Osaka Previews Services Shift that Could Reignite Global Multilateral Trading System
While headlines from the Group of Twenty (G20) summit in Osaka, Japan understandably focused on the latest trade war truce between the powerhouse economies of China and the United States, media coverage unfortunately overlooked a strategically significant trade policy pivot at the summit.
The group of global policy makers in Osaka acknowledged the growing importance that the digital economy plays for supporting economic growth and innovation, and the need for the trade policy paradigm to account for this shift. While a substantial number of key policies needed to complete this shift remain incomplete, by turning their attention toward the digital economy global policy makers could help reignite discussion at the global multilateral trade level at a time when most are obsessed with bilateral negotiations.
For the last year, the New Atlanticist has consistently highlighted the important nexus among trade, the digital economy, and services for advanced economies (particularly the United States and the European Union) as well as China. My colleagues and I argued in July 2018 that commonly agreed standards for trade in services can create the foundation for a more constructive set of transatlantic trade relationships while providing support for Chinese growth. The key to progress regarding services trade is as much about finding ways to make domestic regulatory frameworks interoperable as it is about successes in the World Trade Organization regarding the Trade in Services Agreement.
Policy makers have been making quiet, steady progress throughout 2019 so far regarding these issues. The WTO has taken steps to increase transparency regarding non-tariff regulatory barriers in order to provide a foundation for concrete, data-based policy discussions. The European Commission has been quietly increasing its efforts to enhance transatlantic regulatory cooperation, starting with technical standards that support the broader ongoing discussions regarding manufacturing sector conformity assessments.
Additionally, the bilateral US-China trade tensions that have been much on display this year have not just been about tariffs on old-economy sectors. The most intractable issues have been focused on services policy issues in sectors strategically significant for supporting twenty-first century growth as noted in this post and as highlighted in the White Paper released by the Chinese government on June 2, which championed the importance of “economic sovereignty” and national standards.
These actions laid the foundation for the policy shift articulated in Osaka on June 29.
The Osaka Declaration
Traditional trade policy experts will find the Osaka Declaration underwhelming. The Declaration notes the importance of addressing the dispute resolution problems at the WTO without identifying how the impasse can be resolved. The Declaration indirectly recognizes accelerating centrifugal forces away from centralized, multilateral solutions by noting that bilateral and regional free trade agreements are “complementary” to the broader goal of promoting free trade. G20 leaders chose not to repeat their trade ministers’ language from earlier this month identifying “urgency” regarding WTO reforms generally (Ministerial para. 54) or the WTO committee work reforms specifically (Ministerial para. 56).
In other words, G20 leaders implicitly underscored the impasse at the multilateral level by failing to identify concrete measures that might break the impasse.
To be fair, G20 leaders in these areas only repeated verbatim the Ministerial Statement on Trade Policy issued in advance of the summit earlier this month. The news cycle fixation on the bilateral China/US trade truce illustrates the scale of the challenge. It is not just policy makers focused on bilateral (rather than multilateral) issues; pundits, experts, and stakeholders are also focused primarily on bilateral matters.
A Shift Towards Services and The Digital Economy
The good news from the Osaka Declaration is that policy makers are pivoting hard and fast towards a new set of issues on trade where policy interests may be more aligned. New issue areas traditionally provide opportunities for constructive engagement because entrenched positions have not yet had a chance to develop.
Trade policy experts focused on the services sector and the digital economy will be delighted with the Osaka Declaration because it indicates that policy makers are shifting their attention away from trade in goods in order to craft a new policy foundation focused on the twenty-first century digital economy. Consider two examples from the Declaration:
- Paragraph 6 underscores the importance of taking a holistic perspective that includes “all components of the current account, including services trade and income balances” when evaluating economic and trade policies. As many have noted, the United States holds a persistent and substantial bilateral trade surplus with China when services are included. Data from the United States Trade Representative indicates that in 2018 the United States also held a $60 billion surplus in services trade with European Union countries as compared with a $169 billion goods deficit. Consequently, a shift to a more comprehensive assessment of trade relationships holds potentially constructive implications for transatlantic trade talks as well.
- Paragraph 11 stresses the “importance of interface between trade and digital economy” and indicates that G20 policy makers seek to “further facilitate data free flow.”
These are small but significant shifts in policy attention.
The Challenges from Here
Yet it is too soon to celebrate. The policy shift articulated in the Osaka Declaration is not backed by concrete initiatives. Moreover, the policy issues raised by increased attention to digital economy issues promise to highlight the growing tension between national standards and multilateral efforts to generate cross-border consensus.
The Osaka Declaration confirms that the Distributed Age featuring less centralized decision-making structures has indeed arrived. The Osaka Declaration indicates the international system is evolving accordingly, with a pivot to non-tariff regulatory barriers at its core.
For example, G20 policy makers committed in Osaka only to “support the sharing of good practices on effective policy and regulatory approaches and frameworks…including regulatory sandboxes” (para. 12). These are profoundly national regulatory initiatives which to date have be used at least as much by policy makers to foster competition across jurisdictions as opposed to promoting consistency in standards across borders.
The “AI Principles” originally articulated by the Organization for Economic Cooperation and Development (OECD) were also endorsed, but the Declaration underscores that the principles are “non-binding” (para. 12).
Finally, efforts to promote increased cross-border data flows have been positioned with the goal of achieving “interoperability” (Osaka Declaration Para. 11, Ministerial Statement para. 16). This goal lays the foundation for intense bargaining among Chinese policy priorities for national standards regarding intellectual property rights, US national security priorities, and European priorities for privacy and data protection. These competing interests all point towards tactical tensions in future talks.
Increased transparency regarding good practices and interoperability among different national systems may generate a pragmatic way forward for the global economy. It may also provide an opening for renewed transatlantic leadership, where many of the relevant standards are far more well-developed and in many cases are compatible with each other. Engaging in open, honest exchanges of view may also reinvigorate the multilateral process at the WTO and elsewhere because these entities provide the only structures for sustained discussion.
Expectations for quick action, however, need to be tempered. The differences in values and priorities at national level run deep. Trust among the major participants in the trade policy debate is running low even as rhetorical heat runs high. The current climate for policy volatility lurching between trade wars and trade truces seems set to continue even as policy makers agree to shift gears to focus on strategically significant digital economy policy priorities.
Barbara C. Matthews is nonresident senior fellow at the Atlantic Council. A former US government official and global policy expert, she is also Founder and CEO of BCMstrategy, Inc., a start-up company delivering patented technology to measure cross-border policy risk and anticipate outcomes. Follow her on Twitter (@bcmstrategy) and her blog (Disruption and Data).