The world faces unprecedented and difficult challenges, including the US-China rivalry, the Russian invasion of Ukraine, the Covid-19 pandemic, climate change and supply chain disruptions.
A consequence of these challenges is the possible splitting of the world economy into two or more political blocs, similar to what happened before World War II.
To avoid this, the rules-based international trading system needs to be reinvigorated to deal with the problems faced by the World Trade Organization (WTO). The US and China compete relentlessly in areas such as military prowess, scientific and technological advancement, and global leadership.
One strategy pursued by the US has been the imposition of high tariffs on imports from China, ostensibly aimed at correcting trade practices believed to give China an unfair advantage.
This sparked a tariff war as China retaliated by raising import tariffs on US imports. This kind of unilateral action would not be allowed in a more functioning international trading system.
Unilateral country policies such as “America First” and “China First” violate international trade rules. They are unfair and harmful to other countries and self-destructive as they lead to a dramatic drop in bilateral trade and affect other parties’ trade.
Japan, a middle power that benefits significantly from free trade, plays an important role in achieving the goal of a well-functioning, rules-based international trading system. This should be done in collaboration with like-minded countries like Australia, Canada, New Zealand and Singapore.
The WTO was established in 1995 to promote international trade and address the problems faced by its predecessor, the General Agreement on Tariffs and Trade (GATT). It has two main functions.
One is to set and enforce rules for international trade and promote free trade by convening multinational trade negotiations. As international economic activity expanded from goods to services and investment, so did WTO rules.
The other function is to settle disputes between WTO members. The WTO improved the dispute settlement mechanism by introducing a two-tier system – the Panel and the Appellate Body.
This dispute settlement mechanism worked relatively well until the United States vetoed the appointment of the Appellate Body judges, as it was used more frequently than the GATT dispute settlement mechanism.
While the number of disputes brought before the GATT from 1948 to 1994 totaled 314, between 1995 and 2019 there were 598 cases under the WTO. The US claimed the Appellate Body made decisions that exceeded its powers and that it ceased operations in December 2019. All panel decisions submitted to the suspended Appellate Body have effectively been deferred.
WTO members must agree on how to deal with the suspended Appellate Body. In March 2020, a group of 16 WTO members led by the European Union and Canada set up a separate appeals system, the Multi-Party Interim Appeal Arbitration Arrangement (MPIA).
In the event of disputes between the members involved, the MPIA serves as a temporary solution to the non-functioning of the WTO Appellate Body. Japan should join the MPIA and hold discussions to solve the problem by making its own recommendations.
The WTO has been unsuccessful in introducing new rules for fast-growing international economic activities such as investment and digital trade — key issues in the US-China rivalry. Conducting multilateral trade negotiations has become more difficult as they require consensus among the now enlarged WTO members.
The WTO has taken two approaches to strengthening a rules-based international trade order by overcoming the problem of ineffective rulemaking. On the one hand, through regional trade agreements (RTAs), which promote trade between members by preferentially eliminating trade barriers.
The trade expansion effect is generally greater for RTAs with more members. In recent years, RTAs have addressed issues such as trade in services, investments, digital trade and intellectual property rights. They have contributed to liberalization and set rules for dealing with unfair trade practices.
Mega-RTAs in the form of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) are expected to grow in membership and expand the international reach of the rules-based system.
Japan is a member of these two RTAs, while China is an RCEP member and has applied to join the CPTPP. Japan and other members of the CPTPP must ensure that China meets all membership conditions, including conditions against special and preferential treatment towards state-owned enterprises, before joining. This would provide China with an opportunity to correct unfair trade practices.
The other approach is to encourage plurilateral arrangements, where like-minded countries agree on rules on a given issue, rather than pursuing consensus decisions across the WTO. At the WTO, these actions begin with joint declaration initiatives.
Several plurilateral treaty negotiations – on e-commerce, investment facilitation, environment and domestic regulation of services – are already underway or have been completed.
Japan has actively participated in these discussions and is one of the organizers of the joint declaration initiative on e-commerce. Plurilateral agreements can facilitate the formation of agreements because only interested parties have to make commitments and accept free riders from non-members.
Non-members have no objection as they receive the benefits of the arrangements on a most-favoured-nation basis.
Countries and economies participating in these discussions need to keep in mind that the ultimate goal of adopting the two approaches is to create a global rules-based trading system that covers a comprehensive set of issues.
To achieve this goal, countries and economies participating in RTAs and plurilateral agreements should be ready to expand their membership and increase their outreach.
In order to facilitate the process of introducing hard laws such as WTO rules, a “soft law” approach also makes sense. One example is the Asia-Pacific Economic Cooperation (APEC), of which Japan is a part.
Due to the non-binding and voluntary participation, ambitious and high-level rules can be discussed at APEC. Discussions at APEC have contributed to the introduction of WTO rules such as the Information Technology Agreement.
Successful economic performance by Japanese companies in foreign markets is of paramount importance for the Japanese economy, which is faced with a shrinking domestic market due to its declining population. Revitalizing a rules-based international trading system would allow Japan and other countries to sustain economic growth.
Shujiro Urata is Senior Research Advisor to the President of the ASEAN and East Asia Economic Research Institute. This article is based on a report prepared by a study group of experts for the Japan Economic Foundation.
This article was first published by the East Asia Forum, which is based at the Crawford School of Public Policy at the Australian National University’s College of Asia and the Pacific. It is re-released under a Creative Commons license.