G20 needs deeds, not mere words, to link trade and investment
Can governments transform what they say into what they do?
The trade ministers of G20 countries met in Shanghai last month to pursue longstanding discussions on what they should say to each other and the rest of the world about policy towards international trade and investment.
The immediate objective was to forge a communique that heads of state and government would use as input for the summit declaration marking the end of China’s G20 presidency. That meeting will be in Hangzhou in less than three weeks from now.
A notable feature of the G20’s positioning in its 10th July Trade Ministerial Meeting Statement and its Annexes is the emphasis on coherence between trade policy and investment policy. This positioning predates China’s G20 tenure, but has received more emphasis this year.
The question is what it really means.
One reason given for needing to emphasise a “coherent, complementary and mutually reinforcing” trade and investment relationship is that trade and investment are flagging globally.
According to the World Trade Organisation, trade has grown on average by less than 3 per cent since 2009, compared to an average of 7 per cent from 1990 to 2008. The United Nations Conference on Trade and Development reports that foreign direct investment fell by 16 per cent in 2014, and has been sluggish or negative since 2012.
The statement on trade calls, among other things, for removing red tape to lower trade costs, increasing trade in services, paying more attention to the shortage of trade finance, reaffirming the primacy of the WTO in trade matters, and addressing trade and development. This is familiar fare.
For investment, the desiderata include an open, transparent, non-discriminatory and predictable investment environment. Legal certainty and standing for companies in disputes, access to discussions on investment policy, and the right of host governments to regulate for public policy reasons are among the elements of a desirable regime.
It is hard to argue with these aspirations.
But what is the reality? The G20 trade ministers acknowledge that protectionist actions taken by G20 governments have accumulated inexorably over the years and are now more numerous than ever. Restrictions on FDI abound in many economies, including limitations on the size and legal form of investments, foreign equity share limitations, and local content requirements.
At least on trade, the G20 recognises the gap between rhetoric and reality. Investments are more complicated because regulations are subject to hundreds of bilateral treaties and there is no single locus to address such matters.
The emphasis on linking trade and investment in G20 discussions is interesting because it reflects realities in today’s global economy, where trade and investment are increasingly co-dependent as part of production and marketing structures that stretch across multiple jurisdictions.
Economics textbooks in bygone times emphasised trade and FDI as substitutes. If a government wanted FDI, it would try to attract it by putting up trade barriers to lessen competition in the domestic market.
If FDI was not trusted because large international companies merely extracted resources and profits, then trade might be preferred and investment frustrated.
In today’s world of global value chains and connected economies, the idea of separating trade and investment makes little sense.
They are treated as complements. To do otherwise would run counter to the stated aspirations of many governments and contemporary business practice, and would close off opportunities for income, growth and jobs.
But governments have a long way to go if they want to avoid the pitfalls of thinking about these things in a protectionist manner.
They will need to start by clearing away significant obstacles that crimp trade and investment opportunities – an objective already affirmed in successive communiques. Then would come boldness in creating a regulatory architecture to reflect the complementarity of trade and investment.
Are governments up to the task of helping to shake nearly a decade of economic lethargy? Can they transform what they say into what they do?
In the face of multiple unrequited declarations of intent, we may have cause to fear that words and deeds still share the same currency.
Patrick Low is a fellow at the Asia Global Institute of the University of Hong Kong