BLOGGING FOREIGN POLICY
This week, I had the chance to participate in a DFATD “Fast Talk” where a roomful of individuals at DFATD (as well as DFATD personnel around the world) has a conversation with experts around the world on a given topic via teleconference. I was one of the four non-Canadians brought into provide ten minutes of thoughts and then participate in a Q&A session. The others were an American, a German and a Pole, all working at elite think thanks. The session was held under Chatham House rules, so I cannot say what anyone said, but I found a good deal of consensus and some disagreements which I think I can report (with only my name attached).
I had the first speaker’s slot and discussed NATO’s strengths and limitations before discussing the current crisis in Ukraine. I pointed out that NATO members always, always have conflicts of interest so gaining consensus is always hard. That this particular crisis has an interesting dynamic where those closest (Poland, the Baltics) and the furthest (U.S., Canada) seem to have similar views about the severity of the threat and the need to act and the ones in the middle (France, Germany) appear to be less motivated. I also pointed out that regardless of interest, NATO members also always vary on how much they can do, based on what capabilities they have invested in in the past and on what restrictions/caveats that domestic politics might impose (I never shirk an opportunity to plug the new book). More …
I also mentioned a key strength of the institution—that there is no substitute for NATO. Because its members value the organization, when the organization itself is seen as being at risk, members will do quite a lot to prevent it from failing. We saw that in Bosnia in 1995, Kosovo in 1999, and in Afghanistan as well.
What about the current crisis? Well, there was some disagreement about enlargement—whether we should give membership to Georgia and maybe Ukraine. I was in the majority of the panelists when I suggested that this was a bad idea. This conclusion is based on the fact that extending NATO to include new countries means being aware of the resulting need then to provide a credible commitment to defend those countries. I doubt whether we could defend Ukraine or Georgia (or Moldova or Azerbaijan) if we wanted to while getting consensus to do so would be mighty, mighty hard. The real question is how to provide some kind of partnership to these countries short of membership that improve their security and provide some reassurance.
The real problem is this: there is little we can do to help Moldova or Georgia or Ukraine if Russia decides to invade. Unless we want to create tripwires everywhere with Americans stationed in these countries as hostages (because it is most important to lock in the American commitment), these countries, even with a lot of new equipment and training, cannot hold off an aggressive Russia.
So, the question then turns to how to make Russia pay for its aggression. There was near unanimity that the measures taken thus far fall short. The sanctions have not been that heavy. The West could certainly to do more. One speaker pointed out that the EU has an economy of USD $12 trillion and Russia has an economy of USD $2 trillion which suggests that the balance of economic power is actually not in Russia’s favour.
We then pondered Putin-ology because the costs imposed on Russia may or may not faze Putin, depending on what one thinks of his character and of his domestic political requirements. Much was made of his current popularity, but I pushed back, suggesting that it is inflated due to a “rally around the flag” effect. Serb irredentism was popular until the costs mounted and then Slobodan Milosevic sold out his kin abroad. If and when the costs of these adventures mount, the Russian people will care more about themselves than about the kin abroad, Putin will then have to ponder how to manage things. Yes, he is not exactly a democrat, but he apparently needs to be at least symbolically attentive to things like elections. When authoritarians hold semi-fake elections and win, they tend to lose power.
As we looked to the future, the discussion turned to the next summit of NATO in Wales in September. We discussed what should be on the agenda. The answer, given current events, should be security in Europe and not much else. The days of NATO venturing beyond its raison d’être are over for the time being. Even President Obama omitted the pivot to Asia in his latest foreign policy statement, so NATO should not be concerned with ignoring China, North Korea and rest of the other side of the world.
Today the U.S. Supreme Court delivered landmark rulings against Argentina in a pair of legal battles with creditors holding foreign-law bonds on which the country defaulted in 2001 in the midst of its massive economic and political crisis. More …
In the most closely watched of the two cases, the Supreme Court denied Argentina’s request to hear an appeal of a lower-court decision that Argentina cannot make debt-service payments on the bonds it restructured in the wake of its default unless it also makes payments to creditors who refused to accept Argentina’s restructuring terms.
In a second related—but less consequential—case, the Supreme Court found that the U.S. Foreign Sovereign Immunity Act (FSIA) does not prevent defaulted creditors from seeking information on Argentina’s foreign assets. The Court held that while such assets may be protected from seizure or “attachment” by virtue of sovereign immunity, these protections do not apply to attempts to discover the existence of such assets under subpoena.
Four years after its default, Argentina offered a take-it-or-leave-it deal in 2005 to its defaulted bondholders: a one-time offer to exchange their impaired bonds for new paper worth between 25 and 35 percent of the nonperforming debt. To encourage participation in the debt exchange, the Argentine Congress passed a law in February 2005 that forbade the government to make payments on any bonds not tendered, to later reopen the exchange or to settle with nonparticipating creditors one-by-one on the side.
About 76 percent of eligible bondholders accepted the 2005 debt exchange, but a collection of speculative hedge funds and retail investors decided to hold out for a better deal. Some pursued litigation against Argentina in the New York courts, under whose law most of the defaulted bonds had been issued.
That litigation has been wending its way through the US legal system ever since and Argentina has been locked out of international capital markets. It can’t issue new bonds in New York or London because existing judgments in favour of the holdouts and new legal actions would immediately lead to the seizure of the proceeds from any new debt issuance.
For a few years after the default, being shutout of international borrowing didn’t matter much: Argentina’s 2002 decision to stop pegging the peso at parity to the US Dollar and the subsequent devaluation spurred demand for Argentine exports. Chinese appetite for Argentine soya and other agricultural commodities also took off. For a few years, Argentina’s balance of payments was financed without issuing foreign-law bonds.
Argentina also managed to tap some foreign capital through domestic debt issuance. Bonds issued under Argentine law and related debt service payments made inside Argentina are shielded from litigation by foreign holdout creditors—but they also lack the protections offered by New York or English law. The terms of a bond issued under Argentine law can be changed by fiat of the Congress in Buenos Aires.
Greece’s 2012 restructuring showed how limited the protections are for holders of domestic debt. In February 2012, the Greek Parliament passed an act that allowed it to add collective action clauses to the 92 percent of its debt issued under Greek law, which enabled a supermajority of creditors to impose the March 2012 Greek debt exchange on individual holdouts. Given Argentina’s even more fraught financial history and the vulnerability of domestic debt to unilateral restructuring, only limited foreign capital has been interested in Argentina’s domestic bond issues.
In the last couple years, however, Argentina’s finances have become tighter. Foreign reserves have fallen sharply and demand for Argentine exports has been curtailed. Domestically, a combination of, inter alia, the authorities’ impetuous and heterodox economic policies, high inflation and political meddling with the integrity of the government statistical agency have together conspired to drive capital flight.
In view of Argentina’s worsening balance of payments, the authorities have in recent years taken measures to regularize the country’s financial relationship with the rest of the world. Despite its promises never to do so, Argentina re-opened its 2005 debt exchange to holdout creditors in 2010 and pushed participation up to 93 percent of eligible debt. Only a few weeks ago, in May 2014, Argentina concluded an agreement with bilateral official Paris Club creditors (i.e., industrialized country governments) to settle debt in arrears through a 5-year payment schedule.
With the U.S. Supreme Court’s refusal to hear Argentina’s appeal of the lower court ruling, these conciliatory steps are set to be put into jeopardy. Argentina has warned that, under its legislation prohibiting payment to the remaining holdout creditors, the Supreme Court’s decision will force it to default on its restructured debt rather than concurrently begin servicing nonparticipating creditors.
Beyond Argentina’s specific situation, the refusal to hear the appeal has potentially far-reaching implications for sovereign-debt restructuring practices around the world. The case hinged on the pari passu provision included in most sovereign bond contracts and in the debt on which Argentina defaulted in 2001.
This clause provides for equal-treatment of creditors across bond series, but its exact meaning has never been pinned down. New York Federal trial judge Thomas Griesa and the Second U.S. Court of Appeals both ruled that Argentina’s unwillingness to pay defaulted holdout creditors while servicing newer debt issued in the 2005 and 2010 exchanges violated the spirit of pari passu. The Second Circuit further rejected what it called Argentina’s “blanket assertion” that a decision against the country would drive it into a new economic crisis. By indicating its refusal today to hear Argentina’s appeal, the Supreme Court indicated that it would not overturn these rulings.
That leaves Argentina with two choices: either start servicing pre-2001 defaulted bonds held by holdout creditors or, to avoid such payments, default on its 2005 and 2010 restructured debt and undo all the efforts the authorities have recently made to return to global markets.
Argentine President Cristina Fernandez de Kirchner is due to address the U.S. Supreme Court ruling in a televised address at 8pm EDT tonight. Given her personal stake in this case, she’s likely the take the more combative option.
More broadly, the U.S. Supreme Court’s decision throws restructuring of NY-law sovereign debt into question. If holdout creditors have a right to be paid when restructured debt is serviced, then any holdouts from past debt restructurings now have a channel to seek payment. Looking forward, the incentive for any bondholder to participate in future restructurings of NY-law debt is compromised.
Regardless of what Argentina decides to do, American legislators will have to act urgently to clarify the meaning of pari passu in order to preserve New York’s pre-eminent role as a centre for sovereign debt issuance.
One of the basic rituals in U.S. defence politics is to wonder if there is a crisis in U.S. civil-military relations and whose fault it might be. When Donald Rumsfeld was Secretary of Defense, it was pretty obvious. When he was replaced by Robert Gates, it became less clear. Despite the extreme differences between the two men, there are also key similarities. The differences, as I will explain below, tend to focus on self-awareness and humility or their absence. While both are now gone from the U.S. policy-making scene, thinking about them is helpful for understanding this central relationship in American defense policy.
There are always going to be tensions between civilians at the top of a government and the military. The people involved have almost entirely different career paths and have experienced entirely different organizational cultures. Militaries work via hierarchies while civilian politicians get ahead by building coalitions. So, when it comes to make policy, there is a great deal of room for confusion and miscommunication. More …
Last summer, there was much noise produced by the publication of Robert Gates’s memoir—Duty. The excerpts and reviews tended to focus on Gates’ criticism of Obama and his handling of the military. That Obama had concerns and was even suspicious that the U.S. military was trying to “roll” him is an interesting phenomenon. I was not surprised as I had been joking online for quite some time that the military always presents options to the President in three forms: low commitment but high risk, medium commitment (what the military really wants), and high commitment (what the military offers to make the medium commitment look reasonable). This framing of choices is so consistent and yet so clearly manipulative that I am not surprised that Obama felt he was being gamed.
However, upon reading Duty, a couple things become clear. First, the military was not necessarily so coherent in its efforts to persuade President Obama to send more reinforcements to Afghanistan, but the outspokenness of various generals, especially Stan McChrystal, made it appear to be the case. Second, Secretaries of Defense are very frustrated by the White House these days. When we speak of the White House, this mostly refers to the National Security Staff/Council (the old and new name is NSC, but for a while was NSS). Why this frustration? Because these assistants to the President tend not to be used to the military these days and their chain of command, asking the military to do stuff, which only the President and the Secretary of Defense can do. That is, the NSS/NSC is not in the chain of command and have no, repeat no, authority, yet the people working there seem to think they have such authority since they work for the President. Rumsfeld reported the same about Condileeza Rice and her people in the documentary “The Unknown Known.”
Upon hearing about the controversy in summer of 2013, my big question was and remains: where is the Secretary of Defense? It is clear that Rumsfeld, for instance, was the source of much of the tensions between the civilians and the military, as he ignored the military’s advice, sought to marginalize the Joint Staff and the Chairman of the Joint Chiefs of Staff, and micro-managed the details of various operations. But it was strange to see Robert Gates complain about it since it is the job of the SecDef to manage the civilian-military relationship. The President has many jobs, whereas the SecDef has only a few with keeping the peace between uniformed and civilians as one of the most important. Perhaps it is an impossible task, but Gates probably could have done a bit better. He should have, for example, overridden the Marines and McChrystal when the surge led to a mis-allocation of forces—to Helmand and not to Kandahar.
In the conclusion of his memoir, Gates makes a big distinction between when generals speak out of turn to the media and when they give their honest assessments to Congress. Given the division of powers and the role Congress plays in overseeing the U.S. military (something entirely different from the Canadian experience), generals and admirals really do need to give their views when asked by Representatives and Senators. However, they do not need to volunteer their views and go off script when talking to the media or at public events. McChrystal and Petraeus did this on a number of occasions as well as leaking documents, which then put the administration into difficult positions. This sowed distrust. The problem is that military officers often see the short game quite clearly and forget about the long term—they push for the policy of the day, not realizing that this might hurt them in the long run (something that Rick Hillier could have kept in mind as well).
The civil-military relationship requires both sides to be patient, responsible, and restrained. Military officers need to give their best, unvarnished advice to the civilians, and the civilians must not punish the officers for doing so. Despite the clashes reported in the book, Gates is clear that the relationship was still relatively healthy. Obama listened, even when he disagreed, and the military officers offered their views even when they contradicted the President. This is quite different from the Pentagon that Gates inherited, one where Rumsfeld bullied and ignored the advice of the officers. So, even with the disputes reported in Duty, the state of American civil-military relations was far better under Gates than under his predecessor. Comparisons between the two would be most useful for the next President who has to choose an entirely new team.
The latest controversy in U.S. politics is over the trade of five Guantanamo detainees for one American soldier – Bowe Bergdahl. The strange thing about this is how ordinary it is: swapping prisoners is normal in war, even in unconventional wars. So, what is really going on here? Mostly, it is about blame-casting – criticizing the Barack Obama administration no matter what it does. The best illustration of this is John McCain, who is currently blasting President Obama for this trade after advocating it a few months ago. So, what is going on here? More …
First, there is the concern that the five released Taliban leaders will go back into the fight. Sure, that is a concern but thus far the reports indicate that 29 per cent of the people released from Guantanamo join the Taliban again and engage the U.S. and its allies in combat. Is that high or low? It is a mighty low number. How so? Well, in the U.S., roughly two-thirds of the people released from prison are picked up for crimes within three years. So, I do not want to say that there is much rehabilitation going on in Gitmo, but that we need to be clear that it is unrealistic to expect a recidivism rate of 0 per cent. If we understand that, then 29 per cent does not look so bad. Even if the numbers are off somewhat, we need to think seriously about what these five guys would mean to the war effort. Would they turn the tide of the war? Well, since the U.S. and its allies are leaving in 2016 – with most out by the end of this year – this particular pebble is not going to make big waves when compared to the other dynamics in the Afghan war.
The second confusion is about whether the U.S. in this case negotiated with terrorists. Well, sort of. That is, the Taliban are not coded as terrorists by the U.S. since they are not attacking U.S. interests outside of the civil war in Afghanistan (and it is a civil war – outside actors involved just makes it an ordinary civil war). The more important thing is this: The U.S. and its friends have often bargained with terrorists. Jimmy Carter bargained with the people holding American hostages in Iran, who agreed to let them go as soon as Mr. Carter was no longer president. Ronald Reagan bargained with those holding hostages in Lebanon in exchange for arms being sent to Iran. Israel swaps prisoners all the time, often hundreds of Palestinians for a handful of Israelis. If the bad guys have something you want, either you take it or you bargain for it.
Third, will this encourage more kidnapping of American prisoners? Probably not, since the U.S. has already shown a great interest in getting its folks back. More importantly, the Taliban and its ilk already have plenty of incentives to take U.S. soldiers hostage for the propaganda gains. It is not the lack of willingness that accounts for how few prisoners of war are taken by the opposing side these days, but opportunities. Pilots are not getting shot down, unlike in the Second World War and Vietnam. Battles are smaller, so the Americans, or whoever, are not being surrounded, and so on. But any insurgency would seek to capture troops from their adversary – this event is not going to set any significant precedents that will change behavior down the line.
Fourth, Mr. Bergdahl is especially controversial since he seems to have wandered off his post. Maybe. But in the past, we did not investigate the worthiness of who we sought back in a trade of prisoners, such as during the swaps at the end stages of Vietnam (Mr. McCain), so it is not clear we should be doing so now.
Finally, Mr. Obama may have exceeded his authority since Congress has passed restrictions on Gitmo prisoner releases. This is the one issue that is really legitimate in terms of qualms. Of course, the fact that Congress is micro-managing Gitmo is bad, but bad laws need to be obeyed until the courts rule or Congress changes its collective mind. Mr. Obama says he issued a signing statement for just such a possibility. This made him a hypocrite since he opposed such weaseling efforts before he was President, but also makes the GOP in Congress hypocrites for not minding George W. Bush’s abuse of this.
The reality is this: the actual swap is quite normal business-as-usual in the end stages of a war/intervention. It just gives the opponents of the President a chance to blast him for being weak in foreign policy. There are good reasons to criticize Mr. Obama for his handling of the Afghanistan war and for his foreign policies, but this event really is not one of them.
The post was originally published by the Globe and Mail.
The problem with a free world is that it’s never cost free. With more liberty comes more disorder. With more opportunity comes more responsibility. With more competition and innovation comes more inequality and upheaval. Thanks to globalization, new technology and the social and sexual revolution, people have never had more freedom to make choices, question authority and breakaway from class, gender and moral constraints. But the flip side of this hyper-free world is less security, less certainty, more chaos and confusion.
Signs of a growing backlash to this “free” world are becoming hard to ignore. Across the European Union—once the poster-child for liberal-democracy’s triumph over nationalism and chauvinism—millions have voted against the Union and for a return to the security of borders and nations. Across the Islamic world, fundamentalism and authoritarianism are on the rise. Across much of Asia, too, an assertive and unapologetic nationalism is on the march. More …
Nowhere is the resurgence of illiberalism more striking than in Russia where Vladimir Putin’s strong-man appeal to national greatness and his contempt for the dissolute West is wildly popular. His annexation of Crimea, crackdown on the free press and persecution of homosexuals has been greeted not by mass protests, but by enthusiasm.
Even the United States, the leader of the free world, seems consumed by self-doubt over its paralysed democracy, rising inequality and eroding social cohesion. When the New York Times draws unflattering comparisons between America’s political gridlock and China’s decisive leadership—or when a French economist’s 600 page demolition of free-market capitalism becomes a run-way bestseller—all is not well in “the land of the free.”
Instead of more freedom, many people today want less—less “winner-take-all” economies, less “mashed up” cultures, less “on your own” societies. Authoritarians, ultra-nationalists, anti-immigrant and anti-globalization populists are the minority in most countries, but they often voice broader anxieties and fears and are disproportionately shaping the political debate. Few mainstream parties in Europe, America or elsewhere seem to have the stomach any longer to voice support for more globalization, immigration and free trade. Whereas support for illiberalism is virulent and growing, support for liberalism seems weak and defensive.
The global economic crisis has helped fuel this anxiety and anger. The last time that Europe’s far right and far left rose in unison against liberal democracy was during the Great Depression of the 1930s. The lingering fallout from the recent Great Recession—200 million unemployed, massive industrial dislocation, anaemic growth, and shrinking opportunities—has again left many questioning the benefits of open borders, free trade and even the liberal-democratic system itself.
Short memories add to the problem. Today’s liberal world order was a response to the devastating wars of the early twentieth century—and the inward-looking nationalism and authoritarianism that fuelled them. The core idea behind institutions like the United Nations and the European Union was that world peace depended on breaking down the barriers between nations; freeing up flows of goods, people and ideas; and spreading prosperity, democracy and individual rights.
But these lessons of history risk being forgotten. Despite the millions killed under his tyranny, Stalin’s popularity has increased, not decreased, since the collapse of communism. In a recent poll, 42 percent of Russians rated Stalin one of the country’s greatest leaders. In another poll, over 40 percent of Austrians felt the Hitler era “wasn’t all bad,” while 60 percent believed the country needed another strong leader. In ex-Soviet bloc countries, but also in the West, many wax nostalgic about when an all-powerful state took care of everything—from jobs and pensions to housing and social status.
The main problem is that the triumph of the free world was never going to be the panacea promised at the end of the Cold War. The shift to free markets, the roll-back of the state, the embrace of a radically individualistic, me-centred, demand-driven culture was always going to involves trade-offs—costs as well as benefits—that are only now coming into focus.
Erich Fromm, the German social psychologist, argued that the totalitarianism of the twentieth century arose because of people’s “fear of freedom,” and their desire for order, direction and a sense of belonging in chaotic times. Are we headed back to the future—a world of less freedom, more nationalism, a tightening of economic, social and moral constraints? Or is the present era an interruption—a momentary setback—before we keep on rockin’ in the free world? Either way, the answers are not simple and the tradeoffs between different courses of action real.
As Prime Minister Stephen Harper heads to Europe for the G7 summit and anniversary of D-Day, the gap between Canada’s outspoken rhetoric and its diminishing capabilities in international affairs is clearer than ever.
Much of the trip will focus on Russia’s destabilizing actions in Ukraine. First, Mr. Harper will join other leaders in Warsaw to celebrate the 25th anniversary of the end of communist rule in Poland. He and other NATO leaders will likely use the occasion to reaffirm the alliance’s commitment to Poland’s defence. Then he will travel to Brussels for the meeting of the G7, whose member nations will also undoubtedly reiterate their unified opposition to Russia’s behaviour. More …
However, the prime minister may choose to convey a slightly different message. His government has repeatedly suggested that Canada is leading the Western response to the Ukraine crisis. In the words of Foreign Minister John Baird: “No other government has stood up more forcefully and aggressively against the Russian aggression in Ukraine.”
In fact, the main difference between Canada and its allies has been mainly one of rhetoric, not one of substance.
Ottawa’s language has been unusually strong, including Mr. Harper’s comparison of Russia to Nazi Germany. But Canada’s actions – including targeted sanctions against a limited number of the Kremlin’s supporters, political and economic support for the Kiev government, modest deployment of military assets as part of NATO’s “reassurance package” in Eastern Europe, and the contribution of observers for Ukraine’s election – have been comparable to actions by many other allies.
Mr. Harper, however, seems to have concluded that there are domestic political benefits in portraying himself and Canada as leading the Western response to the Ukraine crisis. This message might convince some at home, but it is unlikely to pass muster with our allies, who are well aware of what Canada is – and is not – doing.
They know, for example, that Canadian defence spending fell to one per cent of gross domestic product in 2013. Among the other 27 members of the North Atlantic Treaty Organization, only five countries spent a smaller percentage of GDP on defence than Canada. One of them was Luxembourg.
A similar pattern also holds for Canada’s non-NATO partners. Australia, for example, currently spends 1.6 per cent of GDP on defense and recently announced that this figure will increase to 1.8 per cent by mid-2015.
Although Canada’s contributions to the Afghan and Libyan missions were greatly appreciated, our allies also know that Canada was reducing, not increasing, its commitment to NATO immediately before the Ukraine crisis. Ottawa abruptly ended its participation in the alliance’s joint ground and airborne radar systems, for instance. One of NATO’s first acts during the Ukraine crisis was to deploy these radar planes to Eastern Europe – without Canadian crew members.
Given all this – and the fact that Canada’s actions on the Ukraine crisis have been similar to those of our allies – the Harper government’s contention that it is leading this response is not only implausible, but also condescending towards our allies. After all, it suggests that they lack Canada’s moral clarity and political resolve.
While most countries speak simultaneously to domestic audiences and foreign actors, the Harper government seems to be very focused on the home game. If doing so weakens Canada’s position internationally, this is a price that the Conservatives seem willing to pay. Canada seems to have largely lost interest in long, steady, patient work of cultivating and maintaining relationships.
Indeed, the Harper government seems to regard diplomacy itself as morally questionable. They have suggested that Canadians have a choice between either Mr. Harper’s foreign policy or the abandonment of their principles.
Of course, this is poppycock. Skilled diplomacy – the ability to persuade others to do what you want them to do – is a prerequisite for upholding moral principles and Canadian interests. Prime Minister Brian Mulroney, for instance, succeeded in galvanizing international opposition to apartheid – a moral stance, if there ever was one – because he took diplomacy seriously. He nurtured a broad array of international relationships and worked through the Commonwealth and other institutions to mobilize a coalition.
By contrast, Canada’s recent neglect of diplomacy may be reducing our ability to get things done – even with our closest ally, the United States. The Harper government has not hidden its exasperation with the Obama administration, including on the Keystone XL pipeline. But should they be surprised? You can only lecture people so many times before they reach for the mute button.
Taking credit for leading the West’s response to Russia fits this pattern. If it ends up irritating allies who have done just as much as Canada, and who believe themselves to be no less moral, then so be it. The Harper government seems determined to sustain a narrative that portrays Canada – and, specifically, Mr. Harper – as a brave outlier in international relations, leading the West in the face of Russian aggression.
It is a heroic image. But like other romantic tales, it is largely fictional.
The Salzburg Global Seminar session “New Dynamics in Global Trade Architecture: The WTO, G20 and Regional Trade Agreements” met on the heels of the provisional end in December of negotiations under the 9th Ministerial Conference of the World Trade Organization (WTO) in Bali. The understandings on trade facilitation reached at Bali have breathed a new sense of possibility into the WTO’s multilateral trade negotiation processes. They also underscore that the WTO’s legalistic, comprehensive and consensus-driven procedures need to be supplemented by softer approaches that, while not legally binding nor fully inclusive, can help crystallize political support and stimulate concerted action for freer international trade.
While Bali undoubtedly marked a fresh achievement and carries substantial positive demonstration effects for the multilateral system, considered views on the long-term import of the Bali discussions are mixed. For some, Bali marks the beginning of a feasible path to rescue the WTO’s 12-year Doha Development Agenda (DDA) negotiating round from a longstanding stupor. It is a tangible step that shows the system works and that the DDA can be brought to a conclusion, perhaps in piecemeal steps. More …
For others, Bali is a new indicator of just how impaired the WTO’s fully inclusive, consensus-based negotiating processes have become. It’s no exaggeration to say that finding common ground on trade facilitation is almost the least that WTO Members could have done to qualify Bali as a success. Trade facilitation is not one of the DDA’s core issues, but it is amongst the more easily accessible of low-hanging policy fruits. In fact, many aspects of the Bali package had already been implemented unilaterally by WTO Members (WTO 2013). Some aspects of trade facilitation aren’t even narrowly about trade: they’re more akin to international development assistance and capacity building.
All that said, trade facilitation is still a sufficiently prickly issue that we should celebrate a victory on this front. After all, it’s worth reflecting on the possible counterfactual: ministers could have failed to find any common ground at Bali, which would have left the DDA in an even more dire state than we presently find it. Whether small or large, Bali represents an opportunity on which action can be built. But it also points to the challenges of moving forward within the WTO. It’s not clear how the Trade Facilitation Agreement (TFA) shall be implemented. It’s not even clear that WTO Members can agree on a substantive work program for the year ahead.
In this context, it’s worth taking stock of the WTO’s key functionalities and considering how they might be supported, complemented or replaced by “softer” processes outside the WTO’s “hard” legally-binding environment to ensure the possibilities created at Bali are realized. The macroeconomic environment for trade liberalization is unlikely to improve in the near term: “secular stagnation” in the United States, deflation in Europe, competitive devaluations set off by “Abenomics” in Japan, weaker growth in China and mounting public debt stocks across developed and emerging markets are all going to put pressure on governments to tighten trade restrictions and potentially engage in beggar-thy-neighbor behaviour. The world needs to anticipate these developments and act proactively to ensure that recent, hard-won gains in opening up trade are not reversed. Over the last 20 years, most elements of the Washington Consensus have been implemented ubiquitously under national reform programs, which is necessary but not sufficient to generate greater global openness in the current macroeconomic climate. Greater global openness will require closer coordination between the International Monetary Fund (IMF) and the WTO at the country level and at the international level to create the conditions for further liberalization.
At the same time, the nature of trade is evolving: as we’ve long known and a recent study by the McKinsey Global Institute (2014) quantifies, trade is increasingly dominated by knowledge-intensive goods and services. Some refer to this as 21st century trade that cuts across value chains. But this trade is not so distinct from 20th or even 19th century trade. Global value chains trade bread-and-butter goods and services. Digital commerce also leads, often, to the exchange of physical goods and services. This trade still faces old-school protectionism that needs to be prevented, contained and reduced. All of this makes it especially timely to consider how the WTO’s processes can be strengthened from within and enhanced by parallel efforts on the outside.
Even as more and more major countries agree to take on WTO Membership and the sometimes onerous reforms that come with it, they are increasingly liberalizing their trade policies through unilateral, regional, and plurilateral processes outside the WTO’s comprehensive framework. Many of the gains expected to be realized by the conclusion of the DDA are already being achieved outside the WTO. Even as the WTO’s dispute settlement mechanism (DSM) is being lauded as its most effective core competency, countries are increasingly seeking recourse to the WTO’s DSM to resolve problems under their regional and plurilateral agreements rather than WTO-negotiated accords. Ironically, even as the DDA limps along, trade liberalization is advancing by other means—other means that should be embraced by the WTO. WTO Members need to be less concerned about whether we’re putting our trade policy eggs all in one multilateral, fully-inclusive basket with the WTO and more concerned that we’re managing to put together a collection of “hard” and “soft” boiled eggs that can deliver trade reform in a variety of fashions. Building on the Salzburg Global Statement on New Dynamics in Global Trade Architecture: The WTO, G20 and Regional Trade Agreements, this implies a number of lines of action.
Simplifying the DDA
The DDA needs to be simplified, made more relevant to trade in knowledge-intensive goods and made more compelling to business, while still delivering on the “rebalancing” of the international trade system promised to developing countries through the more liberal treatment of agricultural and labour-intensive manufactured goods. We can’t cast the DDA aside. Developing countries won important promises that are personified in it and they will not let it go. Revise, amend and simplify the DDA instead, recognizing that multilateral negotiations have become tougher since the DDA’s inception in 2002 as more countries have joined the WTO.
A slimmed down DDA could focus on limited slices of three things: agriculture, market access for manufactured goods, and rules on services. And each of these three areas should be organized around counterbalancing concessions and interests amongst major developed and emerging countries that set up negotiations for the kind of trade-offs and compromises that can lead to agreement. This should form the core of the WTO’s deliberative efforts to articulate a more effective work program for the DDA.
Embracing smaller negotiating groups
WTO Members need to step back from the DDA’s “Single Undertaking” and embrace smaller groups of critically important Members for at least the initial stages of negotiations. Mega regional trade agreements (RTAs) and plurilateral agreements (PAs) are already consuming most of the attention of major trading economies and they cannot be contained by any amount of wishing for more comprehensive, inclusive and universal processes. Moreover, steadfast advocacy of universalist approaches requires us to acknowledge the key role that major powers—the United States and Europe—played in the past to bring these approaches to cloture and are less able to play now.
At the same time, it’s not clear that new centers of economic and political power are ready, able or willing to play similarly catalytic roles. Amongst them there is interest in taking more incremental, step-by-step engagement in trade liberalization processes, treating each step as a limited experiment, and moving forward only when proof of concept has been established. In some respects, this is positive: new powers provide a powerful demand for the WTO to move away from one-size-fits-all processes and tailor its approaches more closely to diverse circumstances. But with a multiplicity of new poles acting in this fashion, it’s not clear that the fully inclusive, one-country one-vote consensus-dependent processes of the WTO can elicit the kind of leadership needed to reach cloture in negotiating processes—the kind of leadership in the provision of public goods that the “old powers” have traditionally provided.
WTO Article II.3 offers a mechanism for WTO Members to form clubs to advance plurilateral and regional agendas of common interest without necessarily extending involvement to other countries. Resulting RTAs and PAs can be “multilateralized” into WTO structures (i.e., Annex 4) on a consensus of all WTO Members. But this standard is simply too strict and needs to be relaxed. Agreement of countries accounting for a substantial share of world trade should be sufficient for integration of an RTA or PA into the WTO. This would still ensure that truly controversial or problematic agreements could and would be rejected, while at the same time allowing constructive agreements to be brought into the WTO’s more comprehensive framework to advance wider liberalization. RTAs and PAs can be used to engage on policies not currently covered by the WTO and the WTO can use them as the basis for cooperation in new areas.
It’s not clear that the universalist WTO is the place where trade discussions should start: in many ways it is the most difficult path to initiate reform processes. In fact, it’s more obvious that the WTO is where these discussions should finish. With its fully inclusive processes, it’s the venue where agreements made between the world’s largest trading partners can be made more widely operationalizable and extended on a reasonable basis to all countries.
Ending universality in decision-making
Whilst this wasn’t widely discussed at the Salzburg Global session on New Dynamics in Global Trade, WTO Members need to reconsider the organization’s decision-making processes and make a distinction between the universal, equal voice between countries in the Organization’s affairs and equal power in making decisions that come out of its discussions.
We don’t make decisions by an equally weighted consensus of the world’s countries in other multinational economic fora. At the IMF’s Executive Board, decisions are taken by majorities and supermajorities and voting power is tied to a member country’s GDP, trade, capital flows, and international reserves. At the World Bank, voting power is linked to a country’s paid-in capital. In both Boards, countries are grouped into constituencies and represented by chairs on an Executive Board which is composed of 24 Directors at the IMF and 25 at the Bank. Both Boards exercise decision-making authority delegated by the Boards of Governors of their respective institutions, which are the highest-decision making bodies in both organizations. In both cases, voting power of the Governors is the same as that of the respective Directors.
Nevertheless, the Bank and the Fund provide an instructive example for the WTO. Negotiations at the WTO could be streamlined by delegating most discussions to an executive board of the 20 or so largest trading nations, with the most existential questions reserved for treatment by the full WTO membership. Decision-making could also be weighted by the size of a country’s trade flows across the Membership and within a putative WTO Executive Board, with the most fundamental decisions reserved for one-country, one-vote processes in the full WTO Membership. If the goal is substantive trade liberalization rather than narrowly respecting a historical precedent of fully inclusive decision making, then it makes sense to experiment with options along these lines. After all, clinging to notions of universalism that obtain more in the breach than in practice does nothing to change the fact that more than 100 small countries are currently excluded from the mega RTA process under which the bulk of liberalization is presently occurring.
Pursuing concerted unilateralism through “soft” institutions
It’s been said that when lawyers supplant economists on the same public policy issue, it’s a good sign. It implies that the substantive debates have been settled and discussion has shifted to the minutiae of rules and implementation. But the dominance of lawyers in policy processes can also go too far. Trade liberalization negotiations under the WTO have become overburdened by legalism and held hostage to universal consensus. The DDA round has lost sight of one of the fundamental tenets of trade liberalization: at least some form of unilateral liberalization always makes sense. No country needs others to act in order to realize gains from more open trade. Of course, it’s better for everyone if countries do act in concert. But it’s not required.
WTO Members should move on this insight in three ways. First, the Organization and its Members should embrace the G20’s informal efforts, such as those undertaken during the financial crisis, to limit any increase in protectionism. The standstill on such measures negotiated in 2008, which has been subject to some slippage, did an enormous amount to buttress the WTO’s work. Non-institutions or soft institutions such as the G20 can provide a venue, free from narrow legalisms, to create the political support for free trade that may be tougher to generate in the WTO. Second, the WTO should welcome, encourage and support efforts to make trade a more formal part of the G20’s mandate and work program. Third, the WTO should shift its approach to integrating RTAs and PAs into its frameworks. Rather than asking how we can multilateralize regional and plurilateral agreements, it should instead be asking if we can unilateralize them through processes of concerted individual unilateral adoption and Asia-Pacific Economic Cooperation (APEC)-style open regionalist processes, in active collaboration with, inter alia, the respective RTA, PA, G20 and APEC secretariats and their members. This is the clearest way to ensure that, in the pursuit of regional and preferential agreements we maintain the principle of most-favoured nation (MFN) tariff liberalization while also allowing for various kinds of customized liberalization on a country-by-country basis.
The WTO can play a critical role in making action under the G20 and other soft institutions such as the APEC more universal. It can interpret RTAs and assist developing countries in coming along with them on a concerted unilateral basis. In the process, it can also help both large and small countries achieve coherence in their external commitments and prevent fragmentation.
Simpler, smaller, narrower and softer: the agenda for the WTO laid out above is all of these things and it might, to some, seem a rather defeatist line. But it’s also a case in which less is almost certainly more: more prioritization in the Organization’s work program, more focus in its negotiations, more nimbleness in its decision-making, and more engagement with complementary venues that can support the WTO’s work. Far from a scaling back, this four-point agenda represents a strategy to enhance the centrality of the WTO in the pursuit of greater openness between countries. Sticking to a conservative “hard-core” course of business as usual would be clearly inimical to the long-term health of the Organization. In a diverse, multi-polar world, we need a range of different ways to get free trade “eggs” into our collective liberalization basket. Some will be hard boiled, some will be soft boiled, but either way, they’ll produce gains for the global economy.
A version of this piece was published by the Salzburg Global Seminar on May 22, 2014.
I have spent much of my time writing here at CIC explaining that Canada lacks a strategy for its role in world, especially when it comes to defence spending. I have bemoaned that the Harper government avoids taking tradeoffs seriously and sticks to its pledges until going past the point at which they are entirely incredible (such as building a port in high Arctic). But perhaps there is something clever going on here: that the lack of serious thinking is working for Canada.
As I’ve examined previously, Canada is in the process of rebuilding its navy and replacing its combat air force without revisiting the Navy’s and the Air Force’s missions. The Navy being designed presently will look a lot like the Cold War and post-Cold War Navy: with a relatively modest Blue Water navy that works well with the navies of its allies. Perhaps this new navy will be smaller since the ships are going to be more expensive, but they will be performing the same operations as before—participating in alliance operations around the world. More …
The requirements for the new plane, whether it is the F-35 or something else, are largely designed with alliance operations in mind, not the defence of Canada. Interoperability is one of the most important features of and justifications for the plane.
Why is this important? Because these procurement processes are baking alliance commitments into the key military assets and thus into Canada’s defence options down the road. This would not be so noteworthy if we had not already heard rumblings of dissatisfaction with NATO. Also, the Canada First Defence Strategy, mostly overcome by events, is exactly that—Canada first. It is not about multilateralism. Indeed, the government in Ottawa has been hostile to NATO playing a big role in the Arctic.
These decisions are incredibly important given that military hardware lasts far longer than any government. Indeed, Canada, the United States, and others are sailing/flying/driving equipment that is not just older than the sailors and pilots and soldiers but sometimes twice as old. But as many continue to question the relevance of NATO now and down the road—the organization has been having an existential crisis pretty much since 1989, if not its founding—it apparently remains the organizing principle for Canada’s military procurement strategy. And, yet, we see a government that is fairly skeptical of multilateralism invest deeply into those weapons that make the most sense in multilateral operations, binding Canadian governments for the next thirty plus years.
Of course, there is a great deal of overlap between the military hardware that is best for working with NATO and the technology that is best for working with just the United States. So, it could be that this government is mostly focused on keeping the Canadian Forces interoperable with the Americans rather than its other multilateral partners. This government tends to prefer bilateral efforts over multilateral ones, and generally finds partnership with the US attractive. Either way, the current plan does not appear to be a Canada first strategy as mooted by the government. And this is fine since Canada does not face severe conventional threats. Indeed, as a fan of NATO, a critical one but a fan nonetheless, I am glad to see Canada committed to the alliance now and well into the future.
The irony, of course, is that the absence of new thinking combined with the effort to rebuild the CF based on what it has always been doing means this. Harper is missing the chance to undo a key Liberal approach defence and foreign policies—the centrality of multilateralism in Canadian military operations. Oops?
As pretty much everyone has heard, Canada’s performance through the 2008 global financial crisis has burnished our reputation for financial probity. The World Economic Forum has named Canada’s banks the world’s soundest for six consecutive years. In relative terms, we have had a very good crisis.
Our “good” crisis has not done much, however, to boost Canada’s standing in financial markets. “The Banker” magazine’s 2013 index of top international financial centres puts Toronto 9th globally—the only top-10 city to drop two rungs from 2012.
Similarly, Long Finance’s Global Financial Centres Index (GFCI) ranked Toronto 14th amongst international financial hubs, down from 11th in 2012. No Canadian city was mentioned in the survey’s list of financial centres that were likely to become more significant.
Instead, our stability has made us into a haven for emerging-market plutocrats looking to stash their cash in Canadian real estate. Sotheby’s found that foreigners accounted for about 40 percent of Vancouver’s luxury-home purchases last year. Similarly, the Conference Board noted that Vancouver’s real estate market is tightly tied to Chinese economic fluctuations. When all of this gets detailed in The New Yorker, as it was last week, we’re vying with Manhattan for honours in the wrong game.
These foreign inflows are combining with domestic capital, pushed by generationally-low interest rates, to create one heck of an asset bubble in urban Canadian real estate. Rather than making Bay Street look like the new Wall Street, foreign capital is making Liberty Village look like pre-crash Phoenix or Las Vegas.
Instead of rewarding Canada for a good crisis, foreign capital is making us more vulnerable to future financial turmoil. More …
In response—and especially given that this week is “Responsible Investment Week” with its annual conference being held around Toronto by the Responsible Investment Association from May 26-28—Canada needs to work at becoming more than the Avis of second-tier financial centres: it’s not enough to try harder. There’s no point trying to outdo New York at being New York. The relatively small size of Toronto’s securities industry puts Canada at a persistent disadvantage in attracting trading and corporate finance.
We need to try differently. Thomas Friedman argues that “average is over”: when it’s so easy to find better people, companies and even countries to do a job, all of us have to find unique ways to add value.
Responsible investing offers Canada an opportunity to do things differently. It’s both an approach to allocating capital and an asset class in its own right. Responsible investing runs the gamut from efforts to avoid underwriting activities that damage society—tobacco, weapons, pollution—to the active search for investments that produce positive social and environmental impact—reducing poverty, empowering women, reducing crime—in addition to a financial return.
About one in every nine dollars under professional management in the United States, some US$3.74 trillion, is invested in responsible strategies, with double-digit growth in recent years. That’s a little more than twice Canada’s annual GDP and roughly equal to the assets of Canada’s banks.
In surveys, at least a third of North American investors express a strong interest in do-good investing. European and younger investors tend to be even more engaged, which sets up responsible investing for further growth. As Baby Boomers age and begin redeeming their retirement savings, responsible investing will become the way all asset allocation is done.
Returns on responsible investments vary as much as in any other market segment. But what’s clear is that fears of a zero-sum trade-off between financial returns and doing good are overblown: social benefits can go hand-in-hand with satisfying fiduciary responsibilities.
Additionally, responsible investments are broadly uncorrelated with other assets. In a post-crisis world where nearly every market moves in lock-step with the actions of central bankers, responsible investment offers a natural hedge.
Responsible capital tends to be patient capital: dominated by pension funds and endowments, it’s invested for long-run returns, not speculative gains. An enhanced focus on responsible investing could complement the macroprudential measures being implemented in many countries, including Canada, to trim the distortions created by exceptional short-run monetary stimulus.
The United States and UK already have more flexible and supportive regulatory and taxation frameworks for responsible investing. Canada needs to play catch up.
We need clearer and common structures to certify responsible investments, measure their social impact, and report returns. Getting beyond publicly-traded equities and connecting interested investors with responsible private investment opportunities needs to be made easier and due diligence needs to be made simpler. Ontario’s Social Venture Exchange (SVX) represents a nascent start at linking responsible investors with investable private placements. Finally, we need to take impact investing beyond accredited (i.e., institutional, high net worth, sophisticated) investors and support efforts to build retail products and distribution platforms.
At the same time, efforts to create a single national securities regulator must not be allowed to undo the substantial regulatory experimentation and responsible investment product innovation that has been achieved in several provinces.
Getting this right matters for Canada, but even more so for Toronto: 7.6 percent of its workers are employed directly in financial services, a higher share than in either New York or London.
The same report that lauded Canada for its sound banks also called out limited access to financing and insufficient capacity to innovate as the two biggest impediments to doing business in this country. Building Canada into a world leader in responsible investing would address both these challenges in one swift move.
This post was co-written with Salomé Mirigay.
Iran is often in the news because of its suspected nuclear weapons program. A nuclear Iran certainly poses a threat to international peace and security, which is why the international community imposed economic sanctions against Tehran.
But, what if the country’s nuclear agenda wasn’t the only threat to world stability? The treatment and persecution of minorities within Iran is a serious problem that, unfortunately, does not receive equal news coverage and scrutiny by the media.
There are way too many prisoners of conscience rotting away in Iran’s prisons. For the most part, these are intelligent and dedicated people who only wish to better their country, but whose voices are muffled by repression and imprisonment. Having views contrary to those of the government can be very costly. Even worse, simply choosing to practice a different faith than the State religion (its version of Islam) can lead directly to a prison sentence. More …
This is what happened to thousands of Baha’is over the past few decades. The execution of over 200 Baha’is in the mid-1980s spurred an international outcry that eventually led to a halt in killings. But the persecution of Baha’is has not stopped. It’s more insidious, and not as overtly shocking, but no less worthy of attention.
Over a hundred people of the Baha’i faith are now behind bars, imprisoned solely on religious grounds. Among them are the seven leaders of this religious community. This May marks the sixth year of their imprisonment, on false charges, and they are not about to get out. They all received a 20-year sentence. The Baha’i community is Iran’s largest religious minority and government policy seems constructed to oppress all its members.
Equally troubling is that even their dead are not left alone. The Iranian government has recently authorized the excavation of a Baha’i cemetery in the southern city of Shiraz with the goal of building a sports complex. But the tombs in this cemetery are not ordinary. It is the final resting place of ten courageous women who were executed for their beliefs in 1983, at the height of persecution against Baha’is in the country. Many of the women were in their twenties, and one was as young as 17, Mona Mahmudnizhad. She was killed by hanging, after being tortured.
Mahmudnizhad was killed once. Now, over thirty years later, her remains are being attacked, in what seems to be a continuing attempt at erasing the memory of her and her cohort’s sacrifice. With laws in place that prevent Baha’is from attending university, it is difficult not to see these actions in Shiraz as being part of a larger strategy by the government to erase the symbols of the Baha’is from Iranian society and to make life as miserable as possible for them.
But while nukes capture the attention of national governments, and for a good reason, we should also worry about the treatment of religious minorities and the importance to safeguard their human security. How a country treats its own citizen is often a harbinger of what it intends to do outside of its borders.
It is Canada’s responsibility to work towards strengthening international human rights norms and assisting those suffering the denial of their basic rights. While most members of the international community agree that freedom of religion and liberty of conscience have to become valid human rights in the Islamic Republic of Iran, it is of prime importance that governments speak out regarding the contemporary persecution of the Baha’is in the country. Faces and names matter when it comes to mobilizing public opinion against a regime that preys upon both the living, and the dead.