Time for global leadership, Japan-style

06 February 2019

By Shiro Armstrong.

This article was originally published by East Asia Forum.

Japan has taken up the G20 presidency at a key time in global economic affairs and has the opportunity to shepherd the global economy through a period of greater uncertainty than there has been in decades. But the task is tough. Not only are the issues on which progress must be made substantial, but also Japan’s G20 presidency will effectively be one of the shortest ever, with leaders meeting in the middle of 2019.

The World Trade Organization (WTO), at the core of the multilateral trading system, is in crisis. With only three out of its seven possible appellate body judges, the WTO’s dispute settlement body’s appellate court is down to the minimum number of judges needed to function. If one of the three judges has to recuse himself or herself from a case or becomes unable to serve, the enforcement mechanism of the multilateral trading system ceases to function. This is the system that holds countries accountable to the world trade rules and, without it, a core function of the WTO will collapse.

It’s the United States that is vetoing the appointment of new judges because it says it wants changes to the system.

The importance of the multilateral trading system and dispute settlement mechanism is more hardwired into Japanese strategic thinking than perhaps that of any other country. Japan’s post-war reconstruction and rapid rise was made possible by reliance on open international markets underpinned by the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT). The WTO entrenched the dispute settlement process that has avoided much conflict over trade issues. Recently, for example, the dispute over the cutback in Chinese exports of rare earth metals to Japan and other countries was resolved in a WTO dispute settlement case with China accepting the ruling against it. Japan did not retaliate and the dispute was settled peacefully. For Japan and other countries the WTO dispute settlement system works.

The WTO, of course, is far from perfect and in need of some reform. The failure to conclude the Doha Development Round — the most recent multilateral liberalisation round, the negotiations for which started in 2001 — has meant that some rules are out of date or do not exist for new areas of commerce relevant for the 21st century. Gaps in the rules have become issues of contention between the major trading powers.

The leaders of the G20 recognise the importance of reform and, for the first time, the leaders’ communique from last November in Argentina committed ‘to work together to improve a rules-based international order that is capable of effectively responding to a rapidly changing world’.

There is now an opening for G20 leaders to set the strategic direction of reform for the WTO. As the president of the G20, Japan has a responsibility to develop a framework to help prioritise reforms and catalyse action on those that are most urgent. A clear direction needs to be set during Osaka’s G20 summit, or else momentum will be lost.

Of all the areas in which the WTO needs to change, priority must be given to those that help to settle the trade tensions between China and the United States. The trade war has already affected global trade and shaken confidence in global markets, disrupting investment and reorganising some supply chains. Confidence in the multilateral trading system is at stake. Trade wars can easily spread as countries incurring direct or collateral damage seek to ‘protect’ themselves or retaliate by putting trade barriers up.

A G2 deal between the United States and China that eases trade tensions may seem a positive outcome but will do little to calm the now bipartisan push in the United States to contain the rise of China. There is also a real chance that a bilateral deal would undermine the multilateral trading system. The proposed packages of massive Chinese purchases of US energy and agricultural goods may temporarily ease bilateral tensions but will likely be outside of the established rules and potentially divert trade from others.

The global economy will be better served by a US–China deal that is done within a multilateral framework, extending market opening in China to other countries on a most-favoured-nation basis. That would serve Chinese interests as well, even though the instinct will be to do a narrow, bilateral deal to appease the Trump administration. This is where countries like Japan are crucial for marshalling support from other countries to encourage China in particular to avoid a narrow, bilateral settlement and frame a multilateral settlement.

Japan has the ability to mobilise and work with like-minded countries in Asia and around the world to preserve the open, liberal rules-based order and to set a direction going forward on strengthening it. Such an approach will make it easier to avoid a bilateral game of divide and conquer played out of Washington or Beijing.

There will be plenty of distractions for Japan as it negotiates its own bilateral deal with the United States, manages a successful G20 summit and continues to improve its relations with China while managing all the attendant risks. But these challenges will be made easier if Japan works with a coalition of middle powers that share the same core interest in an open, rules-based multilateral order.

The success or failure of Japan’s G20 presidency ultimately depends on whether that is the defining strategic outcome of the Osaka Summit next June.

Shiro Armstrong is Director of the Australia–Japan Research Centre and the Asian Bureau of Economic Research in the Crawford School of Public Policy, The Australian National University. A longer version of this article was originally published here on RIETI.

Image credit: Wikimedia Commons.

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