The G20 will meet in Osaka with world trade in crisis. The time has come to chose between our volatile ally and the multilateral trading system.
The world will be watching Osaka next week for what is shaping up to be the most important G20 summit since the leaders convened to co-ordinate a response to the global financial crisis. The G20 has been less effective during “peace” times but make no mistake, the global trading system is now in crisis.
The world’s two largest economies and trading nations are involved in an escalating trade war that threatens a technology war and new cold war. President Trump’s America First agenda is set to tear down the multilateral rules-based trading system that the United States underwrote for the past 70 years.
The best case scenario for Beijing and Washington is a deal outside of the established multilateral rules. That carries major direct costs to other countries and risk to the rest of the global economy. Chinese purchases of US agriculture and energy will divert trade from other suppliers and buyers. The world will move to managed trade, away from freer markets, and sideline the WTO, replacing and weakening some of its core functions that hold global trade together. These developments are anathema to Australian and Asian interests.
World leaders may be left in a holding pattern waiting for Mr Trump and Mr Xi to do a deal in Osaka. If they don’t do a deal, the trade war will escalate beyond trade, spread to other countries and put the global economy at risk.
Can the rest of the world do better than be bystanders as the two major powers try to carve up the world? Japan does not want to repeat the failure of Papua New Guinea as the hosts of APEC that failed to mediate a leaders’ statement because of China-US tensions.
The Trump administration is vetoing the appointment of new judges to the WTO’s dispute settlement body’s appellate court that is down to the minimum three judges needed to function. If this situation is not resolved by December, the enforcement mechanism of the multilateral trading system ceases to function beyond existing cases. This is the system that holds countries accountable to the world trade rules and, without it, a core function of the WTO will collapse.
Can Japan save the day?
The WTO is far from perfect and in need of some reform. The failure to conclude the Doha Development Round negotiations which started in 2001 has meant that rules are out of date or do not exist for new areas of commerce relevant for the 21st century.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”. A clear direction needs to be set during Osaka’s G20 summit, or else the multilateral rules-based system will be lost.
Is Japanese Prime Minister Shinzo Abe and Japan up to the task of steering the global economy to steadier ground? Abe stepped up to fill the vacuum in global leadership and saved the Trans-Pacific Partnership after Mr Trump withdrew the United States from the regional agreement.
Or will trying to get through the G20 without upsetting Mr Trump end in abject failure at the summit and write Japan into history as making the wrong choice at this key moment?
Japan cannot fudge the choice between protecting the multilateral order and appeasing its security guarantor. A strong statement on preserving the dispute settlement system and a clear strategic direction for WTO reform are needed.
Japan is not alone. Mr Abe will have to marshal support among other leaders who need to stand up for their own core interests in the global system. Prime Minister Scott Morrison could play an important role in such a coalition. The world needs another “Merkel moment” similar to when German Chancellor Merkel made the grouping a 19 v 1 affair in Hamburg and defended multilateralism. The world needs to hold the line. Mr Trump may not understand Japanese subtlety and he will want to avoid embarrassment so the signals need to be sent clear and early.
Indonesia has stepped up to define the way forward with a proposal for WTO reform. There are as many proposals at the WTO as there are countries but only Indonesia has put forward a bold plan at the G20 that goes beyond self-interest. The priority is to preserve the system and define reforms that help to settle the trade tensions between China and the United States, bringing global trade negotiations back to a multilateral course and away from the brink of bilateral lose-lose outcomes.
The EU, like others, wants to focus on Chinese industrial subsidies but keep subsidies to agriculture off the table. Australia, Japan and Korea are worried about upsetting their erratic security guarantor. China has more at stake in multilateralism than perhaps any other country given its prospects for development still depend on it.
Indonesia taking up a leadership role among the G20 powers may appear unexpected. But it is half of ASEAN and an important developing country that chairs the G33 group of developing countries in the WTO. It is also a democracy and the world’s most populous Muslim country. Indonesia carries weight and has credentials.
Japan’s choice is shared by Australia and others. Follow Indonesia’s lead and step up for multilateralism or appease Mr Trump who is trying to tear down the entire world trading system.
Shiro Armstrong is director of the Australia-Japan Research Centre and editor of East Asia Forum at the Australian National University.
This article was published by the Financial Review.