Hon Tim Groser
Minister of Trade
16 August 2012

Speech
Speech to the NZ Institute for International Affairs

Governance and Multilateralism in the 21st Century

Thank you for this opportunity to put forward some ideas about Global Governance and multilateral institutions in the first quarter of the 21st Century. In responding to your invitation, I will stick more or less exclusively to the multilateral economic agenda, with a strong emphasis on trade and climate change – my two Ministerial responsibilities.

Obviously, the issue of global governance is broader than that. Naturally, I have views about these and related strategic issues. But I will stick with the international economic issues for which I have direct responsibility in NZ and to which I devoted most of my professional career prior to entering politics.

Governance: What Does It Mean?

It is a statement of the obvious that political ‘governance’ exists on sub-National, the Nation-State and supra-National levels. It became fashionable in policy circles some 10-15 years ago to talk of the ‘porous’ nature of modern sovereignty.

For a variety of reasons it became more noticeable that power was being ‘drained’ from the Nation State in two opposing directions.

First, it was becoming more and more practical to deal with problems below the level of Central Government – technology being a key enabler.

Second, there was a growing realisation that the Nation State was increasingly incapable of dealing alone with a wider variety of ‘cross-border’ issues than the traditional suite of policies in trade, international financial and security affairs - trans-National pollution being a classic example. The UNFCCC negotiations, which are trying to align climate change policies, are the ultimate expression of this trend No wonder this is fraught with difficulties.

This growing realisation around the nature of power and responsibility socialised a political concept long discussed in European policy circles – the principle of ‘subsidiarity’, another political word that sounds decidedly odd when translated literally from French to English (like ‘modalities’ in trade negotiations). However, the core idea is anything but odd. I understand it as follows: we should seek to devolve power to the lowest level of political responsibility (or governance) consistent with the scale of the problem. Or to put it more crudely – small problems should be dealt with locally, problems too big for the Nation State should be dealt with through multilateral, bilateral or plurilateral arrangements (whether legally binding or not).

This still leaves the vast bulk of responsibility for Governance with the Nation State. Any thought that this trend spelled the slow decline of the Westphalian system of sovereign Nation States would be absurd. For as long as we can forecast, the sovereign Nation State will remain the dominant political actor internationally. States will accept limitations on their sovereignty only in return for reciprocal limitations on the sovereign power of other States to engage in actions damaging to their own country’s interests.

In case this all sounds a little ‘pointy-headed’, let me assure you it is anything but. It lies at the centre of the often ideological debate about TPP, or Trans-Pacific Partnership. When anti-trade groups or people say that TPP will ‘encroach on our sovereignty’ I have quite deliberately said that this is technically correct, but in itself a trivial point. It is like listening to one hand clapping – and about as useful.

The entire purpose of internationally legally binding agreements is to limit sovereignty on a reciprocal and agreed basis. In the area of international trade, one could make a pretty robust argument that literally no developed country in the world has been more damaged than New Zealand by what I would call ‘sovereignty out of control’. That is, our economy has been deeply damaged over the past 50 years by the sovereign right of our trading ‘partners’ to implement destructive policies (huge subsidisation, ever diminishing market access, for example) against our main internationally competitive agricultural exports.

We were not alone of course. A number of other developing countries like Argentina, Chile, Brazil, Malaysia also suffered. This is one reason why I, and no doubt other New Zealanders, have often described NZ as structurally a developing country, with the income levels of a developed country. NZ negotiators apparently turned up to the first meetings of the G77 in the 1960s for this reason - before deciding it was not quite right for New Zealand. The difficulties NZ and leading developing country commodity exporters suffered were a direct consequence of a decision made in 1947 to keep agriculture outside systems of global governance being developed for trade.

The structure was partially fixed in the Uruguay Round when operationally effective rules were introduced into the world trading system – though the degree of actual liberalisation within these new structures was very limited. This remains a central issue for developing country agriculture exporters led by Brazil. There is still scope for a great deal more, using the frameworks introduced into the WTO some 18 years ago.

Exactly the same principle lies at the heart of all trade negotiations. The whole point of TPP and the WTO is to put some reasonable limitations on that sovereignty around principles and policies that we know work and are mutually beneficial. For the most part, the limitations will be moderate, sensible and largely about binding in existing policy settings. We – and no doubt all of our negotiating partners - will make our decisions at the end of these negotiations when we can see the balance of the deal in terms of our overall national interest.

So how well are we doing at the beginning of the 21st Century? What metrics should we use to see how well the system has worked since the end of the Second World War which established the key mechanisms of global governance?

In my view, the answer is clear: the institutions of global governance have underwritten enormous social, economic and political progress. Obviously, far more is driving this than just the institutions of global governance – technology and the spread of ideas is a massive contributor. The key word, I believe is ‘underwritten’.

A simple real-world example should be enough to make the point. In 1950 South Korea was one of the poorest countries in the world. There was an infamous Australian Senate Inquiry into the state of Korea at the end of the Korean War which basically wrote the country off in provocative terms. They could not have been more wrong. We know where Korea stands today: On a PPP basis Korea is around US$35,000, and NZ is on $29,000 per capita.

You do not need to be an expert on Korean economic history to know that the export-led development strategy would have been literally impossible without the Koreans being able to access the relatively open trading system underwritten by the GATT. They started, as most developing countries do, with simple, labour-intensive textiles, garments and shoes.

Their success led to an explosion of real wages and structural adjustment out of these early stage development options. When I was Ambassador to Indonesia over 15 years ago, the entire Korean footwear industry, or so it seemed, had migrated to Tangerang – an industrial and manufacturing hub of Java, some 25 kilometres from Jakarta.

Today, we know Korea as the most ‘wired’ country in the world and a source of extraordinary innovation with brands like Samsung, Hyundai, and LG becoming household names.

This success story would not have happened without effective global governance that opened the door to spectacular Korean development

However, Korea still needed to do the business itself. Years of training as a diplomat prevent me from naming a group of other countries which sat alongside Korea in 1950 as the poorest of the poor. Some of them are still languishing.

They have had the same opportunities the global governance system offered Korea. For different reasons, they have not yet been able to seize those opportunities and solve the most basic developmental problems facing their peoples. A conventional way of summing up the issue is to say that an effective global governance regime is a necessary but not sufficient condition for countries to move ahead.

A ‘Glass Half Full’ Perspective

If we look at this matter on a global basis, some tentative conclusions seem warranted. We are here to discuss ‘governance’, but this is a high level abstraction far above the daily concerns of people around the world. I think what matters to people around the world, at least in material terms, is:

• Personal security and the relative absence of war and violent conflict. Without that, no economic or social progress is possible;
• Progress on the developmental issues facing the vast masses of poor people in the world: grinding poverty, malnutrition, low life expectancy, illiteracy, disease, and lack of opportunity for half of humanity who happens to be women.
By almost every metric, the last 60 years have seen progress unparalleled in the history of mankind. We must be doing something right

In terms of personal security, my father and I were the first generation of European ethnic males who were spared what my two grandfathers were not – periodic slaughter of young men on the battlefields, usually for reasons of Great Power rivalry when there were no fundamental ideological differences amongst them (World War I) and sometimes, and more respectably, to determine fundamental doctrine about global governance and values (World War II). No doubt my son and grandson (when the latter is old enough to contemplate the issue) would regard this as ancient history. It is not.

We know the exceptions – people in Aleppo, Syria’s second city, are dying now, parts of Africa are still are a war zone, there are still major challenges ahead of us in Afghanistan; there are still huge risks from terrorism. However, by the standards of any other epoch, we are seeing more and more people living in conditions of comparative tranquillity. It could change tomorrow with some ghastly strategic mistake, but that is where we are today.

Deaths resulting from war-related violence have fallen 45% since the 1990s and 70% since the Cold War, according to figures compiled by the Peace Research Institute in Oslo. In spite of spectacular publicity in certain localities – often of drug-related crime – crime-related fatalities have declined roughly three quarters across all countries in the last decade.

In Europe, murder was ten times as common before the industrial revolution per head of population as it is today.

You would have been either a sublime optimist, or a fool (or Winston Churchill, who clearly was neither) to have bet on ‘democracy’, however defined, in 1940 being the predominant form of Government 60-70 years hence. In 1940 most of the world was gripped in various forms of authoritarian Government, fascist, communist or feudal, and ‘democracy’ was relegated to a small number of primarily Anglo-Saxon countries.

Various international NGOs (eg ‘Freedom House’) measure these matters. Putting aside many legitimate questions about the label ‘democracy’ – a subject too rich to entertain here – more people today are living in accountable systems than even 20 years ago and the trend is positive. Seventy per cent of people living in ‘democracies’ are in the developing world, led of course by India. As Indian intellectuals like to say, in India, in a sense everyone has a veto.

If we pass from the political/security to the economic, the progress is even more dramatic. This is more familiar territory – most here know the usual metrics about the rise of life expectancy, rise in calorific consumption amongst people in developing countries, the extraordinary decline of absolute poverty, particularly in China and Indonesia.

Let me instead quote some deliberately provocative statistics: the average Botswanian earns more in real terms than the average Finn did in 1955. Infant mortality is lower today in Nepal than it was in Italy in 1951. The Chinese are ten times as rich and live 28 years longer than they did 50 years ago.

Just remember these metrics the next time you hear a ‘doom and gloom’ lecture on the state of world governance. So my conclusion is this: whatever deficiencies there may be, the existing system of global governance has worked pretty well. I do not see any fact-based case for radical changes, with one obvious exception: how we are approaching climate change where clearly the core international response to date – the Kyoto Protocol – cannot possibly carry the load by itself. I will come to that later.

The Challenge Facing Global Governance Models

So the system of global governance that we have brought into the first quarter of the 21st Century, seems to have proven its worth. What are the challenges it faces?

On this matter, we should acknowledge the existence of a fairly conventional, and generally pessimistic, view. Allow me to put that view in the somewhat alarmist language that is conventionally used:

• There is a crisis in international multilateral governance of international economic issues as power seeps from the Western and developed countries to the emerging economies led by China and India.
• In world trade, the WTO is completely stuck. The negotiation was meant to finish in four years. It is now on life support after ten years, or twelve years if you date it from the start of the so-called ‘BIA’ or ‘Built-in Agenda’; there is no realistic prospect of a breakthrough and only a few naive officials still believe in it.
• All the focus is on regional trade agreements, sucking out the life of the multilateral trading system and creating a vastly complex ‘spaghetti bowl’ (or noodle bowl for those of us in the Asia Pacific region), with complex regional rules of origin that risks balkanisation of the international trading system.
• In international financial markets, the IMF, World Bank and major regional financial institutions such as the ECB seem under-equipped, under-resourced and fractured politically to deal with the greatest international economic crisis since the 1930s with all eyes focussed on the Eurozone.
• In climate change, the drive towards a single ratifiable, legally binding agreement stalled at Copenhagen in 2009 in spite of the presence of President Obama, Premier Wen and the generally good and the great – most of whom were uselessly stuck in the coffee bar of the improvised Conference Centre, relying on coffee and gossip while we tried to find out what on earth was going on. Meantime, in the absence of a climate change treaty to replace the Kyoto Protocol, we are heading remorselessly towards levels of CO2e concentration levels that are dangerous to human beings with little hope of a binding multilateral framework to discipline domestic policies.
• The rise of China and the emerging economies – all of which have little or no ownership of the existing multilateral institutions – pose a transcendental challenge to the primacy of the Western Liberal Order, systemised in multilateralism over the last 60 years.
Head for the hills! Say the last rites! Prepare for the Apocalypse. And while you are at it prophesising all this doom and gloom, ask for your speakers’ after dinner fee, since catastrophist theory sells well.

I think the situation is challenging but far less dramatic The main point is clear. There is a massive shift of relative political and economic power indeed underway and the informal systems that underwrite the existing institutional machinery of global governance must shift accordingly.

This is not going to be straightforward because the habits of cooperation and shared responsibility for the ‘system’ are not embedded deeply between the traditional ‘Western’ centres of power and the new emerging centres of power led by China, India and several other large emerging economies such as Brazil. This is what I will now seek to address.

‘Power’ versus ‘Democracy’

We have, I like to argue sarcastically, evolved to higher life forms in international politics. A few hundred years ago, large countries with power simply invaded smaller countries or communities (when they were not established as sovereign states) and imposed their views, languages and culture, often by military force.

Today at least they listen to the views, interests and perspectives of smaller countries – and then they proceed to impose their views.

This is a deliberate exaggeration. In terms of my experience, large and powerful countries will usually try to accommodate small countries legitimate interests provided this does not compromise their essential interests. I have many practical examples in my head behind this observation.

If, in terms of analysing international governance, we use the term ‘democracy’ to describe the concept of equality of nations, we need to recognise that ‘power’ always attenuates ‘democracy’. Yes, the IMF and several other multilateral institutions have near universal membership, but they also have weighted voting systems. Yes, the United Nations General Assembly is a one country, one vote institution – pure democracy on the surface. But sitting above the GA is the Security Council with its five Permanent Members, reflecting the balance of power in 1945 and their permanent veto.

Other institutions of global governance balance power with democracy in informal and subtle ways – the WTO is the most obvious example. There is a voting system inherited from the GATT, but for all practical purposes it is a dead letter. I have not done the research, but I recall only one time in the thirty years I have been associated with multilateral trade diplomacy when it was used.

To say that ‘power always attenuates democracy’ in global institutions is not necessarily a negative statement.

To make multilateral systems work, two or three ingredients are always required:

• The most powerful countries need to drive the decision-making process; otherwise the institutions of global governance become just vacuous debating chambers issuing meaningless communiques, ‘action plans’ and declarations of no consequence;
• Skilled facilitators are needed to help powerful countries which have, I believe, a huge capacity to talk past each other;
• Some self-restraint, and respect for the interests of smaller countries not involved deeply in the engine room of an international negotiation, is required on the part of the most powerful countries. They must start the process of developing convergence on key outstanding issues, but they must leave space for others. This is both a matter of substance – smaller countries have distinct interests and are perfectly capable of blocking a consensus if those interests are ignored; it is also a matter of form. Alexander Hamilton famously observed that ‘men will often oppose a thing simply because they have had no hand in its making’.

To try to persuade you that nothing changes fundamentally when human beings are involved, let me give you my favourite historical example: the process of negotiating the Treaty of Vienna. As many of you will know, this famous Conference developed many of the techniques and modalities used in multilateral diplomacy today – the term ‘Final Act’ being one example.

My rough recollection of the history is as follows. Europe needed peace. The great regional powers were Prussia, Russia, Great Britain, Austria and of course France. The problem was France. The Conference started before the defeat of Napoleon’s forces at Waterloo. Metternich, the Austrian Foreign Minister, and Lord Castlereagh, and British Foreign Secretary, realised that whatever happened, France would remain a great power, even in defeat. There was no point in reaching a consensus without taking France’s permanent interests into account. They found ways to involve Talleyrand, the great French Foreign Minister. I have long ago forgotten the detail.

There were over 30 German principalities – this was, of course, before the unification of Germany under Chancellor Bismark. The Pope and the Sultan of Turkey (or their senior diplomats) were there too. Trying to get an international consensus was like herding cats. What has changed, you might well say?
So the inner power grouping of the major countries basically established what we call ‘convergence’ and then took political responsibility for selling those ideas to the outer concentric rings of smaller countries or principalities. It worked – only the Pope and the Sultan of Turkey refused to sign the Final Act. One assumes that the secular nature of the deal was probably the root cause.

Nothing has changed internationally because human beings have not changed. This is how diplomacy works today. It only works when the great powers understand they have responsibility for making the system work, can find ways to work together even if they have bitter histories and conflicting interests and finally stop short of imposing a deal on the smaller countries so the final deal has something for everyone in it. It is all about balance and requires commitment and creativity.

In short, global governance needs informal and highly effective leadership from the most powerful countries. Without that, there is no effective global governance, just drift. And here is the nub of the problem facing us in the early 21st Century: how do you adjust for shifts in relative political power?

Shifts in Political Power

In the immediate post war era in the trade arena, we had close to a single global hegemonic power – the United States. The United States, I believe, imposed a liberal order allowing defeated Axis powers remarkable room to recover their power, their status and well-being. American power and leadership, underwritten by rapid economic growth, drove the post-war global governance agenda.

Obviously, this was consistent with US national interests and some important design faults were made – in the area of international monetary coordination, the asymmetrical adjustment process putting all pressure on deficit countries and not surplus countries in a system of fixed exchange rates was perhaps the most obvious. However, this is a counsel of perfection. The contrast with the previous global conflagration of World War I and the punitive peace of the Treaty of Versailles that followed it could hardly be more acute. We owe a great debt of gratitude, in my view, to that generation of American political leadership.

Cracks were beginning to appear in the system by the early 1970s. As the deficit costs of the Vietnam War rose causing capital flight from the US, Nixon closed the gold window in 1971, ending unilaterally the Bretton Woods regime of fixed exchange rates. Some ten years later, the then USTR Bill Brock made his famous speech which invoked the term ‘the level playing field’ and foreshadowed for the first time the willingness of the United States to engage in FTA bilateral trade liberalisation, starting with the US-Israeli FTA.

In effect, these events were watermarks not of American power in an absolute sense, but of American relative power. America was not a weaker place, other countries had simply become relatively stronger as they recovered from the disasters of the Second World War.

It was a signal of intent from the US – we will play a huge role in international governance but do not expect us to do all the heavy lifting. If we fast forward another decade into the 1990s, the US Senate rejected the Kyoto Protocol 95-0. The key driver was the same issue: the failure of the Kyoto Protocol to impose comparable obligations on the increasingly powerful developing country emitter countries. The unipolar world has given way to a multi-polar world and it will only strengthen in this direction.

Global Governance: Are We in a Transition?

The G20 has effectively replaced the G8 (formerly G7) as the centrepiece of global governance in the economic sphere. It is, I believe, a profoundly positive shift. The idea that the developed world (plus Russia) could seriously manage governance in the 21st Century given the vast and accelerating shift of power to China and the emerging economies is risible.

Unfortunately, it is equally clear that whatever institutional machinery lies beneath the G20 (and I have attended one as a ‘special observer’ on trade), it is completely undercooked. Declarations from the highest level of political power are made and there appears no drive shaft to turn the wheels.

I was literally astonished that when the G20 met in Washington on 15 November 2008 (days after we won the Election and I was appointed Trade Minister), they issued a clarion call to their Trade Ministers to go to Geneva to complete the WTO Doha Round. Not only did their Trade Ministers ‘fail’ to do what their Heads of Government had called for, none of them even bothered turning up in Geneva to try. Actually, even if there were good reasons for totally ignoring what their Leaders had said, it is a sign of the disconnect at the highest level of international governance.

The good news is that it is abundantly clear that the emerging economies to where the power is flowing value and wish to improve, not replace, the existing machinery of global governance. They are queuing up to join the key institutions of global governance, not to leave them – Russia being the latest to join the ‘international rule set’ implied by WTO membership. Absorbing the underlying culture of these liberal institutions is another matter and will take time. But it is impossible to read (say) BRIC communiques and draw the conclusion that they reject root and branch the existing institutional machinery.

In this sense, the ‘challengers’ to American pre-eminence (China, India and the major emerging economies) are fundamentally different to the competition of the 1950s and 1960s – the Soviet Union. The former Soviet Union indeed had a fundamentally different agenda, driven by an incompatible ideology and consciously created competing and parallel institutional governance machinery to the Western machinery.

We are, post 1989 and ‘Fall of the Wall’, in a completely different space with those who are jostling for influence today Indeed, some leading emerging economies seem to be reinforcing the prudence of the existing system. It was instructive that President Calderon of Mexico issued well-judged appeals to the developed world to get their debt under control. He was right to do so. But anyone who remembers recurrent Mexican debt crises of 20-30 years ago could hardly fail to notice the irony of the student turned instructor.

At the same time, these huge and increasingly powerful emerging economies still face formidable development challenges. There are hundreds of millions of very poor people in China. In climate change, the imperatives of development will continue to trump politically the need to get on top of their rapidly rising emissions. A ‘Second Commitment Period’ made pursuant to the Kyoto Protocol deals only with 15% of global emissions.

We are moving towards a multi-hegemonic system of power but the global governance system that would match that is remarkably immature My central view is that it is not a fundamentally different system that needs to be designed, but rather the informal modus operandi of the system needs to change to reflect the shift in relative power.

The issue here is about leadership: no system of global governance can work without it. When China joined the WTO I heard some deeply experienced people speculate on how the WTO would work with the ‘800 pound gorilla’ in the ring. The concern is entirely the wrong way round. The greater danger is the opposite – these great emerging economies may not use their huge weight and influence to provide leadership but behave too passively.

There can be no definitive conclusion to this. I think we are in a process of transition and the trick here will be to ensure that something gets done on both trade and climate change during that transition.

Thank you.

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