Special

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Interview with Prof. Bernard Hoekman, Director of Global Economics at the Robert SchumanCentre for Advanced Studies, European University Institute in Florence, Italy

Rule-Making in International Trade at a
Crossroads – Views of a Trade Policy Expert

By Japan SPOTLIGHT
Our Japan SPOTLIGHT July/August 2022 issue highlighted a wide range of topics related to the pursuitof a rules-based international trade order. Given the importance of both domestic and international politics
in the process of economic policy decision-making, we interviewed Prof. Bernard Hoekman of theEuropean University Institute, a distinguished trade policy expert and former economist at the GATT.
(Online interview on Sept. 12, 2022)

Background of Crisis ofInternational Economic
Order
JS: Against the background ofrising nationalism in someadvanced countries’ domestic
politics and geopolitical crises
such as in Ukraine and the
US-China confrontation, how doyou view the nature of such crisesin the international economicorder? Do you think there could be
an unprecedented historical crisis?

exercise of economic power and military
power.
We are seeing this in the context ofRussia’s invasion of Ukraine; we are alsoseeing it in recent years in other areas suchas countries restricting trade of criticalproducts as a way of exercising leverage. The
European Union has become more focusedon linking trade to non-trade objectives –labor standards, environmental protection,
sustainable development and so forth.
Again, these are not necessarily newissues, but we are seeing large economies
increasingly using trade as an instrument.
Some nations are using trade policy to coerce
other countries – including in the extreme
case of war in Ukraine. But more generally weare seeing a trend towards linking trade to

Hoekman: In the background, we have seen
this coming for quite a while and you see it
Prof. Bernard Hoekman
reflected in the difficulty that WTO members
have experienced in negotiating new agreements. We have also seen
non-trade objectives.
it in the tension with the appellate body in the WTO. All of that has
been building up for some time. There are several factors in the
Restoring the WTO
background to the current crisis. One of them is rebalancing of the
JS: The key question is how to revitalize multilateralworld economy; the system was very much designed by mostly
trading systems. We need a rules-based international
OECD countries. It wasn’t really designed for a world in which weorder to avoid falling into power games, but how
have very large countries with very different economic systems withshould the WTO be revitalized?
very different governance approaches, not to mention very different
political systems.
Hoekman: It’s a very important question. To a very large extent it
Although politics shouldn’t be that much of an issue for economic
depends on what the large trade powers are going to do and thencooperation, it is one big factor that revolves around how incumbent
that boils down to the question: do these very large trading blocs see
countries deal with China and the competitiveness of China but also
value in having an effective WTO as a tool to deal with their
the sheer size of the Chinese economy and the important share thatproblems? Much of the focus and discussion on the WTO has been
it now accounts for in terms of world trade. There are manyfor a long time now on how to make trade work for development andallegations about subsidies and state-owned enterprises (SOEs) andhow to deal with a very heterogeneous membership. Most WTO
how international competition is distorted. The new factor that has
members are developing countries and many of them are lowbecome a lot more visible is dealing with the potential or the actual
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https://www.jef.or.jp/journal/

income economies. One challenge is to make the WTO a more
effective instrument in addressing issues of development while at thesame time providing a platform in which large powers work out
potential solutions to their problems, while ensuring that everyone
has a voice.
Conditional on EU/US/China/Japan seeing the WTO as a potentially
useful platform to deal with these issues, we need two types ofchanges. On the one hand we need to fix the machine as it is notworking very well and we don’t have a functioning dispute settlement
system. We also lack a clear framework for allowing groups ofcountries to negotiate agreements amongst themselves thateveryone would benefit from but that not everyone has to participate
in. We don’t have a robust mechanism to bring “open plurilateralagreements” into the WTO.
To deal with the problems that are created by subsidies or SOEs,
you need a negotiated agreement between the EU, the United States,
Japan and China. Those countries need to agree to new rules of thegame but there is no need that all WTO members do so. WTO reformthat facilitates plurilateral cooperation is important and involves
rethinking the consensus working practice. Everything in the WTO
works by consensus and this is one factor that has blocked progress
not just in terms of negotiations but also in terms of deciding theagenda of committee meetings, and thinking about what WTO
membership should be discussing. Many WTO members haverecognized consensus as a problem and are moving forward in
discussing matters that are of shared interest.
The dispute settlement problem is serious. The appellate body is
no longer operational which means we don’t have effective disputesettlement anymore. An important area for WTO reform is to makedispute settlement operational again. To date there has been a lot of
focus on bringing the appellate body back. That focus is notnecessarily a constructive approach – we need to have a discussion
as to why the US is so dissatisfied with the appellate body andrefocus the discussion on what do we need from an effective disputesettlement system and then consider the institutional framework to
get there. This will probably involve some kind of appeal system but
not necessarily an appellate body type approach. We need to step
back, be more open, and be flexible in terms of what we have learned
from the last 25 years of dispute settlement and how to improve it.
A necessary condition for this type of discussion is to be honest
about what are the real problems the US and other members see
with the system. We really need to have an approach that is open,
substantive, and constructive.
JS: What do you think about the EU proposal for a

Multiparty Interim Appeal Arbitration Arrangement(MPIA)? Do you think it could work as a temporary

solution to restore at least tentatively the function of
the dispute settlement mechanism?
Hoekman: It was a creative solution to an urgent problem. But I
don’t think it is the solution partly because it didn’t involve the wholemembership; there was no real thought given to its institutional
design and governance. Essentially it was a replacement for theappellate body and to keep an appeal system in place. The real test is
discussing how to put in place something that is more long term andthat everyone agrees with. If that doesn’t happen, the MPIA offers an
appeals opportunity. A major test of how well that is going to work iswhether disputes between the EU and China will be brought to the
MPIA, as both are members – then we will see if it actually works. As
it stands, most WTO members haven’t joined and they are waiting
and looking for a more permanent solution to the conflict on theappellate body

Possible Contribution of Regional FTAs
JS: What is your view on the possible contribution ofregional trade agreements to the restoration of aninternational economic order? For example the
CPTPP and the Japan-EU FTA – would the integrationof those two be a good replacement for the WTO or atleast some parts of the multilateral trading system?
Or the possible integration of the RCEP and the
CPTPP that could eventually lead to an APEC FTA?

Hoekman: It would help. If you look at where rule-making has
occurred in the last 20 years on trade it has occurred in the context
of these types of agreements, not in the WTO. At the same time there
have been lots of efforts at trade agreements that have failed. The
TTIP was one example; the Trade in Services Agreement is anotherexample where we had failure. Now China has knocked on the doorof the CPTPP so insofar as it actually ends up being a successfulprocess, China could accede to the CPTPP and this would be a very
challenging process.
The United Kingdom of course has also asked to join the CPTPP
so we’ll have one European country as part of it. If you think about
the dynamics this would create for the WTO, in principle you havepretty much all of the major players agreeing on a set of rules that go
beyond what we have in the WTO. If you could bring that to the WTO
and link it somehow by saying there are elements of the CPTPP that
we can extend to everyone and make into plurilateral agreements,
then that might be a stepping stone towards revitalizing further someof the discussions in the WTO.
The big question here is the US. Former President Donald Trump
Japan SPOTLIGHT • November / December 202245

made it very clear that trade agreements in his view were bad for the
US and the administration of President Joe Biden has essentially said
the same thing in a different albeit more diplomatic way. The US has
made it clear that it is not interested in negotiating new trade
agreements and intends to pursue other types of cooperation not
involving market access. So that’s where I see the potential for thepath of a CPTPP-based kind of exercise where you take elements of
the CPTPP which don’t involve market access and you say let’s bringsome of those issues to Geneva in the WTO.
JS: How do you assess the US proposal about the

Indo-Pacific Economic Franmework (IPEF) that
doesn’t include any market access? Many East Asian
countries would not be very interested in promoting
it. Do you think the US should provide market accessin the IPEF negotiations as quickly as possible?

Hoekman: This is the issue I was just raising, whether you can orneed to turn these things into trade agreements. Clearly everyone
has an interest in market access including the US, but a lot of what isbeing discussed now including in the IPEF is non-trade issues andregulatory policies. Partly these are security related but a lot of it is
to do with regulatory questions. Those are things we need to deal
with as we move towards a digital economy as technologies arechanging and we need to worry much more about issues related tocybersecurity. There are a lot of areas where we need cooperation.
If mechanisms like the IPEF do that it would be useful. The
approach makes it much easier to involve other countries as long as
it is designed to be open as opposed to closed agreements. The
trouble with trade agreements is they tend to be closed and we often
see agreements among several countries where it is very difficult forother countries to join them. So going back to your previous
question, in terms of connecting the CPTPP to the Japan-EU FTA thatsounds straightforward conceptually but in practice it’s going to bevery difficult because there are different approaches, so doing it iscomplicated. The one thing the CPTPP has that most agreements
don’t – which makes it a rather unique instrument – is that it is open
to new accession. Most trade agreements are not.
JS: There are trade agreements like the IPEF that do

not include market access but include non-tariff tradebarrier-related issues. Is it correct to assume thatonce such an agreement is done on some non-tariffbarriers, the result will be multilateralized? Could thisbe an incentive to implement such tradenegotiations?

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Hoekman: It is very much akin to the discussions that have beenongoing for a long time, and we have agreements now on tradefacilitation where we say, OK we take as given whatever our country
is doing in terms of tariffs or in terms of regulation, but it is reallyabout facilitation. It is about simplification of procedures; it’s about
reducing red tape. We’re not questioning the policy that is being
applied, we are trying to work together to reduce transaction costs,
and the implementation costs for business and for the government.
A lot of what is in the IPEF is really on those types of issues.
Clearly they are important from a market entry point of view, but weare not talking about commitments on trade policy, rather about how
to define what is good policy. It is more about coordination andequality and recognizing each other’s regimes. All of this is going to
be good for business and also for the regulators because it makes
their lives easier as they need to do less to actually control what isbeing done in another country in terms of products, goods andservices that are being traded. It is a different mindset in a different
framework that we are inching towards – you are seeing some ofthat happening in these joint-statement initiatives of the WTO as well.
JS: As you mentioned, an emerging China is really achallenge. How to modify China’s market-distorting
government support or regulations and how to
encourage China to adopt a more rules-based
approach will be very important questions. Given that
China is interested in joining the TPP, would you
agree that it could be invited to join the CPTPP if it
first improves its trade or industrial policies?

Hoekman: The mere fact that they have knocked on the door isalready a very good signal because obviously they have already done
their homework. They have really studied the CPTPP and they knowwhat is in it; they also know what is going to be expected of themand they have decided internally that they can handle it. I think that is
a positive signal. They have already joined the RCEP and so there issome scope for optimism to do this; but clearly we’re not going to
see China changing its economic system. However, if you look at the
track record of China’s compliance with WTO rules and disputesettlement rulings, it’s actually pretty good.
Maybe those WTO rules weren’t good enough and this issomething that the CPTPP is going to try to address. It suggests tome that there is scope for some optimism in terms of dealing withsome of the policy spillovers that are created by what China does interms of the operation of its SOEs. One thing I would point out in thisregard, and again to be cautiously optimistic, is that in what wasagreed between the EU and China and in the comprehensive
agreement on investment there were very specific provisions that

had to do with SOEs, and there was a creative approach found by thenegotiators to operationalize this.
This suggests that there are potential things that have alreadybeen worked out by negotiations on how you might move towards
more competitive neutrality and ensure that there is moretransparency. A key element of this is whether China will see it as in
its interest to consider making explicit commitments on these types
of issues. I think the Chinese government is very aware of this;
there’s a lot of waste associated with the subsidies that are being
given today, so putting in place a system where you have moretransparency and greater accountability in terms of the allocation ofsubsidies will improve efficiency in China and that is in their interest.
A necessary condition for moving forward is that there is greaterawareness and focus on things that are important in an economic
sense. This requires analysis and it requires an entity that collects
the information needed to assess the effects of subsidies and SOEs.
We need to have more of an economic approach to inform
negotiations. In Europe there are still many SOEs but there is asystem to ensure that those firms compete on commercial termswith private firms. Elements of such systems could also be adopted
and put in place in an international framework. To cut a long story
short, there is quite a lot of scope for progress on negotiating
agreements, but we need to work harder to identify and focus on
issues that are likely to have the biggest benefits for both sides.
Balanced is needed; it can’t just be good for one side but bad for theother.

Balance Between Economic Efficiency &Security
JS: I agree with your assertion that economic analysis

should be highlighted, but we are living with a risinggeopolitical crisis and the concept of economic
security is emerging. Put simply, we need a balance
between economic efficiency and economic security,and I’d like to hear your view on how to achieve an
equilibrium between the two.

Hoekman: That is where you really need to have the analysis
because I don’t know what economic security means. The first thing
we need to do on a national basis whether it’s Japan or the EU is to
be clear in our own minds about what we mean by economic
security and what constitutes economic security. Given some clarity
on what that means, the next step is to think about what instruments
we need to actually get us to achieve or increase our economic
security. To what extent does that involve trade policy and to what
extent does that involve other types of policies? There has been too

much of an immediate knee-jerk reaction by many politicians thatsays, “Oh well, we get to economic security through domestic
production.”
Now obviously that is going to come at a very high efficiency costbecause after all we don’t have it now. So we also need to be verytransparent and explicit about the tradeoffs and that brings us backto the need for this type of economic analysis just to make informed
decisions. You would need to know how much more economic
security you will get, assuming we define what that means, and at
what cost. That is a discussion which we have not really had in termsof public discourse.
There has been talk about supply chains failing and that products
need to be produced locally. But the facts suggest that relying on
international trade has worked quite well. The Covid pandemic wasquite a unique situation where suddenly everyone wanted the same
products but there wasn’t enough global supply. Again, I would goback to the need for explicitly focusing on what our objectives are
and what we need, and then to think about how we get there andwhat the costs would be.
Clearly, diversification is part of the solution but we need to ask
ourselves to what extent is the private sector already doing that?
Because they have suddenly seen what can happen in a world which
is more dangerous in the sense that governments can say we’regoing to shut down trade. That is something we certainly learned
from the pandemic and it’s something that is going on now with
Ukraine and Russia and the sanctions that are being imposed byboth sides.
JS: In talking about economic security, some people

are referring to sensitive technologies. In terms ofwhat you said, we need a very vigorous definition ofwhat sensitive technologies are to narrow the scopeof protectionism.

Hoekman: Absolutely, and that needs to be very explicit and to be
the focus of analysis and evidence. Again, what is critical, what isessential? To some extent on the high-tech side it’ll probably be a biteasier. We will have control systems already in place. We have export
controls and investment screening systems already in use. So someof that is there but we need to draw boundaries around this.
Again, we need to be clear what we are talking about and to what
extent we are talking about technologies that are really at the cuttingedge as opposed to products that are not high tech and can besourced from many countries. And there the issue really becomes
one of do we have enough sources of supply to ensure security, anddo we have access to those products? In most cases I would thinkthese do not require domestic production and forgoing the gains
Japan SPOTLIGHT • November / December 2022

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from trade. In most cases, security is not going to require 100%
domestic production.

Areas Where New Rules Are Needed
JS: Aside from economic security issues and someother issues related to geopolitics, there are newareas requiring new rules. As you mentioned, thedigital economy is certainly one good example ofthis. We also have the issues of human rights andlabor standards, the environment and cyber security.
How do you assess the feasibility of rule-making
efforts in these new areas?

Hoekman: A lot of this relates to figuring out how to achieve nontrade objectives, for example consumer protection or data privacy.
How do you achieve those goals in a way in which you minimize
adverse effects on trade? That is an old question but there are newissues with new technologies so people don’t necessarily know what
the answers are. Putting in place platforms where the experts andthe regulators and the trade people can sit together and discuss what
we are trying to do, what works and what doesn’t work, is very
important. Ultimately the focus needs to be on figuring out what isgood policy. Assuming we care about data privacy, what are good
policies to ensure that we meet that objective in a way that we still
facilitate and allow trade to occur?
Often there will be common, shared objectives; the focus should
be on the options to achieve these objectives. How can we do thatwhile still facilitating trade? We need to cut these things up into
different categories. On the one hand we have technical types ofissues that relate to standardization and domestic regulations which
influence trade. Partly the solution is international standardization,
which is what we are seeing in the area of food safety, for example.
There has been a steady shift away from national standards towards
international standards. We are going to see the same thing in otherareas but will need a mechanism for agreeing on what thosestandards are. There are many international organizations able to dothat and that’s not a role for the WTO as it is not a technicalstandards entity.
The other bucket is global emergencies and global challenges.
These affect everybody. Climate change of course is the primeexample, but dealing with pandemics is another example.
Cooperation here is more difficult than it is on technical matters.
Again, you need systems in place to assist governments in
identifying what they need to do to help achieve national objectives
that contribute to the global public good. This not an area for the
WTO. We have the Paris agreements on climate, and we have the ILO
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that has for a long time already agreed on international conventions
for labor rights and labor standards. So the issue becomes one ofenforcement and that’s where trade and thus the WTO comes in.
We are seeing an increasing willingness by some of the larger
countries to use trade as an enforcement device. That is certainly thecase with the EU which is a leader in this area. Increasingly you aregoing to be in a situation where you cannot export goods to the EU if
the company involved does not meet labor standards or does not
exercise due diligence over its supply chains.
There are two dimensions here: one is what are the rules andstandards (which is mostly a technical issue)? The EU applies
international labor standards, and for the environment it is taking theParis agreements seriously. Second, there’s the implementation sideof this – how do you use trade? There is a need for rule-making
because right now this is decided unilaterally. It would be muchbetter to agree to discuss these issues in Geneva around the WTO
table and to agree on how members should use trade to attain nontrade objectives. WTO reform could facilitate that type of discussion,
because it’s not going to be done by 164 countries. This is much
more likely to involve a plurilateral process where the focus is onwhat makes good practice acceptable in terms of the use of trade
policy to enforce these types of non-trade obligations orcommitments.

Role of Group of Like-Minded Countries in
Rule-Making
JS: How do you assess the role of a small group of

like-minded countries in rule-making on such newissues? How do you view a softer approach such as
APEC or the OECD that don’t have enforcement
mechanisms, but that could have a peer review
approach?

Hoekman: It is quite important partly because it ensures that there
actually is a discussion on a particular issue and that there is a focus
on what makes sense, what the different approaches are thatdifferent countries have taken, and so on. That is very much the
APEC model, and it has been proven to be quite valuable in helping
governments and officials to figure out that there might be different
ways to skin a cat, so to speak. However, it can also be acoordination device. Insofar as there are emerging agreements in aparticular area that make things a certain way, if everyone moves inthat direction then we might not need enforcement.
This goes back to your question about non-trade arrangements.
Insofar as everyone agrees it might be self-sustaining, thentechnically speaking we have a coordination problem. We don’t havea conflictual situation as such, and you don’t need enforcement.
What you call “soft law” is a bit of a misnomer. It is not that there
isn’t any enforcement, it’s that we have systems in place wherecountries work together to try and apply policies that achieve theirobjectives in an efficient way. Platforms and institutions like APEC
and the OECD are important. The advantage of the OECD is that it
has a secretariat, while in APEC the secretariat is much smaller.
Somebody needs to do that work of putting together a picture ofwhat the countries are doing in an area and then analyze the effects.
What do we learn from implementation experience? That isextremely valuable and is necessary when we start talking about
regulatory types of instruments. Eventually that might lead into acollective assessment that having some binding rules is beneficial foreveryone but that has to come out of the process, as opposed tosaying we must have hard law as opposed to soft law.

Rule-Making in the Post-Ukraine Crisis Era
JS: The Ukraine crisis could eventually lead to a

power-based solution which would usher in a powerbased national security system that could negatively
affect the trading system. What do you think will be
the overall impact of the Ukraine crisis on the rulemaking system – not only the trading system but also
national security systems?

Hoekman: It has really focused the minds of policymakers in Europe
and in the US in terms of the need to take these types of risks into
account and to be more assertive and willing to do what theeconomic textbooks tell you that you can do if you have somemarket power – which is to exploit your terms of trade.
We are seeing the EU being more assertive and this comes under
the heading of strategic autonomy. Russia’s invasion of Ukraine has
made clear that we need to reduce dependence on potential
adversaries but also more generally reduce dependence on suppliers
that have excessive market power. There will be much more of a
focus on ensuring from a policy point of view greater diversificationand sources of supply for essential products. Economic security isdefined in one simple way – ensuring where there is extreme
dependence on one or two suppliers for goods and services. That
doesn’t really have implications per se for international rules andorder, it is just national policies and trying to ensure and encouragefirms to do more to diversify.
Another implication of the Ukraine crisis will be the acceleration of
the move towards renewable energy, so from the energy side ofthings a lot of the actions that should have been taken a long time
ago are now going to be taken on an accelerated basis. This again

has nothing to do with the international economic order as such, it
has to do more with internal politics. In the EU for example we’vebeen talking for a long time about a single market for energy andinterconnection of the grid, which has gone much more slowly thanit should have done for nationalistic reasons.
So all of that is going to be accelerated and from that point of viewis actually a positive in terms of pushing countries to do what theyneed to do in any event. The other thing that is likely to happen interms of national security is that we’re going to see more andstronger coalitions of like-minded countries who share common
values to cooperate on regulatory types of issues on the non-tradeside but also trade. To return to the EU, it has been re-focusing on
negotiation of trade agreements and partly this is to ensure a morediversified set of suppliers and compensate for the fact that things inthe WTO are not going particularly fast.
However, there’s nothing new here per se. It’s just that we getsome more wind in the sails and as I mentioned earlier the big
question mark here is regarding what the US will do. Again, I think
we’re going to see less in the way of multilateral trade agreements
and rule-making and more in the way of plurilateral cooperation. So
insofar as WTO reform efforts succeed – which depends a lot on the
big players – we might see more cooperation in the WTO. It is still
very much an open question whether nations are going to go down
the route of working with friends and are going to see less of amultilateral trade order and more one that is tied around allies andcoalitions and clubs.
All these things are going to play out on the margins. We’re notgoing to see a big shift from one to the other, partly because China is
so integrated into the world economy. They have a huge interest in
keeping the multilateral trade system working and I think what wetalked about earlier, the signal of knocking at the door of the CPTPP,
is a very important one. Assuming that works, we may see more
happening in the WTO. Assuming that fails and we go more down
this track of geopolitical rivalry and bloc formations, then of course
it’s going to be bad news for the international economic order.

Written with the cooperation of Joel Challender who is a translator, interpreter,
researcher and writer specializing in Japanese disaster preparedness.

Japan SPOTLIGHT • November / December 2022

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