3. Looking for solutions
Monetary affairs
The demands from Europe and China
Whether a multipolar system involving more than one international currency is desirable is a theoretical question. In practical terms, no other currency has made much headway in supplanting the US dollar – though certainly countries outside the US have often expressed the desire for such a shift. Governments, notably in Europe and particularly in France, have long complained about what Valéry Giscard d’Estaing, as French finance minister in the 1960s, called the ‘exorbitant privilege’ of the dollar.
Given the extent to which the US government can borrow more cheaply than other advanced-economy governments, the annoyance is understandable. Moreover, companies that operate in dollars benefit from being relatively insulated from movements in exchange rates.
Despite the envy of other governments over the US privilege, so far their efforts to replace the dollar have betrayed a lack of comprehension about what is needed to establish a dominant currency, as well as a lack of political will. The authorities overseeing the two most likely rivals to the dollar – the renminbi and the euro – appear to believe that a switch can be achieved by government fiat, whether unilaterally or as part of a collective international decision. They have failed to take the domestic actions necessary to encourage the private sector to use their currencies.
The authorities overseeing the two most likely rivals to the dollar – the renminbi and the euro – appear to believe that a switch can be achieved by government fiat, whether unilaterally or as part of a collective international decision.
Both the Chinese authorities and European governments have repeatedly made overt calls for the dollar’s dominance to be reduced. In the aftermath of the 2008 financial crisis, both Zhou Xiaochuan, at the time the governor of the People’s Bank of China, and President Nicolas Sarkozy of France argued that the pre-eminence of the US currency was a destabilizing influence in global markets. More recently Jean-Claude Juncker, as president of the European Commission, called for greater internationalization of the euro in his ‘State of the European Union’ speech of September 2018, designed to set priorities for the last year of his presidency.21
Yet attempts to achieve currency internationalization by top-down administrative action have gone nowhere. Sarkozy’s plans, from which he rapidly retreated, seemed to be more rhetorical than practical. China’s were somewhat more substantive. Zhou, in a widely read essay in 2009, argued for greater reliance on Special Drawing Rights (SDRs), the quasi-currency used at the IMF, as this would lead to diversification out of the dollar.22 As part of this, he argued for governments and central banks to be able to exchange dollars for SDRs through the IMF. US officials briskly dismissed Zhou’s arguments, pointing out that this would essentially constitute a way of subsidizing Chinese efforts to diversify the vast dollar-denominated reserves that Washington had tried to stop it from amassing in the first place.
Beijing then expanded its focus from the multilateral to the bilateral, and from the diplomatic to the practical.23 It embarked on a campaign to encourage use of the renminbi, developing overseas markets in renminbi-denominated bonds and recruiting offshore clearing banks to settle renminbi payments outside China. Mimicking the US Federal Reserve, China also signed a series of swap arrangements with other central banks.
These efforts were rewarded with a modest rise in the use of the renminbi – and with its addition to the SDR basket of currencies in 2016. However, the change is little more than symbolic for the moment: the SDR as a unit is barely used outside the official system, a recent issuance of SDR-denominated bonds by the World Bank notwithstanding.
More important than international bureaucratic tokenism is the fact that full liberalization of China’s capital account, and with it currency movements, would be a risky and reversible process given the fragile Chinese financial system. After rapid capital outflows and market turbulence in 2015, China imposed capital controls to calm the renminbi. Unsurprisingly, the use of the currency for cross-border trade settlement promptly fell back to levels seen four years earlier.24 Beijing’s efforts at internationalization ran straight into domestic constraints.25
China’s great economic statecraft plan to extend its political influence and export its industrial overcapacity, the Belt and Road Initiative, has similarly had difficulties in extending the international use of the renminbi.26 To meet contractors’ requests to be paid in dollars, China has had to run down its international reserves, which was not exactly the point of the exercise.
For the eurozone, the perennial irritation at dollar dominance has been exacerbated by the recent events over Iranian sanctions and Washington’s use of the payments system to force European companies in effect to implement US foreign policy. The EU is setting up a special-purpose vehicle to bypass the dollar-dominated payments system. But this will be a barter mechanism matching Iranian oil and gas exports against purchases of European goods, not a rival payments system per se. In any case, many European companies have complied with the sanctions rather than risk losing access to dollar funding.
Similarly, the EU has called on energy companies in Europe to use euros rather than dollars when purchasing imports. However, as long as the exporting countries themselves want dollars in their reserves, or want to buy their own imports from elsewhere, it seems unlikely that this ‘euro-ization’ of energy pricing will occur, unless the EU offers large incentives to producer countries. EU governments bullying or, in effect, bribing domestic companies to price energy in euros is not a credible or sustainable approach to currency internationalization.
These emphases on short-term fixes ignore the long-term structural problems that hold back the widespread use of the euro.27 The eurozone continues to lack the unified capital market and banking system needed to back a global currency. Nor does it have a pool of safe assets that remotely rivals the US Treasury market for depth and liquidity, reducing the euro’s attractiveness to reserves managers. The situation is not helped by Germany’s reluctance to create jointly issued euro-denominated bonds. Bunds are not a substitute for Treasuries. Moreover, Germany’s obsession with export-led economic growth and its unwillingness to run current-account deficits contribute to the shortage of euro-denominated safe assets.
France and Germany, the two dominant actors in eurozone affairs, are divided on the issue. France, the country particularly exercised about the dominance of the US dollar, wants to create pan-eurozone institutions and instruments, including joint bonds that might make the euro more appealing to international banks and companies. Germany, its parochialism over international economic policy far from dissipated since the 1970s, has blocked any substantial move in that direction.
The dollar may well be an imperfect global currency, especially given the risks to the US federal government’s solvency and the threat of further politicization of the international dollar-based payments system. But the status quo is thus far a natural and largely unchallenged one. The means to supplant the dollar are within the hands of its potential rivals. Their own domestic political constraints, rather than US diplomatic cunning or an absence of global governance, are preventing them from doing so.
Trade
Replacing sole leadership with coalitions
Any solution to the US withdrawal from global trade leadership needs multiple strands. First, faith and leadership need to be restored in the multilateral system, particularly the WTO. At the very least, the US needs to be stopped from acting as a destructive force. Second, any solution needs to use that system to nudge countries such as China back towards a consensus on the merits of free and open trade. Third, economic diplomacy needs to accommodate increasing concerns about trade-distorting behaviour – often allied with technology theft, spying and violations of cybersecurity – by China and other countries, without allowing such issues to become excuses for protectionism. Any solution needs to recognize that newer forms of globalization such as FDI and cross-border flows of data, as opposed to conventional trade in goods and services, have become major spheres of contention, and that the WTO and other international institutions have only weak tools to protect cross-border commerce and prevent distortions.
Indeed, there is quiet but widespread admission among trade officials from a variety of countries that, although Trump has pursued his policy agenda in an aggressive and destructive fashion, some of the underlying critiques of the current settlement are valid. Whatever future part the US plays, the multilateral system’s rules – and possibly its entire management – will need to be rethought.
Of all potential strategies for re-establishing the multilateral system, perhaps the least promising is the idea that the US can simply be plugged back into its former role in unreformed institutions by a future, more internationally minded White House. As we have seen, the US was already drifting away from its anchor role before Trump’s election, particularly with regard to engagement with the WTO and dispute settlement. The Trump administration’s policy represents a very rapid acceleration of this trend but not a complete aberration. No future administration will want to leave itself vulnerable to accusations of being a soft touch and of anchoring a rules-based system abused by China.
Admittedly, it is true that the US has tested the system before, first by addressing a perceived problem unilaterally and then by using the sense of crisis to push forward multilateral integration. In the 1980s, in a foreshadowing of the Trump administration’s dealings with China, the US addressed the perceived unfairness of competition with Japan in steel and cars by in effect imposing quotas. In a realization that such an approach was risky and unsustainable, Washington then turned to the multilateral system and toughened rules against subsidies as part of the Uruguay Round of trade talks, which concluded in 1994 and led to the creation of the WTO.
But China is regarded as a far bigger and more enduring competitor than Japan – in security as well as economic terms – and it will take a great deal to persuade the US that Beijing can be constrained purely by multilateral means. The perception that globalization has hollowed out US manufacturing and increased inequality will also deter future administrations from developing policies that could be interpreted as selling out to foreigners.
An arrangement to replace the current era of US dominance needs to be more flexible and creative. It needs to preserve the best of the system and find ways to extend a rules-based order through coalition rather than unipolarity.
Pleasant though it may be to imagine that multilateralism is driven by altruistic sentiment, in reality large and powerful economies need to feel that their return from membership of such organizations is worth the sovereignty they have given up in exchange. It is quite likely that simply no deal is possible that will persuade the Trump administration that it is worth restoring the WTO to its former role in global trade governance. But it is quite possible to imagine a future president prepared to make a new trade-off between rights and responsibilities. The big trading economies that say they want to preserve the WTO system, particularly the EU, China and Japan, need to prepare a package that a more internationally minded White House could adopt.
An arrangement to replace the current era of US dominance needs to be more flexible and creative. It needs to preserve the best of the system and find ways to extend a rules-based order through coalition rather than unipolarity. It also needs to be humble and recognize that some of the newer issues in globalization are likely to be less amenable to binding international rules. In the meantime, there remains the challenge of shielding as much of the current framework as possible from the Trump wrecking ball to prevent other governments from drifting off and making other arrangements.
Critically, any agreements that aspire to global coverage will inevitably need to involve China as a cooperative member. This contrasts sharply with the pre-WTO era, when the ideological and strategic opponent of the US was economically isolated. During the Cold War, opposition to the Soviet Union provided a coalescing force for GATT members. But that was relatively straightforward when dealing with a bloc that had deliberately distanced itself from international trade. In the West, during the Cold War, economics and politics pulled in the same direction. In dealings with China, the economic and security imperatives are at odds. This complicates the challenge of assembling a critical mass of countries to create a genuine coalition of authority rather than relying on the old system of one leader and a host of followers.
Rescuing the WTO
The WTO is currently in the same position as other institutions that have found that a system they were set up to govern has fundamentally changed around them. The IMF, for example, had its raison d’être largely evaporate when the Bretton Woods fixed exchange rate system imploded in 1971. It cast about for a new task for some time, and then found it as a rescue lender during the debt crises in Latin America, sub-Saharan Africa and other developing regions in the 1980s, a role it has continued to play. The lesson of the IMF’s experience is instructive. It retained credibility by preserving and developing a function with very few close substitutes – something akin to an international lender of last resort backed by the credit of the major economies, including the US.
The WTO could retreat from being an institution that facilitates the creation and enforcement of rules to performing a softer role that might involve setting norms and giving technical advice to countries on meeting them. That would make it more like the OECD or an agency such as the United Nations Conference on Trade and Development (UNCTAD).
A potentially rewarding, but difficult, option would be to find a way of adapting the WTO to preserve and extend its precious rule-setting and enforcement functions.
Certainly, there is a lot of technical expertise in the WTO secretariat that could help it play the more limited role of a policy forum and advisory body. But that would be a waste of an organization that has hitherto had been able to exercise an exceedingly rare function, as a multilateral institution whose laws and rulings the US has generally allowed itself to be bound by. There are, of course, other representative bodies that set global standards, such as the International Telecommunication Union in internet governance. But sooner or later, governments trying to write enforceable rules on international commerce tend to find themselves at the WTO. A potentially rewarding, but difficult, option would thus be to find a way of adapting the organization to preserve and extend its precious rule-setting and enforcement functions.
For the moment, some authorities – initially the EU and Canada, which launched their initiative in July 2019 – are considering a procedural manoeuvre to keep a version of the WTO’s dispute settlement system going, despite the US refusing to appoint new judges to the appellate body.28 But this will essentially be a holding operation. Any attempt to force the appointment of new judges over the US’s objections, such as by invoking rarely used provisions for qualified majority voting rather than unanimity, seems highly dangerous.
The main task, then, is to restore the dispute settlement system’s standing, particularly in the eyes of the US. Dispute settlement, which is the WTO’s clear comparative advantage, is the best test of whether governments can keep the system going and effect enough change to get the US – more likely a future administration than the current one – back on board.
A flourishing cottage industry in WTO renovation has now sprung up, with a variety of countries either individually or collectively producing blueprints for a more efficient and transparent architecture.29 But the US has roundly rejected such proposals as inadequate. In its view, they do not address the insufficient scope of current rules in terms of constraining subsidies, nor do they counter the jurisprudential philosophy of the appellate body regarding trade defence. Such policy blueprints currently fall into the unfortunate category of technocratic fixes to political problems. Indeed, Lighthizer’s particular animus against WTO dispute settlement seems to be rooted in a preference for a GATT-style system where agreements are enforced bilaterally through diplomatic means. No reasonable reform process can accommodate such a philosophical difference.
What would longer-term dispute settlement reform look like? Most likely, it would only be partly centred on the process itself. Completely changing the nature of the system, such as abolishing the appellate process altogether or simply appointing judges based on how they are likely to rule on certain subjects, would hugely undermine its credibility. The solution is most likely to involve not changing the judicial approach but giving the panels and appellate bodies more rules to apply to those aspects of trade-distorting behaviour that they currently cannot influence. This would in turn diminish the need for the WTO’s judicial branch to create law itself, and should address some of the US concerns about overreach.
It is not just the US that has become frustrated with the scant coverage of WTO agreements. The EU and Japan are also exercised about subsidies, and in particular the apparent inability of the WTO to address market distortions created by China’s state-owned enterprises. The EU and Japan, like the US, are also concerned about foreign companies that have invested in China being compelled, either formally or informally, to hand over technology as a condition of doing business in the country.
Japan, which has been playing a historically atypical leadership role in the absence of US direction, has corralled the US and the EU into a trilateral initiative to try to address the inadequate coverage of subsidies under the current WTO agreement, which presupposes a clearer distinction between government and private companies than in reality exists in China.
Japan, the EU and the US have also started coordinated litigation at the WTO against China over technology transfer, despite the US dislike of the dispute settlement system. It seems quite likely that some of the US’s complaints about the judicial philosophy of WTO dispute settlement will quieten down if Washington can use it to challenge Chinese state subsidies and other distortions more aggressively.
Inside and outside the WTO
Any gathering of leading governments needs to be prepared to write rules among its members rather than rely on the WTO’s labyrinthine consensus-based negotiating processes. Realistically, the era is over of multi-stranded ‘single undertaking’ WTO deals, in which a wide array of subjects – manufactured goods, agriculture, services, intellectual property – are negotiated simultaneously among the organization’s entire membership. The apparatus is too unwieldy, and the variability in stages of development among its members too wide, for this to be a viable mechanism in the modern world of trade governance.
Embedding plurilateral agreements in the WTO can be a way of keeping the overall spirit of the system going. In theory, such agreements could take place on a regional basis. In reality, though, such deals are likely to be too small to replace multilateral rules, and they could be sabotaged or dominated by a local power with its own interests mainly in mind. The remaining 11 TPP countries that resurrected the deal after the US pulled out, for example, have created a new set of rules potentially providing a framework for trade in the Asia-Pacific and even beyond. But with the US’s departure from the TPP, the share of global GDP covered by the agreement immediately dropped from 38 per cent to 13.5 per cent. Japan’s bilateral free-trade agreement with the EU covers around twice as much economic activity; an emerging Japanese deal with the US will be even larger in size.30
As the Association of Southeast Asian Nations (ASEAN) has exemplified in the shallow deals that it signs, regional agreements covering economies at substantially different stages of development tend to sink to a ‘lowest common denominator’ in terms of commitments to liberalization. Notwithstanding the fact that countries trade relatively more with neighbours than with more distant nations, assembling a critical mass of economic heft is more important than pursuing geographical contiguity. A plurilateral deal that covers the main economies in the world is preferable to a regional one that could carve up the global trading system into geographical blocs.
Although European industry wants a tougher line on China, it is strongly against the EU cutting itself off from the rest of the world. Whether inside or outside the WTO, trading powers need to work within a web of alliances, not a series of fiercely opposed camps.
Whatever Trump thinks about repatriating supply chains, particularly in the technology sector, any solution to the economic governance problem that involved splitting the world into strategic spheres of influence – and dividing the global economy and trading system to match – would be economically highly damaging, and most likely unrealistic. The EU and Japan may have joined in the trilateral initiative, but separately they have established bilateral diplomatic channels with China to discuss reform of the global trading system. Although European industry wants a tougher line on China, it is strongly against the EU cutting itself off from the rest of the world.31 Whether inside or outside the WTO, trading powers need to work within a web of alliances, not a series of fiercely opposed camps.32
Plurilateral talks among ‘coalitions of the willing’ under the aegis of the WTO are a more promising avenue for this kind of agile, even opportunistic, trade diplomacy. The WTO’s Agreement on Government Procurement (GPA), which has 47 member countries, has functioned reasonably well since it was created in 1996. In January 2019, 76 WTO members launched plurilateral talks on e-commerce – potentially a tentative step towards bringing disciplines on data flows into the multilateral sphere. Any proposals on subsidies that emerge from the Japan–EU–US trilateral format should also be pursued through a WTO plurilateral process in the first instance.
The advantage of this single-issue, small-group approach is that it is easier and quicker to get deals off the ground, as there are fewer WTO members to consult, and as trade-offs between different strands of a negotiation are not required. By allowing later entrants, the system also accommodates members whose economies and trade interests are still developing, and enables them to see the agreement in action before deciding to commit to accession.
The GPA is a ‘closed’ plurilateral agreement, where the benefits accrue only to members who have joined the deal and made their own commitments to open markets. But if enough of the big economies are on board to reduce free-riding, plurilaterals can also take an open form in which the benefits are extended on a most-favoured-nation (MFN) basis to all members of the WTO. An example is the Information Technology Agreement (ITA), launched in 1996 to reduce tariffs on high-tech products to nil, which now has 81 members covering about 97 per cent of trade in IT products. Because the zero tariffs apply on an MFN basis, the open plurilateral essentially functions as a means for individual countries to bind themselves into tariff commitments rather than gain market access.
For that reason, it is likely to be easier to sell closed plurilaterals to countries which must make significant commitments to liberalization to join them, in order to give their governments a sense of reciprocity. This means that a plurilateral that extends disciplines on industrial subsidies, such as the deal that the US–Japan–EU troika would like China to agree, will be a difficult task, since subsidies by their nature apply on an MFN basis. China will receive little in return, unless it makes progress with its own ideas to use such an agreement to introduce new disciplines on the advanced economies’ agricultural subsidies. Still, there is little alternative if the rules on subsidies are to be extended.
Indeed, it is important to clarify what plurilaterals can and cannot do. They can operate more quickly and easily without a large mass of countries that have little direct interest in the subject being discussed, or, in the case of a closed plurilateral, whose resistance to liberalization is such that they would rather not participate. They can focus discussion on one particular subject, rather than negotiating several strands simultaneously. They can concentrate expertise both from within the governments concerned and from industry and campaign lobbies to enable a more informed discussion.
But increasing the ease of negotiation does not remove the need for governments to display political will. China, for example, has been negotiating accession to the GPA for more than a decade, but has always baulked at the commitments involved.
For plurilateral formats to gain widespread acceptance as the only realistic way forward, leaders need first to accept that the multilateral system is incapable of producing meaningful single agreements covering a full spectrum of issues. This realization is currently missing from the governments of several leading middle-income countries, whose acceptance, even if it falls short of enthusiastic engagement, will be necessary to make the system work.
India and South Africa, for example, have emerged as opponents to the plurilateral route inside the WTO, believing that it gives too much power to the larger members and hankering instead after the broad, multilateral ‘single undertaking’ of the Doha Round. India, in particular, is a large user of agricultural and other subsidies; no agreement extending rules on subsidies will be feasible without India’s support and participation. Emerging markets need to accept that the old, multi-stranded, full-membership agreements are no longer realistic.
More generally, middle-income countries – including China – are repeating precisely the errors that led to the collapse of the Doha Round. Rather than fashioning themselves into a constructive bloc inside the system, they cling to the ‘special and differential treatment’ privileges that arise from being classed as developing countries in the WTO.
Certainly, middle-income countries can argue for new rules, for example on subsidies, to be crafted in a way that gives more policy space to economies in earlier stages of development. But for that they need to be engaged inside plurilaterals, not criticizing from the outside and hoping that the whole idea collapses. A pluralistic world cannot drag along unwilling emerging-market passengers. No amount of structural changes to the negotiation processes will remove the need for governments to summon up the political will to make hard decisions.
Global governance starts at home
For the big trading economies, one major obstacle to constructing these governing coalitions is resistance from domestic constituencies to the policies that need to be offered abroad. If China and the EU, for example, are to create a new bargain for WTO membership, they will need to overcome constraints on their own freedom to manoeuvre.
This is most obvious in China’s case. Any attempt to write new WTO rules on subsidies and technology transfer will run straight into Xi Jinping’s ‘Made in China 2025’ strategy to establish a leading position for China in a series of high-tech sectors. Beijing has a reasonable record of complying with WTO rulings. But its endlessly creative ways of intervening to subsidize certain industries, force the transfer of technology and otherwise exploit foreign companies operating in China are insufficiently constrained by the organization’s current law.
More generally, for China to play a responsible role will involve the big wrench of no longer regarding itself as a developing country that can claim immunity from unwanted WTO disciplines. President Xi does not face an electorate, but his economic strategy involves both a nationalistic desire to develop a visible lead in cutting-edge industries and the imperative to create jobs beyond traditional manufacturing industries. Allowing global rules to impinge on that approach means taking risks with China’s new development model.
For the EU’s part, although it has worked hard to overcome some constraints from domestic public opinion, others remain. Like the US, the EU faced opposition to trade deals, particularly those with Canada and the US itself. In Europe’s case, the objections were largely driven by perceptions of the excessive power of multinational companies and the threat to public services and public health, rather than by concerns about job losses and inequality. To pass the Comprehensive Economic and Trade Agreement (CETA) with Canada, and a subsequent bilateral agreement with Japan, the European Commission has undertaken apparently successful outreach work to improve the transparency of its processes and emphasize the compatibility of trade agreements with environmental protection and human rights.
But problems with domestic resistance to trade agreements remain. The EU’s most obvious weakness is its inability to agree substantive rules guaranteeing the cross-border flow of data. The ability to send information easily between countries is an essential part of modern services industries – and, increasingly, of manufacturing supply chains – and the interoperability of data regimes is an important element of this.33
Over the past few years, a patchwork of data protection and privacy rules has emerged from bilateral and regional trade agreements,34 reflecting clear differences in attitudes to privacy, particularly between the US and the EU.35 The US-led TPP, for example, had relatively forceful provisions requiring signatories to prove a public policy requirement if they were to enact laws restricting the flow of data abroad. Even after the US pulled out of the TPP, those rules remained, largely at the behest of Japan.
In the EU, concerns about privacy, particularly in Germany and in the justice directorate of the European Commission, have prevented negotiators from offering anything but weak rules on data flows in their bilateral trade deals, despite the wishes of a coalition of smaller member states and the commission’s trade directorate. The EU’s model trade agreement provisions offer little constraint on trading partners that want to impose data localization requirements or other forms of digital protectionism.
The EU’s opposition to robust provisions on data flows looks distinctly like an overabundance of caution, indeed a lack of courage, in the face of overly anxious public opinion.
When the Doha Round collapsed in 2008, the big trading economies shifted some of their effort towards the plurilateral Trade in Services Agreement (TiSA), which acquired 23 members. TiSA went into indefinite abeyance after Trump’s election, reflecting his administration’s general dislike of all broad international agreements. But even before then, the deal was in danger because of other members’ frustration with the EU for its flat refusal to incorporate rules guaranteeing cross-border data flows. Similarly, the plurilateral e-commerce talks in the WTO that started in early 2019 will struggle to achieve anything but a shallow agreement if the EU continues to hold that position.
The EU’s opposition to robust provisions on data flows looks distinctly like an overabundance of caution, indeed a lack of courage, in the face of overly anxious public opinion. After all, although the Japanese government believes in strong data flow provisions in trade deals, the EU has had no problem signing a bilateral adequacy agreement with Japan, acknowledging that Japan’s data protection laws are sufficiently strong to permit the transfer of data between the two countries.
As in other areas of rule-setting, the EU believes that its sheer size as a trading partner means its own laws – in this case the General Data Protection Regulation (GDPR) – will automatically be adopted by other countries without the need for international agreements, a phenomenon known as the ‘Brussels effect’. There is already some evidence that the European model of data protection and privacy is being thus exported. But if the EU wants to resurrect the multilateral trading and regulatory system, it should have serious conversations about efficient global governance rather than simply hoping to disseminate sometimes sub-optimal rules by virtue of its sheer economic weight. Establishing dominance by default because of the size of one’s consumer market is not the act of a leader in global economic governance.
What could China and the EU get in return for changing their domestic policies? China has already made one request, which is for a WTO investment facilitation agreement (like the trade facilitation agreement launched in 2017) to ease the process of businesses buying foreign companies or setting up their operations overseas. Now that China has become a big overseas investor thanks to its Belt and Road Initiative, it cares about such things. Realistically, however, this is likely to be a fairly minor contribution to the management of FDI.
Ultimately, China’s main gain will simply be to keep the system going. The outcome of the current US–China confrontation will be important in establishing trade-offs between freedom of manoeuvre at home and access to the world economy. If Beijing thinks the pain it has suffered from US tariffs is worse than accepting some calibrated constraints on its industrial policy, it will be more willing to compromise in the WTO.
The EU, similarly, has an interest in keeping a rules-based system operative. Like the US, it also has complaints against China’s trade-distorting behaviour. Unlike the US under Trump, the EU has little taste for direct bilateral trade conflict based on power relations, and would prefer to deal with such problems through the WTO. The struggle within the EU to allow data flows to be fully addressed in trade agreements is not over; it is possible that the sceptics might give way as the price of keeping multilateralism alive.
The new challenge of national security
The final question of how to set rules on trade and FDI – and all the new issues around globalization – is particularly tricky when these are bound up with issues of national security. Governments should try to delineate carefully where security arguments can be used. But realistically it is going to be very hard to have binding disciplines. A WTO dispute settlement panel striking down US tariffs or other actions on the grounds that it can judge better than the White House what will damage US national security will instantly blow up the system.
The related issue of national security considerations in respect of FDI is also probably better left to each country’s judgment. The most that countries can do acting collectively is to create a set of global standards to which governments can aspire, more likely through an advisory and coordinating policy body such as the OECD than a set of binding disciplines in the WTO.
This seems an uncomfortably minimalist attitude to take in the face of an administration such as Trump’s. The White House is using national security arguments in absurd contexts, such as in relation to car imports from Europe and Japan. Even in sectors where this does at least make some sense, such as communications and internet technology, national security rationales are being used disproportionately. Reassessing the role of Huawei equipment in 5G networks is a perfectly reasonable thing to do. Trying to drive the company out of supply chains worldwide through export blacklisting, especially given that its technology is so embedded in the basic functioning of 5G, is a hugely disproportionate response.
Unfortunately, this is an area in which tactical avoidance of a definitive choice between different spheres of influence is probably the only realistic course of action. European governments have so far shown a variety of calibrated responses to US pressure to exclude Huawei from their 5G networks: the European Commission has made non-binding suggestions about the best way to approach the matter, rather than trying to force an outcome. If the Trump administration succeeds in driving the company out of the sector altogether, so be it. Governments outside the US and China will have to make the best choice of technology and regulation possible, and use whatever limited diplomatic room they can find to try to mediate the dispute.
It is hard to see anything with a strong national security component directly being constrained by a particular set of rules. Governments will hopefully conclude that the benefits of the global system are sufficiently large that such measures need to be used sparingly. Any attempt to force those decisions is likely to backfire.
Designing a new system of trade governance is fiendishly difficult, not least because the old one was already beginning to break down. It only takes either the US or China to sabotage any attempts at creating another rules-based framework. The obvious solution of replacing one linchpin with another is not an option. New arrangements also need to recognize that many parts of modern cross-border commerce do not fit inside traditional legal frameworks, and that indeed attempting to constrain them is likely to create a backlash.
The new global economy will be far harder to regulate than the old one. Governments need to keep the existing institutions going when they can, and spread appropriate principles on international economic cooperation and coexistence by whatever means necessary when they cannot. A new consensus on trade and economic governance is clearly needed across a range of areas. But even if one emerges, it is highly unlikely to be underpinned by a single country embodying those principles and underwriting the system.
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22 Zhou, X. (2009), ‘Zhou Xiaochuan: Reform the international monetary system’, BIS Review, 41/2009, https://www.bis.org/review/r090402c.pdf (accessed 14 Jun. 2019).
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