How to tell good industrial policy from bad

Gillian Tett in The FT

 
Five years ago Reda Cherif and Fuad Hasanov, two economists at the IMF, wrote a paper with the (slightly) sarcastic title: “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy”. 

This pointed out that while strategic policy intervention was widely viewed as a key reason for the east Asian economic miracle, it had a “bad reputation among policymakers and academics” — so much so that, from the 1970s onwards, the phrase was rarely mentioned in polite company, or by the IMF. 

No longer. Last month the fund reported that it had observed no less than 2,500 industrial policy actions around the world in the last year alone, of which “more than two-thirds were trade-distorting as they likely discriminated against foreign commercial interests”. 

More striking still, industrial policies used to be far “more prevalent in emerging economies” than developed ones; between 2009 and 2022, there were cumulatively 7,000 subsidies tracked in developing countries, and fewer than 6,000 in developed ones. But last year’s surge was “driven by large economies, with China, the EU and the US accounting for almost half of all new [industrial policy] measures”. 

That shift can be seen not just in data, but rhetoric too. Last month, Mario Draghi, former head of the European Central Bank, lamented that Europe “lack[s] a strategy for how to shield our traditional industries from an unlevel global playing field caused by asymmetries in regulations, subsidies and trade policies”. He called for the EU to fight back with industrial policy. 

In the UK, the opposition Labour party is echoing these themes, calling for a “New Deal” and touting what it calls “securonomics”. In the US, Donald Trump wants huge trade tariffs, while Joe Biden has called for tariffs in sectors such as steel. The president’s Inflation Reduction Act is yet more industrial policy. 

But anyone pondering that striking number in the IMF report should remember a crucial point that ought to be obvious but is often overlooked: “industrial policy” can mean many different things. As Cherif and Hasanov told a seminar at Cambridge’s Bennett Institute this week, there is an important difference between policies that try to create growth by shielding domestic companies from foreign competition and those which help those companies compete more effectively on the world stage.  

The former “import substitution” strategy was pursued by many developing countries in recent years, including India. It is also the variant favoured by Trump and the one being considered by some European politicians, for instance in the case of Chinese solar panels. 

But it is this latter approach that has given industrial policy a bad name. On the basis of copious data, Cherif and Hasanov argue that import substitution models undermine growth in the long term since they create excessively coddled, inefficient industries. 

By contrast, the second variant of industrial policy aims instead to make industries more competitive externally in an export-oriented model, while worrying less about imports. This approach is what drove the east Asian miracle, and is what creates sustained growth, the data suggests. 

The difference in approach is embodied by the contrasting fortunes of Malaysian automaker Proton car and South Korea’s Hyundai. The former was developed amid import substitution policies, and never soared; the latter flourished on the back of an export-oriented strategy.  

A cynic might retort that policy is rarely so clear cut as these contrasting car tales might suggest. It is hard for any company to fly on the world stage if its key competitors are excessively subsidised in closed markets — as evidenced by the woes of EU solar-panel makers trying to compete with their Chinese rivals. It is also tough to tell countries to aim for export-driven growth in a world where trade is fragmenting and protectionism rising. 

In any case, while export-oriented strategies work for small or medium-sized countries such as South Korea, they may seem less relevant for a giant such as America. 

Then there is a more fundamental question around economic change. As a thoughtful paper published last year by the economists Réka Juhász, Nathan Lane and Dani Rodrik notes, while “industrial policy has traditionally focused on manufacturing”, it is the service sector that now dominates. Thus “governments are likely to look beyond manufacturing as they consider productivity-enhancing ‘industrial’ policies in the future”. 

Cherif and Hasanov think institutions such as America’s Darpa give one clue to innovation-boosting measures in this space; Juhász, Lane and Rodrik cite worker training and export credit. But this needs holistic policy, which America, say, lacks. 

Either way, the key point is that insofar as western politicians are now increasingly happy to utter the once forbidden words “industrial policy”, they need to define what they mean. Is the goal to exclude competitors from the domestic stage, via tariffs? Or to make domestic producers more competitive and innovative in a global sense and better able to compete? Or is it something else? Investors and markets need clear answers. So, more importantly, do voters.

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How China changed the game for countries in default

Robin Wigglesworth and Sun Yu  in The FT

Zambia, struggling from an economic and financial crisis compounded by the Covid-19 pandemic, first missed an interest payment on its international bonds. Two and a half years later it remains in limbo, unable to resolve the default on most of its $31.6bn debts. 

That an impoverished and vulnerable country has for so long unsuccessfully laboured to reach a deal with creditors and move on from the crisis is an illustration of the messy process to deal with government bankruptcies, which some experts fear has now broken down completely. 

The consequences could be severe for the spate of countries that have recently defaulted on their debts, and the topic has been high on the agenda of this week’s spring meetings of the IMF and World Bank in Washington. 

In her opening remarks at those meetings, the IMF’s managing director Kristalina Georgieva noted that about 15 per cent of low-income countries were already in “debt distress” and almost half were in danger of falling into it. 

“This has raised concerns over a potential wave of debt restructuring requests—and how to handle them at a time when current restructuring cases are facing costly delays, Zambia being the most recent example,” she told attendees.  

While domestic laws and judges govern the bankruptcies of companies and individuals, there is no international law for insolvent countries — only a chaotic, ad hoc process that involves working through a hodgepodge of contractual clauses and tacit conventions, enduring tortuous negotiations and navigating geopolitical expediency. 

A decade ago, US-based hedge fund Elliott Management exploited that landscape to notch up several lucrative victories by suing defaulters for full repayment of their debts. But this fragile patchwork is now under threat of unravelling completely due to the emergence of a new, disruptive, opaque and powerful force in sovereign debt: China. 

Some experts say Beijing’s lending spree to developing countries and refusal to play by western-established rules represents the single greatest impediment to government debt workouts and threatens to leave some countries in debt limbo for years. 

But Yu Jie, a senior research fellow on China at think-tank Chatham House, believes Beijing’s stance “is less about economic rationalities and more about geopolitical competition”. 

“The multilateral financial institutions are run largely by Americans and Europeans. China had hoped to be able to shape the agenda of debt relief, not to have it dictated by the west,” she says. 

Jay Newman, the former Elliott fund manager who successfully sued Argentina for $2.4bn after its 2001 debt restructuring, says the emergence of China as a significant player has left the entire system in uncharted waters. “You now have one big state creditor with the power to dictate terms and the patience not to make a deal if it doesn’t suit them. It has completely changed the game.” 

The new landscape 

In a grim sign of the times, Alvarez & Marsal — one of the world’s biggest corporate bankruptcy advisers — this year set up a sovereign practice for the first time. Underscoring its expectations for the business, it hired Reza Baqir, a former senior IMF official and governor of Pakistan’s central bank, to lead the new unit. 

The potential is clear. The latest IMF data from the end of February indicates that nine poorer countries — such as Mozambique, Zambia and Grenada — are already in what it terms “debt distress”, while another 27 countries are at “high risk” of falling into it. A further 26 more are on the watchlist. Baqir points out that there are also a lot of struggling state-controlled companies in these countries that will need help as a result. 

“The timing was right” for A&M to set up a sovereign advisory unit, he says. “Given that there are more than 50 countries in various stages of debt distress there is an opportunity for a more holistic approach.” 

Baqir is among those that say the debt restructuring process is broken, largely because it was primarily designed for a bygone era, when creditors were overwhelmingly western countries and western banks. 

Decades ago, the Paris Club was formed to co-ordinate between government creditors, while bankers formed the London Club to restructure their debts. Broadly speaking, western governments drove the process, and occasionally leaned on banks to accept painful settlements. It was largely improvised and often slow, but it mostly worked. 

But the decline of bank lending and the growth of the bond market shook things up in the spate of sovereign defaults that started in the early 1990s. Creditor co-ordination became trickier with myriad bondholders trading claims around the world, rather than just a handful of banks. 

Argentina’s default on $80bn of bonds in 2001 led to years of fights between Buenos Aires and investors such as Elliott, which refused to accept the terms agreed by other creditors. At one point the hedge fund famously seized an Argentine naval vessel when it docked in Ghana. Its reputation became such that bondholders would sometimes invoke the mere spectre of Elliott to scare countries contemplating a default, while policymakers used it as prima facie evidence of the sovereign debt restructuring system’s weaknesses. 

In the wake of the Argentine debacle the IMF responded by attempting to set up a kind of bankruptcy court for countries with itself as judge. But the sovereign debt restructuring mechanism foundered after attracting little support from the IMF’s biggest shareholders. Instead, the US championed the insertion of “collective action clauses” into bonds, which compel recalcitrant creditors to accept a restructuring agreement made by a majority. After Greece’s debt restructuring in 2012 these CACs were beefed up further. 

However, many bonds still lack these clauses. Moreover, they can only help ease a restructuring agreement once it is struck. Many experts point out that they do nothing to solve the biggest fundamental problem: countries are far too slow to seek a debt restructuring as they are wary of a messy process with the potential of worsening an economic crisis and the inevitable political humiliation of defaulting. 

“If I was a finance minister, I’d find it hard to tell my prime minister that we have a clean framework to work with,” says Baqir. 

When they are finally forced into a debt restructuring, the financial relief that countries secure is often too little to ensure a durable upswing. In the few cases where it does clean up their balance sheet, it sometimes only leads to another debt binge. 

This flawed process has now been further complicated — some say wrecked — by China’s vast lending programme across the developing world over the past decade. Many of these loans are opaque in size, terms, nature and sometimes even existence. 

The overall size of the lending programmes is hard to judge, given that China does not report most of it to the likes of the IMF, OECD or Bank for International Settlements. But AidData, a development think-tank based at William & Mary’s Global Research Institute, estimates that the loans amount to about $843bn. China is not a member of the Paris Club, and in most cases the loans are made by its myriad state-owned or merely state-controlled banks, muddling things further. 

It’s like the international financial policy community spent the past decade trying to clean up around the street light, oblivious to the mounds of rubbish piling up unseen around the rest of the darkened street, says Anna Gelpern, a professor of law and international finance at Georgetown University. 

“We spent 20 years focusing on contractual tweaks, assuming that bonds were the problem,” she says. “The problem is the state of global politics, and the fate of low-income countries just isn’t a big priority anywhere.” 

Life in default 

Zambia is a prime example. Of the roughly $20bn of external debt that the IMF tallied when forming its programme in 2022, $2.7bn was lent by international development banks, $1.3bn comes from various western governments, bank loans come to $1.6bn, local kwacha-denominated bonds held by non-residents are $3.3bn and international dollar-denominated bonds account for $3.3bn. But the biggest chunk is nearly $6bn owed to China. 

The IMF has reached a support agreement with Zambia that is conditional on its debt burden becoming sustainable. But other bondholders do not want any relief they offer to simply go towards paying off China. Beijing has in principle agreed to accept a “haircut” on its debts, but experts say it appears to not want anything it offers to go towards improving the recovery of private creditors, leading to the impasse. 

In the meantime, Zambia says it has accumulated about $1.2bn in arrears since its default. Including missed payments to various government contractors, the IMF has estimated that the arrears are actually nearly $3bn. 

Highlighting how China also appears to be leveraging these situations to undermine the western-designed global financial architecture, in January it called for international organisations such as the IMF and World Bank to participate in the debt restructuring. This would overturn half a century of convention that these organisations are “super-senior” creditors exempt from debt restructurings, as participating would imperil their ability to lend to other countries. 

One senior adviser to the Chinese government says that “there is no law that requires World Bank loans to be prioritised” and that the country was “not happy” with a practice that originated in an era when western countries were generally the only creditors. “If we allow the World Bank to take precedence over us, we need to have bigger voting rights and take larger stakes at the bank. China’s duty doesn’t match its rights in development finance.” 

Another increasingly common wrinkle in debt restructuring is what to do with domestic bonds, which local banks and financial companies have often gorged upon. Here too, Zambia is a good example. 

The $3.3bn of local currency bonds held by non-residents have also been cordoned off from the debt restructuring. Lusaka fears that reducing the value of kwacha bonds could wreck its banking industry and do more damage than they are worth. But some holders of other international bonds argue that they should also be included in the restructuring. 

“In the sovereign debt restructuring business we didn’t really think much about local debts,” says Lee Buchheit, a leading lawyer in the field. “There often wasn’t much of it, and we always assumed that the sovereign has a much broader palate of mechanisms it can use to deal with domestic debt.” 

But what to do about Zambia’s Chinese loans remains the thorniest issue and has risen to the highest levels in Washington and Beijing. US Treasury secretary Janet Yellen this year raised the stand-off with Chinese president Xi Jinping’s economic adviser Liu He, and said that it had “taken far too long already to resolve this matter” when she visited Lusaka in January. 

China’s exceptionalism? 

For the most part, experts say China seems mostly content with rolling its debts rather than restructuring them, handing out new loans to ensure that its domestic banks can be repaid in full. But it prefers to act alone, at its own pace, and feels no need for transparency. 

A recent paper by several economists, including Harvard University’s Carmen Reinhart, estimated that China has made 128 bailout loans worth $240bn to 20 distressed countries between 2000 and 2021. About $185bn was extended over the last five years of the study, and more than $100bn in 2019-21. 

Reinhart says that China’s lending stands out for its “extreme” opacity but stresses that its overall behaviour is not as unusual as some people say. “China is really playing hardball because it is a major creditor. US commercial banks also played hardball back in the 1980s,” she says. Baqir agrees, saying: “Whatever the colour or creed of a creditor, creditors think like creditors.” 

The Chinese government adviser also points to factors such as the country’s relative inexperience with debt workouts. “China is still at an early stage in coming up with its debt relief programme,” he says. 

Incomplete domestic financial reforms have also made it harder to offer debt relief to overseas creditors, while some Chinese banks are also struggling with big hits from the country’s wilting real estate sector. 

“We need co-ordination from the top level, which now has other priorities,” the adviser says. He also points out that the pressure on developing countries has intensified following a series of US interest rate rises, and that as a result Washington “should be responsible for the debt trap”. 

But whatever the root cause, most agree on the end result. “All of this [creditor] fragmentation is leading to paralysis,” says Sean Hagan, a former general counsel at the IMF who now teaches international law at Georgetown. 

 There are few solutions being floated around. The IMF in February announced a new Global Sovereign Debt Roundtable to bring together the full gamut of creditors and debtors, and hopefully thrash out ways to “facilitate the debt resolution process”. It is an initiative that few experts harbour much hope for. 

Buchheit likens the impact of an assertive new player on an already fault-riddled debt restructuring system to someone having a bad cold that a doctor struggles to treat, who is then impaled by a spear. “The cold hasn’t gone away, but the doctor is likely to focus more on the spear,” he says. 

Ironically, both Buchheit and Newman — who clashed many times over the years as the leading lawyer for and suer of bankrupt countries — advocate for the same basic approach: countries should restructure the debts they can, remain in default to China, and the IMF should drop its “kumbaya” approach and accept semi-permanent arrears to its biggest shareholders. 

But most expect Zambia-like debt limbo to be the likeliest outcome for a lot of countries. “I suspect this is going to be a recurring problem,” says Reinhart. “And the longer these countries are in the [debt] netherworld . . . the [more the] fabric of the country is affected.”  

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The WTO’s lonely struggle to defend global trade

What role does the organisation have in an era of fracturing multinational alliances and fears of deglobalisation?  Andy Bounds in The FT 

For almost three decades, the World Trade Organization has been lowering barriers to trade and smoothing the path of globalisation. Yet its ministerial meeting in Geneva this week could result in something that would do the opposite: new tariffs. 

As the summit begins, trade ministers from the WTO’s 164 members have yet to agree whether to continue a 25-year-old moratorium on customs duties for ecommerce. 

If India, South Africa and Indonesia continue their opposition it will expire at the end of the meeting on Wednesday, permitting countries to impose charges on messaging apps, video calls and data flows. 

If an organisation whose purpose is to make global trade easier allows a new protectionist measure, says Jane Drake-Brockman of representative group the Australian Services Roundtable, “the WTO will have lost the plot”. 

 It might also reinforce fears that the WTO is unfit for purpose in an era of fracturing multinational alliances, isolationist politics and possible deglobalisation. 

The history of the WTO traces the evolution of globalised trade. Since it was created in 1995, global trade volumes have more than doubled and average global tariffs have fallen to 9 per cent, with billions lifted out of poverty by participating in the global economy. 

Companies established global supply chains, taking advantage of cheap labour or abundant raw materials in developing countries such as China. 

But in about 2015, this period of so-called hyperglobalisation began to come to an end. The election of US president Donald Trump in 2016, who inflamed a trade war against China and put tariffs on allies in Europe in the name of national security, threatened to unwind years of integration. 

Then came the Covid-19 pandemic and its lockdowns, which caused a dramatic fall in global trade. Countries closed borders and imposed export restrictions on face masks, drugs and food to protect supplies when the pandemic shut down factories. 

Finally, Russia’s invasion of Ukraine, which cut food supplies to countries reliant on its vast grain harvest, exacerbated protectionist trends. Today, many nations are deeply worried about dependency on others and anxious to shorten supply routes. 

The picture has rarely looked bleaker for advocates of free global trade. Pierre-Olivier Gourinchas, the IMF’s chief economist, this month warned of a world fragmenting into “distinct economic blocs with different ideologies, political systems, technology standards, cross-border payment and trade systems, and reserve currencies”. 

The question is what the WTO can do in its “MC12” meeting, the 12th ministerial conference in its history, to keep these disparate blocs together — or at least find consensus on some of the key issues under discussion: fishing subsidies, food security, Covid-19 vaccine equity and WTO governance. 

Ngozi Okonjo-Iweala, the former Nigerian finance minister who took over as WTO director-general in Geneva in March 2021, has staked her reputation on finding an answer. She insisted the meeting should go ahead, despite strained relations and stalled talks. In recent weeks, she has been a whirlwind of activity, popping between negotiating groups to urge progress. 

In May, she told members to consider what is at stake. “Let us all remember that the WTO is about people — about using trade as a tool to raise living standards, create jobs and promote sustainable development. So, let’s redouble our efforts, let’s deliver results and let’s reinvigorate the WTO,” she told ambassadors from developing countries. WTO economists have estimated that if the world split into two trading blocs it would lower the long-run level of real global gross domestic product by about 5 per cent.  

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1. Fishing stocks 

What is the issue? Reducing fishing subsidies. 

What’s at stake? Fishing subsidies are estimated to be $35bn worldwide, of which $20bn directly contributes to overfishing. The UN says the number of stocks fished at biologically unsustainable levels increased from 10 per cent in 1974 to 34.2 per cent in 2017. Support for large vessels means small coastal boats cannot compete. 

Who is blocking it? India and China, who want to be classed as small states and as such would face fewer restrictions.

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Business has issued a similar plea. On the eve of MC12, Business Europe and the US Chamber of Commerce said in a joint statement that the “primary objective” of the meeting must be to “reaffirm multilateralism and rules-based trade as the preferred path to boost global economic growth . . . The WTO also needs to demonstrate that it can respond to the most pressing challenges of our time, particularly health, climate change and food security.” 

That might sound like a tall order when the WTO is in danger of failing to agree even on averting ecommerce tariffs. But the stakes are too high for businesses and consumers for the organisation to fail, Drake-Brockman says. “This is a dangerous time for trade. We really need ministers to get a quality outcome that signals the WTO is still a pro-trade organisation.” 

Seeking consensus 

The WTO was established by 123 countries on January 1 1995. It has been in crisis almost ever since. 

In November 1999, huge protests at a ministerial meeting in the US spilled into rioting and fighting with the police, dubbed the Battle of Seattle. Protesters focused on issues including workers’ rights, sustainable economies, and environmental and social issues. 

No longer could technocrats simply cut tariffs and preach about the economic benefits of comparative advantage. The Uruguay round that created the WTO was the last multilateral trade deal. The Doha round, launched in 2001, collapsed in 2015. 

A subsequent ministerial meeting, MC11 in Buenos Aires in 2017, also ended without agreement. Its shadow hangs long over MC12 in Geneva, originally scheduled for 2020 but postponed by the pandemic. 

The geopolitical winds do not look favourable. The invasion of Ukraine looms large; the US, EU and Canada stripped Russia of its most-favoured-nation status, the WTO rule that means you must offer every member the same minimum trade terms. Ambassadors from several countries walk out of the room whenever the Russian ambassador speaks — and ministers have said they will do the same in Geneva. 

The discord does not end there. Even the EU, historically an enthusiastic cheerleader of open, globalised trade, is pursuing what it calls a policy of “strategic autonomy” in response to aggressive actions by the US and China. 

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2. Farming subsidies 

The issue Reducing agricultural subsidies. 

What’s at stake Governments globally provide farmers with $540bn per year, making up 15 per cent of total agricultural production value. This distorts trade and pushes up prices. 

Who is blocking it? India and others, who want to block cheap imports and pay farmers to stockpile foodstuffs in case of emergency. 

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The bloc has introduced unilateral trade defence tools, including an anti-coercion instrument, which would allow it to respond unilaterally to new trade barriers without seeking WTO approval, and a carbon border tax, which will put tariffs on imports of steel and other goods where the producer is not paying a cost for emissions. 

Cecilia Malmström, the EU’s trade commissioner from 2014 to 2019 and now an adviser at law firm Covington & Burling, is worried by the combination. “The EU has always been a big friend of the WTO and has helped it with other allies to reform and change,” she says. But right now it is “focusing much more on trade defence than on opening up trade. And I think that is a real pity.” 

In the US, Trump may be gone but protectionism is not. Joe Biden’s Democratic party, which also controls Congress, says “the global trading system has failed to keep its promises to American workers”. 

The Democrats want more subsidies for domestic manufacturing, with goods stamped “Made in America”, and says they will “end policies that incentivise offshoring and instead accelerate onshoring of critical supply chains, including in medical supplies and pharmaceuticals”. 

Seeking re-election in 2024, Biden has maintained populist messages about protecting workers and bashing China. He has temporarily dropped tariffs on steel from the UK, Canada and the EU but only if they agree within two years to team up to keep out “dirty Chinese steel” with a new agreement to put tariffs on countries without a carbon price mechanism forcing polluters to pay for emissions. 

“President Biden’s trade agenda in all but rhetoric is exactly the same so far as president Trump’s. It’s still America first,” says Malmström. 

Don Graves, US deputy secretary of commerce, says Biden “has recommitted to the WTO, has stated his support for working with and through the WTO, working with [US] partners to provide necessary reforms”. 

Yet the US has undermined one of the fundamental pillars of the WTO system: dispute resolution. Any member can bring a case against another for breaching its obligations, for example by blocking imports or raising tariffs. A panel of experts rules on the complaint, after which the loser can appeal to the appellate body. 

The US refuses to allow new members to be appointed to the panel, rendering it useless. Washington was particularly irritated that the WTO partly backed the EU in a long-running dispute over aircraft subsidies to Airbus and Boeing. So countries are reduced to imposing unilateral measures that often provoke a response from the other side. “The US is the problem,” says Arancha González, a former senior WTO official and Spanish foreign minister. “It needs to accept that compliance is not weakness.” 

China and India’s influence 

The greater threats to rising global trade are in fact the powers that have grown richer on the back of it, according to Chad Bown, a fellow of the Peterson Institute for International Economics in Washington. 

 Exhibit A, he says, is China, whose entry 20 years ago was supposed to prove the relevance of the WTO, bringing the chief beneficiary of globalisation into the system. 

As it grew richer and more interconnected with the west, so its politics would become more western too, ran the arguments of proponents such as then president Bill Clinton. “It will open new doors of trade for America and new hope for change in China,” he said at the time. 

But in recent years President Xi Jinping has tightened the grip of the Communist party on all facets of life. The party grants many companies state subsidies and cheap loans. The services economy is largely closed. 

There are regular boycotts of companies who speak out on human rights issues, such as Nike and H&M. Indeed, since December China has boycotted an entire country’s produce: Lithuania, after it improved its relations with Taiwan, the independently governed island, which Beijing considers sovereign territory. The EU has filed a complaint at the WTO about China’s behaviour, one of two anti-China cases this year. 

“China’s economic system is not one that works within the WTO,” says Bown. “They have so many economic policies that nobody else would even think of using.” 

Then there is India. In trade, Delhi wants the special treatment of a small developing country, Geneva trade officials say. It is helping to hold up a deal on fishing rights by insisting it gets “special and differential treatment”, reserved for the poorest countries, despite having a big fleet. On agricultural subsidies, it insists on the right for the state to buy grain at inflated prices from farmers to stockpile in case of food shortages. 

---

3. Vaccine equality 

The issue Waivers for vaccines. 

What’s at stake WTO intellectual property protections prevent poorer countries making cheap generic versions of Covid-19 vaccines. India and South Africa have been leading a push to allow governments to override IP. There is growing consensus to allow governments to issue compulsory licences to make drugs domestically, with some compensation for rights holders. 

Who is blocking it? The US. Many in Congress are opposed, since the pharmaceutical industry says it would deter investment in future vaccines. The US wants China excluded from using the IP waiver/compulsory licensing scheme as it already produces its own vaccines. 

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Large sectors of its economy are closed to international companies even as its homegrown IT and manufacturing businesses grow in the EU and US. 

Delhi has recently shown signs of engagement. It signed a partial trade deal with Australia this year and has reinitiated trade talks with the EU. It has also compromised on its demands at the WTO for drug companies to hand over their Covid-19 vaccine recipes for free. (See box.) 

But its attitude in multilateral talks remains intransigent, diplomats say, and it has a veto power. “As long as there is India you are never going to get anything agreed,” says Bown. 

‘The WTO will stagger on’ 

Yet despite all that trade is still thriving, González, who was chief of staff to ex-WTO director-general Pascal Lamy, said this month at a seminar at the European Policy Centre think-tank in Brussels. 

“When I look at the figures, I don’t see deglobalisation, I don’t see it in trade. I don’t see it in investment and I certainly don’t see it in digital exchanges,” she said. Cross-border trade and foreign direct investment are higher than they were before the pandemic. 

But she warned of “fragmentation”. The US is seeking to invest in strategic minerals and manufacturing in allied countries, a policy it calls “friendshoring”. China is building a network of African trading partners through its Belt and Road Initiative. Even the EU is looking to friendly states such as Norway and the US for alternatives to Russian oil and gas. 

This activity illustrates that there is still a role for the WTO to play, she said. “Europe thrives on an open economy and European businesses thrive on having one set of rules, which is what multilateral organisations and agreements bring to Europe and European businesses, as much as they bring it to Chinese businesses and to American businesses.” 

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4. WTO governance 

The issue WTO reform 

What’s at stake The WTO has not concluded a multilateral trade round since it was founded in 1995. It has struggled to deal with bilateral trade disputes and growing areas such as ecommerce, modern slavery, sustainable development and how to incentivise environmentally friendly production. 

Who is blocking it? Almost everyone has a different view of what the WTO should do. 

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There are still global issues that can only be solved by multilateral forums, Bown adds. “Look at climate change. We only have one planet.” He suggests countries might form “plurilateral” groups that agree things and have the WTO rubber stamp and perhaps police them. 

But for all the efforts of Okonjo-Iweala to pursue wider goals at this week’s summit, politics is still likely to get in the way of meaningful progress. In the current environment, democratic governments have a hard time convincing lawmakers and the public to endorse bilateral trade deals, let alone comprehensive multilateral deals. 

As a result, MC12 is likelier to see incremental deals than maximalist agreements. Ministers are likely to agree to roll over a deal to allow ecommerce to flow freely until the next meeting in two years, for example, but not even attempt a comprehensive framework to manage the fast-growing trade. “The WTO will stagger on,” Bown says. “We will have as much, or more, trade but just going to different places.” 

It’s possible too that the fragmentation of the multilateral world order is a problem only the members of that order can repair. The International Chamber of Commerce, with more than 45mn companies in more than 100 countries, says it is incumbent on national governments to compromise and bind the trading system back together. 

“Leaders and ministers have not realised how significant failure to reach outcomes would be for global business,” says ICC secretary-general John Denton. “If ministers can’t spend real political capital in making the WTO work, they risk sinking the organisation into further irrelevancy.”

Capitalism and its Self-Delusions