaker||Jonathan FRIED (Ambassador and Permanent Representative of Canada to the World Trade Organization (WTO))|
|Commentator||TAMURA Akihiko (Former Senior Fellow, RIETI)|
|Moderator||NAKATOMI Michitaka (Special Advisor to JETRO / Consulting Fellow, RIETI)|
Introducing the E15
Many felt that the demand for ideas for a new post-Doha Round agenda both for the World Trade Organization (WTO) and the broader trade community would exist by the time of the WTO's 10th ministerial meeting in Nairobi. The E15 was launched in light of this, which has since grown to encompass 18 working groups and 350 experts from around the world and generated several hundred white papers. A very broad set of policy options was developed in time for the ministerial meeting in Nairobi. They were discussed on the sidelines of that event and officially launched at the start of this year in Davos, and have been discussed subsequently in Washington and Beijing, and now in Tokyo and many other cities.
The issues covered are quite broad, e.g., trade in agriculture, competition, digital trade, fisheries, industrial policy, global value chains, innovation, investment, services, subsidies, regional trade agreements, and several other topics.
The first example I will talk about is the facilitation of trade in services. I believe that India is submitting proposals along these lines to the WTO. From an E15 perspective, the most important elements are easing visa and work permit restrictions, simplifying digital regulations and so forth. The need for transparency in national regulations is the second policy proposal. Of course, this requires increased mapping, further notifications, greater inclusivity in regulatory policy making and dialogue. A third area is providing a safe harbor for subsidies which address certain societal objectives. This could be seen as reinstating some of the aspects of Article 8 of the now-expired Agreement on Subsidies and Measures. A fourth area is ensuring the availability of correspondent banking in the least developed countries to respond to what may be an unintended side effect of the Know Your Customer and anti-money-laundering regulations: making it very difficult to secure private financing, which is essential for trade, in certain countries. Greatly reinforcing the deliberative functions of the WTO and more generally enhancing the role of soft law in trade and investment policy making is the fifth and final example. This is a recognition that waiting for formal agreements can sometimes be an impediment to progress. Principles and dialogue, etc. can also be very valuable.
Climate, energy and digital technology
I would first like to recognize the participation of Japanese experts in the E15. A total of 10 very actively participating Japanese experts have joined various groups.
I would like to touch on climate, energy, and digital technology as I know these areas are of particular interest to Japan. On climate, the E15 discussed how the trade regime at the global level could support the ambitions of countries that want to tackle this major challenge. The E15 offers an incredible range of options, some of them exclusive, at the WTO level and others focused on within the wider landscape of trade agreements and trade and investment agreements. The options can be synthesized in six subcategories. The first was minimizing conflict between trade and climate regimes as our guiding criterion. The second was recognition of carbon in trade and the use of the concept of "like products." The third was how to foster climate action by enabling the formation of climate clubs and coalitions. The fourth was the carbon sphere concept embodied in Article 6 of the Paris Agreement which calls for countries to come together and provide benefits and engage in emissions trading. Emission trading schemes currently lack such an international regulatory framework. Carbon taxes may also result in the imposition of equivalent border adjustment measures to promote low-carbon growth, but how to ensure these do not result in clashes with trade rules, particularly in a world of diverse climate action. The fifth was how best to make use of trade relevant rules around subsidies, standards, government procurement, and intellectual property. Finally, the sixth was how to scale up sectoral approaches available to emissions reduction, including for low-carbon shipping and transportation.
These climate action options are very much linked to energy production and consumption. Since the unfortunate Fukushima nuclear power plant incident in 2011, Japan has become the third largest oil consumer in the world behind the United States and China. It's also the world's largest importer of liquefied natural gas, and the second largest importer of coal behind China. Only 2% of Japan's energy supply comes from renewables. Japan, however, is very committed to increasing renewables to 22%-24% of its energy supply by 2030. This will require a truly gigantic effort and supportive international policies. Japanese companies are also world leaders in energy efficiency, which will help very much in bringing down emissions in line with international commitments.
In this respect, the E15 looked at the necessary global action to rapidly scale up the use of clean energy technologies, specifically where cooperation through trade and investment frameworks can play an important role. For example, clean energy technologies require associated services to make them useful, and these services may not always be available in abundance domestically. Boosting trade in clean energy services would require that certain aspects of the trade frameworks be reviewed to identify the appropriate classifications for clean energy services as a pre-requisite for negotiating liberalization commitments. Negotiations on clean energy services market access and facilitating negotiations on market access that would include service liberalization could then be done either multilaterally or through a critical mass of participants. WTO rules on subsidies also require much review to ensure that governments have the space to support clean energy, but equally to further discipline support that may be trade distortive or damaging to the global commons.
We have been looking at digital trade carefully. We have done a very good diagnostic on what is necessary and where governance gaps exist. We understand the challenges and that it is a very dynamic sector that requires a purposeful, integrated approach from the WTO. The global trade body's current e-commerce mandate is insufficient and partial. We have a number of proposals that would address certain issues. For example, we need to ensure that the trade system reinforces user confidence in cross-border digital transactions that build on some of the TPP outcomes, and then multilateralizes some other options with specific commitments such as liberalizing cross-border data flows.
We also want to enhance government and private sector cooperation on digital trade issues. We were surprised to find during this E15 dialogue that communication between policymakers, the private sector, and other stakeholders on specific trade and investment issues is very poor. Cybersecurity and privacy matters are a very large distraction from international cooperation and the use of digital trade in a more enabling manner.
The E15: What it is and is not
Let me start by talking about what the E15 is and is not. People in both government and business are usually concerned with immediate challenges. Corporate imperatives include making a profit in the current year and reporting to shareholders and other stakeholders, whereas governments have to deliver on behalf of their ministers at the next major event. We don't often give ourselves the time or luxury to think in a more strategic or longer term way. METI very wisely has provided us with RIETI to promote strategic thinking, but not every country has a RIETI of its own. Our goal should be to consider what the international trade and investment system should look like in 5-10 years' time.
The volume and quality of trade and investment ultimately generates jobs and growth. We formulate practical options for medium-term consideration by decision makers to foster an environment more conducive to growth.
The E15 is not a roadmap for the world in all respects. It is focused on trade and investment issues; it does not, for example, address global public health issues that are the WHO's purview. The E15 is intended to connect the trade and investment system to other international forums and other parts of national governments that must also do their part in ensuring a more inclusive, equitable and sustainable growth model. The recommendations and considerations of the various E15 expert groups hint at some of these issues but do not purport to offer a recipe beyond the core trade and investment world. However, the recommendations do go beyond the WTO. While on first impression you might think that this is all about the global trading system, but it's actually about trade, investment, supply chains, and logistics. It's about doing business internationally; the trading system in context.
Trade and investment
One example of this is investment. Trade follows investment and investment follows trade. A company with a successful export business may consider establishing a local branch to increase efficiency. Conversely, an investor will seek local suppliers to obtain components most cost-effectively. This is an example of the constant interplay between trade and investment. Experts on investment have said that while we may have achieved some coherence in the global trading framework, similar coherence has not been achieved in the global investment framework.
It is common knowledge that today we have a world with over 3,700 bilateral investment treaties, each with different rules, levels of protection, and standards regarding investor protection and host government rights and responsibilities.
First and foremost, the experts call for greater coherence among bilateral agreements and raise the prospect of working toward an internationally harmonized investment framework. They take inspiration from a recently published United Nations Conference on Trade and Development (UNCTAD) draft investment agreement. The draft code reflects a careful balance between the kinds of protections an investor would want to feel confident entering a country on the one hand and the kinds of reassurances a host country would want as well regarding the right to regulate and promote the public interest at home. Thus, the experts invite policymakers to consider this.
Interestingly enough, just this past week, the G20 trade ministers adopted a set of seven major nonbinding, guiding principles on investment that reflect many of the principles recommended by the E15 group. This set of investment regulations actually has some traction, is actionable, and points the way for the medium term. Two other aspects of the recommendations are interesting. The first is that they encourage policymakers to give particular attention to dispute resolution in investment. A major debate is currently taking place regarding investor-state dispute resolution.
The E15 is calling for much greater transparency in investor-state dispute resolution because one of the criticisms is that these are conducted in secret which endangers the public interest. Finally, in acknowledgment of the reality that developing countries, particularly low-income countries, may not have the capacity to fully cope with the challenges of regulating major foreign investment, the E15 calls for investment capacity building. This does not only mean physical infrastructure, but also governing laws and regulations that give investors the confidence to participate in that infrastructure.
The E15 also gave attention to competition. Efforts were made almost two decades ago to discuss trade and competition within the WTO context. It was one of the so-called "Singapore issues" suggested in 1999 for the post-Uruguay Round work program, but it was dropped from the agenda and never taken up by the WTO. However, the E15 affirmed that trade and competition are very closely related, and that competition needs to be given renewed attention. The most obvious illustration is the advent and increasing pervasiveness of state capitalism. Various public entities, from western pension funds to Chinese state-owned enterprises, are participating in the commercial markets. They are competing with private investors and private traders. If they receive subsidies or exemptions, they obtain an unfair advantage. The E15's first recommendation is that the international community bear the principle of competitive neutrality in mind. This is reflected in a few agreements, such as the Trans-Pacific Partnership (TPP). Second, the E15 asks that we promote and further enhance the harmonization of common standards for anti-trust and anti-monopoly regulation. This is already taking place informally. Doing so will ensure better coordination and cooperation in the administration and enforcement of the related laws.
Bringing a competition perspective into trade may have implications in a number of other areas of trade regulation. Government procurement is one example. Is a country giving extra incentives to its state-owned enterprises? Can a country ensure competitive neutrality in procurement? What's the relationship between competition principles, which prohibit price discrimination between geographic markets, and anti-dumping laws that seem to do the same thing in a less economically rational way? Has anti-dumping strayed too far from the basic principle of looking at geographically segregated markets?
Finally, in a broader context, the E15 hints that an open invitation exists to think about competition and intellectual property. The most headline-grabbing aspect is access to medicines: brand name vs. generic drugs and compulsory licensing. More broadly, the principle of intellectual property protection is that an inventor is given monopoly rights for a certain amount of time in exchange for making his/her invention available to the public in a timely way. The monopoly is granted to reward the investment required to make the invention. What is the right balance between granting or extending monopolies vs. the public's interest in having access to medicine? Intellectual property or the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)-related issues are not just about intellectual property, but rather intellectual property in a competition context. When agreements are negotiated only by trade negotiators who only know about TRIPS and don't talk to their competition authorities, the broader public interest perspective inherent in marrying intellectual property with a competition perspective may not emerge in Geneva or in our multilateral agreements.
These illustrations of investment and competition reinforce a few facts about E15. First, E15 goes beyond and tries to take a broader view than the WTO. Second, it is medium-term. Third, it takes us to a certain level of analysis and research and invites further analysis, research, and reflection regarding policy options.
Finally, remember that trade and investment has the post-WWII international trading regime as its base. This means that the E15 has concerned itself with ensuring greater competition between firms to generate more wealth. The trading system does not address how that wealth should be distributed. That's within the purview of national governments' taxation systems, reward systems, etc. We do not offer the E15 to address all concerns. Inclusiveness is the key.
Commentator TAMURA Akihiko
The E15 launch turned out to be very timely. We are concerned that in the aftermath of Brexit, we may see a ripple effect of protectionism, fragmentation, and insular mindset, possibly becoming contagious all over the world. We need a solid, global anchor and a foundation for the sake of advancing the welfare of global citizens. In this context, E15 recommendations are full of creative suggestions and proposals which intend to restore the legitimacy of the multilateral trading system. I understand that the E15 recommendations rightly look beyond the WTO, rather consider the trading system as part of a larger ecosystem.
Having said that, I would like to make three points. First, concerning inequality within a single nation. It should be pointed out that the premise of the E15 proposals seems the same as the one at Seattle in 1999, the third WTO ministerial, which was bogged down primarily by two camps: developing countries arguing for reducing the gap between north and south on one hand and environmentalist non-governmental organizations (NGOs) arguing for a sustainability cause on the other. Back then, we didn't sufficiently consider the third source of anti-multilateral trading system force, which is protectionist sentiment generated by an income gap between rich and poor within the same nation. Traditionally, wealth allocation within one country has been considered to be beyond the reach of global trading and other international systems. The global trading system has been primarily concerned about inequality between developed and under-developed countries. Not much attention has been paid to inequality within one nation. However, this is one powerful source of anti-globalism nowadays. While the majority of citizens of countries with advanced economies believe that reducing the gap between north and south is morally grounded, such ethics-based argument as argued by the E15 proposals is becoming increasingly difficult to sell. Without any element addressing this newly perceived unfairness, that is, the domestic income gap, the E15 proposals or any proposal to revamp the global trading system would not be taken seriously.
The second point I would like to raise is the necessity of further involving private investors in the construction process of the architecture of the global trading system. The premise of global trade liberalization is to enhance economic growth in developing countries by securing a more transparent, stable and deregulated market environment and thus encouraging risk-averse private capital to be invested into the market concerned. The E15 proposals, however, do not seem to be sufficiently mindful of the necessity of involving private investors in the process of crafting and evaluating what is to be negotiated, constructed and dealt.
The final point I'd like to make relates to the linkage between the multinational trading system and diplomacy or geopolitics. It is hard to deny that the Bretton Woods system was created by the United States at least in part to serve its diplomatic goal of helping western countries recover from World War II so that they could become its allies. After the Cold War ended, a new discourse on raison d'etre of multinational trading system was needed and thus envisaged: a multilateral trading system would bring about wealth to all of the parties and that wealthier citizens would like a more democratic, more open, less authoritarian regime.
This is not necessarily how it has worked so far, however. This reality may have discouraged many players from being engaged in the global trading system. If E15 proposals are completely indifferent to the diplomatic dimension of the multilateral trading system, some of the readers of the E15 report might consider the report to be a bit narrow-sighted.
I should emphasize again that at least initially the E15 was not government-focused, and was intended to integrate the voices of society and business. I think you are right that the internal issues cannot be ignored. The E15 does address this to a certain extent. One of its mandates is to strive to disseminate the dialogue to all of society. I think this will involve tackling some of the issues surrounding taxation, for example.
In terms of the private investor involvement, I think there has been a very clear focus on the importance of investment facilitation.
Regarding general legitimacy, I would say that the transparency and efficiency of the global trading and investment system are the key building blocks in creating a more legitimate trading system.
We took license to try to interpret the bulk of the work that has been done on inequality. The E15 effort is reflected in about 150 papers and about 1,000 pages of policy options. We looked at the body of knowledge on some of the concerns you mentioned. We have proposals on legitimacy and so on. But I must recognize that it has been a modest attempt and requires much more work and interpretation. This is a first effort, and we are hoping that people build on it.
This is an expert-led initiative, more in the category of applied research than context, and it does not purport to be exhaustive. It's advice in context. We turn to others for advice once the limits of what we do has been reached by connecting this to some of the other work of people with a range of complementary expertise. But we will do more work in the future on geopolitical concerns.
On private investor participation, business goes where it thinks something is going to happen. There have been less frequent visits to Geneva from the private sector lately because it doesn't see anything happening, which is a chicken-and-egg problem. The private sector doesn't feed in because it doesn't see any issues ripe for resolution. But companies need to push governments to move.
Q1. How are you trying to sell the package to a Japanese audience, to the Japanese government, RIETI, scholars, and business? Also, what is the difference between E15 and other similar activities? And, what is the next action for E15?
Q2. How can the Japanese government and researchers revitalize the WTO?
Q3. Much depends on the United States. The U.S. situation is closely linked to the negative mood on trade, investment, and immigration. This is a problem of protection. I think your report should deal with this issue.
Q4. My question is about the aspirations of Japanese politicians and scientists to exploit an unconventional natural resource called methyl hydrate. Given all of the pluses and minuses and divergent views on such a topic, how should the international trade and investment system deal with such subsidization? Should it be disciplined, encouraged, or tolerated?
Q5. The world economic slowdown is a concern. Many bring up possible reasons that could be behind it. Trade and investment are important keys of invigorating growth. What are your thoughts on this?
What can Japan to do to revitalize the WTO? What is challenging the global membership to move on to new issues and into a modern agenda which responds to 21st century needs is the stalemate over the issues that have predominated since Doha as leftovers from the Uruguay Round. The most central and prominent is agriculture, an issue primarily of domestic support—subsidies at home. The four biggest subsidizer countries in volume terms are the United States, the EU, China, and India. Per-capita subsidization may be rational given the varying income levels of farmers, but this seems to be a cover for occupying larger and larger export shares, which distorts competition. What Japan and RIETI can do is add to the analytical and factual bases because now it is more of a political debate.
On methyl hydrate, a commodity Canada shares with Japan, there is nothing in the international system prohibiting subsidization of basic research and analysis. It doesn't distort trade. If you subsidize the price of an export commodity, that's distorting, but we are nowhere close to that. I think the move toward renewables is more likely in the near future as the cost of commercializing methyl hydrates will be prohibitive for some time to come.
This is a first effort to try to gain some diffusion for the E15 in Japan. One thing is to stimulate more research and contributions to build on what has been done so far.
What's next? We will follow this with an engagement phase: bringing the experts and stakeholders together with policy makers. We also want to complement the work done so far with some deeper analysis. We hope to continue to engage more and more with Japanese policymakers and others.
The challenge for us in the medium term is ensuring that whatever is suitable to be harvested immediately by the WTO negotiators in their two-year cycle is brought forward. We have the ideas; they are not the roadblock. There is the risk of inertia among policymakers that works against proposals. However, the E15 offers a trunk full of initiatives and ideas that can be used in very specific instances, including revitalization of the WTO. Moving forward will require leadership. That is also something we are hoping to generate going forward.
*This summary was compiled by RIETI Editorial staff.