Beijing hosted an EU-China summit on July 16, followed by the signing of a trade agreement between the EU and Japan on July 17. Can these two events be taken as the EU’s answer to the trade war declared by Washington and President Trump’s protectionist policies? Alexander Lomanov, professor of the Russian Academy of Sciences and Chief Researcher at the Institute of Far Eastern Studies of the Russian Academy of Sciences, discusses the role of emerging economies in shaping the global economic agenda, the future of the WTO and globalization.
The EU’s answer to Donald Trump
The trade agreement signed by the EU and Japan on July 17 absolutely can be considered an answer to the trade war declared by Washington. The symbolism of this answer runs deep. Although the greatest effort has been made by the Europeans, we must not forget that the Japanese have long been fighting for multilateral trading mechanisms. They played an important role in promoting the Trans-Pacific Partnership that President Trump killed. The EU and Japan are major economies that have shown their commitment to multilateral free trade. The supporters of the European-Japanese agreement never miss an opportunity to note that it covers 600 million people and one-third of global GDP. Nevertheless, the importance of this step should not be overestimated. Cancelling duties in the amount of one billion euros a year will help promote mutual trade, but is unlikely to cover the losses incurred by the European Union and Japan in the wake of US sanctions.
Trade between the EU and Japan accounts for just 20 percent or so of trade between the United States and China, whose sanctions and counter-sanctions already threaten to send the global economy into a tailspin. It’s easier for Brussels and Tokyo to talk, because neither is motivated to deal a blow to a partner who steals manufacturing assets and jobs. These are market economies with high wages.
Europeans take pride in having secured the end of duties on exports of cheese, wine and pork to the Japanese market. However, for Japan, these products are not part of the daily consumer basket, and the presence of these foods on the local market will not affect Japanese producers. It is important to keep in mind the national gastronomic customs of different civilizations. French cheese poses as much a threat to Japanese sushi producers as Japanese sake threatens to cut into the revenue of German breweries on the European market. Now, if Europe were a major producer of high-quality rice and capable of exporting millions of tons of rice per year, Japan would think twice before agreeing to any duty-free trade arrangements. However, optimism with regard to lower duties on Japanese cars may be inflated. Europeans are conservative and are likely to prefer familiar German and French makes out of sheer habit.
No place for China
The agreement between the EU and Japan is an agreement between two old economic centers accustomed to play by Western trade rules. Both sides are well integrated into global production chains, and there are no major sources of contention between them.
The talk of preserving multilateral mechanisms and keeping globalization open raises a major practical question: How to take account of the emerging economies’ interests? How to incorporate China, India, Brazil and new players that will emerge in Asia and Eurasia into the global economic system? The agreement between Japan and the European Union does not provide an answer to these questions.
On Monday, July 16, Beijing hosted the 20th anniversary EU-China summit with the participation of European Commission President Jean-Claude Juncker and President of the European Council Donald Tusk and President Xi Jinping and Prime Minister Li Keqiang. International experts and the media immediately began speculating that China was building an economic alliance with Europe to oppose Trump. The Chinese were forced to provide clarifications at the highest level that maintaining multilateral formats and preventing the creation of trade barriers do not represent an attempt to cause trouble for the United States. Premier Li Keqiang had the following to say: "Talks between China and the EU are not directed against a third party, and no third party is affecting these talks. Trade friction between China and the United States is a bilateral issue. China does not want a trade war with the United States, as there will be no winner in that war."
At the Beijing summit, China and the EU unanimously affirmed the need to preserve the role of the WTO and to reform this organization as a means of guarding against unilateral trade actions. However, this cannot be done without the go-ahead of the United States. Given the current circumstances, the Americans will not agree to any WTO reforms that could damage their national interests, while Europe has mixed feelings. It doesn’t trust China and Russia politically, but European businessmen see opportunities for very lucrative trade and economic deals with those countries. Meanwhile, America has called Russia and China strategic rivals, and transatlantic NATO solidarity continues to hold, though NATO membership fees are now noticeably steeper thanks to Trump.
The EU-Japan trade union and the EU-China summit do appear similar. Their goal is to preserve the positive legacy created in international trade since the 1990s. However, nothing really meaningful can be done to resolve global economic problems if the US, China and other emerging economies don’t work together. The EU-Japan trade agreement, just like the old Trans-Pacific Partnership, has no place for China. The problem of reforming the mechanisms of global economic governance and the participation of new players in rulemaking is simply postponed.
It appears that creating a new global mechanism reflecting the new balance of power is not a job for today or tomorrow. Most likely, the path to creating new rules will take decades to reach, although Trump’s tough measures can speed up the process of finding a new consensus.
Reforming the WTO: Make the WTO great again?
To reform WTO mechanisms, a high degree of mutual trust and overlapping interests are needed. However, no one seems to be willing to come to an agreement, or to look for mutually acceptable solutions.
The countries that have come under US sanctions filed complaints with the WTO, and the United States responded in kind. Clearly, the proceedings will last for months and even years. There are no one-stop-shop mechanisms for fast resolution of disputes through the WTO. And the United States is unlikely to approve of anything of the kind.
Nothing can change in America until after the next presidential election. As long as Donald Trump is in the White House, no one should expect to see any restraint or receive any concessions from Washington. From the perspective of the incumbent president, the WTO is just another tool that should serve to make America great again. The process of redistribution of authority and influence within the WTO toward new economies - such as China - is just beginning and will take a while.
Russia will not stay on the sidelines, since building barriers to global trade is not consistent with its interests. However, if China, while calling for WTO reforms, continues to address its current problems, for Russia it is more a matter for the future, – one of securing a dignified position in the new world economic system, in which our country sees itself as a producer and exporter of high-tech products. The current economic pressure on Russia with the help of Western sanctions is mostly due to political factors, rather than economic competition.
The WTO will not die, as everyone understands perfectly well that once this platform is gone, there will be even more squabbles and conflicts. The economic goals of the second half of the 20th and early 21st centuries (free flow of goods, investment and labor, lifting trade restrictions and protection of intellectual property) will remain in place. However, their full-scale implementation will be possible primarily in bilateral and regional formats, rather than at the global economic level.
Globalization will not die
The center of gravity in the global economy is steadily shifting from West to East. The era of globalization based on Western norms, standards, values and laws is on the wane. Calls are emerging for a new globalization that would take into account the interests of all players, and divide proportionally the benefits and responsibilities between East and West, without reducing the matter to an arrangement where the East complies with Western demands for modest remuneration. The East - including Russia, China and India - wants to have a say in developing new global governance rules. And if there’s no such new globalization, there may be no globalization whatsoever.
But how can we achieve a new open globalization while avoiding major crises, shocks, conflicts or clashes? How can we create new mechanisms for international economic interaction in order to sustain globalization under rules that would be substantially revised with the participation of new emerging economies? The countries that understand the value of open markets and seek to eliminate trade barriers will be the ones looking for answers to these questions.
