AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro
Peace Institute

The Japan Institute ofInternational Affairs(Secretariat)

Research Institute for
Peace and Security

No. 307
19 March 2024

NAVIGATING THROUGH TURBULENCE:
TAKING A MULTI-TRACK APPROACH TO
SAFEGUARD THE RULES-BASED ORDER
Naoko Munakata
・ Former President Trump's proposals torevoke China's MFN status and impose hightariffs on Chinese goods appears to be
motivatedbywidespread
frustrations
regarding trade that have evolved since
China’s accession to the WTO, caused by thefailure to check China’s state-led economic
policies despite the promises it had made.
・ While concerning, such drastic proposals
could serve to change the negotiating
dynamics surrounding trade policy and might
open the door to a sustainable solution. In themeantime, Japan should take a multi-track
approach to pursuing WTO reform, WTO
plurilateral agreements on new issues, andregional and bilateral FTAs, as well as
economic revitalization at home that would
support its sustained leadership in theinternational trade system.
The views expressed in this piece are the author’s own and should not be
attributed to The Association of Japanese Institutes of Strategic Studies.

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

・ The CPTPP’s role in spreading the rule of law is crucial for preserving therules-based trade system, the rigor of its accession process being the key tothe forum’s success. Cooperation between the CPTPP and the EU is worth
pursuing.
A Gathering Storm in the Trade Landscape
The global trade system has weathered numerous challenges, including
US-China tensions, the pandemic, and ongoing wars. The malfunction of the World
Trade Organization (WTO) has only added to the instability.
Amidst these challenges, the proposals from former President Donald Trump torevoke China’s Most Favored Nation (MFN) trade status and impose 60% or higher
tariffs on imports from China, along with a 10% across-the-board tariff, forebode aneven greater upheaval. A bipartisan report also recommends reverting to annual
renewal of China’s MFN status to restore the US’s economic leverage. Former UnitedStates Trade Representative Robert Lighthizer, an advocate for what he terms 'strategic
decoupling' from China, sees the repeal of China’s MFN status as pivotal in rectifying
the errors associated with China's accession to the WTO1.
More than two decades since joining the WTO in 2001, China has emerged as
the world’s second-largest economy and a major trading partner for many countries,
leading to such significant interdependence that China occasionally weaponizes its
trade partners’ dependence. Moreover, it has evolved into a military superpower with theaim of reshaping the international order and challenging the status quo. In this complex
landscape, what steps should Japan take to uphold the rules-based trade systemamidst intensifying great power competition?

Frustration with the Current System
Underlying the drastic proposals above are strong frustrations about China’s
exploitation of the current system. Despite joining the WTO in 2001, it has failed totransition into a market-oriented economy and instead expanded state-led economicpolicies, including massive subsidies, forced technology transfer, and discrimination
against foreign companies in strategic sectors by exploiting gaps in WTO rules. The

1

Robert Lighthizer, No Trade Is Free: Changing Course, Taking on China, and Helping
America’s Workers, Broadside Books, 2023

http://www.jiia.or.jp/en/commentary2

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

WTO has been unable to prevent these developments and has thus helped accelerate
China’s growth without prompting the promised reforms.
In fact, the WTO’s three core functions —updating rules through negotiations,monitoring compliance, and settling disputes— have not been effective. First, updating
rules through negotiations is hindered by consensus-based decision making, giving
each member veto power. This is especially problematic in addressing market-distorting
practices by state-owned enterprises (SOEs). Second, monitoring compliance ishampered by low levels of notification compliance, allowing new market-distorting
measures to go unnoticed. Third, proving rule violations in dispute settlement ischallenging in countries with low transparency. This can be exacerbated by the WTO
Appellate Body (AB)’s judgments. For example, the AB’s interpretation of “public body”
that has raised the hurdle of determining an entity as such has undermined theeffectiveness of subsidy rules, especially in a non-transparent environment. Criticizedfor its judicial activism, the AB has ceased to operate due to the US blocking
reappointments. Hence, there is a growing risk of trade disputes escalating intofull-blown trade wars with retaliatory measures.
The issue is not just with China. There is a strong sense of unfairness in theUnited States that free trade did not lead to improved labor standards andenvironmental protection even as countries grew wealthier; instead, it prioritizedmaximum efficiency over these concerns to the detriment of middle-class jobs and thefabric of local communities on the importing end. Such frustrations led to the Biden
administration’s rejection of trade agreements involving tariff reductions in favor ofagreements without them – e.g., the Indo-Pacific Economic Framework for Prosperity(IPEF) – and may underlie former President Trump’s proposal of a 10% universal
baseline tariff. To help restore confidence in and support for free trade in the UnitedStates, the problems that imbue such frustrations need to be addressed.

Possible Shock Therapy?
For all its challenges, the WTO’s reach spans almost the entire world, serving
as the foundation of the global trade system. Many free trade agreements (FTAs) relyon it for both substantive disciplines and enforcement mechanisms. In the United States,stakeholders such as farmers benefit from the WTO and oppose policies that undermine
its functioning. Even critics of the current trade system such as Mr. Lighthizer haveacknowledged its importance, reportedly stating, “If the WTO didn’t exist, we would

http://www.jiia.or.jp/en/commentary3

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

have to invent it.” With no viable replacement on the horizon, it is imperative that its
members persist in their efforts to reform and strengthen the WTO.
In fact, the Trump proposal could change the negotiating dynamics surrounding
the WTO. Recall the Nixon shock, when the US introduced a 10% import surcharge. In
exchange for its elimination, an agreement was reached to depreciate the dollar and to
conduct trade negotiations that included a reduction in non-tariff barriers (a non-starter
until then), leading to the launch of the Tokyo Round. Chaos in the internationalmonetary system and fears of trade protectionism made governments more receptive tonew initiatives in international trade policy2.
The Imposition of the import surcharge at that time was essentially a US
demand for rebalancing burden sharing. It wanted its trading partners to bear more of
the economic adjustment costs attendant on international trade. Today in the UnitedStates, high-tech companies are growing rapidly, exports of IT services are expanding,and the overall economy is booming. The significant widening inequality and opposition
to free trade there are seen by other countries as consequences of its inadequate socialpolicies.
However, at a time when authoritarian states are seeking to rewrite theinternational order to their liking, it is urgently necessary to rebuild unity between the USand other countries that are committed to restoring the health of the international tradesystem, an important pillar of the rules-based international order. Authoritarian statesseeking to change the existing order are at the same time benefiting from it, and thus
their position is inherently fragile. It is hoped that the rise of protectionism in the US will
be a blessing in disguise and eventually lead to an understanding of shared interests.

A Multi-track Approach to Upholding the Rules-based OrderIn the meantime, Japan should actively pursue plurilateral agreements open toall WTO members on e-commerce and other matters of interest. Discussions to explore
common ground are useful for subjects less amenable to convergence such as “tradeand environmental sustainability.” Japan has also joined the Multi-Party Interim Appeal
Arbitration Arrangement (MPIA) to ensure an independent appeal process in theabsence of a functioning AB. FTAs with emerging economies and regional FTAs such as
the Regional Comprehensive Economic Partnership (RCEP) can also complement theWTO.
2Gilbert R. Winham, International Trade and the Tokyo Round Negotiation. Princeton University
Press, 1986. P.15

http://www.jiia.or.jp/en/commentary4

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

More fundamentally, however, Japan should aim to reinstate the function oftrade agreements in promoting market-oriented economic reforms and upholding therule of law. During the Diet deliberations for approval of the Trans-Pacific Partnership(TPP) Agreement, the late Prime Minister Shinzo Abe emphasized that “the TPP
will serve as a catalyst for economic reform in each member, thereby expanding thereach of the rule of law.” He underscored the importance of the rule of law as thefoundational principle for the TPP’s 'coalition of the willing.' This concept extends
beyond the TPP framework. Preserving an international order based on universal
values, particularly in the face of authoritarian ambitions, necessitates broadbased

cooperation

among diversecountries.

Even

those

notembracing

democracy rely on the rules-based international order for stability and growth.
Japan should work hard to preserve the effectiveness of the Comprehensive
and Progressive Agreement for TPP (CPTPP), formed after the US’s withdrawal, andavoid repeating the mistakes of the WTO, where members can evade accountability for
non-compliance and exploit veto power to stall progress. The rigor maintained
throughout the process of the United Kingdom (UK)’s accession to the CPTPP sets theexample to be followed in the future.
In addition, to help alleviate the negative impact of any drastic measures that
the United States might take to further hamper the WTO, Japan, in close cooperation
with like-minded partners such as the EU, the UK, Canada, and Australia, should
discuss what can be done through plurilateral and bilateral frameworks. For example,
they should explore the possibility of cooperation between the EU and the CPTPP. The
IPEF is also an important forum for developing the idea of free and fair rules as well as
incentives for countries in need of heavy lifting to comply with them.
At home, Japan should work to revitalize its economy, promote investment andinnovation in areas crucial for solving social challenges such as environmental
sustainability and digital transformation, and keep its products and technologies
indispensable to the rest of the world. A strong domestic economy is vital to sustaining
its leadership in the international trade system. After all, “a nation can be no stronger
abroad than she is at home.”3

3Remarks Prepared for Delivery At The Trade Mart in Dallas, TX, November 22, 1963
[UNDELIVERED]
https://www.jfklibrary.org/archives/other-resources/john-f-kennedy-speeches/dallas-tx-trade-mart-undelivered-19631122

http://www.jiia.or.jp/en/commentary5

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

Conclusion: Navigating Forward
In the face of unprecedented challenges, Japan plays a crucial role insafeguarding the rules-based order. By championing the rule of law, addressing the root
causes of frustration, and pursuing a multi-track trade approach, Japan can lead theway to a more stable and equitable global trade landscape.

Naoko Munakata is a professor at the Graduate School of Public Policy, The University ofTokyo.

http://www.jiia.or.jp/en/commentary6