East Asian Economic Strategies

Indonesia’s G20 needs to secure open trade for recovery from crisis and conflict

Visiting Fellow

Yose Rizal DAMURI
Center for Strategic and International Studies, Jakarta

Russia's invasion of Ukraine makes the cooperation agenda for pandemic recovery much harder. It has also threatened to derail the G20 process altogether. Indonesia is set to host the leaders of the world's most important economies at the G20 summit in Bali at the end of October. Inviting Vladimir Putin to the 2022 G20 summit could face a boycott by the G7 advanced economies. Not just the summit, but the agenda and work program is at risk of being derailed as the membership grapples with the Russia problem.

Nevertheless, the global community has shown its ability to rapidly coordinate economic sanctions and present a largely united front against a war of aggression. Despite the tragedy from the conflict and its effect on the global economy, this also underlines the security dimension of economic interdependence.

The coordinated economic and financial sanctions on Russia appear to be imposing huge costs on the Russian economy. Whether they help in ending the conflict depends on other factors, but the sanctions have made Russia internalize some of the costs of its aggression. Economic sanctions and trade measures can help to constrain bad behaviour and give the global community non-military tools to fight back in the extreme against military aggression. The collective action, however, can only be effective, given the high degree of economic interdependence, where countries need each other in sustaining their economic activities. China is more integrated into the global economy and appears to be distancing itself from Russia.

Maintaining the interdependent open economic system is a powerful weapon for securing peace. Crucial to that is an effective multilateral trading system with a stronger World Trade Organization (WTO) at its centre. The crisis in Ukraine can be a catalyst for strengthening the scaffolding that holds the global economy up.

WTO as the Core of the Global Trading System

The WTO, at the heart of the global trading system, is in crisis. For two decades it has largely failed to update global trading rules or open new markets. Bilateral free trade agreements have chipped away at those objectives, although more recently, the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership agreement have made progress for its members. Since the end of 2019 the dispute settlement body at the WTO has no judges thanks to a US veto, so it can no longer enforce the rules to keep markets open. The multilateral trading system can be revived by advancing the reform of the WTO.

Maintaining the interdependent, open economic system is also a necessary condition for economic recovery from the pandemic. Any recovery will be short lived without open, international markets, which are essential to a prosperous Asian and world economy. The G20 is the only group that can mobilise support from the world's most powerful economies to reform global institutions such as the WTO. A stronger trade regime with the WTO at its centre is necessary to support the recovery and face new economic challenges in the post-pandemic era.

Indonesia must find a way to keep the G20 focused on cooperative outcomes and directed towards economic recovery. The challenge is to focus on a small number of strategic outcomes instead of a long and unachievable wish-list. Clear progress on WTO reform will be a monumental legacy of Indonesia's leadership of the G20.

Indonesia has a moral authority that few other countries do to set a clear strategic direction for reforming the WTO. Indonesia stepped forward to articulate a comprehensive plan for WTO Reform at the Osaka G20 Summit in 2019. This initiative was welcomed and attracted support from other G20 countries, leading to the Riyadh Initiative to the Future of the WTO in 2020, but progress has been slow.

G20's Support for WTO Reform

Indonesia should now propose a G20 Common Framework for a WTO Reform strategy paper to guide the reform initiative. Indonesia's position as chair the Group of 33 developing countries in the WTO can build bridges on this issue between the main protagonists in a geopolitically fraught environment. Indonesia successfully led the conclusion of RCEP, the world's largest regional trade agreement, at a time of rising protectionism, great power strategic competition and the pandemic-induced recession.

The days of big multilateral deals like the Uruguay Round are likely over, where unanimous agreement on all issues is necessary to conclude the deal, having seen the death of the Doha Round. In a world of bottom-up rule-making and concerted unilateral action, what is needed is leadership and action led by multilateral principles.

The world trading system is at risk of fragmenting as new rules are forged around political blocs. Multilateral rules are needed in new areas such as the digital economy, and regional action can be directed towards that goal.

A strategy is needed to revive the WTO's three main functions of trade liberalization, the monitoring of trade policy, and resolving trade disputes. There are sensitive issues such as developing country status and subsidies, but there are also less contentious areas for quick progress such as transparency and the notification of new trade measures. A signal by the G20 on the willingness to set the direction and scope of WTO reform would help to move things forward.

The extensive work that has been completed on WTO reform can inform the G20 Common Framework and the stages of its implementation. The G20 is not a negotiating forum but can mobilise the political will necessary for progress in the WTO and elsewhere.

As the one of the supporters of WTO Reform, Indonesia should join the Multiparty Interim Appeal Arbitration Arrangement (MPIA) that replicates the function of the WTO's Dispute Settlement Body's function, alongside with Europe, China, Singapore, Australia and 20 other WTO members. Finding a solution to have a functioning WTO dispute settlement system is a top priority but until then, as a concrete, confidence-enhancing step, Indonesia can announce its preparedness to join MPIA in the lead-up to the G20 Summit and call on others, especially in the region, to follow. That would reinforce Indonesia's trade policy leadership credentials at the same time as supporting WTO reform.

Indonesia has the opportunity and responsibility to put the global economy on the right track. It can bring India — the perennial trade policy spoiler — and Brazil into an action plan for their G20 presidencies and help to bring India closer to East Asia's supply chains. Indonesia chairs ASEAN in 2023 and can carry forward the momentum with regional implementation of G20 outcomes as RCEP gears up this year.

A stronger multilateral trading system with an effective trade organisation will be a necessary condition to recover stronger, including to discourage the escalation of the already increasing geopolitical tensions. The G20 presents an important opportunity for President Widodo to focus on the strategic priorities where Indonesia has traction and can lead by example.

March 31, 2022

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