European Commission president Ursula von der Leyen’s proposal to cooperate with the twelve countries of the Asia-Pacific trade pact CPTPP needs full endorsement. Initial steps should involve a standstill agreement that commits 39 countries to safeguard multilateral trading rules, write Tim Groser, Steve Verheul and John Clarke.
European Commission president Ursula Von der Leyen has stepped outside the comfort zone of clichés around ‘trade cooperation’ to make a concrete proposal at last week’s EU summit to prevent further erosion of the rules-based system supporting international trade.
She deserves immediate and strong political support from key centres of political power. The new German Chancellor has already done so.
What president von der Leyen is addressing is not a small, let alone academic, issue.
Some 80% of global trade, representing hundreds of millions of jobs and trillions of dollars of investment, is supported by the legal commitments developed over decades of progressive trade liberalisation. We call this loosely ‘the WTO system’. That system is under severe political pressure due to the US’s tariff war.
As European Central Bank chief Christine Lagarde put it recently: ‘Tariffs are one thing. But it is another thing to have complete uncertainty…what we are seeing on the part of economic actors…is uncertainty about the underlying rules of the game…. about the framework within which they operate’.
Let us spell this out in practical business terms: at whatever point any company may be on the supply chain, it can deal with, say, a 10% or even 20% tariff (this can be priced into any contract). No company or country needs ‘free trade’ to have flourishing trade relationships.
More broadly, all economic actors can deal what might be called ‘bounded risk’, such as the likely range of exchange rate movements, the possibility of shipping delays and other normal commercial risks. Companies can access sophisticated market instruments – at a moderate price – to hedge against them.
Toxic risk
But what is truly chilling to business activity is toxic risk. Risk of such a towering dimension that unforeseeable policy developments may make one purchasing manager’s sensible commercial decision today look utterly foolish tomorrow.
This toxic uncertainty leads, as Christine Lagarde observed, to deeply conservative decisions with a chilling effect on hiring staff, on new investments, and in developing new business relationships beyond your borders.
In the face of the looming threat of high US tariffs the EU commission president has proposed that the 39 countries, largely developed economies of the EU itself and CPTPP, meet to develop a strategy – “structured cooperation” – to counter that threat.
We agree 100%.
The threat is not some distant possibility over the horizon. The clock is ticking on the 9 July deadline imposed by the United States on around 70 countries to negotiate some type of trade “deal” or, in many cases, face higher unilateral tariffs.
The international community will have to find, in the longer term, a way to re-establish a stable framework for global trade and investment.
This is not an intellectual or technical challenge. There are legions of experts who could propose a series of adjustments to the existing framework and develop some new principles to govern trade.
Developing such a robust framework is rather a political challenge.
It is manifestly obvious that such a political project must eventually include both China and the United States, as well as other emerging centres of global power such as India and Brazil.
This is completely beyond political reach in the foreseeable future, although your authors remain hopeful that, following Churchill’s dictum, the US having tried all the wrong things will ultimately end up doing the right thing.
Stabilising their individual trade relationships with the US will be the immediate priority of the EU and TPP countries – and rightly so.
But alongside their efforts to seek short-term accommodation with the US administration, we believe it is time for a coordinated, global response to address wider systemic issues – exactly as president von der Leyen has proposed in outline terms.
Anti-American? Quite the opposite.
At a deeper level, such an initiative would be aimed at sending a subliminal message to Washington: “We hear you. We do not like what you are doing to address the problems, but we are starting a process of mapping out some possible solutions to longstanding US concerns about the international trading system”.
The best place to start? To translate into concrete terms what the president of the EU has proposed on 26 June: an agreement between the European Union and the 12 countries of the CPTPP.
The Comprehensive and Progressive Trans-Pacific Partnership is a multi-country free trade agreement, which includes Japan, the UK, Canada, Australia, New Zealand, Mexico, and several other Asian economies.
Together with the EU, the grouping, centered in the Asia Pacific and the Americas, accounts for more than 30 percent of world trade — comfortably more than twice the share of the U.S.
The first step we propose is absolutely achievable politically: a standstill agreement to resist further protectionist moves.
Let us focus brutally on the real priorities. Forget future reform of the rules to address issues long ignored by the international community. Yes, we must come to that. But that is for the future.
Our first priority is to support the 80% of world trade described above from further damage. Because protectionism is like a virus, it can spread, infecting the world trading system’s historical immune systems.
They also serve who only stand and wait – John Milton
A standstill commitment, to keep markets open to each other, to do nothing that would be WTO-inconsistent, is the first essential step.
This would not affect the rights of the 39 countries to introduce WTO-consistent trade defence measures to counter trade diversion, or continue legitimate ‘de-risking’ policies.
But those of the 39 countries who feel bound to negotiate agreements with the USA should eschew WTO-illegal preferential arrangements outside of the framework of an FTA. And they should reject pressure to take WTO-illegal measures to counter China. We should look to a future where China and other BRICS could join this standstill.
What such a commitment would do is send a massive signal to Washington that a very substantial part of the global economy, including nearly all the traditionally closest partners of the United States, remains committed to the rules-based system.
A standstill would be well received politically by the businesses and populations of the 39. Public solidarity amongst this powerful group to balance the pilgrimage to Washington to be told what the “deal” is, would be welcomed by electorates.
This process must start outside Geneva and at ministerial level with this group of 39 countries that can move decisively. In the medium term, this grouping could be a focal point for developing new rules and commitments to a trading system that can deliver continued growth and prosperity to their people.
There are no negative consequences of such a commitment for the United States, historically an important defender of open trade.
Class of ‘39
The G39 would however, be conveying an unmistakable subliminal message to those US friends uncomfortable with current trade policy trends.
A simple metaphor: we may hear in U.S. media variants of the question: “Why weren’t we invited to the Class of ’39 Reunion? Aren’t these our friends?”
It may not be possible to go very far in the initial meeting of ministers. The focus would be on the immediate and achievable objective of a Standstill.
But to be more politically credible, the ministerial we propose has to at least start addressing a much more complex agenda. Reaffirming existing commitments is vital in the present fragile environment but there are gaping holes in the system of global trade.
Very little has been done in the 30 years since the WTO was founded to plug those gaps. So a commitment on standstill should not be, to quote Nina Simone “the end of the line”.
Over time the EU and TPP countries could agree to tackle systemic challenges to global trade beyond the initial standstill concept, which is certainly what the European Commission president is hinting at.
This could even spark cautious interest from friends in Washington. At some stage, the chasm on trade must be bridged and there ARE people inside the current administration who deeply understand this. Just don’t ask them yet.
Tim Groser has served as New Zealand’s trade minister, Steve Verheul was Canada’s chief trade negotiator, and John Clarke was senior trade negotiator for the EU and head of the EU delegation to the World Trade Organization and United Nations.
To read the commentary as it was originally published by Borderlex, click here.