The world trading system is wracked with uncertainty and risks of inefficiency linked to new forms of exclusive trading blocks. This challenge follows from the emergence of trade disputes between major players in the trading systems, involving the US and China in particular. In turn, the origins of those disputes lie in the success of the trading system to facilitate some developing economies onto a fast-growth track, but also its failure to adapt to new environments. The consequences are significant because the trade conflict negatively affects economic output, create uncertainty in trade, lead to the formation of new subsystems and force countries to make a choice among the sub systems. The Chief Economist for the World Bank Goldberg draws parallels with disputes of the 1980s, which led to a stronger system. She believes that if countries were to cooperate constructively, the same could happen again today.
It is undoubtedly true that today’s world is different from that in the past. The important aspects of this difference may be represented by the development of global value chains (GVC), the increased importance of services in manufacturing production and expanding digital trade. Today, global value chains account for three quarters of the world trade. Among the three global factories—Factory Asia, Factory Europe and Factory North America, Asia shows a relatively higher regional concentration in the value chain trade than do NAFTA or those linked to EU. Recent decades have seen increasingly close linkages between services and manufacturing industries, referred to as the process of “servicification”. In this process, services play three different roles in manufacturing production which may be summarized as “out, in and with”. “Out” refers to buying services as inputs for manufacturing production, that is, outsourcing. “In” refers to the firm’s in-house capacity in the provision of value added. “With” refers to selling bundles of goods and services by a manufacturing firm. One of the drivers of the evolution of global value chains and the service sector is the developments in digital technologies. The digitalization has had a major impact on trade. It aggregates global demand and lowers the cost of exporting. It facilitates the entry into trade by small and medium enterprises. It reduces the capital requirements for establishment in many traded services. There is evidence that barriers to services and inefficient digital platforms could hurt manufacturing production, thus justifying the service trade liberalization to improve manufacturing productivity.
The current dispute between China and the US involves a number of issues such as provision of subsidies, dumping of products and IP (intellectual property) issues including forced technology transfers, patent violation and espionage. The US unilateral measures are linked to different parts of the US Trade Act such as injury (Section 201), security (Section 232) and IP (Section 301). Other issues have also emerged in the US-China dispute such as the US security requirements in the construction of the digital infrastructure, FDI flows, and access to emerging technologies. The US has ruled against Chinese investment in critical IT-related infrastructure and this policy has been followed by a number of US alliance partners such as Australia, New Zealand, Taiwan Province of China and Japan.
The imposition of tariffs by the US and China has generated negative spillover effects as others try to protect themselves from the import surge induced by the products diverted from either China or the US by imposing their own tariffs on imports. Generally, the US action is self-defeating and amounts to an “own-goal”. It is hardly mentioned that many of structural reforms that the US seek from China are already on China’s reform agenda and thus China may possibly benefit from the reforms.
What about the state of play in the multilateral system WTO is faced with a number of new issues that include non-tariff barriers (e.g. subsidies), barriers in services and investment, digital trade, trade facilitation and regulatory convergence.
From the global perspective, the application of protectionist measures by countries has not declined, but the composition has changed. There is much greater use of subsidies than tariffs in the decade. The failure of Doha Round has motivated its members to adopt new protectionist measures, refuse to cooperate in new appointments (e.g. in the dispute settlement process), ignore the reporting commitment and delay new work programs. Consequently, many countries have turned to preferential agreements for the solution of their problems.
In view of the above complexities in the global environment, what strategy should Asia pursue First, Asia should prioritize the issues. There are two key elements of the trading system which the major Asian economies should consider. One is the increasing importance of services and digital transactions in the global economy as many new issues (regulation, privacy, security) would come to the fore with them. The other is the failure of the WTO to respond and adapt to its own problems and the problems that business world is faced with.
Second, the Asian economies should take advantage of its available assets. They have in place regional structures which are particularly useful at this time, including CPTPP and RCEP as well as the underlying structures of ASEAN and APEC. Many countries also have their own reform agendas. There are substantial gains from regional cooperation to achieve these reform agendas. However a regional approach alone is not likely to be sufficient, and regional cooperation and that at the global level should be pursued in a complementary way. Therefore, it is important for the Asian economies to carry out well designed cooperation at different levels. At the bilateral level, efforts should be made to update existing FTAs to support the evolution of value chains. At the regional level, the Asian economies should focus on RCEP and look for ways to harvest CPTPP on some difficult and new issues. For the new opportunities, the Asian economies should work more closely to take the BRI (Belt and Road Initiative) to the next stage, placing more importance on policy reforms to support the generation of its potential benefits. Last, provide a coalition of leaders for progress in WTO reform. An important task is to make contributions to the application of plurilateral models to services regulation, investment and domestic regulation (including with respect to security), and come up with a solution to the issue of developing country status.