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Japan walks the walk on the rules-based order

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Japanese Finance Minister Shunichi Suzuki, and Governor of the Bank of Japan Kazuo Ueda, attend the presidency press conference at the G7 meeting of finance ministers and central bank governors, at Toki Messe in Niigata, Japan, Saturday, 13 May 2023 (Photo: Shuji Kajiyama/Pool).

In Brief

Three and a half years ago the world trading system confronted the threat of its rules becoming unenforceable as the World Trade Organization (WTO)’s Appellate Body seized up amid US objections to its jurisprudence.


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This wasn’t merely some arcane bureaucratic spat. The Appellate Body is a cornerstone of the WTO, itself the culmination of a decades-long process of building a rules-based international trading system that stands as one of the greatest achievements of international politics. In its absence, the WTO is unable to meaningfully conclude trade disputes between its members, with many disputes effectively appealed ‘into the void’.

The multilateral trading system, grounded first in the 1947 General Agreement on Tariffs and Trade (GATT) and, from 1995, the WTO, gave countries confidence in opening up their economies and relying on international markets to secure energy and strategic raw material imports that, in the 1930s and before, were more commonly acquired through imperial conquest. With countries largely free from feeling exposed to economic openness being used as a weapon against them, trade policy and economic exchange could largely be pursued separately from the high politics of national security considerations — and trade disputes be resolved without resort to diplomatic or military conflict.

As Arata Kuno explains in this week’s lead essay, ‘there have been more than 600 cases dealt with under [the] WTO [dispute settlement] regime’. But ‘the WTO’s Appellate Body has been non-functional since December 2019 due to US vetoes of the appointment of judges, with the United States claiming Appellate Body overreach’.

US objections to Appellate Body jurisprudence were just the tip of the iceberg of scepticism about the free-trade ethos the WTO embodied, felt acutely in the parts of the United States that were left behind by the country’s flawed response to globalisation, as well as among politicians who felt that China had unfair advantage.

Some think that welcoming China into the WTO was a mistake. A mistake for whom? It helped lift hundreds of millions of people out of poverty — not just in China. It has embedded a market economy in the PRC, entrapment from which no Chinese political leader can escape except at huge cost. China’s growth brought security and prosperity to many in the global economic community.

To be sure, the criticisms the US has made of the WTO are not without some merit. An inability to modernise the WTO rulebook has meant rules are out of date or even absent in emerging areas like the digital economy. With all 164 members effectively having a veto — empowering serial spoilers like India — rulemaking has been difficult, but not impossible.

Both China and the United States are acting as major powers will do when they feel they can get away with ignoring rules. China has used its economic muscle against Japan, South Korea, Australia and others in failed attempts to change their policies.

Meanwhile, the United States is trying to out-China China via the CHIPS and Science Act and Inflation Reduction Act, an embrace of industrial policy and trade favouritism that makes the US energy transition more expensive and violates the global trade rules that the United States used to enforce.

A strategic interest is in defending the existing system, not just updating its rules.

Less than six months after the Appellate Body ceased to have enough judges to function, the European Union and Canada led the creation of the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), a plurilateral framework which duplicates the Appellate Body, enabling members to resolve WTO disputes among themselves. In East Asia, Australia, New Zealand, Singapore and importantly China, are now among the 53 members.

Some large economies that rely on multilateral trade rules were notably absent from MPIA. The standout absentee was Japan — but that changed in March this year when it too joined.

Japan had been torn between its support for those rules and not wanting to upset its ally the United States. Multilateralism is in Japan’s DNA, as it relies on the international market to procure its energy and raw materials under the GATT framework. It had the bitter experience of having the United States cut off supply of energy and Australia cut off iron ore in the 1930s.

Why did Japan take so long to join? Kuno explains that an argument had taken hold in Japan that a successful MPIA would slow reform of the dispute settlement system — instead of an interim arrangement, it might become a permanent substitute. Trade ministers agreed to aim for a ‘fully and well-functioning dispute settlement system’ by 2024 at the 12th Ministerial Conference of the WTO in 2022, but the US veto looks difficult to overcome heading into an election year. Joining MPIA is insurance against the United States’ holding the dispute settlement system hostage.

And more immediate self-interest in resolving a steel-related dispute with China drove the decision home, with the MPIA now set to deal with that issue. China’s opportunity to display adherence to WTO rules via its membership of MPIA is something for the global community to work with.

Japan’s membership of MPIA is timely as it hosts the G7 Leaders’ Summit this month. The United States is now the only G7 member for whom WTO rules are not enforceable — the rest are all in MPIA. Expanding MPIA membership, especially in East Asia, should give the multilateral trading system a boost.

On the G7 agenda is what to do about China’s economic coercion. Guests at the Summit, including Australia and South Korea, have been the victim of Chinese sanctions designed to change their national security policies. The United States wants a unified retaliation instrument, like the European Union has created. That looks like a kind of trade vigilantism that would get most of the world offside and would only compound the economic costs of responding to Chinese coercion. Japan appears to be resisting this idea in favour of support for sectors and countries hit by sanctions. That’s a band aid solution: the best protection against coercion is a free and open trading system and multilateral rules that support it.

Japan has an opportunity at the G7 to take a stand for the multilateral trading system. But sitting uncomfortably alongside its multilateral instincts are instincts to give in to US pressure to contain China.

The G7 summit and Japan’s actions will tell whether pragmatism will triumph over that fantasy.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

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