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On issues ranging from exchange rates to energy policy, foreign aid, and the multilateral trading system, China's actions over the past few years have challenged some of the most fundamental norms and rules of the existing global order.
China's key role in torpedoing the Doha Round of global trade negotiations in July is the latest, and a critically important, case in point. China has a huge national interest in maintaining the global trading system and enhancing its effectiveness; this system has played a crucial role in facilitating China's breathtaking growth. The widespread rise of anti-China protectionism in the United States and Europe (not to mention many developing countries) could choke off China's exports and sharply curb its growth. The erosion of the global trading system would cause major problems for China and damage the world economy.
As the world's second-largest economy (and its second-largest exporter), China bears a great deal of responsibility for preserving the global trading system. In the past, China never played an active role in the Doha talks, but it is now aggressively challenging the system. At the WTO ministerial meeting in Geneva in late July, China joined the organization's inner steering committee for the first time. It seemed that China might be willing to help promote a fruitful outcome. But China, far from supporting liberalization, used its newfound clout to join India in seeking new protection beyond the red lines of most of the other participants, including many developing countries. Doha may thus become the first global trade negotiation to fail since the 1930s, when protectionism erupted everywhere and brought on a worldwide depression.
The consequences of Doha's failure will be grave. Developing countries--most of which rely heavily on expanded trade opportunities--will suffer the most. The Doha round's primary aim was to open markets for the lowest income countries and thus accelerate their economic progress. Ironically, it was China and India--the largest and most successful developing countries--that triggered Doha's demise because they were unwilling to open their own markets sufficiently to permit an agreement.
China's (and India's) refusal to accept a significant share of systemic responsibility for the global economy also bodes ill for other upcoming international negotiations--particularly on climate change. China recently replaced the United States as the world's leading polluter, and Beijing's refusal to play an active and positive role in climate negotiations would be devastating for the entire planet.
Furthermore, the China-India alliance that emerged in Geneva could fundamentally alter the politics of global economic negotiations. India, despite its billion people and rapid growth rate, is far less important than China to the world economy; its economy is less than half as large, trade accounts for less than half as much of its national output, its total trade is smaller than the annual growth in China's trade, and it has attracted less foreign investment since its independence in 1947 than China currently receives in a single year. Nevertheless, support from India--a longstanding defender of "special and differential treatment" for developing countries--could add to China's already substantial negotiating clout at the WTO by bringing together more than one-third of the world's population and creating a formidable force that could block initiatives supported by most other nations on issues ranging from currency rules to global warming.
Finally, the failure of Doha will leave a gaping vacuum in the global trading system. There will be a surge of bilateral and regional agreements, especially as China seeks to strengthen its regional hegemony (and further weaken the global system) by creating an Asian trading bloc. There will be a wave of new trade litigation, as Brazil has already threatened against the United States, which could strain the WTO's Dispute Settlement Mechanism to a breaking point. And there is a severe risk that new national initiatives to counter global warming, including in the United States, will include new barriers against imports from countries that do not adopt similar regimes.
The global trading system was already extremely vulnerable to such pressures prior to the collapse of Doha. The backlash against globalization in many countries, including the United States and China, had already jeopardized support for open markets. Huge global trade imbalances, even with the recent decline in the U.S. deficit, have reinforced these pressures. And the global economic slowdown, especially in the richest countries, has intensified this opposition to freer trade. Now, the demise of Doha threatens to discredit the entire WTO system, which built its reputation by steadily reducing global trade barriers.
The implications are particularly profound for the United States. The failure of Doha has terminated the Bush administration's key multilateral trade initiative at a time when Congress is blocking its bilateral free-trade agreements and repudiating "fast-track" trade promotion authority.The next U.S. administration and Congress will thus inherit a dangerous policy vacuum and will have to fashion a trade strategy that reconciles the huge benefits of further liberalization with contemporary pressures, intensified by the "China challenge" and the demise of Doha, to move in a very different direction. A central part of that strategy must be the creation of a new "G-2" partnership with China that recasts the trading system in a way that both countries can respect and defend.