Friday, October 23, 2020

The multilateral system: use it, or lose it

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Asia’s businesses and households rely on a global system of rules and institutions to do business overseas. That global system is under attack, and Asian governments are yet to mobilise to stop it. Governments in the region weaken the system every time they preference short-term bilateral band-aids over long-term multilateral solutions; from managing US–China tensions to the response to COVID-19. Now is the time for Asian governments to show leadership on the global system and its reform. If they don’t use it, they’ll lose it.

Workers remove the International Monetary Fund (IMF) emblem and nation flags from the podium after a World Bank/IMF ceremony in Hong Kong (Photo: Reuters).

Losing it would be a big problem for the region. Asia relies on the global system for its prosperity. Asian governments rely on the World Trade Organization to settle trade disputes and rely on the global trade rules for the majority of their trade. They rely on the Paris Agreement to address climate change, the WHO to address global health challenges and international law to bolster security. Asia relies on the US-led global financial system for investment, finance and stability.

The global system is vital to Asia’s interests. Yet, one by one, global rules and institutions have been undermined in recent years. The United States has shelved the WTO dispute settlement process, shown contempt for trade rules and trade partners, withdrawn from the Paris Agreement and cut funding to the WHO. The United Kingdom has threatened to breach international law in its Brexit negotiations. China has responded to US flouting trade rules with managed trade and shows disrespect for international human rights law in Hong Kong and in its treatment of Uighurs in Xinjiang. The United States, China, Japan and South Korea have sidelined the multilateral system in their trade disputes. During the COVID-19 crisis the cooperation and solidarity of the global financial crisis has been replaced with confrontation and suspicion.

The multilateral system is far from perfect. It’s fragmented, inefficient and out of date. It’s been 27 years since the WTO concluded a comprehensive trade round. Its trade rules are silent on the digital economy, data flows, subsidies, state-owned enterprises, technology transfer and all the things fuelling tensions today. Attempts to plug the gaps with plurilateral and hundreds of bilateral trade agreements have created a noodle bowl of inefficient and incompatible rules that businesses and households struggle to navigate.

Finance is no better. The IMF is too under-resourced to fend off a widespread shock. Its governance structure is from a bygone era. Countries remain hopelessly reliant on the US dollar, scrambling to build mountains of costly reserves that divert resources away from development programs while hurting US exports and inflaming trade tensions. Attempts to create regional substitutes for the IMF have made crisis responses slower and less effective, often creating a false sense of security.

Whether it’s trade, finance, technology, climate, human rights or geopolitical conflict, the global system has failed to keep up with the growing need for international cooperation. But these deficiencies should inspire reform, not retreat. If out of date trade rules are fuelling tensions, the solution is to update the trade rules, not to let even more trade take place outside the rules. Global problems require global solutions. Yet the response of many countries, most notably the United States, has been to abandon the system, creating more problems and tensions in the process.

Asia’s efforts to protect the global system are not commensurate with its incentives to do so. Asia’s dependency on the global rules-based system means it has a huge stake in protecting it. Too many Asian governments have imprudently favoured short-term bilateral band-aids over long-term multilateral solutions. Responses to COVID-19 have focused on bilateral deals on trade in personal protection equipment, vaccines, borders and financial support rather than promoting regional or global cooperation. Attempts to manage spill-overs from US–China tensions have often been bilateral rather than working with other countries in the region that are in the exact same boat. While Indonesia has shown leadership in pushing for WTO reform in the G20, too few Asian countries have supported it, focusing instead on trying to put out bilateral spot fires and win favour with superpowers.

There is a better way. If Asia wants the multilateral system to survive, it needs to promote it, use it and, most importantly, reform it. US–China tensions, combined with the November US…

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