International trade is facing many risks, according to the WTO trade forecast of September 2018. Among these are rising trade tensions and global protectionism, as well as increased financial volatility as developed economies tighten their monetary policy. Consequently, the WTO downgraded world merchandise trade growth to 3.9% (2018) and 3.7% (2019) respectively.
The most imminent threat to international trade is the escalating US China trade war, which leads to tariff escalation between both major players. This does not only affect the growth outlook for the US and China, but third countries and regions (including the EU) are affected as well. Rising protectionism and increased uncertainties pose severe threats to global trade.
Another conflict is threatening the functioning of the WTO as the guardian of an open and rules-based global trading system. The current US administration refuses to appoint new judges to the Appellate Body, which will cease to function in December 2019, if the US does not change its position. So far, the US is not willing to engage in serious reform discussion with other WTO member states, including the EU. Therefore, the threat to the WTO is real.
In addition, the WTO faces a credibility problem due to the fact that the current multilateral rules are outdated. With the exception of the Trade Facilitation Agreements, all rules date back to 1995, the creation of the WTO. In addition, the Doha Round is making no progress so that the WTO is losing its ability to advance trade liberalization and to deal with modern trade realities.
Options available for the G20 to tackle the issue
The G20 per se is no immediate player in trade negotiations. Nevertheless, the G20 has a special responsibility for trade and the multilateral trading system. All major trading partners are present and the dividing lines in trade run across G20 member countries. Therefore, the G20 is an ideal forum for informal discussions at the highest political level on how to overcome deadlocks in trade talks. The WTO members then need to make the final decisions.
Unfortunately, the G20 has a bad record on trade. Despite frequent promises to refrain from protectionism, G20 countries are responsible for the majority of protectionist measures. G20 countries also failed to find possible solutions for the Doha Round. However, a success in global trade issues would greatly increase the legitimacy of the G20 as the premier forum for international economic cooperation. What are the important issues?
Modern trade rules for the WTO
Right now, there is no shared purpose among WTO member states anymore. Therefore, the only way forward is through plurilateral agreements among like-minded countries. What should the G20 do?
First, it should try to find a consensus on how to design plurilateral agreements. The T20 recommended in Tokyo in May 2019 that the benefits of plurilateral agreements on trade liberalization should be open to all WTO members (so “called critical mass agreements”), whereas plurilateral agreements on new rules could also be just applicable to the members of the group (so called “open plurilaterals”).
Second, the G20 needs to reach a consensus on what kind of modern trade rules are needed for the WTO. At the 11th WTO Ministerial Conference in Buenos Aires four plurilateral initiatives were started on e-commerce, investment facilitation, services domestic regulation, and Micro, Small & Medium Enterprises (MSMEs). But these initiatives are not enough. There are many more trade issues, which need to be advanced, such as services trade, trade in environmental goods, rules on how to deal with harmful subsidies, or overcapacities. The G20 is a good forum to reach a preliminary agreement: What are the interests of developed countries such as the US or EU? How far is China willing to go to modernize WTO rules? And what solutions are possible to overcome the objections by South Africa and India?
Coherence of bilateral and plurilateral FTAs
If major G20 member states continue to revert to bilateralism and mega trade deals (CPTPP, RCEP, EU-Japan FTA, USMCA etc.), G20 member countries should start discussions on “best practices” on how to avoid incompatible agreements (e.g. regarding rules of origin or standards in new trade issues).
Stronger peer review against protectionist measures
Another aspect, where the G20 must deliver, is on the promise of free and open borders. Particularly in the present period of global trade slowdown, the G20 needs to get serious about tackling protectionism. However, the G20 works by consensus and in the present climate, a new pledge would probably be mere lip service. However, this is an important issue, which needs to stay on top of the agenda for the future.
New rules for global investment
The G20 must also deal with rules for global investment, which is barely regulated on a global level. Instead, countries have negotiated numerous bilateral and regional investment treaties. The non-binding ‘G20 Principles for Global Investment’ call for open, non-discriminatory, and transparent conditions for investment while reaffirming the right to regulate investment for public policy purposes. The G20 needs to work on these principles and enhance them further.