Developing rules for trade in the Indo-Pacific

Multilateral trade organisations and the rules-based order underpinning them are failing to respond to new challenges and keep pace with the evolving nature of global trade, writes Philippa Cordi.

Philippa Cordi holds a combined Bachelor of Laws (Honours) / Bachelor of Arts in International Studies (Japan Major) from the University of Technology Sydney. and is an Analyst at the Australian Government Department of the Treasury.

The global trading system is currently under pressure from rising protectionism, unilateral and coercive trade measures, and concerns about the relevance of the World Trade Organisation (WTO). These conditions have been exacerbated by COVID-19 driven shocks to demand and supply.

To revive the global trading system post-pandemic amid these conditions, Australia, as a ‘middle power,’ should consider aligning policy with three main pillars, being (1)defending and advocating for Australia’s interests in the global rules-based trade system; (2) enforcing trade and investment measures through partnerships and alignment with domestic industrial policy; and (3) regulating policy through retrospective surveillance and monitoring to ensure positive trade and investment outcomes, supported by other diplomatic initiatives.

Importantly, concurrent alignment with each pillar will ensure a coordinated effort in defence of Australia’s long-term interests.

Arguably, multilateral trade organisations, and the rules-based order underpinning them, are failing to respond to new challenges and keep pace with the evolving nature of global trade, particularly that of digital trade. This criticism is often directed at the WTO as a consensus-based organisation which relies on the voluntary cooperation of its member countries. For example, the WTO has been criticised for failing to implement a functioning e-commerce regime to facilitate modern business transactions.

However, as a middle power in the region, Australia should remain actively involved in WTO processes. In doing so, Australia can strengthen such processes while defending and advocating for Australia’s national interests in the rules-based trading system. In this way, Australia can nurture an inclusive and development-friendly regime underpinned by the rules-based order, especially given the number of developing nations in the region.

Active involvement in a global trading system is important primarily because an open rules-based order and inclusive multilateral system is valuable in offering much-needed predictability, uniformity and regularity. It reconciles conflicting rules and facilitates business transactions across multiple and overlapping preferential agreements, particularly beneficial in standardising policy and procedures.

Second, the rules-based order maintains the focus on shared values, as distinct from power and influence. This focus ensures that the order is inclusive of small and medium enterprises and developing nations, irrespective of their perceived influence or type of government. Third, the rules-based order requires ‘give and take.’ Participation at the multilateral level requires sufficient mutual benefit to ensure voluntary buy-in and a desire to cooperate.

Significantly, any failings on the part of multilateral organisations or perceived gaps in the rules-based order are an opportunity for Australia to advocate for change in furtherance of her national interests. Indeed, involvement and support from the WTO would only enhance the legitimacy and geographical coverage of this change. Accordingly, Australia should focus on formulating new aspects to the rules-based order. This is especially pertinent given that many modern challenges are globalised and interdependent, and therefore better solved through collective action and a coordinated effort.

For example, the digital economy in Southeast Asia is estimated to be worth $300 billion by 2025. However, there remains a sharp disparity in the technological capability of countries in the region, amid conflicting and piecemeal digital trade rules. Accordingly, formulating digital trade rules at the multilateral level is pertinent in standardising rules regarding, for example, trade facilitation and data sharing.

Further, Australia faces strong economic competition as well as coercive, unilateral trade measures, threatening Australia’s competitiveness and influence. Australian foreign policy should, concurrent with the other pillars, implement trade and investment measures domestically through partnerships and alignment with industrial policy. Other successful exporting nations have embraced trade liberalisation while providing support to local firms. For example, Japan, Korea and Taiwan have historically provided conditional support to local firms, contingent on their meeting specific performance targets often related to technological upgrading and export volumes. Countries such as the UK and South Korea have also used national development banks to support new firms and facilitate their access to export markets.

Indeed, Australia’s recent decision to finance Telstra’s takeover of Digicel Pacific via a $1.33 billion loan indicates a shift from trade liberalisation. Outwardly, the shift in strategy is driven to counter the growing presence of China. In this regard, Australian foreign policy could be more proactive in countering coercive trade initiatives generally. For example, Australia could engage routinely in partnerships with the private sector (such as domestic banks) and the public sector to direct outbound investment and development financing in furtherance of Australian foreign interests. Greater consultation between policy-setting, transaction and regulation will ensure a greater alignment of common goals and connect foreign policy with domestic industrial policy.

Finally, monitoring and maintaining policy through retrospective surveillance will be beneficial in ensuring positive trade and investment outcomes. Existing government agencies such as the Productivity Commission have the potential to undertake a granular analysis of foreign and industrial policy, including, for example, the likely impact on business innovation. In this way, Australian foreign policy can balance the protection of Australia’s national interests with equal scrutiny of the policy.

Ultimately, as a middle power, Australia can play an important and influential role in reducing trade barriers and recalibrating rules in reviving the global trading system. This can be achieved through a coordinated effort to defend and advocate for national interests while aligning with domestic industrial policy, and monitoring retrospectively.