Policy Update 018 Pre-event Interview No.4

Institutionalization of International Relations in the Era of Globalization

Faculty Fellow, RIETI

Professor, Graduate School of Arts and Sciences, the University of Tokyo

The recent RIETI Symposium, entitled "Prospects for the Doha Round: Major Challenges in the Multilateral Trading System and their Implications for Japan" examined key issues facing the WTO from the following four perspectives: 1) the relationship of the multilateral trading system to the regional trade liberalization agenda; 2) functioning of the WTO system; 3) domestic processes of trade policymaking; and 4) global governance. In the fourth of our series of interviews with key participants in the Symposium, we asked Faculty Fellow Akira Kotera about the ideal form of a multilateral trading system and what is needed to realize it.

RIETI: First, could you explain why this project, "Current Status of and Prospects for the Multilateral Trade System," was launched and what issues you are working on right now?

Kotera: The Doha Development Agenda (DDA), a new round of multilateral trade negotiations being held by the World Trade Organization, started in 2002. Many difficulties had to be overcome even before launching the new round. However, things have been just as difficult after the launch and it is now certain that the Doha Round will once again miss its deadline. Furthermore, as exemplified by a shift in Japan's trade policy, the general postwar trend toward the institutionalization of international relations seems to have come to a turning point. Japan, which used to pursue multilateralism almost single-mindedly, began to seek regional trade arrangements including bilateral free trade agreements or economic partnership agreements in 1999. It has already concluded EPAs with Singapore and Mexico and is currently undertaking negotiations with many other countries.

Against this backdrop, I thought that it was extremely important for Japan to get a clear picture of how the international economic regime should develop in the future and that in particular, it is necessary to examine, from Japan's viewpoint, international economic relations centered on the WTO. The WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT), have played the pivotal role in postwar international economic relations. Today, however, the presence of the GATT/WTO regime is receding somewhat. Given these circumstances, it is necessary to examine the current situation at the WTO and its prospects for the future. This is how I launched the project.

RIETI: It seems that Japan has been increasingly focusing on FTAs in the past few years.

Kotera: Before the turn of the century, Japan was very much on the sidelines with respect to FTAs. It is only at the very end of the 20th century that Japan changed its stance and began to seek FTAs, pulled along by the global tide toward such agreements. And it appears that Japan, up until recently, has been fumbling its way along without a clear picture of what an FTA is. But now, after concluding EPAs with Singapore and Mexico, and having reached agreements in principle with the Philippines and Malaysia, Japan seems finally to be getting clear ideas about the kind of FTAs/EPAs it is seeking.

When we redraw the picture of overall international economic relations by incorporating this clear image of FTAs/EPAs, we can clearly see that the WTO is the pivot, with FTAs/EPAs playing a supplementary role. Given such different roles played by the WTO and FTAs/EPAs, Japan needs to have good control over these two wheels - the WTO on one side and FTAs/EPAs on the other - to get them rolling in carrying forward its trade policy. A clear recognition of the fact that the WTO and FTAs/EPAs have different roles to play is needed from the viewpoint of the institutionalization of international relations, too. However, while it is indisputable that the WTO is primary and FTAs are supplementary, this is not to say that we should take FTAs lightly. What we need to do is properly identify what can and cannot be achieved through FTAs and what can and cannot be achieved through the WTO. It is hoped that Japan will start trying to fully exploit the strengths of each.

RIETI: What problems do you see at the moment in the multilateral trading system embodied by the WTO?

Kotera: We need to understand that the problem we see today is the problem of the WTO negotiations not moving forward smoothly. It is not that the WTO regime as a whole has fallen into a state of dysfunction. Since ever the launch of the WTO, the trade regime has made steady progress, supported by the presence of the WTO dispute settlement mechanism. The WTO system itself and liberalization under the WTO framework constitute the foundation of Japan's trade diplomacy. The same holds true for other WTO members, including the United States, the European Union and developing countries. What we are facing now is various problems arising in the course of our efforts to achieve further progress by strengthening the WTO mechanism.

In this regard, the problem of developing countries is one of the factors we need to focus on. Increasing attention is being given to the divisions between developing countries and developed countries such as the U.S. and the EU, which take the form of a deadlock in the WTO negotiations; the U.S. and the EU are demanding that developing countries lower tariffs on manufactured products, which are still at extremely high levels, while developing countries are urging the U.S. and the EU to abolish their agricultural protection policies. Both of these are long-standing problems that have continued to this day. Thus, naturally, it is very difficult to solve them.

In addition, unlike in the past, when developed countries such as the U.S., the EU and Japan were able to lead the negotiations under the GATT/WTO, developing countries will not easily follow the lead of developed countries today. In other words, the greatest problem is that the game is becoming complicated, with more players involved in the decision-making process.

Making this already complex game still more complicated is the fact that nongovernmental organizations (NGOs) have come to exert a certain degree of influence on the decision-making process of the WTO. To be sure, NGOs had shown interest in the WTO as early the Uruguay Round. However, the rapid progress of globalization in the later half of the 1990s prompted them to raise objections to WTO-led liberalization and the like. And now NGOs are beginning to tie up with developing countries.

Thus, not only have developing countries themselves come to exert significant influence on the decision-making process of the WTO, NGOs are also exerting a certain degree of influence through these countries. As a result, there has been a series of cases where a developing country, in a top-down decision, has overturned an agreement reached by its delegation in Geneva after NGOs critical of the agreement directly lobbied top government officials back in the capital.

Another thing I would like to point out in relation to the problem of NGOs is the fact that liberalization of the international economy is closely linked to the internal problems of each country. Every country has certain sectors that are weak economically and unable to compete in the global market. The agricultural sector in Japan and the steel industry in the U.S. are typical examples. Such weak and uncompetitive sectors have always resisted to moves toward liberalization led by the WTO. And these sectors tend to have an extremely strong influence over politicians, as one can see from how farm lobbies operate in Japan.

We must not overlook the fact that such resisting forces (i.e., protectionists in each country) are beginning to ally themselves with NGOs. As a result of globalization, the wealth gap between developing and developed countries has been widening in the international sphere, as has the gap between competitive and uncompetitive sectors within each country. Having observed and analyzed what is happening on the international and domestic fronts, NGOs are fiercely criticizing globalization as the culprit behind both of these problems. Here, it should be noted that NGOs are quite different from conventional domestic pressure groups. Taking advantage of the Internet, NGOs have established an international network through which they can mobilize expertise to appeal to people across national borders.

Sectors that can be easily liberalized have already been opened up under the existing agreements of the WTO. All the remaining sectors that are subject to liberalization negotiations are extremely sensitive. And today diverse opinions, including those of NGOs, are being voiced concerning the liberalization of such sensitive sectors, which is one big reason why the WTO negotiations have had difficulty moving forward.

The NGOs raise certain issues that need to be taken into consideration such as poverty and the environment. And it is impossible to institutionalize international relations in disregard of these problems. Thus, there is no doubt that NGOs are saying something we should be listening to. At the same time, however, it is also true that the presence of NGOs is one reason behind the ongoing deadlock of the WTO negotiations.

Another problem is the rise of regionalism. Frustrated with the slow pace of multilateral negotiations under the WTO, many countries, including Japan, are leaning toward a regional framework and this is putting yet another brake on the WTO negotiations. That is, the more government officials are assigned to FTA negotiations, the fewer there are available for the WTO negotiations.

How we should define the relationship between such regionalism and the WTO is becoming a major issue not only in Japan but also internationally. Let me remind you of the situation when Japan began to negotiate its first FTA. At that time, some people had gone so far as to say that the WTO would become unnecessary once enough FTAs were concluded. However, negotiations on the Free Trade Area of the Americas (FTAA), which were slated for completion by the end of 2004, missed the deadline and they are still dragging on. From this we can see that we cannot afford to rely solely on FTAs. We need both FTAs and the WTO. And we must use them based on a clear understanding of the different roles they play.

The bottom-line question is how to institutionalize the liberalization process in the international economy. From the viewpoint of global governance, this is the question of how to combine the two existing trends, regionalism and multilateralism, to create an optimal global regime. Naturally, this will involve the problem of developing countries. Also, it is not enough to look at the relationships between countries. In promoting the liberalization of the international economy, we need to closely monitor relations on various levels, including the grass-roots and industry levels within each country.

In the WTO negotiations, we must solve highly complex multiple simultaneous equations. When you understand this, you begin to see the degree of difficulty WTO negotiators face.

RIETI: Is the upcoming symposium also intended to boost the spirit and awareness of those engaged in day-to-day negotiations by presenting a comprehensive picture of the complexities and difficulties faced by the WTO?

Kotera: Yes. I think that those at the forefront of negotiations are working very hard. But it seems that they are sometimes devoted to their respective tasks without sufficiently understanding the meaning, or positioning within a broader context, of what they are doing. Also, it seems that they are not necessarily equipped with proper historical perspectives.

For those at the forefront of negotiations, how to bring the negotiations to a conclusion is the matter of greatest concern. At the same time, however, leaders back in the capitals of each country must work out a grand vision of how their country should proceed with future negotiations and what kind of regime they seek to realize.

Given these circumstances, I believe what we can and should do as academics is to present to those at the forefront of negotiations the background of the problems they encounter in day-to-day negotiations, along with the underlying historical perspectives. I believe that the three issues I have discussed - the rise of regionalism, the problem of developing countries, and the growing presence of NGOs - are the most important in determining how to proceed with liberalization under the WTO. And I had thought that Japanese delegates in Geneva would be thinking the same way. When I discussed these ideas with some of the members of Japan's mission in Geneva last year, however, I realized that they do not necessarily share such concerns. For instance, they do not fully understand the importance of having contact with members of an NGO within a broader context.

Some scholars say the problem of developing countries can be solved by explaining to them the merits of liberalization. But things are not that simple in reality. Even if Japan tries to explain the merits of liberalization to developing countries, they will be receiving harsh demands from the U.S. government at the same time. And if Japan tries to persuade the U.S. to ease its demands, this may undermine incentives for the U.S. to liberalize its agricultural trade. When it comes to this sort of negotiation dynamic, we academics have much to learn from practitioners.

To break the ongoing impasse at the WTO, it is necessary to take a multidisciplinary approach. At the upcoming Symposium, we will have first-class experts from various academic fields including politics, economics and law. In addition, an official of the Ministry of Economy, Trade and Industry who is engaged in the WTO negotiations will be joining us as a panelist. I hope we will be able to develop some constructive ideas and offer a direction for the future through active discussions at the Symposium. Also, we will have Professor I. M. Destler from the U.S. with us. Because what is taken for granted in Japan is not necessarily seen the same way internationally, I hope Professor Destler will help us Japanese to recognize and correct our biases.

RIETI: Finally, what, in your view, is an ideal multilateral trading regime and what will it take to realize it?

Kotera: Although there is little to add to what I have already said, it is important to clearly define the WTO as the linchpin of the multilateral trade regime. And then, based on this foundation, we can and should turn to FTAs/EPAs where the WTO cannot provide sufficient liberalization - in the area of investment rules, for instance - so that we can pursue further liberalization together with other like-minded countries. I think that is how the multilateral trade regime should operate in the future.

Geographic factors count in deciding whether or not to pursue an FTA. For instance, should Japan seek to conclude an FTA with an African country with which it does not have strong economic ties? Such a country would rank low on Japan's list of prospective FTA partners, particularly compared to countries in Southeast Asia, where a number of Japanese companies operate. Yet, even in such a low-priority country, we want to see a certain set of rules in place. And it is in the WTO where general rules must be accommodated. On the other hand, vis-a-vis Southeast Asian countries, China, and South Korea, Japan needs to seek the kind of liberalization and rules that are suited to the depth and intensity of our economic linkages with these countries. It is important to keep these facts in mind when developing an overall negotiation strategy. And based on such a strategy, specific decisions, such as how many government officials should be assigned to which negotiations, should be made.

The Doha Round is indeed dragging on. But we must recognize that no matter how long it may take to complete this round, substantial liberalization and institutionalization under the WTO have already been achieved. What we are working on now are unresolved problems carried over from earlier negotiations. It is therefore understandable and inevitable that these difficult problems will take time to resolve. We must avoid responding in a simple-minded way, such as giving up on the WTO, just because the negotiations do not move forward smoothly. We must keep thinking about how, and based on what underlying concepts, we should promote liberalization, and, in doing so, how to balance the roles of the WTO with those of FTAs.

>> Original text in Japanese

Interview conducted by Toko Tanimoto, chief editor of the RIETI website, on July 7, 2005.

August 15, 2005

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