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Multilateral economic governance: A way forward?

Published onJul 11, 2022
Multilateral economic governance: A way forward?

My focus is on trade — specifically on elements of success and elements of fragmentation in the trade regime established by one particular multilateral economic institution, the World Trade Organisation. I will discuss what Kristen Hopewell calls the China paradox, the current US-China rivalry, the mistaken assumptions that we make, the fact that there are many Chinas, and then, the way forward. I cannot offer comprehensive solutions; but I hope that I can, at least, identify a range of possible steps forward.

We have seen, of course, a profound change over time. At the moment, progress on multilateral trade governance is pretty much stalled. After World War II, America wrote most of the global rules that everyone else had to follow if they wanted to be part of the Western trade regimes. But today, there is no rulemaking going on: the death of the Doha Round has been followed by failure even in the restricted, single-issue efforts to jumpstart the multilateral engine through negotiations over agriculture and fishery subsidies.

The fundamental change is that the US can no longer make the rules. This is something that the US has been trying to grapple with for a while, even before China became so dominant. In this context, simplistic narratives about China are really unhelpful. Attempts to impose binary ways of thinking — classifying China either as a peacefully rising partner, or as a disruptive threat — don’t help us either to analyse the problems or to design solutions, because the Chinese are both of these things.

More generally, in terms of trade and the World Trade Organisation, there are stories we tell ourselves that really aren't very accurate. One of the stories we tell ourselves is that the United States has exercised what is referred to as benign hegemony, that we tied ourselves to a rules-based order in order to help others, that we were benign, not coercive hegemons, and that this was a way in which everybody could improve their situations.

We also tell ourselves that incorporating potential rivals into the trade regime is the answer — and that China has benefited handsomely from the rules-based trading system, that their economic rise is in large part due to their involvement in the World Trade Organisation and access to the trade regime. But in fact there were plenty of other causes of China’s rise.

Another story we tell ourselves is that China will support the trading system from which they have benefited so richly. And in many ways, they do support the system. They support the trade system and most of the rules; but I'll talk about ones they don't support.

Another story we tell ourselves is that interdependence through trade and global value chains bolsters cooperation, that the more intertwined we become, the more we will have a stake in the wellbeing of our partners. But in fact weaponised interdependence seems to be the new approach to interdependence. So interdependence does not make conflict go away.

Another story told by some commentators in the US is that we should not worry about the rise of China, because China is just Japan 2.0: “we'll all look back and say we shouldn't have made such a fuss, just as we look back now at the way the US was worried in the 1980s that Japan was going to be the economic hegemon”. But in fact, there are huge differences between Japan and China. Japan is dependent on the United States for security guarantees. China is not.

Most of these common stories you hear about China’s position in global trade and geoeconomics from pundits in the United States are just stories; they're not accurate.

What we've seen in the trade regime is a combination of success and fragmentation. In many ways, you can think of the GATT (and its offspring, the WTO) as dizzy with success. After World War II, each round of trade negotiations led to more and more and more opening of the world economy in a multilateral system, with the dramatic reduction of barriers to the entry of goods into countries across the world. In this sense, the trade regime was dizzy with success; it tackled the easy things, the transparent things.

Where things started to get more complicated, was the Uruguay Round of trade negotiations that went on from 1985 to 1994, and led to the establishment of the WTO. What the Uruguay Round brought was deep economic integration, with complicated WTO rules reaching very deep into each country's domestic regulatory regimes. This meant getting into everybody's business in a way that the global trading system had not done before. It was bound to create trouble and conflict because it required states to change their domestic regulatory bargains in order to stay compliant with the trade rules. And some of these requirements for regulatory change were very, very tough.

The three big issues brought into the trade regime in the Uruguay Round — intellectual property protection, the agreement on investment, and the agreement on services (the GATS agreement) — were quite problematic for the most of the world. Intellectual property protection was the most controversial, the most problematic; and that's where we really started to see pushback on the trade rules. Like the agreement on investment and the agreement on services, it had been lobbied for very hard by multinational corporations that owned IP, that were big investors and that were big service providers. The new rules led to massive resource transfers from the global South to the global North, especially through intellectual property protection and royalties. Some of the transfers from South to North were bigger than the whole foreign aid budgets that were going North to South. So, this was really problematic from an equity standpoint, and it was not in most countries' interest to adopt stringent rules around intellectual property.

This became very obvious very quickly with the HIV AIDS pandemic in the late 1990s and early 2000s. We saw the growth of activism in developing countries which were experiencing millions of unnecessary deaths because of lack of access to antiretrovirals, which were patented and very expensive and not available. This put intellectual property onto everybody's radar — including the radar of many of the negotiators who hadn't really thought about it before, and who hadn’t really been sure exactly what they were signing up for at the time. That led to a real pushback against the trade regime (and in particular against this aspect of the trade regime), which has not gone away,

We are now seeing the same problems arising with COVID, because patents exclude people from using relevant technology or know-how, and thereby create scarcity. And scarcity is not what you want in a pandemic when it comes to medical equipment, protective equipment, vaccines and therapeutics.

In addition, the introduction into the world trading system of services, intellectual property, and investment created a lot of regime complexity, with multiple institutions becoming responsible for looking after these issues. For example, intellectual property was defined as a trade issue by those who wanted it in the trade regime; but with HIV AIDS, it became redefined as a public health issue. This move towards redefinition was accelerated by various sorts of bad behaviour. 39 pharmaceutical firms sued Nelson Mandela, who was just trying to get rid of medical apartheid in South Africa to make sure that his people could get affordable HIV AIDS drugs. This led to the mobilisation of an international coalition determined to take intellectual property issues into the World Health Organisation. A similar sequence of events occurred in the case of the Food and Agriculture Organisation when firms such as Monsanto started pushing for patents, or patent-like protection of seeds.

In short, the introduction of services, investment and intellectual property into the global trade regime led to regime complexity and much more institutional thickness. And this in turn led to forum shopping and forum shifting. Different coalitions of actors started to engage in strategic institutional behaviour in order to try and foment changes that they wanted. For example, the coalition seeking access to medicines was able to get unanimity at the World Health Organisation about the importance of relaxing patent rules to get access to medicines for health emergencies. And that later found its way back into the trade regime as the Doha Declaration on access to essential medicines.

As a result of this strategic behaviour, the United States began to be unable to get what it wanted in multilateral forums. The BRICS and other countries were pushing back. They didn't want any more intellectual property expansions, because they had seen what had happened in HIV AIDS. In response, the United States started to engage in its own strategic behaviour, by threatening other countries with sanctions under section 301 of US Trade Law, if they didn't protect intellectual property. And we need to remember that all of this occurred before the rise of China.

Following the rise of China, the US began to engage in plurilateral negotiations, in an effort to create clubs of like-minded parties — such as the Transpacific Partnership and the Anti-Counterfeiting Trade Agreement. These two plurilateral agreements represented vertical forum shifting. The US knew it couldn't make the rules that it wanted at the multilateral level because it was getting pushback, so it moved down vertically to these plurilateral agreements. And the plurilateral agreements were strategic in the sense that they did not include China. The thinking was, that if the US could get countries representing 80% of the world’s economy to agree to the rules that the US wanted, especially around things like intellectual property, then China would have no option other than to join the clubs and adopt the rules that the US wanted. So this was a kind of end run by the US around the WTO where they knew there was going to be a stalemate. And this, too, ended up not working out very well for a variety of reasons.

The Doha Round, which was launched in 2001, became a casualty of this strategic behaviour. A large part of the reason why the Doha round died was the lack of trust arising from the fact that, in the Uruguay Round, when the US was asking developing countries to liberalise trade and services, protect intellectual property and liberalise investment climates, the promise was there would be a quid pro quo — with Europe and the US rolling back agricultural subsidies to increase market access for agricultural goods from developing countries. The US and the EU did not make good on those promises. They did not roll back those subsidies. The developing countries had to invest a lot of resources to build institutional capacity around services, investment and IP, but what they were promised in return wasn't delivered. Because the Doha Round went on so long, it eventually became a story about US-China rivalry. But that happened only in more recent years. The Doha Round was in trouble from very early on.

The main reason why the rise of China has so severely exacerbated these pre-existing tensions in the global trading system is the phenomenon that Kristen Hopewell has christened ‘the China paradox’.

The ‘paradox’ is that, on the one hand, China is now an economic powerhouse — the world's largest trader, the world’s second largest economy — but, on the other hand, China is actually a developing country. If, instead of focusing on the aggregate size of the economies, you compare per capita GDP, in China, it's 8,000 dollars per capita whereas in the United States, it's 57,000 dollars per capita. So, China has a long way to go in terms of development, in raising per capita GDP.

Because of this paradox, the rise of China has destabilised global trade governance. Instead of accepting reciprocity and universal liberalisation, which is what US likes, the Chinese insist that (despite the huge size and power of their economy) they should be offered special and differential treatment in the trade regime because China is still a developing country. They argue that they should not be subject to reciprocal disciplines, but should instead be allowed to protect or provide subsidies for certain sectors which they claim they need to develop before they can accept universal reciprocal rules. It was conflict over this issue between the US and China that finally killed the Doha Round. The US walked away from the agreement, because they were not happy with the carve-outs for China, granting it special and differential treatment as a developing economy.

Post-Doha, in the World Trade Organisation, there have been two negotiations, one on agricultural subsidies, and one on fishery subsidies. In both of these areas, the market size of China really hurts the global South because of the structural power and sheer size of the Chinese economy. For example, China has the largest industrial fishing fleet in the world which causes catastrophic overfishing. Similarly, in the case of agricultural subsidies, whereas it used to be only the rich developed countries of the global North which were engaging in subsidies that were hurting the agricultural industries of developing countries, now it is China that has become the world's biggest agricultural trader, the world’s largest supplier of agricultural and fishery subsidies, and the world’s largest provider of export credit. So, the biggest subsidy villain, if you want to call it that, is China. And yet, it's the developing country aspect of China, rather than the economic powerhouse aspect of China, that is driving these big subsidies. So the old North-South subsidies argument doesn't really work anymore.

Ignoring the importance of ‘the China paradox’ is just one of the ways in which the debate about global trade governance is being vitiated by mistaken assumptions. Another is the characterisation of the pure market as an ideal type. In practice, markets are not just flat spaces or arenas in which exchange happens. They are more like arenas, in the old Roman sense of the places where gladiators engage in contest. There is a lot of power-play in markets, and a lot of hierarchies; they are not just neutral opportunities for everybody.

The supposed existence of a state-market dichotomy is another flawed assumption. States and markets are in practice deeply intertwined with one another. And in the case of China, policy is definitely not driven by concerns about state versus market; it's driven instead by concerns about liberalism versus development. ‘Economic powerhouse China’ is very pro-IP. It has the biggest intellectual property office in the world; it has trained a ton of judges; IP is a big curriculum item in its law schools; and IP is taken very seriously in all areas in which China is globally competitive. In these sectors, the Chinese have good R&D capabilities, and they care a lot about having the products of those capabilities protected. They want to be on the side of the table getting the royalties now. But, at the same time, ‘developing country China’ is willing to relax these standards, and hence to be accused of stealing intellectual property, in sectors where they're still developing. So, ‘the China paradox’ comes out in all sorts of different ways.

Another mistaken assumption is that all countries, as they become modern, make sequential progress towards liberal democracy. In the US, there was a big assumption that once China was in the WTO, it was inevitably going to become a capitalist open market society governed by a democratically elected government. That's proved to be a pretty problematic assumption. The continued resilience, and maybe even the strengthening of the authoritarian state-led capitalist economic model in China challenges such naïve market conceptualisations.

China also has very interesting positioning when it comes to concepts of power and fairness in the global economy. On the one hand, Chinese subsidies are really hurting the global South in important ways. But on the other hand, when they do engage with the global South, in terms of aid, they don't put conditions around it like the International Monetary Fund does when it tells developing countries that they have to cut their budgets for schools or heating oil budgets. Instead, they say, "No, we're not going to interfere with their domestic sovereignty. We have a non-interference principle. There are no conditions." Of course, that's appealing to many developing countries by comparison with the more heavy-handed approach of the West, and of the US in particular, communicated through the International Monetary Fund.

So the Chinese have very mixed preferences about global markets. On one hand, they want open markets in which they can compete with highly developed technologies. On the other hand, they want space for development, and agricultural subsidies which will not only promote development but also protect food security in the context of US-China rivalry. These are complicated issues. There is not one China — not one standard approach.

Vaccines provide another interesting example of this complexity. China's vaccine diplomacy was in sharp contrast to Western vaccine nationalism. In the period before June 2021, the West was hoarding all the vaccines that it could, even though a lot of the rest of the world had nothing, and we had more than we needed in some cases. By contrast, China, like India and Russia was practicing vaccine diplomacy. China not only gained R&D credibility in vaccines and demonstrated the ability to manufacture different platforms, but also developed a really flexible distribution system. They widely distributed vaccines; they advertised them as public goods; they looked like very good benefactors during this period.

At the same time, as Stephen Kaplan points out in his new book about Chinese strategy on globalising patient capital, they were taking a long-term commercial view. As newcomers to vaccine development, they needed to prove efficacy. But, as they didn't have enough cases domestically, they had to do their phase three clinical trials to get emergency use authorisation elsewhere. So they did their trials in developing countries, and simultaneously developed commercial contracts under which, if the trials proved successful, the countries involved were bound into buying Chinese vaccines. It was very strategic. They were also really flexible. Whereas, in the United States, intellectual property owners are very reluctant to transfer technology, the Chinese vaccine developers were happy to provide finished vaccines, ready-to-fill ingredients, or raw materials. They were willing to transfer technology, to provide training, to provide machinery for production, or even to do a joint venture with a local firm to produce vaccines. These options were very attractive, especially for countries that were hoping to become regional hubs of pharmaceutical production. So the Chinese secured large commercial orders, alongside the vaccines donated for geopolitical reasons.

In all of this, China proved itself to be a reliable supplier. And, instead of challenging the WHO like the US, the Chinese used the WHO. They were able to get emergency use authorisation for two of their vaccines, after which they donated 100 million dollars to COVAX, a multilateral donation hub. But this donation covered the cost of COVAX buying the vaccines from China. So, from every point of view, it was a pretty good strategy.

The fundamental truth that emerges is that there are many Chinas. Some segments are decentralised in China, some are internationalised. Some sectors are competitive, others are in development. All of this creates a range of different preferences about different aspects of trade. The Westphalian assumption that China is a unitary state behemoth overlooks all of these variations in Chinese sectors and Chinese behaviour. And it prevents us from thinking creatively about potential solutions for cooperation.

Once we acknowledge the complexity of China and start thinking creatively about the way forward for trade governance, different options open up. One possibility is open plurilateralism where anyone can join a plurilateral agreement ex-ante or ex-post, instead of the more sneaky and exclusive track the US was trying to follow, but failed to follow, with TPP. A second possibility is incrementalism, through single issue negotiations. But a full round, like the Doha Round, with multiple issues, that's probably done for a while. I don't see that coming back anytime soon.

The central question is who is going to make the rules that everyone has to follow. Thus far, China can block rules. It has blocked what the US wanted — which was for China to open its markets much more and not to receive special differential treatment as a developing country. But China has not yet been able to create new rules. The question is whether, with its structural power, the size of its economy, and the development of its institutional capacity with the Belt and Road Initiative and the Asian Infrastructure Investment Bank, it is going to begin to acquire the capacity to formulate and sell new rules to the world.

Given the terrible situations that we face in the world today, it has never been more important to think about peaceful cooperation and to try to come up with solutions. We need solutions to climate change, to COVID-19, to war in Ethiopia, and to war in Ukraine. We need to ask, is globalisation on pause or is it in reverse? Having seen global supply chains severely disrupted, both through the pandemic and now through war, we need to ask whether we can ensure future prosperity in a ‘de-coupled’ world that includes the disruption of global value chains and increased self-sufficiency.

I want to end with a question from Terry Halliday, who is a socio-legal scholar. Is China a big threat, or is it engaged in a peaceful rise? If we get the answer wrong, if we fail to recognise the paradoxes and contradictions within China, then we will be subject to instability, indeterminacy and confusion. As long as deficiencies of understanding are present (and they're definitely present right now in the US-China relationship), global norms are going to remain in flux, and normative convergence on an authentically negotiated set of universal standards is going to falter. So, I think these are the things on which we need to focus.

Professor Susan Sell

RegNet, Australian National University

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