Global trade governance and the G20: Negotiating across deepening fault lines

14 September 2018
  • The cumulative difficulties faced by the multilateral trading system today are tantamount to a full-blown crisis.
  • There is a temptation on the part of policymakers and pundits to look immediately at recent causes, particularly the trade wars launched by President Trump. In fact, the crisis has far deeper roots and several sources.
  • The G20 may be an ideal forum to address some of the problems that global trade governance faces, and offer some solutions. This article offers recommendations for actions that the G20 could take to its own advantage and also the benefit of non-members.

 

For all the uncertainties that surround international trade in our times, 2018 will probably go down in history as a particularly difficult year for global trade governance.

Morale was already very low in in 2017, a year which began with the signing of an executive order by President Donald Trump withdrawing the United States from the Trans-Pacific Partnership negotiations. Through much of 2017, the Trump administration repeatedly expressed its scepticism towards multilateral trade, and the rules governing it. The World Trade Organization (WTO) was already in poor shape, given the persistence of deadlocks in the Doha negotiations since their launch in 2001. The organisation had already hit a new low in December 2017, when its ministerial conference in Buenos Aires ended without a declaration. But in 2018, things took a dramatic turn for much worse.

On 2 March 2018, President Trump declared on Twitter, “Trade wars are good and easy to win,” and announced that the United States (US) had plans to slap tariffs on steel and aluminium imports. Not only did the US follow through on this threat against major trading partners and allies (thereby triggering a series of retaliatory and counter-retaliatory measures from different sides), but also chose to hold up the appointments of judges to the WTO’s Appellate Body. Both the negotiating and dispute-settlement arms of the WTO now risk paralysis, a proposition that should be alarming in its own right, but is all the more so in a world of escalating trade wars – the costs of this systemic failure will be high for all parties. Is there anything that the G20 can do under these dire circumstances?

In this article, I identify the sources of the problems the system is facing. I then highlight the strengths of the G20, and also some of the risks confronting it. Finally, I identify the next steps in terms of policy measures, and also offer specific policy recommendations.

Understanding the crisis of global trade governance

It is all too easy – and perhaps even fashionable – to blame President Trump for the crisis that global trade governance faces today. But to do so is to confuse symptom with cause. There are at least three reasons why we are seeing institutional paralysis within the WTO and escalating trade wars outside, and all three illustrate deeper and more fundamental problems with the system.

First, Trump’s narrative of “America First” is backed by a significant portion of the American electorate that believes that the gains of globalisation have passed them by. They attribute increasing inequality in their society, and the job losses and declining wages they personally face, to the costs of international trade.

Usually, the pernicious hardships endured by these groups have several causes, ranging from technological change to the inadequacy of welfare mechanisms that could have allowed a better distribution of the gains of globalisation. But trade is often the scapegoat, especially as blame can easily be attributed to the international level, and in addition, imports are somewhat easier to control and curtail than technological change. The current US administration has harnessed this discontent very effectively – perhaps even fanned it further by building a narrative that links domestic inequalities and poverty within the US to global trade governance. But the scepticism towards different aspects of globalisation – including international trade – had been building up, even prior to Trump’s arrival on the scene.[1]

Second, while few major trading partners have escaped his ire, China has attracted particularly scathing accusations from President Trump for not playing by the rules. Here, too, it is worth recalling that this blame game is not new, and prior US administrations have also pointed their fingers at the rising powers in the course of the Doha negotiations. Susan Schwab, former US Trade Representative, for instance, famously compared the unwillingness of the rising powers to make concessions to “elephants hiding behind mice.” As the BRICS (Brazil, Russia, India, China, and South Africa) – and especially China and India within this group – have acquired greater economic clout and political weight in the WTO, the expectation that they should take on greater global responsibilities has risen.

Amidst the changing international balance of power and the domestic discourse of discontent, it is perhaps not surprising that the ability of the large middle-income countries to use and misuse loopholes in the trading system appears galling to the developed countries. Local content requirements, violations of intellectual property rights, and the use of subsidies might have been tolerated in the early years of the Chinese accession to the WTO, but with China’s emergence as the world’s second largest economy and dominant geopolitical power in Asia, they now attract hostility.

Third, discontent with the trading system is not unique to the US or the other developed countries. The rising powers and other developing countries have also had much to complain about. Brazil, for instance, has long pointed to the hypocrisy of the US and the European Union in demanding market access in developing countries while keeping their own markets in agriculture highly protected. India has argued that the agricultural negotiations of the Doha Development Agenda disregard the food security concerns of its poorest farmers.

Nor is the disagreement between the established powers and the rising ones simply a low-level one over specific negotiating demands. Rather, when they have been accused of free-riding on the system, rising powers like India have retorted that they cannot be expected to provide for global public goods that they had no voice in identifying in the first place. The development focus of the Doha negotiations, in fact, revealed just how polarised the trade debate is between countries that often have very different visions of development, and of how development might be achieved with reference to individual governance structures, social priorities, and histories and cultures.

The persistence of the Doha deadlocks is an important indication of just how dissatisfied virtually all parties are with the workings of the WTO. Global trade governance has long been in desperate need of fundamental reform. Trump’s actions, seen in this light, are little more than the match that sets a powder keg ablaze. Can the G20 do anything to rescue the situation?

Potential of the G20 and risks

There are at least two very good reasons to believe that the G20 might still be able to initiate a sensible and constructive discussion on reforming the global trading system.

First, the G20 enjoys several strengths that are unique to this forum. Always intended as a rapid-response force to crisis, it enjoys the agility and flexibility to adapt to the urgent needs of the day.[2] As a leaders’ level summit, it offers critical opportunities for heads of state to meet eye-to-eye, which can be especially important in building trust in times of crisis. Additionally, the format also allows for issue-specific meetings – for instance, of finance ministers, agricultural ministers, trade ministers, and so forth, in advance of the summit – and thereby can facilitate the right mix of visionary leadership and technical implementation. Unlike the G7, it brings together a critical mass of economies from both the North and the South. Host countries can play an especially proactive role in further engaging with diverse groups of non-state actors, and also guest countries.[3]

Perhaps the biggest strength of the G20 lies in the fact that it is not a formal organisation of global governance, but a forum where key actors can come together and try to engage in collective agenda-setting. At its best, the G20 can develop innovative ideas (for example, through the innovations that it offered in the aftermath of the 2008 financial crisis, or indeed ideas such as the Compact with Africa that it developed as part of the German presidency), which can serve as useful focal points in the more formal organisations of global governance.

Second, for all the economic turmoil faced by the world today, the G20 still holds considerable promise due to the important achievements of the previous summit. The Hamburg Summit in 2017, in spite of all the demonstrations and riots outside, has several successes to its credit. Its biggest – and unprecedented – contribution was to start a discussion on making globalisation fair and sustainable. The Hamburg G20 Declaration acknowledged that “the benefits of globalisation have not been shared widely enough” and also offered some concrete measures to shape globalisation in order that it might “benefit all people.”

On trade, the Hamburg G20 continued with the tradition of prior summits in committing all members to fight protectionism and reinforce a rules-based system. But it broke new ground by recognising that the fight against protectionism would also include a fight against “unfair trade practices” and recognised “the role of legitimate trade defence instruments in this regard.“ The Leaders’ Declaration addressed at least some of the issues that had been raised by the US via its clause on excess capacities in industrial production: “We urgently call for the removal of market-distorting subsidies and other types of support by governments and related entities. Each of us commits to take the necessary actions to deliver the collective solutions that foster a truly level playing field.“ The clauses relating to labour and environmental standards and human rights took into account an EU-led agenda. Besides the Compact with Africa, the Declaration included general provisions that recognised the importance of enabling people to “seize the opportunities and benefits of economic globalisation.” Measures to achieve this included exchanging experiences on the “mitigation of the adjustment costs of trade and investment liberalisation and technological change.”

It might have been expected that given the scale of its ambition and the many different constituencies that it tried to accommodate, the Hamburg Declaration and Action Plan would produce only limited compliance. In fact, the Hamburg Summit has been awarded the highest compliance score thus far in comparison to all prior G20 summits.

The demand for a re-thinking and re-negotiation of globalisation – of which international trade, and the rules governing international trade, form a major part – is loud and clear from all sides. This is as true of the BRICS countries, which would like to see the WTO’s rules accommodate their concerns (arguments that take different shapes, but broadly translate into the demand to accommodate their different trade and industrial policies as developing countries) as it is of the US (e.g. its demands that the rules be tightened to prevent their misuse by countries like China) and the EU (e.g. its long-standing demands on improved labour and environmental standards). The Hamburg Summit set this process of reform underway, and this should give us reason to be at least cautiously optimistic.

Optimism, however, must not give way to complacency, especially as there are at least four risks that make the task of the G20 especially difficult in Buenos Aires and beyond.

First, while polarisation levels were already high in the Hamburg summit, we have seen a considerable heightening of tensions in 2018, especially in the context of the trade wars underway. The threat of tensions in international trade is usually easier to address in comparison to the task of getting countries to climb down from positions they have already locked themselves into (as is now the case with the US, China, India, and others).

Second, within the G20, the context is rendered even more difficult by the fact that the greater share of its membership now comprises populist and authoritarian governments. Orlik and Jimenez argue that populists “now manage the largest bloc of the G-20 economies.” They further demonstrate that that populist and authoritarian governments potentially create barriers to growth, either by adopting policies that “damage growth potential” (e.g. in the case of Brexit in the United Kingdom) or by damaging international and domestic institutions (e.g. Trump in the case of the G7, or Erdogan’s appointment of his son-in-law to a key position in government, thereby undermining accountability).

Third – contra the argument “It’s the economy, stupid!” – underlying at least some of Trump’s actions are fundamental concerns that relate to security. The administration’s attempts to justify tariffs against European allies by presenting German car imports to the US as a threat to national security were (rightly) ridiculed. But the case of US tariffs and investment restrictions targeted against China is less straightforward, especially when seen in light of the Chinese geo-economic expansion via its Belt and Road Initiative and String of Pearls strategy. Even as China attempts to balance (at least on the issue of tariffs) against the US by increasing cooperation with the EU, we have also seen a growing wariness in some European countries regarding Chinese investment and the potential security risks they entail. The growing importance of these geo-economic concerns risks producing negative issue-linkage, and considerably complicating the tasks of the G20 (which has, at least thus far, been primarily an economic forum).

Finally, and partly related to the previous point, the fault lines within the G20 are deepening. Even within the so-called West, new fault lines are evident – witness the fractures that have emerged even within the “exclusive” G7 club. The BRICS Summit in July 2018 marked the tenth anniversary of the grouping, and produced a joint declaration with several paragraphs dedicated to trade. But in reality, even among these five countries, there are important differences that go beyond democratic versus authoritarian regimes. It is hard to see how China and India would be able to paper over their differences, especially in the context of China’s geopolitical expansion in their shared region. While China has increasingly tried to present itself as a guardian of globalisation, it is not at all clear whether “globalisation with Chinese characteristics” would be palatable even to its allies in the BRICS group, let alone the EU or the US.

The next steps

Can the G20 negotiate across the deepening differences and fault-lines identified here? I suggest three sets of policy measures for the upcoming negotiations.

Target unfair trade

For all the differences among G20 members, almost all of them share one concern: a recognition that international trade needs to become fairer, as do the rules that underpin it.

  • The G20 could go a long way in developing a consensus around the Hamburg agenda.
  • Such a consensus would help create space and encouragement for domestic policies within countries to cope better with the displacement created by trade, and also strengthen the international rules in ways to prevent their misuse.

Find ways to revive and reform the WTO

While the recent turn towards tariff wars is an unfortunate development, it provides us with a powerful reminder of the importance of reviving and reforming the WTO.

  • As a first step, the G20 would do well to go beyond its usual anodyne statements highlighting its commitment to the rules-based multilateral trading system.
  • The second step would involve coming up with concrete proposals for reform. Even if the G20 is unable to come up with specific recommendations towards this (due to the divergence of interests and values within its own membership), it could at least acknowledge the shortcomings, as seen from different sides.
  • Such a recognition may go some way to potentially reigniting the interest of the US in multilateralism, and it would also be the right thing to do given the long-standing stasis in the system (which predates Trump).
  • The process of developing a reform agenda would ideally have to work hand in hand with a moratorium on bilateral deals (e.g. in the form of export restraints by which countries affected by US actions try to appease it) and any further unilateral actions (e.g. by the US or others). Such a moratorium would be an important signal that countries are committed to using the proper channels to de-escalate the ongoing trade wars, and reinforce members’ commitments to the WTO and its reform process. Every attempt needs to be made by all sides to use the proper WTO channels to de-escalate the ongoing trade wars.

Achieve a coalition of multilateralists

Germany’s foreign minister, Heiko Maas, has called for an Alliance of Multilateralists. This idea has relevance for the G20 too.

  • Ideally, the entire membership of the G20 should stand for multilateralism.
  • But, given the divergent pulls of populism and authoritarianism today, a group of like-minded and liberal democracies within the G20 could make a vital difference by coalescing together and taking the lead on an agenda for reform.
  • Such a coalition would need to define the “West” or “liberalism” more broadly, and may need to steer clear of issues such as human rights (which are not only divisive but also have not formed a part of the G20’s traditional mandate). Instead, it could seek common ground across the North and South on other shared values, including free and fair trade, the rule of law (domestically and internationally), climate change mitigation, and sustainable globalisation.

Globalisation – and specifically trade that is both free and fair – needs strong and committed champions. The G20 still has a critical mass of countries that could work together to champion this cause, to their own advantage and also to the advantage of many developed and developing countries outside the G20.

 

This article is extracted from the forthcoming ICTSD compilation on How the G20 Can Reshape the Global Trade SystemThe compilation is the third in the series (see the first and second) and will be released in October 2018.

Amrita Narlikar is the President of the GIGA German Institute of Global and Area Studies and Professor at the University of Hamburg. She can be followed @AmritaNarlikar


[1] It is worth bearing in mind that the US is not the only country where we are seeing a backlash against globalisation. The rise of right- and left-wing populism in Europe are examples of this backlash, as is the result of the Brexit referendum in the United Kingdom.

[2] While its subsequent efforts to expand into a “steering committee” for the global economy led to multiple criticisms along different lines, appealing to different normative principles of legitimacy and efficiency, the primary and original role of the G20 as a “crisis committee” was much less contested (see for example here, here, and here).

[3] Despite all the criticism that it attracted from some segments of civil society, the Hamburg Summit in 2017 marked a qualitative jump in improving the inclusiveness of the G20 process.