By Shin Ito —
Recent developments have demonstrated that even founding members of the Bretton Woods regime are willing act against the values of “liberalism, multilateralism, and rule of law,” — which are the basis of the global economic and trade system — by embracing protectionist policies. As a result, the free, open and rule-based international order is approaching a crisis. The United States, which had led the free trade regime for decades, withdrew from the Trans Pacific Partnership (TPP), pushed for re-negotiation of the North American Free Trade Agreement, and has imposed additional duties on imported steel and aluminum since President Donald Trump has come into office. Meanwhile, the European Union (EU), Mexico, and Canada imposed retaliatory tariffs on U.S. exports. Moreover, trade friction between the United States and China, in the form of U.S. penalties against China due to its violation of intellectual property rights and forced technology transfer, and, in turn, China’s counteractions against the United States, remains unresolved.
The situation facing global trade is disconcerting. According to the World Trade Organization (WTO), its members applied 137 new trade-restrictive measures between mid-October 2017 and mid-October 2018, up from 108 in the prior-year period. The coverage of these trade-restrictive measures amounts to $588.3 billion, which is more than seven times larger than a year ago. In order to deter the spread of protectionist and unilateral measures as well as maintain the global free trade regime leadership is required. Japan, president of the next G20 summit, should leverage its key position in the international order to take a leading role in fighting protectionism going forward.
Function of the G20 Summit
In November 2008, the inaugural G20 Leaders Summit was held in Washington, D.C. in order to promote further policy coordination (including developing countries) and respond collectively to the global financial crisis that occurred in the wake of the collapse of the Lehman Brothers. While the phase of the crisis was winding down, the third summit was held in Pittsburgh in September 2009 where the leaders designated the G20 as the “premier forum for international economic cooperation” and decided to convene it annually.
This means that the function of the G20, which in early days was the place to discuss and implement G20 members’ policy coordination, has changed to “a framework that lays out the policies and the way we act together,” aiming at adjusting interests among the members. In short, with the perception that the global financial crisis has passed the G20’s sense of common purpose has waned.
Preventing Fragmentation of World Economy
In the leaders’ declaration of the G20 Buenos Aires Summit last year, while they committed to work together to improve a rules-based international order and the WTO’s function, they did not commit to fight protectionism because the United States did not accept it. The words “anti-protectionism” which have always been referred in leaders’ declarations were erased for the first time in G20 history. This development could prompt fears that the G20 may permit and accelerate the adoption of protectionist trade policies if the body fails to change course. Regarding the current international trade environment, WTO Director-General Roberto Azevedo warned, “The proliferation of trade restrictive measures and the uncertainty created by such actions could place economic recovery in jeopardy. Further escalation would carry potentially large risks for global trade, with knock-on effects for economic growth, jobs and consumer prices around the world.”
Looking back on history, after the Great Depression in 1929, the United States, United Kingdom, and France shifted their economic focus inward. While they lowered tariffs and promoted trade within each economic bloc, they imposed high tariffs on imports from outside their bloc and protected their industries. This caused global trade to decline sharply, and the global economy shrank further. To avoid repeating similar mistakes, international economic disintegration must be stopped. And the G20, with its membership representing around 80 percent of world GDP, remains the perfect forum to do it.
Expectations for Japan’s Presidency at G20 Osaka Summit
Japan will assume the G20 presidency for the first time at the G20 Osaka Summit on June 28 and 29, 2019 and Prime Minister Shinzo Abe will shape the leaders’ declaration. The most important agenda item for the Osaka Summit is how to revitalize the words “anti-protectionism” in the declaration, and show the world that the G20 is monolithic against protectionism. Under ordinary circumstances OECD countries have cooperated and led the fight against protectionism. However, the situation has changed. While the EU, Japan and the United States commit to address non-market policies and practices in the third countries, tariffs are being imposed even among the former Western Bloc as described above and achieving voluntary cooperation for anti-protectionism seems difficult.
Against this backdrop, Japan, which recently concluded two comprehensive and high-standard mega free trade agreements (FTAs): the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Japan Economic Partnership Agreement (EPA) and regards itself as a standard bearer for free trade, has to lead to gain widespread support from other G20 members who want to counter protectionist trade policies. As a part of Japan’s effort, negotiating a trade agreement with the United States could give Tokyo additional clout with the Trump administration at the G20.
At the same time, Japan should take the opportunity to expand the pro-free trade group among like-minded countries. In the future, this pressure could be enough for the United States to once again recognize the economic significance of multilateral trade liberalization and embrace it. Based on the fact that businesses in free trade zones are more active and have greater opportunities than those on the outside looking in, countries which do not conclude FTAs initially often face significant economic pressure to eventually join in. For instance, South Korea concluded an FTA with the EU ahead of Japan and its exports, including automobiles to the EU, increased. This motivated Japan to conclude the EPA with the EU as soon as possible.
To these ends, Japan as a president of the G20 Osaka Summit has a responsibility to coordinate members’ voices against protectionism as well as lead to maintain and improve the global free-trade system.