Abstract: In a closed-door seminar during the 3rd Bund Summit held by the China Finance 40 Forum, experts shared their insights on the new pattern and new trends of global trade. This article concluded the outcomes of the discussion, including the three new challenges facing the global trade system and suggestions on how to strengthen the role of WTO in response to climate change.
I. THE GLOBAL TRADE SYSTEM IS FACING THREE NEW CHALLENGES.
European experts pointed out that the current global trade system is facing the following three new challenges, which have been amplified by the Covid-19 pandemic.
First, the world needs a robust international organization to help countries set international rules and standards as well as find solutions to issues related to carbon emissions, health and medical equipment, free and fair trade, stronger role of World Health Organization (WHO), etc.
In recent years, the World Trade Organization (WTO) has been under enormous pressure as its internal mechanism fails to catch up with the current development of trade, making it urgent to reform the organization.
On November 30, the WTO 12th Ministerial Conference (MC12) is about to take place in Geneva to discuss the reform of WTO. Apparently, some important issues will not be solved all at once at a ministerial conference. Member countries hope to make some small yet concrete progress, but the prospect now seems to be dim.
For the world to achieve breakthroughs in critical issues, the support of China and the US is needed. Treating trade issues solely from a geopolitical perspective will lead to a worrisome trend.
Second, trade agreements fail to fully play a critical role in facilitating the achievement of Sustainable Development Goals（SDGs）such as green development.
It’s not enough to utilize trade agreements only to reduce tariffs and trade barriers, strengthen cooperation, and boost investment and economic growth.
Currently, countries believe that trade has to play a bigger role in promoting sustainable development.
EU trade agreements have long included specific chapters on trade and development, such as international conventions related to protection of environment, timber, endangered species, human rights and labor rights. In terms of climate change, the EU has proposed a “Carbon Border Adjustment Mechanism” as a tool to reduce emissions. There is a growing consensus that imposing a carbon tax is the most effective way to combat climate change as it can be implemented in various ways to reflect the amount of carbon emissions through the price of imported goods.
At the moment, the “Carbon Border Adjustment Mechanism” is still a proposal that will go through arduous negotiations within the EU. Other countries also raise doubts about this mechanism, arguing that it is an act of trade protectionism. Nevertheless, many similar proposals have propped up around the world, with the same goal to levy a tax on carbon and encourage carbon-free production.
Therefore, the best case is that members might come to some international agreement on a global carbon tax, which is similar to the OECD-led global minimum corporate tax deal reached by 140 countries recently. Indeed, this also means that this kind of deal is extremely hard to be made.
Third, the global supply chain is facing severe crisis, particularly in the shipping industry.
Due to the pandemic, shipping problem has become a worldwide concern. About 80% of the global goods are transported by sea. However, a considerable number of ships are stuck outside the port and waiting to be unloaded, increasing the costs of transportation to 10 times that of pre-pandemic period. Stock shortages and shipping delays have pushed up prices and undermined consumer confidence. The world is over-reliant on a few critical shipping hubs while the infrastructure of these ports has not been updated for a long time.
On top of that, shipping problem also has a huge impact on climate change, as shipping accounts for 14% of the total transport emissions. The EU has proposed including the shipping industry in the emission trading system, which is now under discussion. Countries need to consider using smaller and more environmental-friendly ships to promote the modernization of ports.
II. THE RISE OF REGIONALISM PUTS HUGE STRAIN ON MULTILATERAL TRADE SYSTEM
An American expert commented that the rise of regionalism in the context of geopolitical conflicts has put huge pressure on globalization and the multilateral system.
The expert noted that currently, the economic downturn, increasing uncertainties and severe geopolitical issues have dealt a heavy blow to the multilateral trade system.
The manifestations of this shock include: WTO is almost paralyzed due to various reasons; the pandemic has exposed fragility of the supply chain, exacerbating the risk of decoupling; since the US waged trade war against China, more countries have started to use national security concerns as an excuse to block normal technological exchanges; the rise of regionalism such as CPTPP, USMCA and other regional trade agreements creates a favorable environment for the participants, especially for the initiators of the agreement.
In particular, if some regional free trade agreements (RTAs) were signed based on geopolitical factors, covering only the tariff deals in a small fraction of the trade areas, the agreements would become exclusive clubs of certain countries, which will threaten the multilateral system.
Currently, WTO should consider how to set new rules in these areas and encourage countries to integrate RTAs into the WTO framework so as to enhance their transparency and extend them to new signatories.
Some experts thought that RTAs might promote the liberalization and facilitation of multilateral trade rules, but this positive effect is becoming harder to achieve due to the polarization of interests among member states.
Proponents of RTAs argue that more liberalized and facilitative trade agreements can be first established within regions to pave the way for promoting multilateral trade rules by harnessing the experience and outcome of RTAs. Although the three main functions of WTO are almost paralyzed, as all the existing agreements haven’t been overturned, WTO remains the foundation of international trade.
With more and more countries promoting the liberalization and facilitation of rules in RTAs, regional agreements are expected to steer multilateral trade agreements towards taking more liberal and open measures. However, given the large number of WTO members, members’ interests are becoming more divided, so are their positions on trade policies. Meanwhile, WTO needs a major country with real influence to lead. All these challenges make the transformation from RTAs to multilateral trade rules of the WTO much harder.
Experts pointed out that in most cases, major countries of a RTA basically put what they are already doing or plan to do on an official document, while their trading partners need to bear most of the costs and adjust policies. Benefits for these economies are maximization of economic returns through regional integration, despite radical changes during the policy reform. Past experience shows that countries that implement the reform would gain the greatest economic benefits, such as China’s accession to the WTO in 2001.
In this sense, it is of great significance that China applied to join CPTPP to align its policies with the agreement that is most open and holds the highest standards in the Asia-pacific region. But it will take a long time as China still faces some institutional barriers. China needs to take concrete actions to push forward greater reform and opening up.
III. MAJOR ECONOMIES CAN STRENGTHEN THE ROLE OF WTO IN RESPONSE TO CLIMATE CHANGE
Experts believed that China, the US, Europe and other countries and regions need to work together to set up an agenda on trade and climate change issues under the framework of WTO.
Although the WTO is not responsible for developing climate policies and setting decarbonization goals, its rules can regulate relevant subsidies, laws and regulations as well as taxes, and be used to design tools to raise costs of fossil fuels. Specifically, four measures can be taken:
First, revising WTO rules on subsidies.
1. Subsidies favorable for environmental objectives. Several years ago, the WTO had defined environmental friendly subsidies as “non-actionable subsidies”. Now the WTO should consider redesigning rules on subsidies to encourage innovation, facilitate decarbonization, and stimulate the emergence of new sectors and job opportunities. This reform should protect environmental friendly subsidies that support related R&D from being restricted by countermeasures. For example, carbon cleaning machines and technologies that reduce greenhouse gas emissions can be included into the category of non-actionable subsidies so as to prevent these technologies from being restricted by trade sanctions.
2. Subsidies on fossil fuels. The WTO should stop providing subsidies on new coal-fired power plants for developing countries. Meanwhile, it should allow the upgradation of existing facilities to cut emissions. Building coal-fired power plants in developing countries does not help solve the global issue, which just transfers the problem from one country to the other. Financial and technological aid to developing countries should help these countries generate electricity in a cleaner way.
Second, resuming negotiations on environmental products. In December 2016, WTO was almost close to concluding a deal on this issue but failed in the end. Member states were divided on some details of the deal. Now, the WTO should redraft the deal, determine a list of products, set an internal agenda, and promise to update the list of products that enjoy zero-tariff treatment each year or every two years. In addition, it should also conduct negotiations on environmental services which are lagging way behind talks on environmental goods. Major trading nations don’t need to spend much time on these negotiations, yet their actions will send positive signals.
Third, strengthening carbon sink capacity. Some relevant proposals have been put forward but failed to make much progress due to disagreements among members. For example, in terms of rules on fisheries subsidies, members are concerned that countries that subsidize fisheries will seek special and differential treatment and allow their industrial fleets to keep overfishing in seas and oceans. At present, there are reasons to apply special and differential treatment to artisanal fisheries but there are no grounds for industrial fisheries. Likewise, the WTO needs to take actions to prevent deforestation and illegal logging. At the same time, it should provide trade policy credit to encourage reforestation. There are some precedents in the United Nations that can be introduced into the WTO.
Lastly, major emitters should strive to reach consensus on decarbonization policies under the framework of WTO. Since progress of decarbonization among countries varies, trade barriers in the trade system might increase and the new barrier has emerged in the form of carbon border adjustment mechanism. The EU first proposed this idea but it fails to take into account differences in decarbonization policies between countries. The mechanism should not only consider tax measures but also regulatory rules, standard setting, etc. Therefore, we need to find a way to let major emitters agree on low-carbon targets and promise to adopt policies with the same effects. In this respect, the mechanism of WTO can help achieve this goal.
This article first appeared on CF40’s WeChat Official Account on December 3, 2021, compiled according to the discussions at the closed-door seminar “New Pattern and New Trends of Global Trade” at the 3rd Bund Summit on October 23. The views expressed herein are the participants’ own and do not represent those of CF40 or other organizations.
