Asia's Response to the Collapsing Consensus on Trade

Global trade disruption and collapsing consensus on trade

There was a growing discontent over the global trade regime even before COVID. However, COVID created some real challenges for trade especially in terms of the shifts in global supply and demand curves. While recovery from this is underway, currently there are growing geopolitical tensions, particularly between the United States and China, uncertainty over the extent of decoupling, and thinking about trade in different ways. This is creating issues across Japan and the rest of Asia.

There are at least three major challenges for trade. First is a collapse in global leadership with less enthusiasm from major players, especially the United States, to support the existing system which is mainly anchored on the World Trade Organization’s (WTO) commitments but with other aspects. Second is the rise in alternative approaches to managing trade, particularly using a range of new trade agreements which have rules that are either inconsistent or incompatible, which creates both opportunities but also risks of fragmentation. Third is a lingering uncertainty about whether existing trade agreement models are fit for purpose.

To fix this problem, three things can be done. One is to get the bigger players to reengage at the WTO. This is especially critical for developing countries in regions with no alternatives. Second is an alternative to encourage coalitions of “middle powers” to try to shore up the system and create workarounds. A third approach is to create networks of trade agreements that have a certain alignment in principles, norms of behavior and outcomes, in order to continue to create structures around the WTO.

The problems of Asia

The risks that a collapsing global trade system represent for Adsia are very high because it is a very trade dependent part of the global economy. However, there is a limited understanding of what that means. The WTO system remains as a foundation for all of the new free trade agreements that are built on top of it. Therefore, it is important to reflect on what can be done to support that foundation and how to use those other structures to help create new structure that will not implode if the foundation collapses.

Lack of U.S. leadership

The United States until recently was willing to defend the virtue of the system of trade and the importance of multilateral institutions as a mechanism for doing so as it clearly received a lot of benefits out of the multilateral trading system. However, in the last decade, there has been a shift in policy, particularly by political parties, about whether or not the United States’ engagement in the multilateral trading system is a source of opportunity and optimism or a source of risk and dependence. Under the last and the present administrations, there is less tolerance for anyone that is seen as free-riding on the system thanks to US contributions and an enthusiasm for pursuing protectionist policies. In contrast, the American public support is higher than ever for the importance of trade, resulting in an interesting dichotomy.

Furthermore, the changing political structure in the U.S. has complicated trade because traditionally the Democrats were more hostile to trade while the Republicans were more supportive of it. Now, some democrats are increasingly sounding far more pro-trade than before. Simultaneously, Republicans are struggling because their free trade credentials are under threat from the Make America Great Again crowd. Therefore, it is unclear who needs to be appealed to in order to provide renewed enthusiasm for the WTO multilateralism or alternatives. Moreover, the U.S. has increasingly connected national security and politics to economics, which is compounding difficulties in supporting integration of economic issues.

Another challenge is that in the last decade the link between government and business has been broken in the U.S. This means that the business community is not really engaged on trade discussions and are disconnected from the US trade representative and congress. Hence, the hope that the United States will revert to normal is misguided, because the politics, the geopolitical context, and the connections with business have changed in Washington for real.

If not the U.S., then who?

So, the challenge is, if it is not the U.S. who is pushing the multilateral system, then whom will that be? The European Union (EU) is a possibility, but the loss of the UK to Brexit has not helped the EU’s overall free trade ambitions, because within the EU, the UK was the most enthusiastic supporter of free trade. With the UK out, there is even more enthusiasm by some EU members to remain inward and protectionist to promote different trade agendas. Also, if the Europeans were going to take up leadership, they would pull the multilateral system in a different direction.

The next alternative is China. It is not obvious how much China would want to be a leader and how much others would follow. Therefore, in practical terms, it would be challenging.

With Japan as one of the largest global markets and one of the biggest recipients of the benefits of integration and trade openness, Japan could certainly be a leader in pushing WTO reform but also return to multilateralism. But that is a very different role from the way Japan has traditionally conducted policy, but it could do so as part of the coalition of middle powers. However, some middle powers also do not like this agenda, especially India and South Africa. So, even a coalition of middle powers does not automatically guarantee a revival of the same kind of WTO or multilateral approaches that were seen in the past. A coalition of middle powers that is hostile to the idea of integration forming and being able to push through a certain amount of their agenda can also be imagined. All these mean that the WTO is going to be crippled for some time to come.

How to shore up support for trade?

One alternative is to create regional initiatives which build up and eventually form a framework of integration efforts to the global level, but there are some serious challenges. One challenge can be seen from the Regional Comprehensive Economic Partnership (RCEP) discussions. The RCEP was originally conceived as a way to knit together five separate ASEAN-plus-one agreements, but all five underlying agreements were quite different. Ultimately, it took eight years to negotiate RCEP and nearly all underlying ASEAN-plus-one elements were rewritten or replaced. The key message here is that agreements crafted in one time period for one set of members may be unacceptable for future members at a later date.

Another example is the challenge of adding new members to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The United Kingdom accession talks took two years even though it has almost no trade with CPTPP countries. So, every new member is going to have new issues which come up in unexpected ways. The accession queue list now includes China, Taiwan, Costa Rica, and Uruguay, whose issues may arise from geopolitical contest or simply a lack of experience in mutual trade. So, the process of adding members is difficult.

Next, there is also a need to think about the challenges in implementing many of the present agreements. For both RCEP and TPP, implementation is very weak. No government in CPTPP has delivered all of their commitments. So, implementation even among competent and organized members of these agreements is a challenge, but it is especially hard for newer agreements on new topics such as the digital-only agreements.

There are two versions of the digital-only agreements presently:
First is the Digital Economy Partnership Agreement (DEPA) between Chile, Singapore and New Zealand, with South Korea, Canada, and China, all in accession talks. The second version is the Digital Economy Agreements (DEAs) where Singapore is leading the way with Australia, with South Korea, and with the UK. But the problem with both of the DEPAs and the DEAs is how to implement some of these commitments.

This gets worse when looking at cutting-edge areas like trade and gender, which Australia and the UK have a separate chapter on. So, it is not just negotiating that is hard, implementation is also a challenge. So, there are some real issues to solve in terms of not only thinking about how to create an agreement, but also how to get that agreement implemented in the future.

The Indo-Pacific Economic Framework as a new model

Two more relevant things need to be mentioned. One is, if existing free trade agreements (FTA) are no longer fit for purpose, can an alternate model be imagined? For the Americans, the answer to this is the Indo-Pacific Economic Framework (IPEF), which has “trade” as one of the four pillars of activity, but it does not match the traditional trade agendas or the competencies of the officials who are apparently actually responsible for them. This complicates the matter as the signatories then need to coordinate not only 14 international members but also with all of the domestic agencies, ministries and stakeholders, etc. Furthermore, the timelines are tight. However, several questions need to be answered as IPEF has possible overlaps with the Asia-Pacific Economic Cooperation (APEC) and so it is important to think deeply about the consequences of incubating such new models.

Asia still supports traditional FTA arrangements

Despite this new model, Asia tends to prefer traditional FTA arrangements like the RCEP, CPTPP, and the EU models. This suggests that Asia does not see the need for a completely new model of trade. But if this new model of trade is needed, then there is a desperate need for more trade secretariats to manage this complicated structure. Currently, there are only two, one for ASEAN and another for APEC. There is a need to have a good RCEP Secretariat that will manage implementation, manage future cooperation, and which will also serve as the focal point for development aid projects and programs, but the secretariat has yet to be finalized after 18 months of the agreement coming into force. Also, the RCEP Secretariat cannot be a department within the ASEAN Secretariat. This will not help with the implementation and the future expansion of RCEP. The CPTPP also needs to have a Secretariat. Japan needs to have someone who is full-time on the task, who can handle these accessions, who can deal with the implementation. If CPTPP does not get a Secretariat in Tokyo, which is the preferred choice, then the suggestion is to put the CPTPP Secretariat in London.

If the global system continues to crumble, then there is a need to have some other standing bodies of trade expertise ready and able to fill in those gaps. So, there is an urgent need to make these secretariats for larger regional agreements as functional as possible.

Trade in the future?

The threat to the global trade system is the greatest challenge to trade in this lifetime. So, those alternative arrangements are becoming even more important. Asia, in particular Japan, as a very trade dependent region needs to think hard about how to ensure that those alternative arrangements are fit for purpose, that they have a structure and an institutional outcome that can support open trade lanes and trade issues that are otherwise going to be stymied. In that context, Japan has a key role to play in making trade fit for purpose for today and then potentially into the future, because the alternative is alarming.

Comment

URATA Shujiro:
This insightful presentation by Dr. Elms gives a number of strong messages and contains appeals to the Japanese government, particularly the Ministry of Economy, Trade and Industry (METI). The first takeaway message from the presentation is that it is a good diagnosis of the problems that current world trading system. I would like to mention some of the reasons for the current dysfunction in the trading system. I will start with the fact that specifically the U.S. and China are continuously violating the WTO rules. Also, many of the new trade agreements are incompatible with each other. Furthermore, the rise of protectionism acts in opposition to the world trading system. Lastly, the geopolitical rivalry between China and the U.S. is a source of problem of world trading system.

The second takeaway from the presentation is the solutions presented by Dr. Elms. What should Asian countries do to deal with the problem? According to Dr. Elms, there is a need to entice bigger players to reengage with WTO, but this is unlikely to happen considering the situation with the U.S. and China. Another possible solution is that a coalition of middle powers could shore up the system and create workarounds. A third possible solution is to create a network of trade agreements, preferably with similar models, language, or approaches.

Next, moving to comments and questions, a coalition of middle powers that could create a rules-based trading system is a very good alternative. However, the questions are whether Japan can play a leading role in this creation of a coalition and do Asian countries expect Japan to play that role, and if so, how can Japan do that?

My next comment relates to enlarging CPTPP, RCEP, and other existing mega-regionals by accepting new members:
could this be a good solution? There was a necessary emphasis on setting up a competent secretariat. However, which countries should host the secretariats for CPTPP and RCEP? For CPTPP, Dr. Elms mentioned Japan should host the secretariat, while for RCEP, perhaps it could be Indonesia, Malaysia, or other countries. I would also like to ask, should CPTPP members accept China?

Another comment is, is creating plurilateral agreements like digital trade agreement a possible way to deal with some of these problems? As per Dr. Elms, plurilateral agreements could be a possible alternative to current WTO, but the question is how to overcome the challenges such as the differences in opinions on specific issues. Regarding business sector involvement, Dr. Elms talked about the different attitude between business and U.S. administration from the past. Here, the question is, how can we attract the business sector to get them involved in promoting trade talks? The final question is regarding the geopolitical problem. Decoupling from China is likely to continue and IPEF is one of the means to decouple from China. Since a number of countries, including Japan, do a lot of business with China, how should Asian countries deal with this anti-China initiative?

Q&A

Q:
Could you elaborate further about Japan’s contribution to changing the situation using plurilateral, regional, and other initiatives? The next question is secretariat of CPTPPP and RCEP asked by Dr. Urata. Which countries should host secretariat for CPTPP and RCEP? How should countries like Japan and other Asian countries deal with decoupling from China and deal with specifically IPEF, which puts national security at odds with economic growth from a certain perspective? Do you have any good ideas on how to realize the e-commerce agreement and Joint State Initiative as legally binding meaningful agreements by the time of next WTO ministerial meeting?

Deborah ELMS:
On Japan’s leadership, no one is directly saying Japan needs to drive this forward. This is partly because there has not been a real recognition of where and how things are changing, because Japan has not picked up the baton with the exception of CPTPP. The fact that Japan took the TPP and got it into force shows that there is an appetite for allowing Japan to be a much more important player in the plurilateral context, also in the regional context, and potentially, with the WTO as well.

It is in everybody’s interest that Japan helps push forward those ideas in any context in which it can with a vision of the future that is interconnected, inclusive, and sustainable. Trying to sign on to some of these is important and relevant, including areas where Japan has not played a role like the DEAs and DEPAs.

The reason to promote Japan as a secretariat host for CPTPP is because there is a need for a CPTPP Secretariat, and it is another signal of Japan’s intention to push alternative ways to think about integration at a high level of ambition. Japan is extremely competent and could do this job well. Regarding China, because Japan is much more front and center in the conversation about China, it needs to have a secretariat where the secretariat is impartial and can say that it has polled members who can take the decision collectively of saying no or yes to China.

Regarding whether China joins CPTPP, there are three points that matter:
the decision to open a working party, the process of the working party, and whether to accept the entry after the working party concludes. Nobody knows where that dialogue will go, but to reject China at the beginning before even having a dialogue is a mistake. Regarding whether the EU joins, it is a possibility, although it would be hard for the EU, because the CPTPP rules are sometimes at odds to the EU, but that is also a conversation that should occur.

RCEP Secretariat’s location needs to be in an ASEAN country. It would be odd if one of the dialogue partners took the RCEP Secretariat, but it should not be in the ASEAN Secretariat. These two bodies do different things. It is a great idea to put it in one of the newer members of ASEAN where a lot of development aid and capacity building is already being funneled and where the government is enthusiastic about embracing integration. That is also the kind of message needed in order to move trade integrations forward beyond this region and to bring Latin America, Africa, etc., on board. Japan could also help Cambodia or other countries to deliver concrete outcomes based on their issues to attract interest from the citizenry and business communities.

Businesses have to be given some reason to care. The worry is that an IPEF-type structure could easily be uninteresting to business. Another worry about IPEF is that it is being positioned as an alternative to the TTP and deliver a reasonable decoupling, but that is not likely. If it fails in its very lofty goals, people are going to be disappointed by the outcome and the business community will remove its support.

The question about the Joint Statement Initiative (JSI) on e-commerce is perfectly relevant. It needs to deliver actual results for companies, which is not easy. Even in a JSI, which is like a coalition of the willing, it is proving difficult to get this done and make it legally binding. To produce a result, an early harvest maybe possible, but it is not going to be enough if it is not impactful. So, maybe creating a plurilateral of a plurilateral by splitting members of the coalition is necessary. JSI is key and Japan needs to push to get some kind of results or businesses will just go elsewhere.

Businesses are doing all sorts of different things, and if a certain coalition is not working, they will forget about the whole system and try to solve their own problems by working directly with governments or relevant authorities to get their work done. That will be alarming because that means big companies in big markets are setting the rules, not governments or developing countries or smaller businesses.

For Japan, there is a great story that is not told well enough and loud enough. This is a moment where Japan needs to step it up and do so in a much more public way and say it is going to pursue the following kinds of initiatives and then genuinely drive some of these outcomes which will safeguard the supply chains and other interests for the region. The last thing Japan will want is for that decoupling initiative to get more traction. So, anything Japan can do to ensure cooperation among the largest number of players is important. For this, it needs to be bold, seize those initiatives, and push as much as possible, sometimes quietly behind the scenes while at other times being more vocal about it, because the alternative is not great.

Q:
This year marks the 50th anniversary of this Japan-ASEAN friendship and cooperation. What risks do you see for ASEAN-Japan relations in the future?

Deborah ELMS:
Japan is incredibly invested in ASEAN and nobody knows it. For 50 years, Japan has been a leading partner in ASEAN, and this anniversary is the perfect moment for Japan to trumpet what it has done and to explain its positive influence in the region.

This relationship is the foundation to both Japan’s identity, but also to ASEAN’s outcomes. Next, it needs to build on that such as it is looking forward to the next 50 years. So that is one where, Japan, as an example, could support ASEAN development through RCEP. If Japan has the support, it can support the RCEP Secretariat, provide potentially seed funding, and then support ASEAN through RCEP. This would ensure integration within ASEAN continues and would support them as they go into the next 50 years. There are some great milestones that Japan needs to leverage in its relationship with ASEAN and the region to push that integration agenda and initiative. Japan has been a major player in delivering 50 years of economic integration in the region which has benefited the globe. So, this is the exact message that it should be sending and this anniversary makes it easier to send that message.