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Japan’s Lost Moment in Osaka

Dr Titli Basu is Associate Fellow at the Manohar Parrikar Institute for Defence Studies and Analyses. Click here for detailed profile.
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  • July 12, 2019

    The G20 presidency offered Japan its first leadership moment in the newly dawned Reiwa era1 as world leaders gathered in Osaka, at a time when the rules-based global economic governance is becoming more fragmented under pressure from growing American unilateralism and Chinese state capitalism. Japan had a difficult choice: whether to let politicisation of trade harm the global economy by allowing managed trade and weakening enforcement mechanism of the World Trade Organisation (WTO) to appease its most important security ally - the US, or be an anchor of free trade and open markets. While Japan envisions its role as a leading promoter of rules-based liberal international order, the G20 tested Japan’s leadership in championing the cause of trade liberalisation and resisting protectionism. Prime Minister Shinzo Abe’s objective was to reinstate global confidence in the multilateral trading system 2 at a time when backlash against globalisation is unleashing economic nationalism in order to undo ‘unfair trade practices’.

    Stakes were high for Prime Minister Abe as the US-China trade friction over deficits and siphoning off cutting edge technologies continue to disrupt supply chains and undermine the global economy, which by International Monetary Fund (IMF) estimates could condense the global GDP by 0.5 per cent, or about $455 billion, by 2020. 3 At the global level, Japan – as the third largest economy – was keen on projecting its readiness to step up as the leader of multilateral trading system, particularly after successfully rescuing the TPP-11 following the US exit and concluding the Economic Partnership Agreement with the European Union (EU) following Brexit. However, power politics constrained Japan’s G20 agenda as building consensus on issues of global economic governance exposed deepening fault lines not just between the developed and developing economies but amongst the developed economies as well.

    At the national level, as Japan heads for Upper House elections in July, Abe had to demonstrate his ability to advance national interests while navigating the complex web of geo-economic tensions as protectionist policies could impact Japanese exports. Export value to the US and China each account for 20 per cent of the total Japanese exports. 4 Additionally, the G20 had presented Abe an opportunity to demonstrate Japan’s geopolitical standing through summit diplomacy on the side-lines.

    What did Abe accomplish?

    As president of the G20, Japan had a key role in agenda-setting. Japan’s top three priorities were: launching the Osaka Track for data governance, reinforcing a free and fair trading system, and tackling global environmental challenges. 5 In the run-up to the summit, Abe at the World Economic Forum envisioned that Osaka G20 should be recalled “as the summit that started world-wide data governance”. 6 Japan argued the case for building rules for data governance and constructing a new regime underpinned by Data Free Flow with Trust (DFFT). This is aligned with Japan’s push for data-driven Society 5.0 which the fourth industrial revolution will generate. However, global data governance is intensely debated. Even though cross-border flow of data and information creates increased productivity and innovation, there are more than a few challenges related to privacy, data protection, intellectual property rights and security. The Osaka Declaration on Digital Economy was not signed by emerging markets and developing economies like India, Indonesia, South Africa and Egypt.

    While Abe wanted to find a ‘common ground’ without focussing on ‘confrontations’, 7 the G20 struggled to make considerable progress in providing strategic direction on reforming the WTO — which serves as the foundation of global trading system. The Osaka Declaration made little progress on critical issues such as President Donald Trump’s stance on blocking new appointments to the appellate body, consequently weakening the key dispute mechanism. At the G20, Abe’s attention regarding WTO reforms was steered towards digital trade and industrial subsidies 8, subjects that would not offend Trump.

    For the US, EU and Japan, the larger debate on WTO reforms evolved around three axes: alleged overstretch by the appellate body, low compliance regarding notification of government subsidies in accordance with specific agreement rules, and the practice of allowing members to self-designate as developing countries with the aim of obtaining special and differential treatment, as in the case of China. 9 While they have coordinated their efforts in pursuing WTO reforms,10 China has submitted its own proposal earlier in May as the organisation is becoming ‘a new platform for great power rivalry’ 11 and the debate on ‘three no’s’ versus ‘three zeros’ 12 intensified.

    While Japan promotes globalisation and multilateralism, Trump’s “America First” policy, employing tariffs to correct the ‘unfair trade practices’ of not just China but also allies like Japan and the EU, dilutes global liberal economic governance. A view is fast emerging that to preserve the free trade system, economies like Japan, the EU and China should join forces towards liberal regional integration on trade and investment without the US, consequently driving the US into an unfavourable position which may lead the business elites to create pressure on Trump to ease protectionist measures. 13 However, the Osaka Declaration had no reference to protectionism and multilateralism. Instead, it outlined the objective of keeping the trade and investment ‘free, fair, non-discriminatory’. 14 Incidentally, Japan has prioritised concluding the Regional Comprehensive Economic Partnership (RCEP), representing 33 per cent of the global GDP. 15 However, the RCEP negotiation is navigating the fragmentation within, leading to an evolving discourse among stakeholders to conclude RCEP minus India or pursue RCEP within an Association of Southeast Asian Nations Plus Three (ASEAN+3) framework for now.

    Another formidable challenge for Abe at the G20 was traversing the climate politics. As the US attempted to mitigate references to the Paris Agreement, which reflects “common but differentiated responsibilities”, several signatories including France ensured that the G20 upholds the essence of the Agreement. Fault lines of the climate politics reflected in the Osaka Declaration which carried a separate paragraph on the US reservations vis-à-vis the Paris Agreement. In contrast, the Osaka Blue Ocean Vision, addressing the problem of marine plastic waste, received unanimous support that encouraged the adoption of a comprehensive life-cycle approach.

    Summitry on side-lines

    Osaka also witnessed a flurry of summit diplomacy on the side-lines of G20. In one of the key meetings, the US and China negotiated a temporary truce in the escalating trade war even as the structural issues, including subsidies and state owned enterprises, remained unresolved. For Japan, the most important bilateral meetings were with the US and China. As strategic competition escalates between these two powers, managing Japan’s national interests in the US-Japan-China triangle is influenced by the complexities of geostrategic and geo-economic variables. Alliance management is testing Japan’s policy choices as Trump intensifies rhetoric on allies before the 2020 re-election bid. Intense negotiations in the automobiles and agricultural sectors, drug-pricing and currency rules on the one hand, and negotiations on cost-sharing agreement which is scheduled to expire in 2021 in the backdrop of ‘Cost Plus 50’ proposal 16 on the other, will test the foundation of their decades old alliance. The Trump-Abe bilateral meeting in Osaka discussed difficult trade issues including new Japanese investments in the US and purchase of military equipment by Japan. 17

    As China-Japan bilateral relations embark on a ‘new era of development’, summit with China was prioritised since this was President Xi Jinping’s maiden visit to Japan after he took office in 2013. While Japan opposes the emergence of a Sino-centric regional order, unpredictability in Trump’s Asia strategy has led to reorienting of Japan’s China policy. Since 2017, Japan’s China policy is indicating a ‘tactical detente’, 18 influenced by pragmatic calculations rather than major shifts in the attitudes, as contested sovereignty and history issues remain unresolved. In the long-term, the US behaviour towards alliance management will continue to be a pivotal factor in Japan’s strategic equation with China. 19

    Abe also held meetings with the other key partner countries in the Indo-Pacific including a bilateral with India and a trilateral along with both America and India, focussing on connectivity, infrastructure, and regional security. Japan steered the G20 Principles for Quality Infrastructure Investment underpinned by responsible debt financing, governance and environmental considerations, which appears aligned with India’s proposed Global Coalition on Disaster Resilient Infrastructure.

    Meanwhile, managing difficult regional neighbours tested Abe’s diplomatic mettle. While Abe made little progress with President Vladimir Putin on contentious issues like peace treaty and territorial disputes, there was no meeting with President Moon Jae-in. Japan’s relations with them are increasingly determined by domestic political pressures, historical baggage and, more importantly, strategic variables in the region. Meanwhile, the US-North Korea impromptu meeting at the DMZ post-Osaka summit caught the Japanese by surprise, reiterating Trump’s unpredictable approach.  

    The lost opportunity

    The G20 is considered as the premier forum for nuanced debate on how best to manage the impending risks in global economic system. Hence, as a leader and advocate of globalisation and multilateralism, Japan was expected to restore international confidence in the multilateral trading system and present solutions to reduce risks and economic instabilities.

    The debate on global economic governance in Osaka was dominated by competing interests and narrow national agendas which made this important platform rather ineffective in resolving major problems facing the global economy. At a time when the world economy is dealing with the ramifications of US-China trade rivalry and also Brexit, Japan as a flag bearer of multilateralism and open markets, with strong national interests to protect both, could have been more assertive in setting the strategic direction for upholding the rules-based multilateral trading system. However, the Osaka summit was a lost opportunity for Japan. Even though Japan outlined an ambitious agenda, the cause of multilateralism got compromised by politicisation of issues pertaining to global economic governance..

    Views expressed are of the authors and do not necessarily reflect the views of the IDSA or of the Government of India.