Author: Shiro Armstrong, ANU

The world will be watching Osaka next week for what is shaping up to be the most important G20 summit since the leaders convened to coordinate a response to the global financial crisis. The G20 has been less effective during ‘peace’ times but make no mistake, the global trading system is now in crisis.

The world’s two largest economies and trading nations are involved in an escalating trade war that threatens a technology war and new cold war. President Trump’s America First agenda is set to tear down the multilateral rules-based trading system that the United States underwrote for the past 70 years.

The best case scenario for Beijing and Washington is a deal outside of the established multilateral rules. That carries major direct costs to other countries and risk to the rest of the global economy. Chinese purchases of US agriculture and energy will divert trade from other suppliers and buyers. The world will move to managed trade, away from freer markets, and sideline the WTO, replacing and weakening some of its core functions that hold global trade together. These developments are anathema to Australian and Asian interests.

World leaders may be left in a holding pattern waiting for Mr Trump and Mr Xi to do a deal in Osaka. If they don’t do a deal, the trade war will escalate beyond trade, spread to other countries and put the global economy at risk.

Can the rest of the world do better than be bystanders as the two major powers try to carve up the world? Japan does not want to repeat the failure of Papua New Guinea as the hosts of APEC that failed to mediate a leaders’ statement because of China–US tensions.

The Trump administration is vetoing the appointment of new judges to the WTO’s dispute settlement body’s appellate court that is down to the minimum three judges needed to function. If this situation is not resolved by December, the enforcement mechanism of the multilateral trading system ceases to function beyond existing cases. This is the system that holds countries accountable to the world trade rules and, without it, a core function of the WTO will collapse.

The WTO is far from perfect and in need of some reform. The failure to conclude the Doha Development Round negotiations which started in 2001 has meant that rules are out of date or do not exist for new areas of commerce relevant for the 21st century. Gaps in the rules have become issues of contention between the major trading powers.

The leaders of the G20 recognise the importance of reform and, for the first time, the leaders’ communique from last November in Argentina committed ‘to work together to improve a rules-based international order that is capable of effectively responding to a rapidly changing world’. A clear direction needs to be set during Osaka’s G20 summit, or else the multilateral rules-based system will be lost.

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