Uncertainty looming large on world trade: Can multilateralism be the savior?

Major economies need to come together and set up a global agenda of reconstruction and development.

Rajesh Mehta, Anil K Kanungo and Prithwis De

As Covid-19 pandemic takes its toll on the global economy, the need for international cooperation has seldom been so urgent. It is felt that such international cooperation under current duress can spring up from leading multilateral institutions like the World Trade Organization. However, persistent US-China trade war, coupled with latest tech war of Huawei with US tech giants, economic slowdown in EU, disturbance in Middle-East, India-China border conflict, leadership battle in Turkey, and confusion over Brexit, are generating more fissure and vitiating the atmosphere of trust and interdependence among nations, the twin requirements to further the cause of multilateralism.

These regional tensions and disputes are presently significantly weakening the multilateral system, as a result the capacity and resolve of the WTO is proving futile and unproductive. In the quarter century of its existence since 1995, the WTO has failed to conclude even a single round of multilateral trade negotiations, and its dispute settlement function has been derailed by an impasse over appellate judges leading to abrogation of its impartial and transparency mechanism-dispute settlement body (DSB) in WTO.

In addition, President Donald Trump’s threat to withdraw from WTO and his fervent protectionist policy are adding fuel to the fire by denouncing the relevance of WTO and increasing importance of regionalism. Experts started questioning, is WTO losing its influence? Is it still relevant in the new global era? Trade blocs like BRICS, ASEAN, Quad, G8 and G20 are making their relations blossom stronger. Innumerable trade blocs on the horizon combined with spirit of “Deglobalization” and nationalism is taking over globalism.

Currently multilateralism is directionless. Who will head the key multilateral organization such as WTO? Present chief of WTO Roberto Azevedo stepped down in August end, one year ahead of the schedule. This move has triggered an unexpected and critical question about the future of multilateralism. It is hardly able to establish its relevance in the current situation. Next Director-General (DG) will have a humongous task to restore the spirit and essence of multilateralism. The selection process of DG normally works out through a consensus rather than having a formal vote.  The candidate list is gradually reduced to a few through a series of consultations with members until it’s clear that a single candidate can garner unanimous support.

Eight candidates are in the fray and it is expected a new DG will be selected and will be at helm in September 2020. If consensus is not arrived at, then one of the four deputy DG would take over as the interim head. US has been highly critical of the WTO and has threatened to pull out of the organization if things go against its trade interests. It will undoubtedly seek to play a major role in the multilateralism drive. US government is pretty firm on this when such sentiments are echoed by US Trade Representative Robert Lighthizer who categorically mentioned that he would veto any candidate with even a “whiff of anti-Americanism.”

Second major issue confronting the progress of multilateralism is the economic slowdown precipitated by the Covid-19 pandemic. Individual economies are experiencing huge economic loss as well as health crisis. One of the major fallouts of this global pandemic economic slowdown is the virtual collapse of US-China Phase One trade agreement. The agreement that was signed recently has become non-functional due to Covid-19. The move that was anticipated to patch up the US-China trade confrontation has vanished from the pressing agenda. China’s part of the commitment to increase purchases of US products by $200 billion under the phase-one agreement is certainly out of reach now, and the planned phase-two negotiations have essentially been stalled.

Over the space of a few months, what was anticipated was a positive stroke that would have been a major selling point in the US-China rapprochement has been developed into a huge barrier and a political liability. This is further amplified by the steep decline in the overall US-China relationship because of bitter back and forth bickering over the handling of Covid-19. Such incident has further weakened the prospects of multilateralism bouncing back. Because trust and confidence of multilateralism in the 21st century so far have been eroded because of the incessant trade skirmishes and trade spats between China and US.

But what is expected out of US is to take a calibrated cooperative attitude towards most significant economies in the world such as China, EU, India, ASEAN to bring back the spirit and confidence of multilateralism. Threatening to stop funding to ILO, erecting physical barriers with neighbor Mexico, losing faith in multilateralism, and derailing the process of multilateral negotiations on peace and trade fronts will only result in loss of world stability and welfare.

On the other hand, given the dim prospects for the phase one deal, China has little incentive to implement any obligations that are difficult and will more likely meet only those terms which are in its best interests.  At least for now, the much-heralded phase-one trade agreement appears to be fading in tandem with the US President’s re-election prospects. The new presidential incumbent will have a delicate and sensitive role to play to create a stable and workable phase one trade agreement and foster a workable and enduring relationship with China in particular.

Thirdly, the promise to create and bring back strong manufacturing base and providing employment to Americans may be on the top of the agenda for the US and its administration, but may not be a convenient idea to propel the mandate of multilateralism. This move is driven by the spirit of rather unilateralism. USA is therefore engaged in designing and using its trade policies to accelerate such activity by drafting trade agreement known as CUSMA.

The centrality of this strategy lies in the revised NAFTA -known as Canadian-US-Mexico Agreement (CUSMA). The agreement attempts to reconfigure North American automotive production through a more stringent rule of origin. Under the revised agreement, 40% of the value of a vehicle must be at least produced by workers earning a minimum of $16 an hour in order to match duty free requirement. Since the wage rate will be considerably higher in US than prevailing ones in Mexico, expectations are high that manufacturers would shift production to USA.

Automotive producers are slowly becoming aware about the evolving electoral dynamics in the US and are weighing the possibility of a new US Administration who will favour such a move. A new approach to trade might be on the horizon.

A counter move is also shaping up in Mexico where Honda, Toyota, and other manufacturers and suppliers are opting to triple wages to workers to meet the tougher rule of origin rather than shift production to the US. But can this higher labour costs be compensated, to some extent, by the effective supply chain empowered by Blockchain, Artificial Intelligence and Machine Learning solutions which allow better manufacturing production scheduling, appropriate demand planning, healthier maintenance of machinery, efficient route planning, smart inventories, etc. that can reduce transaction, storage and logistics costs? Only the time will tell. Owners and producers of such auto majors feel remaining in Mexico possibly makes more sense than absorbing the disruption and cost of moving to the US, especially at a time when uncertainty over leadership is brewing. Companies in other industries that have been cajoled or incentivized by Trump policies to move production back to the US may probably share similar sentiments. A lot can still change.

Statistically world economy under Covid-19 is witnessing serious negative growth. Before the Covid-19 pandemic could hit the global economy, global growth was witnessing a relatively slower growth and world trade had become shaky and sluggish. According to the update by the World Economic Outlook, IMF, in July 2019 the projection of global growth was under revision, moving to 3.2% in 2019 and 3.5% in 2020.

The revision reflects negative surprises for growth in emerging markets and developing economies; most emerging markets like BRICs have 30% of the world GDP and 17% share in the world trade. In most of these economies, growth is being revised down by 0.3 percentage points in 2019 to 4.1%, and by 0.1 percentage points for 2020 to 4.7%. Similarly, APEC predicts a 3.7 per cent contraction in the region’s economy — a total output loss of US$2.9 trillion in 2020.

As most of the economies during the lockdown period entered recessionary phase, multilateral organizations also supported such trends with their projections. According to WTO, the world merchandise trade is likely to decline by 13 per cent to 32 per cent in 2020 due to the pandemic and the consequent lockdown. Current statistics by OECD shows India shrank by a historic 23.9%, US by 9.5, France by 19, UK by 21.7 and China by 3.2.

Under such difficult juncture, it is important to look for leadership that should be magnanimous, workable, and consensual. Major economies such as US, EU, China, India, Brazil, Russia, need to come together in setting up a world agenda that of reconstruction and development. Powerful blocs such as Quad, G-20, BRICS, EU may draw upon strategy and policies of trade promotion and global health to remain strong and rebuild world economy. The first-ever virtual Ministers Responsible for Trade (MRT) meeting on July 25, 2020 among trade ministers from 21 APEC economies is an encouraging step towards a post-COVID-19 recovery and establishing strength of multilateralism.

As per the eminent economist, Dr. Arvind Panagariya, “Multilaterism can be revived only if all major parties are willing to give some concessions to get concessions from others. That is simply not the case right now. Among the major entities in the system–US, EU, Japan, China, India, Brazil, Russia — each wants the others to make concessions without offering any of its own.”

(Rajesh Mehta is an international consultant,columnist and policy professional, Anil Kanungo is former Senior Faculty, Indian Institute of Foreign Trade, and currently Professor, LBSIM, Delhi, and Prithwis De is a leading London based Consultant.)

 READ MORE:

US intransigence led to collapse of WTO’s Buenos Aires ministerial (December 27, 2017)

 

 

One Comment

  1. A very optimistic thought in such testing times, but highly challenging! Mixing up Diplomatic relationships with economic sustainability is the challenging ‘solution’ complicated even more in the Covid times.

Leave a Comment

Your email address will not be published. Required fields are marked *

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.