Essay About The Future World Trade

That the World Trade Organization (WTO) has been in the grip of a systemic crisis since 2008 is well known. Notwithstanding relatively minor successes at the Bali Ministerial in December 2013, the WTO’s negotiating function remains effectively stalled. The Nairobi Ministerial, set to take place in December 2015, is not likely to yield systemic solutions, notably to break the Doha Round impasse. The longer this negotiating stalemate endures, the more the WTO’s foundations will crumble, particularly the much-prized jewel in its crown: the Dispute Settlement System. Why? Because an institution that is not able to modernize and continuously update its rules will be, and is being, bypassed. In its 20th year, the WTO faces an intensifying existential crisis.

Competing visions

There are many reasons for this. But at the heart of the problem lies a competing vision for the WTO. One vision is content with “WTO 1.0”; an organization that gives priority to the bulk of its developing country membership with focus on restraining negotiating ambition for fear of the consequences of over-stretching the policy and institutional capacities of those members. A different vision offers “WTO 2.0”, in which the rules are continuously updated and expanded to reflect the realities of modern trade and investment, particularly the global value chains (GVCs) that drive them.

Two broad constituencies, inter alia, advocate “WTO 1.0”: least developed countries (LDCs) and other poor or small country groupings such as small island developing states (SIDS) and small, vulnerable economies (SVEs); and large emerging markets such as India, Brazil, and South Africa, plus a range of middle-power developing economies. These countries, for the most part, share a view that the WTO should not impose undue obligations on its members, and that differential obligations, or special and differential treatment (SDT), should permeate the system. Many are also sceptical that GVCs will confer the benefits proffered by WTO 2.0 advocates, arguing instead that the gains from GVCs are unevenly spread, with the benefits concentrated in developed world multinational corporations while the costs are concentrated on their developing country hosts.

Again, two broad constituencies advocate “WTO 2.0”: developed countries represented, inter alia, by the OECD; and developing countries wishing to integrate better into GVCs, such as those comprising the Pacific Alliance. These countries share the view that the WTO rules need to be extended and updated, and reciprocal market access too. Hence they advocate for incorporation of new issues such as competition and investment into the WTO rules architecture.

As usual, this polar spectrum view conceals important realities. Advocates of WTO 2.0 seem unable to deal with the power of agricultural lobbies in some countries. Agricultural lobbies are quintessentially products of the WTO 1.0 world. This chronic failure fuels the sceptics in that WTO 1.0 paradigm who argue, justifiably, that double standards undermine trust and the legitimacy of the WTO. For this reason the agriculture problem has to be fixed, but almost certainly won’t be. Similarly, there are growing lobbies in certain WTO 1.0 countries that want their governments to sign up to WTO 2.0 rules or market access commitments, but their concerns are routinely sacrificed to the dominant WTO 1.0 paradigm. South African services exporters targeting African markets come to mind.

Shift in balance of power

These “low politics” of trade are now merging with the “high politics” of global affairs. The ongoing rise of emerging markets in world trade and investment, particularly represented by China, is slowly but surely tilting the balance of global power away from the North and West, towards the East and South. This poses serious challenges to the western architects of the WTO, and the broader global trade and investment order in which it resides. These tensions are reflected particularly in the US and play out in various internecine political battles, tying the Executive’s hands in its attempts to exercise leadership of the trading system, particularly in the WTO.

Consequently the US is looking elsewhere, to the Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). These “mega-regional” trade negotiations represent, at once, an attempt to pioneer new rules among like-minded countries consonant with the WTO 2.0 vision, and an attempt to restore US primacy over the global trading system. The overt intention is to extend US, and US-EU, regulatory preferences to the WTO down the line, through a process of competitive liberalization.

This high stakes poker game has unpredictable consequences. Of most importance is that no one can predict whether mega-regionals will ultimately succeed. While the TPP’s conclusion does appear to be in sight, its final adoption is hostage to a complex political cycle incorporating, not least, the 2016 US elections. The TTIP’s future is less certain, since negotiating power is much more diffuse between the parties, and EU regulatory preferences diverge in significant respects from those in the US.

So how might this all end? In the concluding chapter of our World Economic Forum report on the high and low politics of trade, Robert Lawrence and I set out three scenarios:

  • Building blocks: The TPP and TTIP conclude smoothly, taking account of “outsider” concerns, and a virtuous cycle of trade and investment liberalization ensues. The regulatory agenda is incorporated into the WTO through inclusive plurilateral arrangements, modelled along the lines of the Trade Facilitation Agreement’s “ladder” of SDT provisions. WTO 2.0 is built incrementally, by providing consensual pathways between it and WTO 1.0. Almost certainly this scenario would require a lasting fix of the agriculture problem.
  • Stumbling blocks: In this, more likely, scenario the hurly-burly of trade negotiations gives rise to many compromises in the TPP and TTIP, including on regulations. So US and EU primacy in the global trading system is not decisively restored, leaving behind leadership ambiguity. But enough is done to convince key developing countries, notably China, to converge with mega-regional outcomes, so that the critical mass shifts towards WTO 2.0. But in the absence of decisive leadership, and competing visions for WTO 2.0, progress towards that vision is by no means assured. In short, the outcome is one of continued ambiguity in which Chinese and Indian preferences, with their own domestic reform imperatives in mind, loom ever larger.
  • Crumbling blocks: There remains a substantial possibility that the TTIP, especially, could rumble on for years without reaching a decisive conclusion. Therefore, US and EU primacy in the trading system would be hamstrung, hastening the advance of potential Chinese and emerging market leadership. However, since those countries will not be in a position to exercise decisive leadership for years to come, the outcome is likely to be stasis, and continued exercise of influence through regional formations – such as RCEP in the Chinese case. Thus the centrifugal forces unleashed by continued stasis in the WTO would acquire full force and with unpredictable consequences.

Clearly it is not possible to say where the WTO system will end up until we are clear how mega-regionals, especially the TPP and TTIP, shape up. Nonetheless, a world of stumbling blocks seems most likely, with the WTO poised nervously in-between while the great trading powers position themselves for leadership and influence. This scenario may turn out well, especially if China’s regulatory preferences converge towards US and EU norms, but that outcome is far from certain.

The World Economic Forum report, The High and Low Politics of Trade, is available here

Author: Peter Draper is Senior Research Fellow, Economic Diplomacy Programme, the South African Institute of International Affairs (SAIIA), and a member of the World Economic Forum’s Global Agenda Council on Trade & FDI

Image: Kayakers take in the last of the day’s light as they paddle past a ship anchored off Cape Town, May 1, 2011. REUTERS/Mike Hutching

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Written by

Peter Draper, Senior Research Fellow, Economic Diplomacy Programme, The South African Institute of International Affairs (SAIIA)

The views expressed in this article are those of the author alone and not the World Economic Forum.

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WITHIN Asia, it is Chinese activity, not Chinese inactivity, that has people worried, and their concern is understandable. Perhaps most provocative is China’s devotion to the “nine-dash line”, an ill-defined swish of the pen around the South China Sea. Within this perimeter, China claims all the dry land and, it appears, all the water and seabed too; by way of contrast, the rules of the United Nations Convention on the Law of the Sea (UNCLOS) would tend to see quite a lot of those things as subject to claims from other countries. Speaking in June at the Shangri-La Dialogue, an annual regional-security shindig in Singapore, Wang Guanzhong, a Chinese general, made it clear that although China respected UNCLOS, the convention could not apply retroactively: the nine-dash line was instituted in the 1940s and the islands of the South China Sea have been Chinese for 2,000 years.

Others in China have been blunter. Wu Shicun, head of the National Institute for South China Seas Studies, based on the southern Chinese island of Hainan, recently pointed out that UNCLOS was developed under Western guidance and that, looking to the long term, “we should rebuild through various methods of regional co-operation a more reasonable, fairer and more just international maritime order that is guided by us.” Not surprisingly, this has caused concern in Washington. “How much of the temple do they actually want to tear down?” asks Douglas Paal, a former American official now at the Carnegie Endowment for International Peace.

Probably not all that much, for now. But “China gets it that being a great power is messy, and involves trampling on a few flowers,” says Lyle Goldstein of America’s Naval War College. “It is a price the Chinese are willing to pay.” Rules such as those which say the nine-dash line must be respected might be acceptable for the small fry. But as China’s then foreign minister, Yang Jiechi, vocally pointed out at a meeting of regional powers in Hanoi in 2010, “China is a big country and other countries are small countries and that is a fact.”

Militarily, this is indeed the case. China’s armed forces are, if not technologically first-rate, certainly large and impressive, not least because they include a nuclear-missile force. But some of Mr Yang’s small countries have a big friend. With troops and bases in Japan and South Korea, America has been the dominant power of the western Pacific for 70 years. Its regional presence has not declined much since it won the cold war a quarter of a century ago. On a trip to Asia in 2011 Barack Obama announced a “pivot” of his country’s policy away from the Middle East and towards Asia.

China’s leaders are convinced that America is determined to prevent their country from increasing its strategic and military influence in Asia—that it is trying to contain China as it once sought to contain and eventually crush the Soviet Union. The irony is that China is the only country that really believes the pivot is happening. South-East Asian nations express a fair amount of scepticism at the idea that America’s attention has been newly fixed on their region, and his opponents in America claim Mr Obama has done far too little to follow through on what he said in 2011.

That said, the recent Shangri-La Dialogue did nothing to dispel China’s fears. Japan’s prime minister, Shinzo Abe, offered to assist China’s neighbours with military hardware, and has been pushing, within the constraints of Japan’s pacifist post-war constitution, for a more robust defence policy in the region. In his first year in office Mr Abe visited every member of the Association of South-East Asian Nations. America’s secretary of defence, Chuck Hagel, endorsed Mr Abe’s ideas at Shangri-La, accusing China of “destabilising unilateral actions”.

China has been assertive in the South China Sea for decades, but there has been a distinct hardening of its position since Mr Xi came to power. Recent moves to dominate the seas within the “first island chain” that runs from Okinawa through Taiwan to the Spratlys (see map) have alienated almost all the country’s neighbours. “It would be hard to construct a foreign policy better designed to undermine China’s long-term interests,” argues Brad Glosserman of the Pacific Forum CSIS, a think-tank.

The moves are undoubtedly motivated in part by a desire to control the resources of the sea bed. But China itself does not see them as straightforward territorial expansionism. Chinese leaders believe their own rhetoric about the islands of the East and South China Seas having always been part of their territory–a territory that, since the death of Mao, they have chosen to define as almost the empire’s maximum extent under the Qing dynasty, rather than its more modest earlier size. And if they are expressing this territorial interest aggressively, they are behaving no worse—in their eyes, better—than the only other power they see as their match. The Chinese note that America is hardly an unsullied protector of that temple of the global international order; it enjoys the great-power prerogatives and dispensations they seek for their own nation. Disliking the restraints of international treaties perhaps even more than China does, America has not itself ratified UNCLOS. With a handful of allies it rode roughshod over the international legal system to invade Iraq.

China might also note parallels between its ambitions and those of America’s in days gone by. Although America waited until the early 20th century to take on a global role, it defined an ambitious regional role a hundred years earlier. In 1823 James Monroe laid out as policy a refusal to countenance any interference in the Western hemisphere by European nations; all incursions would be treated as acts of aggression. Conceptually, what China wants in East Asia seems akin to a Monroe Doctrine: a decrease in the influence of external powers that would allow it untroubled regional dominance. The difference is that the 19th-century Americas did not have any home-grown powers to challenge the United States, and most of its nations were quite content with the idea of keeping European great powers out of the area. At least in its early years, they were the doctrine’s beneficiaries, not its subjects.

China is not completely uncompromising. Along its land borders it has let some disputes fade away and offered a bit of give and take. But this is in part because the South and East China Seas are seen as more strategically important. A key part of this strategic importance is the possibility that, eventually, the question of Taiwan’s sovereignty will come to a head; it is in effect protecting its flanks in case of a future clash with America on the matter. The ever-volatile situation in North Korea could also create a flashpoint between the two states.

When Mr Xi said, at his 2013 California summit with Mr Obama, that “the vast Pacific has enough space for two large countries like the United States and China,” it was an expression not so much of the possibility of peaceful coexistence that must surely come from being separated by 10,000km of water, as of the idea that the western Pacific was a legitimate Chinese sphere of influence.

And if Mr Xi’s words, repeated to America’s secretary of state, John Kerry, in Beijing in July, seemed to imply a symmetry between the countries, China knows that, in fact, it enjoys various asymmetric advantages. For one, it is a unitary actor. It can drive wedges between America and its allies in the region. Hugh White, an Australian academic, argued in a recent article that, by threatening other Asian countries with force, “China confronts America with the choice between deserting its friends and fighting China.”

China’s armed forces are much less proficient than America’s. But China enjoys the advantage of playing at home. America can dominate these seas only through naval and air operations. If Chinese anti-ship missiles present a serious threat to such operations they can greatly reduce America’s ability to project power, without putting China to the expense of developing a navy of its own remotely so capable. Thus the military forces of the two sides are not as unbalanced as one might think by simply counting carrier groups (of which China is building its first, whereas America has ten, four of them in the Pacific).

China also thinks there is an asymmetry of will. It sees a war-weary America as unlikely to spend blood and treasure defending uninhabited rocks of no direct strategic importance. America may speak loudly, but its big stick will remain unwielded. China’s people, on the other hand, their views shaped not just by propaganda but also by a nationalism that needs scant encouragement, look on the projection of power in the China seas very favourably. And its military-industrial complex yearns to be paid to build bigger, better sticks of its own. Even if party leaders wanted to succeed in their stated desire for a peaceful rise and to remain within international law, the way they have shaped the spirit of their country would not necessarily let them.

This is especially true when it comes to Japan, the country which took on the role of regional power in Asia when China was laid low in the 19th century, and with which relations would always be most vexed. The vitriolic propaganda against the Japanese in Chinese media scarcely needs official prompting; Chinese suffering under Japan’s cruel occupation is well remembered. Japan is a useful whipping boy to distract attention from the party’s inadequacies. China’s leaders have legitimate security concerns and a right to seek a larger international role for their nation but, obsessed with their own narrative of victimhood, they do not see that they themselves are becoming Asia’s bullies. 

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