Danilo Türk

Former President of Slovenia

From 2007 to 2012, he served as President of Slovenia. From 1992 to 2000, he was the Slovenian Permanent Representative to the United Nations. He has had a long and distinguished career focused on minority and human rights.

Messages of the First China International Import Expo

On 5 November 2018 President Xi Jinping opened the first China International Import Expo (CIIE) in Shanghai. The message coming from the CIIE is that China is the world’s most promising market for goods and services in the decades to come. This ought to be seen as a good news for the world. For China this represents a new phase of opening up and engagement with the world.

This orientation does not come as a surprise. Observers will agree that China has already developed from an export dependent, largely manufacturing economy to a modernized economy with a growing domestic demand and a fast growing importance of services. A single statistical indicator tells a story of global significance: In 2006 the gross exports from China to all countries of the world equalled 35 per cent of China’s GDP, while in 2017 the figure was only 18 percent. And this change happened at the time of high growth rates that for the most part revolved around 8 per cent annually. The magnitude of this transformation is not difficult to imagine: The economy of China was simultaneously growing and becoming increasingly based on domestic demand. It is not too farfetched to visualise the future of China as the largest import market in the world.

In his key-note speech at the opening of the first CIIE President Xi Jinping offered an ambitious vision of the future economic engagement of China with the World. Quite necessarily – and realistically - that vision proceeded from the offer to provide some of the basic conditions such as lowering of Chinese customs tariffs, simpler customs clearance and other administrative procedures and expanding the market access for imported goods more broadly.

But much more was offered for the coming years: Liberalisation and improved investment climate for foreign investors and, importantly, opening of services sector, including in such areas as telecommunications, education and medical services. In this context President Xi recognised the opportunity arising from the combination of the proven interest of foreign investors and the existing shortages in the domestic, Chinese supply. These shortages, according to President Xi, can be reduced through international investment and other forms of international cooperation.

Activities in the services sector should help developing “world class business environment” in China. Furthermore new synergies should be developed, including in the field of intellectual property. Innovation should be stimulated through cooperation in science and technology which will strengthen the mutual understanding between foreign and Chinese partners. In order to strengthen further opening up President Xi announced creation of “pilot free trade zones” that would provide conditions for developing new models of international economic and technological cooperation.

The vision expressed at CIIE is welcome notwithstanding the doubts voiced by some western commentators. It is in a way ironic that the Chinese offers for further opening up are met with scepticism. Ironic, yes, but not entirely surprising. The western mind is mainly focused on the immediate – the existing tariffs, the existing practices in protection of intellectual property and, above all, on the immediate likelihood of making profit. This logic is understandable but no longer sufficient. A medium and long term vision is needed as well. Otherwise the world will become victim of short term measures and countermeasures and the resulting tensions, a pattern in which everybody will lose. What is needed is a vison of medium to long term development in which everybody will win.

Admittedly, such a vision requires a great amount of work and removal of obstacles that impede further widening of international economic cooperation today. In addition, it needs an adequate multilateral framework. It should not be assumed that the way forward will be easy. The diversity of real and perceived interests, the fears and geopolitical calculations and many other factors are likely to complicate further development. Therefore, it is necessary to understand and discuss the obstacles and find ways of their removal. In addition it is necessary to develop adequate models of reform of the multilateral system.

The subsequent paragraphs of this paper offer some thoughts for further discussion.

Intellectual Property and Transfer of Technology

On 1 June 2018 the EU issued a formal communication under the dispute settlement procedure of the World Trade Organization. The EU requested consultations with China relating to Article 64 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The key allegation of the EU is that certain Chinese measures pertaining to the transfer of technology into China adversely affect the protection of the intellectual property rights of foreign companies transferring technology to China (see doc. WT/DS549/1; G/L/1244; IP/ D/39 of 6 June 2018).

The EU alleges that China imposes restrictions on the foreign intellectual property rights holders, who, because of restrictions, cannot freely negotiate market– based contractual terms of licensing and other technology related contracts. The EU communication includes the critique of alleged discrimination affecting foreign intellectual rights holders doing business in China. In the context of joint ventures, emphasized the EU, China imposes mandatory contract terms that are discriminatory to foreign enterprises and restrict the ability of foreign companies to protect their intellectual property rights in China.

These allegations will be subject of “consultations” between the EU and China within the framework of the WTO’s dispute settlement system.

Even without entering the legal details it is possible to identify the key legal and policy questions. Historically, every catch up nation seized the ideas of those who were technologically more advanced and built on them – often at displeasure of the latter, as Martin Wolf, a prominent columnist of the Financial Times recently pointed out. He then emphasized: “The idea that intellectual property is sacrosanct is wrong. It is innovation that is sacrosanct. Intellectual property rights both help and hurt the effort. A balance has to be struck between rights that are too tight and too loose.” (FT, 11 April 2018)

Balance in technology transfers is not a new aspiration but it is of particular significance now, at the time of the fourth technological revolution. The US and the EU are insisting on stricter protection of the intellectual property rights. China, in its legitimate pursuit of technological advancement, is trying to limit what it perceives as the adverse effects of strict intellectual property protection.

The resulting tensions reach beyond the relations among states, or, as is the case with the mentioned communication, beyond relations between the EU and the Government of China. The European and American companies have an important role as stabilisers of relations with China. Their legitimate interests have to be taken into account and appropriate balance has to be found. This is increasingly understood in China. Typically, the Prime Minister Li Keqiang emphasized (at the press conference following the EU China Summit on 16 July 2018) that “…Those who maliciously violate intellectual property rights will be fined to the point of bankruptcy….” (italics added)

President Xi used a slightly milder but nevertheless clear language in his opening speech in the first Shanghai CIIE when he made the following commitment:

“We protect the lawful rights and interests of foreign companies, and we are resolute in meting out, in a law-abiding manner, punishment for violations of the lawful rights and interests of foreign investors, particularly intellectual property rights infringements.”

This language suggests that China understands well the need find a balance between legitimate interests of the foreign investors and its own development needs. The question is what kind of policy instruments will have to be used. Will the existing forms of protection of intellectual property suffice? Are they at all adequate to deal with challenges with the world of the digital revolution and artificial intelligence?

The technological change of our era has been remarkably global. Its effects have reached every corner of the world and have gradually helped practically all parts of the world to participate in the furthering of change. In this process China has become a player of the first order. The question for the future is whether this process of globalization will continue along the existing patterns or will it change. And change can either mean a new level of globalization or a path of “indigenisation” of technological standards and the consequent fragmentation of the future technological development. The perspective is further complicated by the security aspect of technological development. Technology contributes to the military and other elements of the “hard power” of the state. The question of dual use of technology is always a difficult one.

In such circumstances the way forward requires political wisdom and innovation. It would be important to agree that China’s development is part of the global transformation in knowledge, science and technology. While China clearly stands to benefit from international transfers of technology, which will help it to realize its plan of “made in China by 2025”, other countries should benefit too. The challenge is to devise a system that will enable all sides to take advantage of the future technological development. At the first opening of the CIIE in Shanghai in November, President Xi announced launching of “a science and technology innovation board at the Shanghai stock exchange and experimenting with the registration system for listed companies”. This could be a promising opening for a new type of technological cooperation for the future.

The objective should be to build “win -win outcomes”. For this to happen, all the relevant participants have to take an open minded approach and work to better understand China’s innovation system and development plans. The WTO consultations initiated by the EU should not be oblivious of this.

Another interesting question is how to take advantage of China’s ability to provide knowledge opportunities through mutually beneficial exchange and cooperation in research and education. Let us recall, innovation is more important than protection of intellectual property. And innovation is closely related to education and culture. So, it would be important to include the development of higher education and research cooperation into the equation, while keeping in mind the centrality of the trading system itself and the WTO.

WTO and the International Trading System

Let us look at the international trade more broadly, i.e. beyond the trade related intellectual property issues. How realistic is the thinking of building bridges at a time of rising barriers to trade? What should be done to enable building bridges through trade and international cooperation in the future?

These questions sound familiar in the light of the current sliding into a global trade war – but also paradoxical in light of the fairly consistent and positive development in global trade over the past decades.

Let us recall, in 1948 the US rejected the Havana Charter for the establishment of the World Trade Organization with the argument that such an organization would impede free trade. Instead, the General Agreement on Tariffs and Trade (GATT) was established as a negotiating mechanism that allowed a gradual reduction and removal of barriers to trade. Over decades, tariffs on trade in goods were reduced dramatically and quantitative restrictions were largely removed. Non-tariff barriers were addressed through a number of agreements adopted in the Tokyo round of trade negotiations in the 1970s. Subsequently, a certain level of liberalization of trade in services was achieved during the Uruguay Round of trade negotiations in the 1980s. And finally, in 1994 the World Trade Organization was established. It included mechanisms for both permanent negotiations and an effective dispute settlement process. While the stalling of the Doha Round trade negotiations a decade ago cast some doubt on the WTO, the system is still a remarkable global success.

In light of this historic and fairly consistent progression, the introduction of high tariffs on certain goods and the talk of a global trade war sounds both anachronistic and frightening. Isn’t the existing set of agreed instruments sufficient to address the allegedly unfair trade practices? State subsidies, where they exist in contravention of the agreed trade rules, can be dealt with under the Tokyo round’s Code on Subsidies and Countervailing Duties. Other non-tariff barriers to trade can be addressed by the relevant instruments that already exist.

However, it is not hard to discover that the real threat comes – not from the trade itself – but from a combination of geopolitical tensions and restrictive measures in trade. Deficit in the trade in goods of the USA cannot be a sufficient reason for a trade war: the balance of trade in goods is part of the larger picture of economic cooperation that is heavily influenced by trade in services and by the continued domination of the US dollar as the global reserve currency. And there also seems to be some scope for future adjustments in trading in services to include licensing fees for the use of intellectual property. Expansion of trade, including trade in services, is a better option than restrictions to the trade in goods, to say nothing about trade wars.

What else should be discussed in order to adjust the global trading system for the benefit of all? A special attention has to be paid to the dispute settlement procedures. Despite the allegations to the contrary, the US and the EU have been quite successful in the disputes settlement processes they had initiated before the WTO. Dispute settlement cannot always satisfy everybody. Nevertheless, it is necessary in real life and it would still be reasonable to reform the system where reform is needed to make international trade freer and fairer. Settlement of disputes based on the agreed and time tested techniques is a powerful instrument of fairness. It would irresponsible to sacrifice such an instrument at the altar of the rhetoric of fairness.

There are good reasons to do “whatever it takes” - to borrow a famous phrase used by Mario Draghi, President of the European Central Bank in 2012 in a different context – for the preservation and further evolution of the WTO. If WTO is considered too rigid for effective management of the global trading system, then it should be improved. Given the entire history of WTO, this would be the most natural thing to do and negotiations are the best way forward.

There are some signs of hope. On 25 June 2018 China and the EU reached an agreement to launch a group that will work to update global trade rules to address technology policy, subsidies and other issues characterizing the current debate on global trade. Subsequently, in the joint statement of the 20th EU-China Summit of 16 July 2018, a joint working group on WTO reform, “chaired at Vice-Ministerial level” was established. It seems that China and the EU take the WTO reform as the way forward.

The interests of China and EU overlap as far as they both oppose the tariff hikes of the United States. At the same time, the interests of the US and EU overlap with regard to the questions of transfer of technology and protection of intellectual property. The picture looks like a typical multipolar situation with competition at its core. This suggests that the best approach will require an appropriate choice of multilateral means.

It is important to involve all the relevant players: Japan that has just concluded a free trade agreement with the EU, the fast growing India with the diversity of her needs, an array of developing countries… A new initiative for improvement and reform of the WTO would have to provide space for the legitimate interests of all.

A Way Forward

Globalisation of the past decades has brought immense benefits to the world. However, it has also contributed to serious problems that need to be addressed. Income inequality, both among states and within states, and environmental degradation are the most visible ones. Many of the fundamental problems today are not only economic, but largely or even primarily social and political. Income inequality and growing inequality of wealth, the staggering unemployment in some parts of the world and the adverse effects of climate change are among the most obvious examples. Destructive demagoguery and chauvinism are among the most serious political problems today. And they are all, one way or the other, related to globalization.

Naturally, not all problems can be addressed through international economic cooperation and trade. However, in a globalized world the international trading system has a big impact on societies and has to help in the search for solutions.

This realization is not entirely new. The ideas to include “social clauses” into the global trade agreements were discussed in the past, including at the time of the creation of the WTO. Social safety nets and a sense of shared benefits are among today’s economy most urgent needs. Shared benefits strengthen the sense of living in a shared society. The unwelcome alternative is an ever more toxic concentration of wealth and the resulting divided societies threatened by violent upheavals.

Shared societies are societies open to reform. Reforms in education systems, labour policies, pension systems and health systems are among the most important priorities of governments. Governments need space for such policies and the international system, including the international trading system, should allow them to formulate and pursue such policies. Reducing international trade to the issues of competitiveness would be too simplistic and inadequate to help resolving the most urgent problems of our era.

Is the international system capable of devising a framework that would allow these social and political issues to be effectively addressed? Can a new round of international trade negotiations and reforms help? And, more fundamentally: can such negotiations be conducted in a public and transparent manner, so that the general public would see the benefits as well as the difficulties?

There are no clear answers to such questions yet. But a discussion is necessary and the Imperial Springs International Forum could be one of the places where such a discussion will take place.

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