Leaders from the Group of Twenty (G20) major economies will gather in Hangzhou, China in September 2016 to address a range of shared governance priorities.

This year’s Chinese presidency has identified trade and investment as a key priority for the 2016 summit, interconnected to and supportive of three other focus areas including growth, economic and financial governance, and inclusive and interconnected development. The International Centre for Trade and Sustainable Development (ICTSD) has provided inputs into the G20’s consultative process around trade and investment in order to generate ideas for its work in the mid and long term.

Successive G20 leaders’ communiqués have recognised the importance of trade and investment in driving economic growth, job creation, and sustainable development. The G20 has also affirmed the need to work to ensure that trade agreements whether bilateral, regional, and plurilateral contribute to a stronger multilateral trading system.

This volume brings together a series of short papers by leading experts and practitioners that evaluate future contributions the G20 could make to global governance in trade and investment. The pieces variously focus on how the G20 might continue to work towards strengthening and ensuring coherence between the WTO and the wider international trading system, boost global growth, refine investment rules, respond to different views on the speed and nature of economic integration, and foster inclusive global value chains that offer viable development paths, all underpinned by a commitment to sustainable development as a guiding compass for global economic governance and the trading system.

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China’s G20 Presidency: Proposals for the Global Trade and Investment Regime in the 21st Century

by Ricardo Meléndez-Ortiz, Chief Executive, ICTSD

“What’s past is prologue,” so goes the saying in Shakespeare’s The Tempest. After eight years’ development, the summit of the Group of Twenty (G20) major economies has gradually become the premium forum for global economic cooperation, now viewed as a critical fixture on the international agenda. Presently, the G20’s achievements, criticisms it faces, and recent global market rout serve as an important backdrop for this year’s Hangzhou Summit.

China has highlighted “robust trade and investment” as a key theme in a document announcing the priorities for this year’s G20 summit, interacting with and complementary to three other focus areas, including “breaking a new path for growth,” “more effective and efficient global economic and financial governance,” and “inclusive and interconnected development.”

This article provides selected ICTSD and E15Initiative policy recommendations to the G20 Hangzhou Summit and beyond, member governments, and relevant stakeholders with respect to the Chinese Presidency’s trade and investment theme.

Enable the WTO to Better Serve and Lead the Global Trade and Investment Regime

The World Trade Organization (WTO) concluded its Tenth Ministerial Conference (MC10) in Nairobi, Kenya, last December with a pivotal outcome: an agreement to disagree on how, or indeed whether, to continue its Doha Round of multilateral trade negotiations. In practical terms, this has left the international community without a multilateral trade agenda, and raises both challenges and opportunities for the 2016 G20 summit.

Many of the challenges and divisions between members spotlighted in Nairobi are not new, however, but instead stretch back over a decade that has seen the WTO outcompeted in relevance by other fora. On the one hand, major liberalisation has occurred in world trade since 2001, with the World Bank estimating a 30 percent average reduction of tariffs affecting all regions and larger cuts in several major emerging economies. Such liberalisation has two main sources, unilateral policies seeking competitive advantages in a world economy in which imports matter as much as exports, as well as bilateral and regional agreements of deeper integration. On the other hand, the WTO has been faced with tectonic changes in world markets, the rapidly-expanding use of digital technologies, and more efficient transportation. Some of these shifts have been of a major scale, responding to China’s rapid insertion into the international rules-based liberal economic order. And some have led to the emergence of international production networks – so called global value chains (GVCs) – with the ensuing significant evolutions of trade and investment relations, and a corresponding need for regulatory cooperation frameworks.

Against this backdrop – characterised by extraordinary changes in the real and political economy of trade and investment and competition from non-WTO fora, including emerging mega-regionals setting new benchmarks for standards and policy coverage – the WTO negotiation function stalled, resulted in the Nairobi outcomes, and is in evident need of reorientation.

If properly deliberated, this challenging environment could provide opportunities for G20 leaders and the trade policy community to rethink and re-craft the future of the multilateral trade system. The G20 should continue to support the WTO, including through helping the institution regain its centrality by repositioning itself in the broader and complex global trade and investment system of the 21st century.

The wider system encompasses both intergovernmental institutional arrangements in the trade and investment areas as well as various voluntary arrangements and rules initiated by private and non-governmental institutions. Broadly speaking, intergovernmental trade and investment arrangements include the multilateral trade system that has the WTO as its backbone, binding regional, plurilateral, and bilateral trade and investment agreements, and other non-binding trade and investment efforts – such as the One Belt, One Road (OBOR) initiative to boost connectivity and economic development in Eurasia – as well as interventions into the trade and investment space from other economic, development, or environment-focused institutions. Non-governmental, voluntary arrangements include a range of social and environmental principles, standards or codes of conduct, such as the Equator Principles for determining and managing social and environmental risks in project financing, or the Group of Seven (G7) decision on responsible supply chains to ensure effective custody of labour and environmental practices of the highest standard.

The G20 can help to shed some light on this shifting and complex trade and investment landscape. Building on decisions in the last two WTO ministerial conferences to ensure the complementarity of regional trade agreements (RTAs) with the multilateral system – rather than regarding these new variables as an intrinsic threat or rival – it can seek to take the next step to position the WTO as a foundation for the wider ecosystem with the capacity to evolve into a leadership role over the regime complex.

With this in mind, priority should be given to strengthening the legitimacy of the WTO by enhancing its inclusiveness, synergy, and effectiveness. Given the current complex political economy that is driving trade talks, WTO members may in the short term explore opportunities to develop various ”trade clubs” within its folds to the greatest extent possible; in the mid and longer term they should work towards multilateralising elements of regional and plurilateral arrangements into the non-discriminatory multilateral system. Members of the WTO have an opportunity to align the institution with the 2030 Agenda for Sustainable Development and its accompanying Sustainable Development Goals (SDGs) to help bolster synergies between the multilateral trade system and other governance objectives. Considering the 2030 Agenda’s integrated policy approach, the WTO offers ready platforms to investigate and deliberate on mitigation of the intricate effects that might stem from trade initiatives implemented without appropriate flanking policies. G20 members may also seek ways for the WTO to contribute to the implementation of the new Paris Agreement on climate change. To bolster its effectiveness, the WTO should seek innovative intergovernmental negotiating approaches on the one hand, and, on the other, add new tools to its legal instruments that go beyond negotiated rule-making per se and instead focus on better regulatory cooperation.

To achieve these aims, the following concrete options may be pursued.

First, G20 members can agree to enhance the monitoring and facilitation functions of the WTO, in particular in the areas of data collection and analysis, transparency, and dialogue. For example:

• Enhance the function of the WTO committees by developing these into active platforms for deep analysis and more effective informal dialogue;

• Participate in or lead informal initiatives, such as a proposed public-private Global Value Chain Partnership (see suggestions below) and the OBOR initiative, which can play a similar role in promoting robust trade and investment as formal trade agreements;

• Participate or lead initiatives for regulatory coherence, such as a proposed global investment policy cooperation compact and the RTA Exchange (see suggestions below).

Secondly, G20 members could act at the WTO to pursue more innovative approaches in negotiations and rule-making processes, by promoting certain model elements for regional or plurilateral agreements with a view to integrating these into the multilateral trade system in 10 to 20 years. For example:

• Encourage members to negotiate and agree on principles for plurilateral negotiations that provide assurances to third parties about their openness;

• Support an independent body, such as an “RTA Exchange,” to set out criteria for assessments of economic impact of RTAs and undertake the analysis.

Thirdly, the G20 could encourage the formation of a working group to address fossil fuel subsidies concretely at the WTO, through an expansion of existing WTO disciplines that are uniquely placed for international rules-based cooperation on subsidies. The G20 has committed to phasing out fossil fuel subsidies. Under the existing WTO Agreement on Subsidies and Countervailing Measures (SCM), fossil fuel subsidies cannot be challenged based on the environmental externalities generated, in other words greenhouse gas (GHG) emissions. The G20 could consider:

• Including better notification and peer review of such subsidies;

• Working towards an immediate stand-alone phase-out of production subsidies, leading to an eventual ban on all fossil fuel subsidies, while taking the impact of consumption subsidies on the poor into account in the reform process;

• Expanding the category of subsidies that could be subject to an absolute prohibition or a presumption of a prohibition, such as found in the now defunct SCM Article 6.1.

Boost Global Trade Growth

International trade and investment contribute to productivity increases in the world economy by facilitating the optimal allocation and use of capital, labour, as well as technology. However, due to both cyclical and structural reasons, global trade growth now sits both below pre-crisis levels and annual Gross Domestic Product (GDP) growth. Sluggish trade expansion has negative impacts on the outlook for economic development and jobs. Building upon the basis of previous summits, the G20 process can move forward two particular initiatives, in order to re-harness trade and investment for global growth.

First, G20 members could support negotiating a plurilateral Digital Trade Agreement, with a view to capitalising on opportunities offered by the rapid expansion of the Internet and other information communication technologies, maximising the contributions of Internet-based trade to economic development and employment, as well as boosting the integration of small- and medium-sized enterprises (SMEs) into global markets. Many developing countries, including least developed countries and island states, have voiced their support for this type of initiative in post-Nairobi debates. Key aspects might include:

• A focus on the core concepts governing cross-border data flows given that data regulation can be a disguised restriction on trade. Inspiration can be taken from rules and principles emerging in some regional and bilateral trade agreements;

• Negotiating the deal in an “open plurilateral mode,” whereby talks take place in the WTO with an open invitation for non-G20 members to sign up, would allow the benefits to be extended on a most favoured nation (MFN) basis once a predefined “critical mass” participation threshold is surpassed;

• Activating and expanding the function of the existing WTO E-commerce Working Group so as to provide more analytical and administrative support for a feasibility study and possible negotiations in future.

Second, the G20 can promote and develop a comprehensive framework for services trade facilitation so as to thoroughly explore the potential contributions of services to trade growth and creation of quality jobs. Services can enable developing countries to leapfrog the traditional manufacturing route. However, services exports continue to make up less than 25 percent of total world exports, despite strong annual trade growth now outstripping that of goods. The discrepancy between the size of such exports and services importance to economic growth points to a major untapped potential in services trade. The following proposals are suggested:

• Deepen regional regulatory cooperation in financial services, including through the creation of regional credit bureaus and rating agencies, facilitation of free data flows and offshoring, and standardisation of documents and documentation requirements;

• Simplify visa and work permits for service providers and set up “innovation zones” that allow researchers and other professionals to enter freely for up to ten years.

Promote Inclusive, Interconnected, and Sustainable Global Value Chains

With intermediate goods making up roughly 60 percent of world total imports, GVCs have emerged as significant international networks of production, information, innovation, and services. As previous G20 summits have correctly pointed out, the better integration of SMEs into GVCs – both regional and international – will bolster local development, global trade, and economic growth. Participating in GVCs relies not only on economic “hardware” – such as transportation, communication facilities, and so on – but also on “software” – including institutional management, quality and safety standards, and custom procedures. As GVCs continue to expand, the inclusiveness, sustainability, and rules governing these are important questions for the G20 agenda. This year’s G20 can propose relevant actions as follows.

First, set up a “Global Value Chain Partnership” as a public-private platform to enable the efficient functioning of supply chains and sustainable participation. The partnership could perform the following functions, including:

• Serve as a strategic and pragmatic platform for governments who intend to further integrate their economies into GVCs to meet and cooperate with foreign enterprises looking for new partners;

• Act as a value-oriented platform for improving the inclusiveness and sustainability of GVCs by involving professionals, civil society groups, and other relevant stakeholders in dialogue;

• Provide research and information facilities, for example, by mapping sectoral GVCs, identifying particular national barriers with regards to linking to GVCs, and providing advice for governments and international agencies.

Second, provide clarity on and bolster the rules-based system in which GVCs must operate in order to simplify business operations, create new opportunities, and enable better participation. This can include the following actions:

• Simplify over 400 RTAs and work towards convergence on salient elements. The G20 could support an independent “RTA Exchange” as a public information platform to enhance the transparency of RTAs, better understand similarities and differences between these, support mutual learning, encourage the use of best practices, and identify rules that could eventually be multilateralised to bolster the international trading system;

• Simplify over 3,200 international investment agreements (IIAs). The G20 could use the Investment Policy Framework for Sustainable Development, recently issued by the United Nations Conference on Trade and Development (UNCTAD) as a basis to develop and promote a new international model agreement – this template would be formulated as a best practice available for voluntary adoption, with the idea to spur modernisation and harmonisation of bilateral investment rules from the bottom up;

• Launch a work programme aimed at fusing the disparate elements of various international trade and investment rules into a more coherent and integrated system; existing policy silos dealing with goods and services, trade and investment, competition policy, intellectual policy rights, and multiple aspects of regulation should be brought together and rendered mutually consistent and supportive;

• In order to facilitate the integration of the least developed countries (LDCs) into GVCs, all developed countries should offer duty-free quota-free (DFQF) treatment to all exports from this group; developing countries should follow the example of China, India, and Brazil by offering DFQF treatment for 97 percent of tariff lines in the next five to ten years;

• G20 countries should also follow Canada’s example by offering all LDCs an extended cumulation approach to rules of origin requirements for trade preferences; this would significantly stimulate exports from LDCs, judging from the evidence of similar rule of origin changes in the past, and make global supply chains work better for development purposes;

• With respect to capacity building, the G20 can both support supply-side capability in developing countries – for instance to help producers and service providers meet international and voluntary standards – and help to reduce trade costs by investing in economic and legal infrastructure and in public services.

Enhance Global Investment Policy Cooperation and Coordination

Like international trade, cross-border investment is an important engine for economic growth and development. While multinational enterprises have accumulated between US$1.5-5 trillion in cash, this investment potential has not been unlocked due to recent instability in financial markets, tumbling commodity prices, slow growth in emerging economies complemented by continued stagnation in major markets such as the EU, investment policy uncertainties, and trade protectionism, among other issues. This is not good news for developing countries, in particular low income economies, as they face a US$2.5 trillion annual investment gap in key SDG sectors.

Against this backdrop the G20 has rightly paid increasing attention to investment issues. Trade ministers this year have endorsed Guiding Principles for Global Investment Policymaking, among other things. Further work could build on these achievements in order to boost investment for sustainable development and improve confidence in the IIA universe.

First, the G20 members could propose a more comprehensive global investment policy cooperation compact. This would:

• Encourage G20 members and the international community to base investment deals on an agreed model investment agreement, which would enable IIAs to better serve the sustainable development goals and elaborate fundamental investors’ rights and obligations;

• Enhance capacity building in the area of investment policy, for example by expanding and upgrading the existing Aid for Trade (AfT) programme into an “Aid for Trade and Investment” initiative, which could be focused on improving much-needed capital flows to infrastructure, climate mitigation and adaptation, and upskilling the labour force;

• Launch a feasibility study for negotiating a plurilateral investment promotion agreement among some G20 members, in one or several strategic sectors, for example environmental services, energy, transportation, or professional services, among others.

Second, improve international investment dispute prevention and settlement to rebuild trust in the system and strengthen its legitimacy. The following actions could be taken:

• Encourage G20 members to set up investor-state conflict management schemes to prevent, manage, and solve disputes, for example, setting up national investment ombudspersons and interministerial committees. The World Bank has started to help some countries set up such schemes that can be used as a reference for G20 members;

• Start a feasibility study for the establishment of an international appeal system or a world investment court; if there are disputes over the arbitration, they could resort to the ad hoc appeal scheme, composed of judicial experts accredited by the international framework;

• Set up an Advisory Centre for International Investment Law, using the Advisory Centre on WTO Law (ACWL) as a reference, to provide legal services for developing country governments that lack legal capabilities, such as helping to negotiate big investment contracts, defend in legal disputes, among other things.

Conclusion

The G20 is shifting its approach from issue-centred to outcome-oriented as reflected in China’s announcement of the Hangzhou Summit’s themes and key focus points. Particularly in the area of promoting robust international trade and investment, the G20 could make several breakthroughs, in addition to maintaining an important cooperation mechanism through the Trade and Investment Working Group.

Supporting the multilateral trade system should remain a priority for the G20 agenda. However, due to a widening trade governance gap, the G20 should no longer support the global trade body as an isolated institution. The G20 could instead develop the WTO’s leadership role in the newly-emerging broader ecosystem of the global trade and investment regime, fusing it more coherently to the broad collection of binding and non-binding intergovernmental trade and investment arrangements, as well as a burgeoning array of voluntary standards and rules developed by the private sector and nongovernmental agencies.

With the purpose of restoring the inclusiveness and effectiveness of the multilateral trade system as well as its legitimacy, G20 members could take active measures to enhance the WTO’s monitoring, facilitation, and cooperation functions, in particular activating the regular work of committees, as well as leading or participating in informal, interdisciplinary initiatives. G20 members could also encourage new innovative approaches in formal rule-making negotiations, and provide alternative avenues for promoting regulatory coherence. Harnessing WTO rules to better address subsidies that have the potential to harm global welfare, such as fossil fuel subsidies, would be a useful contribution to global efforts to tackle climate change.

With respect to boosting global trade growth, the G20 members should explore practical ways to utilise the potential of the digital economy for global trade growth and jobs, including through the launch of a feasibility study towards Digital Trade Agreement negotiations. G20 members could also develop a comprehensive framework for services trade facilitation to maximise the contribution of growing service sectors to global trade growth.

GVCs have been among the key issues at G20 gatherings since 2012. The G20 could initiate a road map towards a clearer rules-based trade and investment system for those operating across GVCs to achieve greater inclusiveness, interconnectivity, and sustainability. Efforts envisaged as part of the road map would provide transparency on, as well as encourage convergence and harmonisation of, disparate trade and investment rules found across the wider ecosystem in key areas.

There is a pressing need to enhance investment policy cooperation. Future G20 work could consider further building on the new G20 Principles for Global Investment Policymaking, which can be nonbinding, include the use of the updated IIA template, enhance the “Aid for Trade and Investment” initiative, and initiate a feasibility study of a G20 plurilateral investment promotion agreement. The G20 can also suggest better ways to manage and settle international investment disputes.