Getting America Back in the Game: A multilateral perspective

Richard BALDWIN:
The open rules-based multilateral trading system was wonderful and did amazing things in the post-war period. It increased prosperity and decreased world poverty while also allowing the emerging markets to rise without major issues. Trump broke it. Until December 2017, the world trading system was making progress. Starting in February 2018, the Trump Administration started a war on trade, putting tariffs on many products from many different countries, including our allies. These countries retaliated and the Trump Administration later turned to a forceful US-China trade war which actually accelerated during the 2020 presidential campaign to involve all sorts of things that were damaging to confidence in the open, rules-based system.

We really need multilateral cooperation right now in 2021 for two, year-defining reasons. First, we need the trade system and multilateral trust and cooperation to fight the pandemic. Second, we have to fight this incredibly deep, broad and synchronized global recession. Although fighting a recession requires changes in domestic policy, international cooperation can help.

Biden's constraints are deep and real. Decades of globalization were great for the US as a whole but they created winners and losers. As Pascal Lamy said it so eloquently, trade works because it's painful and it's painful because it works. That is, trade leads to reallocation of resources within countries and more efficient economies as a whole but it also creates winners and losers. The lack of systemic domestic policies to help the losers in the US adjust created deep resentment in US working-class voters. Both automation and globalization were at fault, but trade is easier to blame than robots, so in the US a consensus has emerged that globalization is a problem. Moreover, Trump's incessant attacks on multilateralism, trade and foreigners created a new rallying point for US politics that is now bipartisan and deeply-held.

It's important to understand how real this is. Brookings has analyzed the malaise in the US working class and the basis of it. Real median hourly wages in the US have been flat since 1970, and particularly since 1990. If you are in the middle of the income scale in the United States, you do not think things are working. The UK is a little bit better but if you go to say France or Japan or many other G7 countries, this has not been the case; there's been a relatively widespread sharing of the prosperity.

Biden said in a speech in July 2020 that there is no going back to business as usual on trade; we need new rules, new processes and voices for all stakeholders at the table, including leaders representing labor and the environment. The whole Biden project is to fix US domestic economic problems first and once American workers are competitive enough to stand up to anybody, then perhaps we will return to opening up to trade. We don't think the world can wait given the current circumstances.

Biden's foreign and climate policies have a very different feeling. The key goals are restoring American leadership abroad and returning to a foreign policy based on American values and a climate policy based on science. Biden's plan includes a "blueprint to repair the damage wrought by President Trump and chart a fundamentally different course for American foreign policy for the world as we find it today—and as we anticipate it will be tomorrow."

Biden must address trade issues to achieve his foreign policy and climate goals. He must repair Trump's damage to trade in order to restore trust. He'll find a trade to be a convenient part of the deals and compromises he needs to make with like-minded nations. It's both a carrot and a stick. Trade will be part of Biden's foreign policy and climate policy and that's an opportunity for people who care about trade.

The plan we've developed has two elements. First, we have to work together and address the US not just bilaterally. Second, we have to design mutually advantageous trade tracks that fit into Biden's foreign policy and climate goals by simultaneously restoring multilateral economic cooperation, starting slowly and hopefully creating a snowball effect.

What do I mean by working together? The group needs to be small, representative and homogeneous enough to agree rapidly. Who will actually be in it is an intensely political discussion which people like us are not very well adapted to solving, but we have criteria. The group needs to be fully transparent with the rest of the world. It needs to operate in an informal and institutional-less setting so that it can be flexible. History offers many examples of this. At the WTO, for example, this is sometimes called the green room process: a group tries to hash out the key tradeoffs and then bring everybody else along.

Biden recognizes the need for cooperation. If we look at world trade shares when Clinton took office, China had 1% and the US had 13%. The EU was 37%, Japan was seven, Canada was three. The G7 accounted for roughly two-thirds of world trade. China is now 10 times larger. The United States is not much smaller, but Japan is 3%, Canada is 2%, and the entire G7 accounts for less than half of world trade. One country has gone from 1% to 10%, and that has changed the reality of the situation. The United States can no longer go it alone.

Biden has already said the US is going to rejoin the Paris Agreement and the WTO and call for a NATO Summit on day one. The US may stop blocking Ngozi Okonji-Iweala's appointment as the new director-general of the WTO. That could be the trade track in the day-one agenda. Biden is planning to repair alliances in his first hundred days. He may also remove the national security tariffs and terminate the low-quality trade deals that were struck. In leading the global fight against the pandemic, most of what he does will be domestic. There could be a truce at the WTO on trade in medical products where there are no tariffs but no restrictions, for example. Leading on climate will mostly be about carbon and it's going to be about science and being committed to changing the way economies run, but we could finish the fish subsidies at the WTO and we could finish the environmental goods agreement as a trade track in climate leadership. Leading the fight against the global recession will require continued cooperation, but it could involve a G20 commitment to no protectionism, the boosting of certainty by starting deliberations on WTO reform and addressing the China interface problem.

The idea is that like-minded nations should change the current mindset. A bilateral approach to the US is less likely to work because the Biden administration is likely to delay any agreements with individual countries until its second term. Working together with the US on mutually advantageous trade tracks, restoring honest economic cooperation and helping tackle the global pandemic and the global recession could work. Maybe Japan could take the lead.

I'll end by saying that this is not anti-China. Trump created an atmosphere of hostility, distrust and acrimony, a toxic environment that stands in the way of adapting economic cooperation among all nations to the economic and political realities of the 21st century. China is and will be part of that reality.

André SAPIR: Brussels released a document a few days after Biden's election, called "A New EU-US Agenda for Global Change." It starts by saying that the EU and the US have a shared history, values and interests and that together we remain very influential globally and that we should see ourselves as an anchor for global cooperation. I'm sure that this is a document that any of us like-minded parties could have issued, including Japan and Canada.

The concrete elements in this document are fairly similar to our joint document here, putting forward issues on health, on climate and then on trade and technology as areas of global cooperation with the US and other nations. For Europeans, and the EU institutions in particular, the fact that Biden is using the word "multilateral" in a positive manner, rather than as a dirty word as his predecessor did, is music to our ears. European leaders both at the European level and in the national capitals are very committed to multilateralism. We all obviously have taken notice of the chart that Richard showed at the end of his presentation, how the world has changed, and sure, the world is very different than it was 10, 20 or 30 years ago, and that's good in that the system has worked and been inclusive. The G20 has played a very important role by bringing advanced countries and middle-income and emerging countries together.

An important narrative in Brussels that has been established with the new Von der Leyen Commission is the European Green Deal. Biden's statements during the campaign about making climate change central to the transformation of the United States were also welcome. They mean that we can work together again toward global cooperation on those issues. Clearly, there are also some trade dimensions to climate issues and in the Green Deal. The European Commission will propose a carbon border adjustment measure (CBAM) by June 2021 as part of the European Green Deal. It's a measure whose nature has yet to be decided but this is an issue that obviously Europe will need to discuss not only with the United States but with all of its allies and other WTO members. Europe has insisted that its CBAM will be compatible with WTO rules, but the details will have to be discussed bilaterally with close partners and multilaterally at the WTO.

Europe is willing to be a bit patient on what it calls the bilateral trade irritants: measures that President Trump took, particularly on steel and aluminum and then the Boeing/Airbus issues. Europe is not expecting that these measures will be removed on day one of the Biden presidency, but they definitely need to be addressed quickly. Brussels was shocked when the US administration decided to impose steel and aluminum tariffs on its allies. People were completely unsettled by that and the trade relationship with the US has been disastrous ever since. Restoring trust bilaterally and multilaterally is absolutely crucial. Europe understands that we are not going back to the Obama administration and that the world has changed, but we want to restore trust at the personal, bilateral and multilateral levels.

On other trade issues, the WTO will be crucial. Europe is committed to leading WTO reform efforts and this is also what Europe expects from the United States, Japan and other like-minded countries. So, the notion of cooperation among like-minded countries is important. Our contribution is not anti-China, but at the same time, one of the realities of the changed world is the fact that China became a member of the WTO in 2001 and a number of issues have occurred since then. We need to look at the reality of the world and together with the United States, Japan, and other like-minded countries, we need to sit down with China and discuss WTO reforms that are not just related to China and its role but indeed other issues of extreme importance as well, including climate and digital matters.

Richard BALDWIN: I think approaching this particular president bilaterally would actually be harmful and would not achieve progress. I think the Biden administration would like to ignore trade for most of its first term at least. The Biden administration was elected by a coalition of Democrats who have very different views on trade, and in general it's not a good time to be pro-trade. I think the Biden administration will try to stall anyone who comes to them with concerns. If instead a group of countries start to work with the US and the US starts to see this collaboration, including on trade, as a way of advancing its policy goals, it's more likely to achieve progress in the short term. The Biden trade policy appointees probably won't be approved very quickly because they will be controversial. The one USTR designate is unlikely to run into too many problems. I think we have to get into the mindset in the years ahead that trade will be a flanking policy to other policies, not the other way around.

The second point is that this is in no way anti-China. In the group, we worried continuously about this being seen as ganging up on China, and I want to address that. Trump destroyed the atmosphere and engendered a hostile, distrustful and explicitly anti-multilateral one. On occasion he explicitly insulted many countries, including China. He was intentionally creating discord as a means of creating opportunities. This is not the way an open rules-based system works. It's not the predictable, slow and very diplomatic way that the US has run this system since World War II. This new toxic atmosphere stands in the way of adapting economic cooperation to the realities of today. Fundamental systemic changes have to be made for different types of capitalism to work together in a mutually advantageous trading system. China will be part of that.

China has benefited more over the last 20 or 30 years from the open and rules-based multilateral trading system than anyone else and they have an enormous stake in restoring trust and cooperation. I mentioned that the conflict between the US and Japan in the 80s and between the US and China now are very similar. Japan and the US were able to move forward and I'm very hopeful that the same will happen with China.

Returning the US to multilateralism is necessary to solve the problems and remove the distrust, hostility and acrimony produced by Trump. It's important to restore the US instinct to act multilaterally by turning to economic cooperation, both as a carrot and as leverage, to advance US interests and also to advance multilateral cooperation. We have to find a solution to the interface problem, and hopefully we will over the next four years.

André SAPIR: One of the great irritants has been the demise of the Appellate Body. Restoring it needs to be a priority. The Trump administration wanted to go back to the GATT situation: a dispute settlement that was in the end purely diplomatic. I think that this option is not acceptable to most countries. We need a judicial element, so we need the Appellate Body to be functional again.

To my mind, much of the complaint that some WTO members have with the Appellate Body relate not so much to judicial but to the legislative function of the WTO. The judicial function of the WTO is inseparable from the legislative function; the rulemaking. The WTO has had difficulty modernizing its rules. That legislative function was broken and the judicial side needed to fill the space. There were disputes and the rules were unsatisfactory but the judges nonetheless had to interpret them. This led to a feeling among some members, including the US, that there was too much judicial activism. However, that judicial activism on the part of the Appellate Body was a reflection of the fact that there was too little legislative work. I think the two functions need to be seen as complementary of another rather than as substitutes.

Reforms of some WTO rules are needed. Negotiations are ongoing on e-commerce, and that's extremely important. Rules are also needed on climate issues, including carbon border adjustment measures. Modernizing the rules and restoring the Appellate Body should be viewed ultimately as a package. If one function does not work well, then the other will be placed under tremendous stress.

Q1: What is your opinion about trade restrictions for reasons of economic national security? I refer to high-tech trade or high technology issues.

Richard BALDWIN:
I think there are two separate matters here. One is the national security tariffs which we have discussed already. The Biden administration will have to come up with a plan to remove those. This plan may involve a broader agreement on things like supply restrictions. The second thing is during the campaign, my personal opinion was that Trump's idea was to create lots of problems and then strike bilateral deals. I think that's what he did with China. He created all sorts of fear and uncertainty and then he did a low-quality managed trade deal which wasn't enforceable or realistic but made it look like he had a win. Trump ramped up the rhetoric over the last few months, attacking China on all sorts of things where he could unilaterally as president have the power to cause disruptions and look anti-Chinese. I think that's where all the technology things came in. I'm not sure whether those will go away because one thing Trump actually did do is that he has broken the "rule of silence" regarding Chinese economic methodologies. Inside the US there was this kind of law of silence where politicians didn't talk about Chinese practices on tech transfer or Chinese policies on developing high tech industries because most American companies were making lots of money in China and had presence in China. Trump broke that convention and now everybody's talking about it. This idea that China's rise in high-tech industries has been a result of unfair practices is now much more of a bipartisan position. Trump's responses were both incoherent and strategically weak, and therefore more destructive than effective. I think the Biden administration will be open to rethinking this but I don't think there's an appetite to return to the status quo. I think it will be difficult to remove these restrictions, and I don't think these attacks on individual Chinese technology companies will reverse quickly.

Q2: Since China's influence and economic power are obviously growing, what is your perspective from Europe on addressing Chinese issues, and do you have any advice for the Japanese?

André SAPIR:
I don't have advice for Japan; I can only tell you what Europe is doing. Number one, I think Europe published a position document last year on our relations with China in which we laid out a realistic approach, viewing China as a partner on some issues and a rival on others. That has all kinds of implications politically and economically. At the moment, the most concrete element of our discussions with China is still a bilateral investment treaty. For Europe it is a huge priority. These negotiations have been going on for five or ten years and have proven quite difficult. There are lots of sticking points both about the treatment of EU investment in China, and also about Chinese investment in the EU. A number of discussions are taking place on both sides now, but I do believe that if we can make progress on this issue, which does address some of the state capitalism features of the Chinese system that we discussed before, in the context of the investment treaty, I think we will be in good standing to be able to approach some of the WTO issues that relate to China under a multilateral framework in a much better way. The US is in a similar process of discussion with China on a bilateral investment treaty and I think that agreement will also be made. I don't know whether Japan is also engaged in a similar process with China on an investment treaty and therefore whether there would be some lessons for Japan.

Q3: Given the difficulty for Biden of repairing and restoring what was lost under Trump, could we restore the global trade order based on bilateral deals?

Richard BALDWIN:
The answer is no. A lot of progress has happened since the Doha Round was launched and a huge amount of liberalization in rule-writing has been done regionally, but it was often in response to things other than trade. It often related to intellectual property rights, etc. necessary for global value chains. These are more appropriately resolved in a bilateral setting. Even so, 10-15 years ago a consensus emerged that these negotiations should be knitted into mega-regional agreements like the TPP, etc. so there was movement toward more multilateral agreements. If we can't restore the WTO's negotiating functions very quickly, we may get back to this smoothing out of bilateralism into regional, mega-regional or even global agreements. RCEP was a big step forward on this, but its main function was to harmonize rules of origin. It did achieve some liberalization among China, Korea and Japan, but a lot of it was harmonizing rules of origin and getting rid of the problems of bilateralism. Bilateralism is most definitely not a solution, especially bilateralism as Trump viewed it.

André SAPIR:
As a staunch supporter of the multilateral system, I very much agree with Richard. I do believe that bilateral regional trade agreements are useful in some instances. In others, I think they've gone too far. I recognize that on some non-trade regulatory issues, substantial progress can only be made among like-minded countries. It's hard to have a global agreement on certain regulatory issues. The EU-Japan trade agreement was able to go further and deeper on some issues than it's possible to do at the WTO with 164 members. At the same time, we have to be mindful of the multilateral rules framework. I'm not keen on bilateral agreements on trade issues that are not already under the ambit of the WTO. I want to emphasize the multilateral rules and then have complementary regional agreements in some areas, not the other way around.

Q4: What's your assessment of Biden's designation of Katherine Tai?

Richard BALDWIN:
I don't know her, but everything I read about her and the reactions to her nomination seem to suggest that it was very clever and reflects to a certain extent the fact that trade is not a partisan issue in the US. Trump's nationalism is a partisan issue, although there are people on both sides of the aisle that that have some elements of that. In terms of the basics of trade, the attitude towards China, the attitude towards worker-oriented, America-oriented trade policy, America First; these are broadly held partisan positions and I think she has the ability to reflect a bipartisan consensus. One thing that I think is very revealing is that she was involved in the NAFTA reform discussions, when the Democrats amazingly more or less went along with the Trumpian view. The Democrats were actually supporting many elements of it in the end. Apparently, she was deeply involved in that. Her involvement signals that trade is not going to be a partisan issue and if it is, it's not going to happen, because that's not where Biden wants to spend any political capital. She is probably a very good bellwether for the new reality in Washington but she may also be a good person to deal with on labor and environmental issues and also the China issue. I think it's a wise choice. It will be interesting to see whether the Republicans let it go through quickly or whether they're going to start blocking everything, but I was encouraged by it.

André SAPIR:
Her nomination was very well received in Brussels. She is very well known among trade negotiators and the official trade community in Brussels. They appreciate her. It was viewed as a very good choice for pushing forward the trade agenda both bilaterally and at the WTO.

Q5: Many people in Japan are interested in whether the new administration in the US can come back to the TPP or CPTPP in the future. What's your assessment?

Richard BALDWIN:
Not anytime soon. It was very clear during the Biden campaign that there's not going to be any big trade deals that involve any liberalization of the US until the big domestic issues are settled. Those aren't going to be settled quickly. The only possible way would be if it were woven into a very large geostrategic, geo-economic pivot to the Pacific or a way of dealing with the Chinese rivalry, but I don't think there really is a way forward. In the past, the instinct in Washington was to do a trade deal and use that as a way of advancing foreign policy goals. That was the way it was in the US starting in the sixties when trade was seen a means of keeping the anti-Soviet coalition together. I think the mood has changed and trade agreements are now seen as a little toxic. Remember, if Clinton had won, it wasn't absolutely certain that the TPP would have won approval in the US Congress. The only way to do it is just to point out to the US that they're getting left behind. That might encourage them to do something on it.