There are few historical parallels of great power rivals as deeply integrated as the United States and China. They have the world’s two largest economies; they are the world’s largest military spenders; and they both are increasingly in competition with each other. As the world’s two largest exporters, their two-way trade exceeded $750 billion in 2022, even as commercial ties frayed and (not coincidentally) the multilateral trading system came under deep stress.

Indeed, on issue after issue—from AI to social media and from Taiwan to Ukraine—sharp differences in values and interests create friction between Washington and Beijing. These frictions will play out in how we trade; how our technological ecosystems interact; and how we manage military competition. At the same time, U.S.-China relations cannot and should not be based solely on competition. On a range of critical issues—from climate change to illegal narcotics—cooperation will have tangible benefits for Americans and, often, for people in China and the rest of the world.

The principles behind a sound China policy

Smart U.S. policy toward China needs to be based on principles that align with the interests of people and the values of our system. As Washington formulates our approach to competition with the People’s Republic of China (PRC), we should look to policies that are:

• Progressive: Our policy should advance the interests of ordinary Americans by improving their opportunities, wages and working conditions and reducing the risk of conflict and military involvement abroad—burdens of which they would disproportionately bear.
• Principled: We should have confidence in our values and be forthright in speaking when China violates basic human rights. We should not try—and would fail if we did—to emulate the fear and coercion that are the hallmarks of autocrats. We will succeed by being better Americans, at home and abroad.
• Pragmatic: China does many things at home; around the world; and in its relations with the United States that don’t align with our values or are contrary to our interests. But the United States has limited time, attention, and money, so we have to focus on the truly vital. No matter its provenance or pedigree, if a policy has not worked, we should do something else.
  Farsighted: Our children would not forgive us if our approach to China results in a world devastated by climate change or war; U.S. workers immiserated by a race-to-bottom economics; or American values eroded by racism or undemocratic actions.
• Collaborative: Our partners around the world are a major source of American strength. Sustaining that influence requires that we listen to their views, understand their needs, and take into account their concerns.
• Evidence-based: The United States should base our policies on facts rather than fear, hope, or ideological assumptions.
• Humble: Humility about the limits of American power is a hedge against unsustainable commitments abroad. The United States spent 20 years, a trillion dollars, and more than 2,000 American lives in Afghanistan and had little impact on its direction. We have far less influence on China. The United States brings its strongest influence to itself, so that is where we should focus our energies and our resources.

Recurring themes

The extraordinary breadth of the U.S.-China agenda means policymakers need a wide range of tools to respond. But certain themes run through each of the eight baskets:

• U.S. work starts at home. If we are serious about competing with China, we need to get serious about making the investments that will allow us to do so.
• There is no conflict between strong and smart. Even as we compete vigorously, we should not seek confrontation. Indeed, preventing conflict should be a major focus of U.S. diplomacy with Beijing.
• We should be confident in our system. Our democratic values set us apart from China; make us stronger at home; and more attractive as an ally and partner abroad.
• Our concern is the behavior of the Chinese government and Communist Party. As we pursue policies to address Beijing’s actions, we must make clear—in word and deed—that our focus is not ordinary Chinese or people of Chinese heritage.
• We need to talk. Our preeminent positions in the global economy; the complexity of the issues before us; and the consequential risks of misunderstanding require direct, regular U.S.-China senior-level exchanges by the administration and Congress.

The issues

What follows is not an effort to assess every aspect of the U.S.-China relationship; map out every connection between every issue; or respond to every headline. Instead, it is an attempt to define the overarching challenges we face in eight broad areas: trade, technology, climate change, military competition, Taiwan, human rights, China’s role in the world, and a cooperation agenda.

Trade: Decades of U.S. trade diplomacy aimed to right the impacts of China’s unfair trade practices have done little to correct the commercial imbalances, which contributed to deindustrialization in the United States and a hollowing of the American middle class

• China has a long legacy of conducting unfair trade practices such as massive export subsidies and state-sponsored intellectual property theft, as well as illegal activities like its use of forced labor. And we must take those on. But just blaming China obscures the impact of bad U.S. trade and economic policy decisions over the last several decades.
• We must make transformational investments in the U.S. industrial base and workers, focusing on sectors where we want to establish or maintain global leadership.
• Experience shows that China will not “play fair” or change its ways, so modernized enforcement tools will play a key role in a long-term, strategic competition.

Technology: Technology will be at the heart of U.S.-China competition, as semiconductors, AI, and other technologies reshape our economies and our militaries.

• The U.S. government needs to make transformational domestic investments in key technologies and our tech workforce. In addition, the United States needs tools and other resources to protect our existing advantages in critical technologies.
• The United States needs new general technology regulations and must work with foreign partners to set rules for the digital economy in line with democratic values.

Taiwan: Washington can manage Taiwan Strait tensions, even as China’s actions raise risks and concern—through military deterrence; direct engagement with Beijing; and continued diplomatic efforts to pull third countries into the conversation.

• We have an interest in Taiwan’s success given its status as a fellow democracy. Its dominance in advanced semiconductors also means we have a significant economic stake in Taiwan’s security.
• We should reinforce an equilibrium in which Taiwan improves its resiliency even as Beijing continues to believe there is a long-term path to “reunification.” This may leave all sides somewhat dissatisfied, but it is far preferable to the alternative.
• In concrete terms, that means the U.S. government—both the executive branch and Congress—should prioritize effectiveness and impact over symbolism and stunts.

Military competition: China is the only competitor to the United States with the intent and—increasingly—the capacity to reshape the global order. The United States faces the challenge of a rising China from a position of strength, even as China’s military grows.

• We can meet the military challenge without increasing the defense budget by capitalizing on existing strengths, spending smarter, and rethinking procurement.
• We must reinforce our alliances—a key security and geopolitical advantage.
• The United States needs to manage risks by maintaining dialogue with China’s military, including on emerging issues such as cyber and AI.

Human rights: China’s human rights situation has deteriorated markedly under Xi Jinping, even as China touts its “model” of autocratic governance abroad.

• We should shine light on China’s human rights abuses—as our values require us to do—while recognizing our influence on how Beijing treats its citizens may be limited.
• We need to push back firmly against the increasing incidence of transnational repression by Chinese officials, particularly when it happens in the United States.
• If the United States does not lead on human rights internationally, we cede the field to Beijing’s profoundly different—and illiberal—vision.

China’s role in the world: As China’s economic power has grown, so has its ambition to shape the global order to its liking. The United States needs to provide (and invest in) an alternative vision and help our allies and partners resist Chinese bad behavior.

• The United States is right to be concerned about China’s vision for the world and should push back against a Chinese model that makes people less free; drives up debt in the developing world; and undermines American interests.
• Our alliances multiply our influence and reduce the risk of conflict. We should help our partners resist coercion and strengthen their democratic institutions.
• The United States cannot just warn countries not to borrow from China; we need to offer real alternatives. It is impossible to beat something with nothing.

Climate change: The world will not avoid catastrophic climate change if China and the United States—the world’s largest greenhouse gas emitters and technology leaders—do not lead by accelerating climate action. This requires cooperation, even as we compete.

• The United States, with its international political heft, technical expertise, and climate history with China needs to employ all levers to press China for stronger action.
• Policymakers will need to weigh climate, economic, and security benefits and risks of allowing Chinese products in the U.S. clean-energy transition. We need to prioritize the interests of American workers but full decoupling is not an option given China’s dominance over key technologies and supply chains.
• U.S.-China competition can be a positive force if we “race to the top” to meet our domestic—as well as the rest of the world’s—clean energy needs.

Cooperation: As the two most consequential countries in the world—and with certain shared interests—the United States should be confident in cooperating with China, especially when it advances U.S. interests, even as we compete in many areas.

• We cannot allow U.S.-China relations to be defined solely by competition. On issues such as stopping the flow of fentanyl and other illegal drugs, we need to cooperate when we can to advance U.S. national interests and the interests of ordinary Americans.
• Cooperating is a way to advance mutual interests—not to do favors for the other. It is against our interests to refuse to cooperate because we disagree with China about many things.

Meeting the central foreign policy challenge of the 21st century will require the United States to be smart and strong, to invest in itself, and to be ready to talk as well as to compete with China. CAP lays out a framework for policymakers and the public to rally around.

To read the full report as it was published by the Center for American Progress, click here.

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Today, a new chapter may have opened. In the wake of financial crises unprecedented since the Great Depression, persistent economic inequality, migratory pressures on Europe and the United States intensifying in the mid-2010s, Brexit, the norm-breaking U.S. Trump administration of 2017-21, the first global pandemic in a century, an accelerating climate crisis, the Russian invasion of Ukraine, and the newest Israel-Gaza war, the world looks to have moved into a distinct era echoing many of the interwar tensions that the post-World War II settlement sought to overcome. And unlike in the 1920s and 1930s when radio first became widely available, modern media display global stresses to everyone visually and in real time and amplify them in a way undreamed of then. How much reversion toward the troubled past is likely, and to what extent will that reversion undermine the global community’s ability to address common challenges, some inconceivable before World War II?

As an economist, I will focus mainly on issues related to commerce and finance, but the nature of the current malaise underscores the inherent inseparability of geopolitics, domestic politics, and economics. The destabilizing potential of this interplay was less salient for parts of the postwar period, especially in the quarter-century or so from the collapse of the Soviet bloc over 1989-91 to the mid-2010s. After that brief belle époque, however, history has indeed returned, with a vengeance.

In this paper, I start by briefly summarizing challenges the Bretton Woods system’s monetary, financial, and commercial arrangements were meant to overcome, and factors that led to the system’s unraveling by 1973. I then describe how economic globalization exploded under the newer floating exchange rate arrangements, and how the Global Financial Crisis years 2008-09 appear under various metrics to be a watershed for global economic integration. Geopolitical developments in recent years may have accentuated the disintegrative forces in the global economy—it is still early days. I therefore turn to the links between geopolitics, domestic politics, and economics and the prospects for future multilateral global cooperation on a range of macro-critical common threats.

Maurice Obstfeld, C. Fred Bergsten Senior Fellow at the Peterson Institute for International Economics, is the Class of 1958 Professor of Economics emeritus at the University of California, Berkeley, where he taught between 1991 and 2023.

To read the abstract published by the Peterson Institute for International Economics, click here.

To read the full working paper, click here.

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In general, no major breakthroughs

The list of themes on the agenda of MC13 includes a wide range of issues, such as agriculture, an extension of the agreement on fisheries subsidies, trade and development, and dispute settlement reform. On most of the issues, members do not seem close to achieving an agreement. Some of the reasons for this are external to the WTO dynamics – for example, the US is one of the main proponents of dispute settlement reform, and no progress on this issue can be expected before the upcoming US elections. Difficulty in fostering convergence also relates to the fact that WTO members seem to be increasingly inhabiting different ‘filter bubbles’. They have very different assessments on where the Doha Development Round stands at the present time, and where to go from here. Diverging opinions lead to different understandings of the present situation, as well as different views on priorities and next steps. WTO members seem to be trapped in a clash of narratives, which opposes groups of countries across fault-lines, contributing to the gloomy mood in the weeks leading to MC13. Options on the table are not clear and narrow enough for Ministers to be able to bridge gaps.

The agenda item on e-commerce

In Abu Dhabi, members will discuss the continuation of discussions taking place under the Work Programme on e-commerce, and will decide on the future of the current Moratorium on Customs Duties on Electronic Transmissions. The Work Programme, launched in 1998, involves all WTO members, and aims to build understanding around the trade-related aspects of e-commerce, including the relation between e-commerce and existing WTO agreements, and its interplay with development. The Moratorium was also introduced in 1998, and exempts digital products, such as online films, music, and software from tariffs (customs duties) as they cross borders. The Moratorium has been extended roughly every two years by consensus, and the current extension will expire at MC13.

The continuation of the Work Programme could be relatively straightforward, especially considering the 2022 Ministerial decision to reinvigorate the Work Programme, and the concrete efforts made to ensure that the discussions emphasize the development dimension. However, the issue may become embroiled in the controversy surrounding the extension of the Moratorium. While some countries hope to make the moratorium permanent, others are increasingly putting its renewal into question. A vocal group of developing countries – including India, South Africa and Indonesia, among others, claims that the Moratorium is depriving developing countries of much needed revenue, citing a study that supports this position. This revenue loss could be even more significant in the future, as digitalization continues, and new technologies, such as 3D printing, develop.   

Alternatively, the Moratorium is supported by a considerable group of WTO members, including the EU and China, and by a large number of organizations in the business sector, as can be observed from a recent Global Industry Statement. Countries often cite studies produced by the OECD, WTO and St. Gallen Endowment for Prosperity Through Trade, among others, to argue that the imposition of customs duties would not only be difficult and costly to implement, but it would actually bring reduced additional revenue to developing countries. In general terms, developed and developing countries agree on the importance of increasing governmental revenue collected from e-commerce transactions, but not on the preferred instrument to do so (tariffs or domestic taxation, such as VAT).

Rendering the Moratorium permanent is not achievable in MC13. Currently, there are split views on whether the Moratorium will be extended for another couple of years or not. While some think an extension does not seem likely – especially considering the US wavering commitment to the liberalization of digital trade – others believe that the give-and-take dynamics at the WTO will once again produce compromise. All sides agree, however, that the extension is becoming harder to approve at every Ministerial, and the multilaterally-agreed Moratorium may be coming to an end. This would not mean, however, that the topic would be absent from the WTO, since a moratorium on customs duties is also being discussed in parallel by the Joint Initiative on e-commerce, an ongoing negotiating process among 90 WTO Members aiming to produce a binding agreement on e-commerce among participants.  

The side discussions at MC13: Joint Initiative on e-commerce

A statement issued by the co-conveners of the JI on e-commerce made clear that, despite best efforts made throughout 2023, a final agreement would not be concluded by MC13. The JI officially began negotiations in 2019 with an ambitious agenda, which included enabling issues, customs duties and market access, as well as a wide range of digital policy issues, such as data flows, localisation, data protection, access to the source code, cybersecurity, and spam. A preliminary agreement has been achieved in the broad areas of digital trade facilitation, open digital environment, and business and consumer trust, covering thirteen specific issues.

Henceforth, negotiators will focus on topics in which agreement could be “within reach”, according to the co-conveners, such as e-payments, development provisions, and customs duties. Nevertheless, the future of negotiations on some of the most ‘digital’ issues, such as data flows and source code, is uncertain. These issues have been very polarized from the outset, and suffered a considerable setback when the US decided to withdraw its support for these areas in order to preserve domestic policy space.

In January, the co-conveners issued a ‘Chairs’ text’ which expresses their views about where the landing zone of potential agreement could be. This text will inspire side discussions at MC13. Negotiators will seek to take advantage of the presence of high-level officials to unblock stalemates before the March round of negotiations of the JI begins.

The indirect impact of other MC13 agenda items on digital trade

At MC13 discussions on WTO reform will continue, including on whether and how to incorporate agreements produced by Joint Initiatives into the WTO legal architecture. Some actors see Joint Initiatives as key mechanisms to make progress on trade liberalization, in a context in which consensus on rule making has been harder to achieve on a multilateral basis. Others argue that Joint Initiatives go against consensus-based decision-making and weaken multilateralism at the WTO. India, South Africa, and Namibia in particular, introduced a communication questioning the legality of Joint Initiatives and their outcomes.

During MC13, the chairs of the JI on Investment Facilitation for Development (IFD) will seek the inclusion of the recently-produced agreement under Annex 4 of the Marrakesh Agreement, which deals with WTO Plurilateral Agreements. Nevertheless, such an inclusion would require a hard-to-achieve consensus among all WTO Members. In this context, the JI on IFD will be an important test-case for other JIs, including for a JI on e-commerce agreement.

Another issue under discussion during MC13 with impact not only on digital trade, but also on digital policy, more broadly, is the ‘Draft ministerial declaration on strengthening regulatory cooperation to reduce technical barriers to trade’. The Committee on Technical Barriers to Trade (TBT) has been one of the hot spots in which geoeconomics have more clearly reverberated in the work of the WTO. In recent years, the number of trade concerns related to digital issues have been rising.  

On the one hand, domestic regulations have been questioned under the TBT Agreement, notably in fields such as cybersecurity and cryptography. On the other hand, Members of the TBT committee have discussed the role of international standards in addressing (and mitigating) regulatory fragmentation in the field of emerging technologies, such as artificial intelligence. The draft declaration states that “cooperation on emerging issues – particularly in the context of international standards development and adoption – provides an opportunity to promote regulatory convergence where appropriate”. The declaration urges the the Committee to enhance its work on emerging regulatory challenges, including in the digital economy.

Looking forward: The impact of MC13 on digital trade governance

The outcomes from MC13 are not going to significantly change the e-commerce landscape. The non-renewal of the moratorium would carry an important symbolic weight, and could be a setback against the WTO’s primary goal to remove tariff barriers to trade, contributing to sapping trust in the Organization. Nevertheless, even if the Moratorium is not renewed, many countries have already committed to a moratorium on customs duties in the context of free trade agreements that they celebrated – according to the OECD 95% of digital trade chapters include such provision. Moreover, if a moratorium is agreed in the JI, at least 90 countries would abide by it at the WTO. The end of the moratorium would certainly create policy space for the countries which have not committed to the non-introduction of customs duties, but it is not clear whether and how they would make use of such space.

One of the collateral consequences of MC13 could be, therefore, to highlight once more the key importance of FTAs for the legal architecture of global digital trade. In particular, FTAs could be seen as the way to “get things done” if the opposition to JIs manages to deter the incorporation of outcomes from joint initiatives into the WTO legal architecture. This could consolidate the growing perception that the most dynamic aspects of the digital economy need to be taken elsewhere and discussed separately, notably in Digital Economy Agreements (DEAs). The WTO continues to be a custodian of the baseline agreements that serve as pillars to the global trading system. However, advancements are taking place outside the WTO framework, at different speeds and geometries, enhancing the complex tapestry of trade policy and regulation.  

Marília Maciel is the Head of Digital Commerce & Internet Policy at Diplo.

To read the full blog post published by Diplo, click here.

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After World War II the United States, several European countries, and other liberal democracies promoted a vision of international economic relations that was deeply influenced by the consequences of the failed policies of the 1920s and 30s. In place of the nationalism and protectionism that characterized much of that period, the United States and its partners developed a framework for global economic order, one that stressed the primacy of multilateralism, openness, and rules. This commitment took concrete shape in institutions like the World Bank, the International Monetary Fund, and the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO) that have universal or near-universal membership, have aimed to advance greater international economic integration, and are grounded in international law.

This nearly 100-year cycle of destructive Realpolitik followed by idealist multilateralism is now mutating into a new global economic order whose contours are still being defined. One of the key drivers of this evolution is climate change. Within the next few years, the primacy of the multilateral trading system will be challenged by the imperative of combating this unprecedented planetary emergency. To manage that scenario, the principal stakeholders in the current system must begin charting a new path toward a future international climate order that guarantees both legitimacy and effectiveness.

Institutionalism and Experimentation

The narrative of the post-war period that puts the institutionalism of the World Bank, the IMF, and the WTO at its center is only part of the story. From the start, the rules of the GATT and then the WTO (Article XXIV) have also allowed for bilateral or regional agreements below the multilateral level if they fulfill certain criteria, and those arrangements should also be seen as contributing to the post-war economic order.

The most striking demonstration of this phenomenon is the European Union (EU), which began as the six-member Common Market in 1957 and has expanded to an economic superpower comprising twenty-seven states. Two more recent examples of this experimentalist approach are the North American Free Trade Agreement (NAFTA) signed by the United States, Canada, and Mexico in 1992 and the 2018 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) among eleven countries. The Transatlantic Trade and Investment Partnership (TTIP) launched by the United States and the European Union in 2013 would have been the largest such free trade agreement (FTA) had it not come to a halt in 2016 owing to differences over agriculture, government procurement, and investment.

WTO rules also permit plurilateral agreements among a coalition of its members on a given sectoral trade issue such as the 1994 Government Procurement Agreement, the 1996 Information Technology Agreement, the Environmental Goods Agreement whose negotiations stalled in 2016, or the ongoing talks aimed at achieving an agreement on electronic commerce. These agreements, sometimes known as “Joint Statement Initiatives,” can be either exclusive or open depending on whether they grant benefits only to WTO members participating in them directly or also to non-participants on a most-favored-nation (MFN, or equal treatment) basis. The Information Technology Agreement is an open plurilateral while the Government Procurement Agreement is an exclusive one.

Not only was a certain diversity of method tolerated or even encouraged by and within the principal post-war institution responsible for creating rules for trade policy. The GATT and then the WTO were never the only fora that contributed to this new cooperative international economic framework. The Organization for Economic Cooperation and Development (OECD)—which emerged from the earlier Organization for European Economic Cooperation that managed Marshall Plan aid—has also played a key role in developing principles on issues like bribery and corruption, international investment, and more recently artificial intelligence and carbon accounting.

The International Energy Agency (IEA), founded in 1974 after the first oil crisis, is one of the first examples of cooperation among like-minded countries that incorporated a geoeconomic perspective in its work by aiming to ensure that an economic and commercial tool (energy policy) would support the national security goals of its members. The G7, inaugurated in 1975 by German Chancellor Helmut Schmidt and French President Valéry Giscard d’Estaing (and which includes the EU as a member), has evolved from a focus on macroeconomic issues like exchange rates and current account balances to geoeconomic coordination, most recently demonstrated in the group’s decisions to withdraw MFN treatment in the WTO from Russia (providing the policy space for the imposition of tariffs) and to agree a price cap on its oil exports after the country invaded Ukraine in February 2022.

Multilateralism and the Question of Ends and Means

In light of this pluralist approach that the United States and its European partners have relied on to advance their prosperity in the post-war economic order, it is worth asking whether multilateralism should be viewed as a kind of steady-state object of policy or rather one means to serve transatlantic interests. Given the fact that multilateralism was the main (but not the only) driver of the liberal economic order for most of the post-World War II era, it is understandable that it could be seen as the overriding goal of policy.

But an equally strong case can be made that multilateralism was one of several methods that served a more important objective: a global economic order that reflected and advanced the liberal values of its leading proponents. These values—a balance between the imperative of stability and the desire for human progress; openness to innovation and exchange; the rule of law; high standards for workers, consumers, and the environment; the primacy of the individual over the state, and fairly regulated competition—should not be negotiable. Yet multilateralism is not the sole avenue available to guarantee that they will thrive. On the one hand, had the bilateral Transatlantic Trade and Investment Partnership between the United States and the EU succeeded, it would have been a major step forward for a high-standard global economy. On the other hand, the inability of the WTO to counter certain nonmarket economic practices of its member states—for example, its 2011 ruling on subsidies by Chinese state-owned enterprises—illustrates the challenges faced by multilateralism in promoting liberal values.

Despite the limits to multilateralism that have emerged in recent years, the Uruguay Round of trade negotiations that led to the creation of the WTO in 1994 was a major achievement in post-war global economic governance given its innovation of a legally binding dispute settlement system, and the WTO remains a key provider of international economic order today. But with a more diverse and more contentious global economy—one where China and its state capitalist economic model challenge liberal values and other countries such as India, Brazil, and Indonesia are asserting their interests more forcefully—it is natural that a less institutionalist, less monolithic approach to creating rules and norms is already gaining traction. A pragmatic conception of policymaking that first seeks to build cooperation among like-minded economies is not necessarily a sign of a retreat from the task of promoting global economic order; it can instead be a rational response to changes in the dynamics of the external environment in which policymaking must operate.

A Geoeconomic Approach to Statecraft

Under the banner of either the friendshoring or derisking of their international trade relationships, the United States and the European Union have now had four meetings of their Trade and Technology Council, a non-binding but important avenue for aligning transatlantic objectives in the global economy that was inaugurated in 2021. A year later, the United States and thirteen countries in Asia launched the Indo-Pacific Economic Forum, and both the United States and the EU are pursuing stronger links with emerging and poorer countries through finance and investment-based initiatives like Build Back Better World and Global Gateway, respectively.

This shift from a more single-minded institutional strategy to one that includes ad hoc, issue-based, and flexible coalitions reflects a broader evolution in thinking about the purpose of international trade and economic policy. New concerns like the resilience and security of supply chains, how to govern the use of artificial intelligence, and the increasing urgency to combat climate change have led to a reconsideration of the aims of policy. In a global order undergoing such mutation, economic efficiency will remain a key concern of transatlantic economic statecraft, but it will need to share the spotlight with other priorities like national security and sustainability.

To succeed in shaping this new global economic order, the United States, the EU, and other economies that share their values and interests—but also less like-minded ones that may respond to both the right incentives and inclusive rules—will need a common vision of the international economy of the future, a spirit of experimentation on the road to that goal, as well as an agility in managing short-term frictions during a period of transformation that will inevitably arise even among countries with broadly shared outlooks.

Beyond the longer-term question of institutions, agreements, and norms, there is already evidence that trade flows are being redirected to countries that share similar geopolitical interests, even if globalization—the exchange of goods, services, and capital across national borders—is not in retreat overall. From an economic efficiency perspective, it would be justified to describe this phenomenon as a case of geoeconomic fragmentation, since the reshuffling of supply chains that it involves may indeed redistribute economic growth in the short term. However, if national security and values concerns are added to the equation, a better term for these changes is “rebalancing.” Whether it is reducing asymmetric dependencies such as raw materials monopolies that could potentially be leveraged by a competitor or adversary or pursuing trade policies that combat climate change through decarbonization, a more geoeconomic approach to policymaking that integrates efficiency, security, and values is likely to be the most effective path to a sustainable economic order.

An International Climate Order

Within this emerging, more diffuse form of globalization, one issue stands out: climate change. It is a planetary emergency that will require years to overcome. As a result, any reform to the structure and rules of the international economic order over the next five to ten years should ensure that it also becomes an international climate order. Given continued rising temperatures, the status quo will not guarantee success; the question is what can and should be preserved from the established economic order and what innovations are necessary. In this process, the issue of sequencing will be key: when to emphasize the strengthening and reform of existing institutions and agreements, and when to invest in new and emerging venues for cooperation and rules-making.

While countries may have differing or even opposing national security agendas, all are affected by climate change (if not all equally). The UN International Framework Convention on Climate Change (UNFCCC) is an important multilateral process to combat global warming, but its commitments rely on the moral force of leadership, the example set by best practices, and the competitive dynamic of peer pressure since they remain voluntary. One noteworthy step taken at the Conference of Parties in the United Arab Emirates (COP 28) at the end of 2023 was the decision for the first time to devote a full day to discussions about the role of trade in promoting climate goals. By doing so, the UNFCCC has in effect broadened its consideration of how to achieve the objectives of the 2016 Paris Agreement to include trade policy measures like tariffs, standards, and subsidies.

The World Trade Organization, for its part, has recently stepped up its efforts to make trade policy a force for climate progress. One such initiative was the launching of the “Structured Discussions on Trade and Environmental Sustainability” (TESSD) in November 2020. The TESSD aims to make the WTO’s work on trade and the environment more responsive to the climate crisis, to promote sustainable global value chains, and to ensure that any future reform of WTO rules—including those governing fossil fuel subsidies—places a strong emphasis on climate goals. Additionally, in 2022, the WTO devoted its annual World Trade Report to the issue of climate change and international trade.

But the WTO faces several challenges in playing the role of fulcrum in a future international economic order that is also by necessity an international climate order.

Ambiguous Rules, Uncertain Reform

First of all, there is an inherent ambiguity in WTO rules regarding the nexus of trade and climate policies. Article XX (general exceptions) states that “nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures…necessary to protect human, animal or plant life or health” or “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.” That language would seem to provide the policy space for countries to use measures that may impact trade or economic growth in the short term as long as they promote climate goals.

But Article XX also begins with a non-discrimination caveat: “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade…”

So far, although the WTO has ruled on broader environmental issues, no matter relating to climate policies strictly defined has been brought before the WTO dispute settlement system. Barring a reform to its rules, it is thus uncertain how the WTO would adjudicate a case that could serve to resolve the tensions inherent in Article XX. The prospects for reform, however, are also uncertain given the differing perspectives of its members even with regard to a global public good like combatting climate change. Some of these divergences relate to the interpretation of the UNFCCC’s language about “common but differentiated responsibilities” for climate action based on a country’s particular situation.

Destressing the Multilateral Trading System

This reality, however, begs the question of whether it would be advisable from the perspective of creating a future international climate order to ask the WTO under its current rules to play the role of sole arbiter of trade policy’s legitimacy as a force for a greener planet. To take two examples, both the U.S. Inflation Reduction Act (IRA) passed in 2022 and the EU Carbon Border Adjustment Mechanism (CBAM) that was introduced in 2023 could be seen as violating WTO rules in different ways and to different degrees.

The IRA’s language laying out how a consumer can qualify for an electric vehicle tax credit includes local content provisions that appear to be inconsistent with WTO Article III on national treatment on internal taxation and regulation. And although the EU has been scrupulous about designing its CBAM to conform to WTO rules, it may be open to a complaint about its adherence to the non-discrimination principle in both Article I (most-favored-nation) and Article III. This is not a hypothetical concern: India has already indicated that it may challenge the CBAM in the WTO dispute settlement system.

Were a WTO panel to rule against the IRA, the CBAM, or both, it is worth asking who would suffer a greater loss of legitimacy. Would it be the United States or the EU, who are trying to combat the existential threat of climate change through trade policy, or rather the WTO that was deeming such actions illegal? If the goal is to reform today’s international economic order so that tomorrow it also becomes an international climate order, it should not be in the U.S. or EU interest for the WTO to suffer a reputational loss on this very issue.

Part II: A Strategy for a Sustainable Global Economic Order

Any approach to building a reformed global economic order that places the imperative to protect the climate at its center needs to start with the World Trade Organization, since no other institution at the moment has the wide membership (164 countries), the policy achievements (the dispute settlement system, several plurilateral agreements, a record of work on environmental issues), and the legal basis to command the attention and instill the commitment of the leading economies. Yet, because of the tensions arising from the diversity of the WTO’s membership, the ambiguity of its rules, and the uncertain path to reform, it cannot end there. There may be no “Planet B,” but the planet requires a Plan B for global economic order.

There are three ways that the United States, the European Union, and other economies with similar interests can make good use of the WTO in the short to medium term as they seek to integrate climate objectives into the international economic order.

First, given the concerns outlined above about a potential negative decision by the dispute settlement system on the U.S. IRA, the EU CBAM, or another national climate policy measure, the United States, the EU, and a group of like-minded countries (what is sometimes known as “G7 plus”) should agree to and advocate for a moratorium on bringing any new cases before the WTO that link trade and climate policy. Such a step would help to destress the multilateral trading system at a time when it faces a challenging agenda before­ and after its February 2024 Ministerial Conference (MC13).

Second, this same G7 plus constellation of countries should pursue a concerted effort to reform the WTO’s rules so that they become more climate friendly. Resolving the ambiguity surrounding the issue of discrimination in Article XX environmental exceptions would be one significant step; so would creating more room for green subsidies and penalizing those for fossil fuels. These moves would help provide the leeway for governments both individually and collectively to experiment with new trade policy tools to promote decarbonization. They may also improve the likelihood that the dispute system’s Appellate Body—now lacking the quorum necessary to hear cases—could again become operational. While it is not the only issue at stake in dispute settlement reform (the use of the Article XXI national security exception, subsidies, and the role of state-owned enterprises are others), progress on climate could help to change its dynamics.

Third, at a later date when there may be greater clarity on rules and a more favorable political climate, a transatlantic push to restart the Environmental Goods Agreement would provide an avenue for trade liberalization to advance climate objectives. This step could be paired with the launch of negotiations toward an Environmental Services Agreement, which would be particularly beneficial to the U.S. and European economies.

Beyond Multilateralism? A Plan B for Global Economic Order

Given the constraints facing a WTO-centric approach, however, the time is ripe to conceive a Plan B for building an international climate order that draws—to various degrees—on  unilateral (or what the EU would call “autonomous”), bilateral, and plurilateral measures that would go beyond but also work in parallel to multilateralism. While it should not be excluded that the WTO will one day become the principal agent for managing a new climate order, it is important to remember the paradox that the most direct road is often not the shortest way to reach a desired destination. There will be a benefit to exploring alternative paths that may at first look like detours from multilateralism but that could in the end lead back to it.

Unilateral or Autonomous Measures: The IRA-CBAM Incompatibility

When it comes to unilateral or autonomous trade measures that can promote climate goals, the U.S. IRA and the EU CBAM are two of the most prominent. They are both effective examples of climate action, but can they contribute in a concerted way to a new international climate order? The IRA is a subsidies-based approach to decarbonization that contains certain local content provisions that may constrain trade. Yet the United States has already signed a Critical Minerals Agreement (CMA) with Japan and is negotiating one with the EU to open the IRA’s rules on consumer tax credits for electric vehicles to these large and close partner economies in a way that will benefit the climate. The United States and the EU also launched a Clean Energy Incentives Dialogue in 2023 as part of their Trade and Technology Council with the goal of coordinating climate-related subsidies in the IRA and the European Green Deal. Both of these steps demonstrate the value of using national frameworks as long as they remain open to alignment with key partners.

The goal of the EU CBAM is to incentivize trading partners to decarbonize in the six areas of economic activity that it covers (cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen) and to provide a level playing field for EU firms. Under the CBAM, goods imported to the EU in these six sectors will have to demonstrate that they are governed by similar restrictions on carbon intensity as those imposed on EU production via its Emissions Trading System. If not, they will be required to buy emissions trading certificates—which would effectively operate like a tariff—or be barred from the EU single market.

While the IRA and the CBAM are useful elements on the road to a new global economic order with climate at its center, they also have limitations. Neither of these unilateral/autonomous efforts—subsidies-based ones like the IRA or those starting from a domestic carbon price like the CBAM—will be sufficient on its own to forge the common rules and bring together the critical mass of countries for the effectiveness and legitimacy a new climate order will require.

Now, it is true that several countries or sub-federal regions have a carbon tax or emissions trading system, and some are considering a CBAM. In principle, that would suggest the EU CBAM could be the germ of a future global approach to decarbonization. However, one shortcoming of the CBAM is that none of the revenues it will generate from taxing imports are earmarked to help poorer countries, who will face serious adjustment costs to scale up to less carbon-intensive production. Without such a financing vehicle it will be difficult to rally countries outside the nucleus of the richest economies to a future international climate order. It is also true that a collection of disjointed border measures without a set of rules to govern them would almost certainly lead to inconsistencies in their application and political tensions among the countries involved.

Bilateral Approaches: The Lesson of GASSA

When it comes to bilateral efforts, the most significant example to date is the negotiations between the United States and the EU toward a Global Arrangement on Sustainable Steel and Aluminum (GASSA). The aim of GASSA is the free trade of steel and aluminum across the Atlantic accompanied by joint measures to limit or block the imports of products that are both unfairly subsidized and more carbon-intensive than equivalent U.S. and European metals. Once such an agreement is reached, the Biden administration would permanently remove the tariffs placed by President Trump on steel and aluminum from the EU in 2018 under the authority of the national security exception in Section 232 of the 1962 Trade Expansion Act. At the moment, tariffs on the EU have been only provisionally removed and a tariff-rate quota is in place that subjects EU exporters to various reporting requirements and could lead to quantitative restrictions when those exports reach a prescribed level.

The failure of the United States and the EU to reach agreement on GASSA at their summit in Washington in October 2023 points to the limits of bilateral approaches as the basis for an international climate order. One reason for the inability to conclude the deal lies with the differing U.S. and EU starting points where trade and climate policies intersect. The EU’s CBAM is a price-plus-tariff approach while the U.S. IRA is based on incentives (subsidies). While Washington has no existing mechanism that links tariffs with carbon intensity the way that GASSA would, Brussels has just launched its CBAM which does exactly that. It is unclear how the EU could maintain the integrity of its CBAM that includes iron and steel while entering into a second regime governed by GASSA that also covers steel imports. At the same time, it is unrealistic to expect other countries to simply adopt the EU CBAM given that their domestic political and economic realities will be different.

Plurilateralism: The Climate Consortium

The challenges facing the WTO as well as the constraints on unilateral/autonomous and bilateral measures to serve as the building blocks of a future international climate order suggest that a “Climate Consortium”—a binding plurilateral or coalition of the willing approach to the governance of trade and climate policy—will be most likely to achieve desired outcomes. A Climate Consortium is inspired by the idea put forward by Nobel Prize laureate William Nordhaus in a 2015 paper called “Climate Clubs: Overcoming Free-riding in International Climate Policy.” It shares certain features with the more recent version of a climate club put forward by the German government during its G7 presidency in 2022 and launched at COP 28 in Dubai in 2023 but also goes beyond it in important ways.

The advantage of a Climate Consortium lies in three important areas.

First, as the challenge of building an international climate order is too large for any single policy approach or single country to solve, there needs to be a framework that encompasses a wide variety of tools and a diversity of economies. The consortium can and should have the ambition to include at least 40-50 countries at the start from several geographies and economic conditions. It should begin its mandate with an inventory of policy options in a range of areas including a carbon price, subsidies, tariffs, carbon-intensity standards, regulations, and—crucially—financial aid to poorer countries. Without an obligatory mechanism for financial flows to such countries to help with their decarbonization efforts, the Climate Consortium could be seen as a way to protect richer countries from trade competition—particularly if it draws upon tariffs—and deprive it of the legitimacy that a more inclusive membership can provide.

Second, a Climate Consortium needs to be able to set rules for its members. Whether the legal framework for this function is an agreement (like the GATT) or an organization (like the WTO) is not of central importance; what counts is that the countries participating in it will have a way to measure performance and manage its governance. While its members should be able to choose from a menu of policy options to promote a low-carbon future, all participating countries will have to commit to binding and enforceable outcomes in the most carbon-intensive industrial sectors. Countries that do not maintain the consortium’s high standards for decarbonization would have their membership suspended.

Finally—and most controversially—under the appropriate conditions and at the right time, a Climate Consortium needs to include the ambition to develop a common external tariff on non-members (as Nordhaus proposed) that do not meet its decarbonization objectives. Such an idea would at present almost certainly be contrary to WTO rules unless the consortium also became a customs union, which may not be practicable given it is unlikely (at least at the start) to cover “substantially all the trade” among its members that those rules would require.

The issue of WTO compatibility is why sequencing is so important when it comes to a Climate Consortium. A common external tariff should be the last step, to be used only if parallel efforts to reform the WTO so it provides greater policy space for climate action do not bear fruit within a three-to-five-year period. Respect for WTO rules is important; however, given the challenges to their reform, considerable damage to the climate could occur before progress is achieved. Before the decade is out, many leading economies could be forced to choose between protecting the climate and adhering to multilateral trade rules. If that time comes, a Climate Consortium—preferably enlarged to 100 or more countries who will have seen the benefit of meeting its criteria—could at least temporarily provide an alternate forum for governing trade and climate policies and achieving an international economic order that is also a climate order.

Conclusion: Climate and Security

When the General Agreement on Tariffs and Trade was founded in 1948 to create rules for world trade and to oversee its development, it had a modest but diverse membership of twenty-three countries. The signatories included Australia, Brazil, Chile, France, India, and the United States. By 1994, when the Marrakesh Agreement was signed, its successor the World Trade Organization counted 128 members from across the globe.

While historical parallels can be treacherous, the way the GATT started from a coalition of the willing interested in liberalizing trade and grew to become the main instrument of global economic governance as the WTO has lessons for today. This is particularly true as in the late 1940s the GATT was a second-best idea that replaced the much more ambitious concept of an “International Trade Organization” outlined in the Havana Charter, but which failed to gain unanimous support. Rather than being deterred by the failure of its institutionalist ambitions, this group of like-minded countries rallied together in a spirit of experimentation to respond to the crisis of a devastated post-war global economy and moved forward with the GATT.

Thankfully, the global economy faces no such calamity today, but the world does need an innovative strategy to combat the planetary emergency of climate change. While a Climate Consortium is not a panacea, it does present the most realistic avenue for balancing the legitimacy that an inclusive approach provides with the effectiveness of like-minded membership. But it should not crowd out other promising avenues for using trade policy to reach the goal of net-zero carbon emissions by 2050 set out in the UNFCCC Paris Agreement. Competition is healthy, and several ongoing unilateral/autonomous and bilateral efforts can also serve climate objectives. The World Trade Organization, while in need of reform, remains the guardian of the current liberal economic order. The members of a Climate Consortium should sequence its development so that time and resources can be devoted to modernizing WTO rules so they unambiguously create the policy space for governments to pursue climate action.

Climate change is not only a threat to economic prosperity and public health but also to global peace and stability given the heightened risks of conflict over natural resources that it could engender. A binding, high-standard, and inclusive Climate Consortium can help to promote a more orderly and secure world for the 21^st century.

To read the full publication, click here.

To read the full publication as it is posted on the American-German Institute’s website, click here.

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Now, the issue is in sharper relief once again, as the Russia-Ukraine war has blocked shipping through the Black Sea, cutting off wheat, sunflower oil and fertilizer shipments, driving up food costs and curtailing physical supplies of these commodities. The intimate relationship between trade and peace is being demonstrated once again with the importance of moving food from areas of surplus to world markets and to those in need. During the 2008 financial crisis, spikes in food prices led to political unrest and violence in northern Africa among other places. Land transportation is at risk – trains and trucks may be interdicted. Some of the warehouses of the World Food Programme (WFP) are empty, with the result that those who were hungry before may be left starving. Even were war to end sooner rather than later, wheat fields are mined, crops are not planted in the war zone, and the logistics of moving grain from other safe sources are not completely flexible. Transportation for Canada’s export crops is aimed westward across the Pacific and not eastward toward Europe and Africa.

There is nothing more basic to the human condition than food. Constraints on food supplies and unaffordable prices drive political unrest and can sow the seeds of war.

Trade can produce greater harmony or greater friction. Where there is big-power geopolitical rivalry, the rivalry itself is likely to dominate the challenge of maintaining peace. This is true with respect to Russia and the West, and it can become the case between China and the West. Trading relations will be uneasy, used to coerce, used to limit goods in the name of national security, and used to build a closer alignment of interests.

There is, however, also an area where there is more conviction and less doubt about whether trade can serve a predominantly positive outcome for peace-related objectives. This is to be found with respect to fragile and conflict-affected countries. For these countries, trade can serve as an enabler for peace. To assure that this is the case, the trade and peace communities must bring the trade-peace connection to the attention of both trade negotiators and peace negotiators. This collaboration has historically been difficult to achieve. 

To read the summary, click here.

To read the full lecture as it was presented at The Graduate Institute and the University of St. Gallen Geneva, Switzerland, click here.

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It is an awkward way to get things done. Consensus means, in theory, that the hands of all 164 members are on the steering wheel. The reality is that some pairs of hands have a more forceful grip on the wheel than others.

To make things move in Geneva, you need the big players to take control, state what they want, and make clear what they are prepared to do to achieve it. In the past, it has been the United States which drove the agenda, first in the General Agreement on Tariffs and Trade and, since its founding in 1995, in the WTO. Nothing of consequence was achieved without US leadership.

Today, this is no longer the case. Such is the politically toxic nature of trade in the United States today, that the Office of the US Trade Representative has deemed a detached, disinterested approach the nation’s best course of action in trade policy.

Two factors have contributed to the sharp deterioration in US leadership. The first is a bipartisan, ardent anxiety over China. Inside the Beltway, it is widely held that China has somehow rigged the multilateral trading system, shirked its responsibilities, and gamed the dispute settlement function. Such reasoning is flawed and not fully supported by the facts. But it can be attributed to the growing Cold War mentality gripping Washington these days.

Keith M. Rockwell is a Global Fellow at the Wilson Center. Prior to his retirement in June 2022, Keith served as a Director at the World Trade Organization (WTO) and spokesperson for the organization for more than 25 years.

To read the full report, please click here. 

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That case is not just grounded in economics. Free trade is a critical foreign policy tool that promotes peace and cooperation, and it remains a pillar of the liberal international order. Free trade is also moral: as Adam Smith observed, humans are “an animal that bargains,” unique in our ability to prosper through commerce. Government restrictions on these natural and voluntary transactions—whether across or within national borders—enrich a privileged few at the expense of all others, especially the poor. Trade also enriches and empowers the world’s poorest and most vulnerable people, especially women and children who once lived in unspeakable conditions.

Finally, China represents real challenges, but dealing with it does not warrant abandoning free trade. Instead, historical and recent evidence demonstrate that China’s economic threat to the United States has been exaggerated, that aggressive unilateralism will prove less effective in influencing the Chinese government’s behavior than multilateral engagement, and that the United States will be better positioned to respond to a rising China if it embraces the openness and confidence that made America an economic powerhouse.

To read the full report from the CATO Institute, please click here. 

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The core assumption motivating this paper is that multilateralism is intrinsically desirable as a force for economic and sociopolitical harmony and progress. Multilateralism offers the best prospects for coherence and inclusion in international trade relations. However, this does not always have to mean universal participation. The entire community of nations do not need to always work in tandem in all areas of trade-related rule-making under the auspices of the WTO, as long as all interests are appropriately protected.

Twenty-three parties were original signatories to GATT and 164 members now belong to the WTO. The membership is far more contrasted today in terms of preferences and priorities than was the case at the outset in the late 1940s, and for a couple of decades thereafter. A more numerous and diverse membership poses greater challenges in forging agreement. One way of looking at this is to consider where a line can be drawn between convergence and managed co-existence in striking an appropriate balance between rights and obligations among members of the WTO. Absent the capacity of members to identify and work with that balance, negotiating stasis becomes the norm – a state of affairs that most observers consider has drifted ever closer to reality.

the-wto-in-crisis-closing-the-gap-between-conversation-and-action-or-shutting-down-the-conversation

To read the full report from the Cambridge University Press, please click here.

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Worse, governments face a conundrum. They are mindful that foreign subsidies can erode the market access won in previously negotiated multilateral and regional trade agreements. Yet, evidently, governments want to retain subsidies to tackle pressing national and global concerns, such as the COVID-19 pandemic response, decarbonisation, and the clean energy transition. What one government regards as a good subsidy and a legitimate exercise of national sovereignty can be viewed more negatively by trading partners.

Recriminations have been exacerbated by a lack of comparable and reliable information on subsidy schemes and awards. In this Hinrich Foundation sponsored report, authors Simon J. Evenett and Johannes Fritz of the University of St. Gallen assembled an inventory of 18,137 corporate subsidies awarded by China, the EU, and the US since November 2008 to assess the scale of national and cross-border commerce affected by these trading powers’ subventions.

Given that trillions of US dollars of trade are involved, and the growing discord between governments over subsidy matters, the time is ripe for deliberation about the nexus between subsidies, market access, and the potential for enhanced international cooperation. The paper concludes by describing six specific goals of this needed policy dialogue on the trade-related aspects of corporate subsidies.

To read the full report from the Hinrich Foundation, please click here.

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To read the original report from the European Commission, please click here.

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