The Change of Global Economic Governance and China 981190698X, 9789811906985

Table of contents :
Contents
1 Introduction Global Governance: History, Logic and the Role of China
1.1 Introduction
1.2 Historical Review
1.3 Global Governance and Its Logic
1.4 Promoting the Reform of Global Governance System is the Trend of the Times
1.5 Focusing on Global Economic Governance
1.6 China’s Outlook on Global Governance and the Path Towards Global Economic Governance
References
Part I Changes in Global Economic Governance Structure and Countermeasures
2 Connotation of Global Governance
2.1 Definition of Global Governance
2.1.1 What is Governance
2.1.2 Global Governance
2.2 Main Contents of Global Governance
2.2.1 Actors of Global Governance
2.2.2 Forms of Global Governance
2.2.3 Objects of Global Governance
2.3 Reasons for Global Governance
2.3.1 Emergence of Global Governance
2.3.2 Reform and Improvement of Global Governance
References
3 Definition of Global Economic Governance
3.1 Actors of Global Economic Governance
3.1.1 Formal Inter-governmental Organizations
3.1.2 Informal Inter-governmental Organizations
3.1.3 International Non-governmental Organizations
3.1.4 Roles of Nation States in Global Economic Governance
3.2 Operating Mechanisms of Global Economic Governance
3.2.1 Membership Mechanism
3.2.2 Decision-Making Mechanism
3.2.3 Dispute Settlement Mechanism
3.2.4 Supervision Mechanisms
3.3 Main Areas of Global Economic Governance
3.3.1 International Finance Governance
3.3.2 International Trade and Investment Governance
3.3.3 Climate Change and Environmental Governance
3.3.4 International Macroeconomic Policy Coordination
3.3.5 Global Development Issues
References
4 Historical Evolution of the Global Economic Governance Structure
4.1 Connotation of the Global Economic Governance Structure
4.2 Evolution of the Global Economic Governance Structure
4.2.1 1870–1914: Era of Laissez-Faire Gold Standard
4.2.2 1914–1939: Beggar-Thy-Neighbor Post-War Period
4.2.3 1945–1975: Bretton Woods System and Embedded Liberalism
4.2.4 1975–2008: Post-Bretton Woods System and Rising of Neo-Liberalism
4.2.5 2008-Now: Diversified Transformation of Global Economic Governance
4.3 Evolution Modes of the Global Economic Governance Structure
4.3.1 Hegemony-Led “Hard Governance”
4.3.2 North Negotiation-Soft Governance
4.3.3 North–South Cooperation-Soft Governance
4.4 The G20 and the Global Economic Governance Reform
4.4.1 Evolution of Issues Discussed by the G20
4.4.2 Overview of Progress in Major Issues
4.4.3 Differences in Major Countries’ Demands for Global Economic Governance
References
5 Impetus for Evolution of the Global Economic Governance Structure
5.1 Three Contradictions in Global Economic Governance
5.1.1 Contradiction Between the Free-Rider Tendency of International Public Goods and Collective Actions
5.1.2 Contradiction Between Restrictions of International Rules and National Autonomy
5.1.3 Contradiction Between the Non-Neutrality of International Institutions and the Democratization of Global Governance
5.2 Power Restructuring and Evolution of the Global Economic Governance Structure
5.2.1 Hegemonic Governance
5.2.2 Club Governance
5.2.3 Inclusive and Improved Governance
5.3 Changes in Philosophy and Evolution of the Global Economic Governance Structure
5.4 Laissez-Faire Economic Philosophies
5.4.1 Embedded Liberalism
5.4.2 Neoliberalism
5.4.3 Post-Crisis Conceptual Reconstruction
5.5 Domestic Political Transformation and Evolution of the Global Economic Governance Structure
5.5.1 Domestic Re-Distribution and Domestic Foundation of Global Economic Governance
5.5.2 Practices of Embedding Global Economic Governance into Domestic Governance
5.5.3 Income Gap Expansion and Global Economic Governance Reforms
References
6 Reform Orientation of Global Economic Governance
6.1 Promoting Democratization in Global Economic Governance
6.1.1 Advancing the Diversification of Global Governance Actors
6.1.2 Enhancing the Legitimacy of Global Economic Governance Structure
6.2 Enhancing Interests Inclusiveness of Global Economic Governance
6.2.1 Advancing Fair and Equitable Interest Distribution Among Countries
6.2.2 Advancing the Compensation of Domestic Interests Through the Coordination of Internal and External Governance
6.3 Countermeasures for Solving Global Issues
6.3.1 Improving the Effectiveness of the Governance Mechanisms
6.3.2 Innovating Ideas to Usher in New Governance Channels
References
Part II International Financial Governance and Countermeasures
7 Overview of the Evolution and Reform of International Financial Governance
7.1 Concept and Framework of International Financial Governance
7.2 Necessity to Reform the International Financial System
7.2.1 Multi-polar Pattern and Unipolar Currency
7.2.2 Consequences of the Lagging Reform of the International Financial System
7.3 Key Points in the Reform of International Financial Governance
7.3.1 Diversified Reserve Currency System
7.3.2 Governance Reform of International Financial Institutions
7.3.3 Institutional Guarantee and Cooperation Mechanism Building of International Financial Governance
7.4 Conclusion
References
8 Factors Influencing the Evolution of International Financial Governance
8.1 Changes in International Economic Strength and Governance Pattern
8.1.1 Changes in the Relative Importance of Developed Economies and Emerging Economies in the Global Economy
8.1.2 Different Groups of Countries Under International Financial Governance
8.2 Financial Crisis and Global Liquidity Management
8.2.1 Measurement of Global Liquidity
8.2.2 Global Liquidity Changes and Financial Market Risks
8.2.3 Relations Between Global Liquidity and Financial Stability
8.3 Factors Influencing the Evolution of International Financial Regulatory System
8.3.1 Evolution of Micro-Prudential Supervision
8.3.2 Evolution of Macro-Prudential Supervision
8.4 Conclusion
References
9 Defects and Challenges of Current International Financial Governance
9.1 Defects and Challenges in Current International Monetary System
9.1.1 The International Reserve Currencies: Unfair and Unstable
9.1.2 Exchange Rate System: Diverse Choices and Difficult Coordination
9.1.3 International Balance of Payments: Long-Term Imbalance, Difficult to Sustain
9.2 Defects and Challenges in International Financial Regulatory System
9.2.1 Problems in Macro-prudential Supervision
9.2.2 Problems in Micro-prudential Supervision
9.2.3 Problems Caused by Insufficient Coordination of International Financial Supervision
9.3 Defects and Challenges in International Capital Flow Management
9.3.1 Evolution and Status Quo of International Capital Flow
9.3.2 Challenges of International Capital Flows
9.4 Defects in International Financial Governance Mechanism
9.4.1 Defects in the IMF’s Governance Structure
9.4.2 IMF’s Functional Deficiencies
9.5 Conclusion
References
10 Reform Direction of International Financial Governance
10.1 Reform Direction of International Monetary System
10.1.1 Super-Sovereign Currency Plan
10.1.2 Diversified International Monetary System
10.2 Reform Direction of International Financial Regulatory System
10.2.1 Reform Direction of International Financial Regulatory System
10.2.2 Reform Direction of International Capital Flow Management
10.3 Reform Direction of International Financial Governance Mechanism
10.3.1 Reform of the IMF’s Governance Structure
10.3.2 Strengthening its Own Resources
10.4 Conclusion
References
11 Countermeasures for China’s Better Participation in International Financial Governance
11.1 Positioning and Goal of China’s Participation in International Financial Governance
11.1.1 The Goal of China’s Participation in International Financial Governance
11.1.2 China’s Participation in International Financial Governance Should Be Based on Domestic
11.1.3 China Should Stick to the Positioning as a Major Developing Country
11.1.4 China Should Gradually Improve International Financial Governance
11.2 SWOT Analysis for China’s Participation in International Financial Governance
11.2.1 Strength (S)
11.2.2 Weakness (W)
11.2.3 Opportunity (O)
11.2.4 Threat (T)
11.2.5 SWOT Summary
11.3 Strategic Choice for China’s Better Participation in International Financial Governance
11.3.1 At the Domestic Level
11.3.2 At the International Level
11.4 Policy Suggestions for China’s Better Participation in International Financial Governance
11.4.1 Reform of the International Financial Institutions
11.4.2 Management of International Capital Flow
11.4.3 Promoting Coordination and Cooperation of the Global Financial Safety Net
11.4.4 Strengthening the Monitoring and Management of Global Sovereign Debt
11.5 Conclusion
References
Part III Progress and Countermeasures of International Trade and Investment Governance
12 The Development of International Trade and Investment
12.1 The Development of International Trade
12.1.1 The Development of International Trade After World War II
12.2 The Development of Foreign Direct Investment
12.2.1 International Direct Investment Before World War I
12.2.2 International Direct Investment Between the Two World Wars
12.2.3 International Direct Investment After World War II
13 Major Platforms and Institutions for International Trade Governance
13.1 GATT and Trade Governance
13.1.1 The Development of GATT
13.1.2 GATT’s Basic Principles on Trade Governance
13.2 WTO and Trade Governance
13.2.1 The Creation of the WTO
13.2.2 The Main Contents of the WTO Agreement
13.2.3 The Basic Principles of WTO Trade Governance
13.2.4 Problems of Global Trade Governance Mechanism by the WTO
13.3 Regional Integration and Trade Governance
13.3.1 The Number of Regional Trade Agreements Continues to Grow Rapidly
13.3.2 Economic Integration Will Reveal More New Features
13.4 G20 and Trade Governance
13.4.1 The Main Operating Mechanism of the G20
13.4.2 Major Summits Involving Trade Topics
13.4.3 G20 Hangzhou Summit
References
14 Fields for International Trade Governance
14.1 Trade Rules in the Signed Agreements
14.1.1 Changes in the Way of Rule-Making
14.1.2 Changes in the Content of the Rules
14.2 Development of Trade Rules on Services
14.2.1 Cross-Border Trade in Services
14.2.2 Trade in Financial Services
14.2.3 Rules for the Movement of Natural Persons
14.2.4 Progress of Regulation on Telecommunications Service
15 International Investment Governance Entity
15.1 National Government and International Investment Governance
15.2 Non-state Actors and International Investment Governance
15.2.1 Intergovernmental International Organization
15.2.2 Non-governmental Organizations
15.2.3 Multinational Companies
15.3 Emerging Governance Entity for Investment: The G20
References
16 International Investment Governance Field
16.1 The Main Content of International Investment Governance
16.1.1 Promoting International Investment to Enhance Economic Growth Momentum
16.1.2 Advancing the Reform of the International Investment System
16.1.3 Reforming the Dispute Settlement Mechanism for International Investment
16.2 International Investment Governance Rules
16.2.1 Bilateral Investment Treaty
16.2.2 Regional Investment Treaty
16.2.3 Global Multilateral Investment Rules
References
17 Countermeasures for China’s Better Participation in Global Trade Governance
17.1 Rational and Effective Global Trade Governance Mechanism from China’s Perspective
17.1.1 China’s Demands for Global Trade Governance Mechanisms
17.1.2 How to Realize an Effective and Rational Global Trade Governance
17.2 China’s Participation in Global Trade Governance
17.2.1 Strategic Thinking on China’s Participation in Global Trade Governance Mechanism
17.2.2 Specific Countermeasures for China’s Participation in Global Trade Governance Mechanism
References
18 Countermeasures for China’s Better Participation in International Investment Governance
18.1 Main Views on Future Direction of International Investment Governance
18.2 Prospect for Negotiations on Global Multilateral Investment Agreement
18.3 China Promotes the G20 Mechanism to Participate in Global Investment Governance
18.4 Outlook
References
Part IV International Climate Change and Sustainable Development Governance
19 Theories and Paradigms of International Climate Governance
19.1 Scientific Assessment of Global Climate Change
19.2 Particularity of Global Climate Change Issues
19.3 Concepts and Goals of International Climate Governance
19.4 Value Norms of International Climate Governance
19.5 Core Elements of International Climate Governance
19.6 Models of International Climate Governance
19.7 Participants of International Climate Governance
References
20 Institutional Evolution of International Climate Governance
20.1 Evolution of International Climate Regime Under the United Nations Framework Convention on Climate Change
20.1.1 The United Nations Framework Convention on Climate Change and the First Commitment Period of the Kyoto Protocol
20.1.2 Bali Roadmap and Negotiations for the Second Commitment Period of the Kyoto Protocol
20.1.3 Durban Platform and Post-2020 International Climate Negotiations
20.1.4 The Paris Agreement and New Arrangements for International Climate Governance
20.2 Climate Goals Under the United Nations Sustainable Development Agenda
20.2.1 Germination and Development on Ideas of Environmental Crisis and Global Sustainable Development Governance
20.2.2 Climate Change and a New Round of Reforms in the Worldwide Sustainable Development Governance
20.2.3 Impact of the Sustainable Development Agenda on International Climate Governance
20.2.4 Policy Selection of Climate Governance Under the Framework of Global Sustainable Development
20.3 Climate Change Issues Under the Multilateral Trade Framework
20.3.1 Global Trade Distribution and Trade Carbon Emission Distribution
20.3.2 Climate Trade Measures Under the WTO Framework
20.4 The G20 and International Climate Governance
References
21 Implementation Mechanism of International Climate Governance
21.1 Emission Reduction Mechanism
21.1.1 Emission Trading Scheme (ETS)
21.1.2 Clean Development Mechanism (CDM)
21.1.3 Carbon Tax
21.2 Technical Mechanism
21.2.1 Technological Changes and Pollution Control
21.2.2 Connotation of Low Carbon Technology and Key Fields of Transfer
21.2.3 Low Carbon Technology Transfer Mechanism Under the Convention Framework
21.2.4 Financial Gaps and Obstacles to International Technology Transfer
21.3 Financial Mechanism
21.3.1 Progress on Climate Finance Issues at Previous Conferences of the Parties
21.3.2 Fund Mechanism Under the United Nations Framework Convention on Climate Change
21.3.3 Financing Innovation Outside of the United Nations Framework Convention on Climate Change
References
22 Evaluation on the Effect of International Climate Governance
22.1 Evaluation of the Effectiveness of International Climate Governance
22.1.1 Construction of an Armington Trade Climate Model with Multiple Countries and Multiple Commodities
22.1.2 Data Source and Parameter Calibration
22.1.3 Analysis of Simulation Results
22.2 Equity Assessment of International Climate Governance
22.3 Evaluation of “Intended Nationally Determined Contributions” Targets
22.4 The Future Development Trend of International Climate Governance
References
23 Countermeasures for China’s Better Participation in International Climate Governance
23.1 Objectively Understanding China’s Position in Global Climate Governance
23.2 Promoting China’s Low-Carbon Transformation with Focuses and by Stages
23.3 Constructively Maintaining the Current International Climate Governance System
23.4 Further Deepening Pragmatic Cooperation on International Climate Issues
References
Part V International Macroeconomic Policy Coordination and Countermeasures
24 Historical Evolution of International Macroeconomic Policy Coordination
24.1 Evolution of the World’s Economic Pattern and Order
24.1.1 General Logic of International Economic Policy Coordination: Linkage, Spillover, Coordination and Conflict
24.1.2 Consolidated International Economic Relations and Policy Spillover Effect
24.1.3 Trade and Regional Economy Integration: Comparisons Between Eurozone and East Asia
24.1.4 International Economic Pattern Evolution and International Economic Order
24.2 Evolution of the International Macroeconomic Policy Coordination Theory
24.2.1 Principles of International Economic Policy Coordination: Necessity and Feasibility
24.2.2 Prerequisite for International Macroeconomic Policy Coordination
24.2.3 Principle and Transmission Mechanism of International Economic Policy Coordination
24.2.4 Difficulty in International Macroeconomic Policy Coordination: Welfare Effect and Its Asymmetry
24.3 Evolution of the International Macroeconomic Policy Coordination Practice and Relevant Comments
24.3.1 International Economic Policy Coordination Before the Bretton Woods System
24.3.2 The Era of the Bretton Woods System
24.3.3 After the Collapse of the Bretton Woods System: 1970s and 1980s
24.3.4 Contemporary International Economic Policy Coordination: Since the 1990s
References
25 Spillover Effect in International Macroeconomic Policy Coordination
25.1 Literature Review on the GVC and Value-Added Trade
25.2 Global Value Chain and Spillover Effect of International Macroeconomic Policies: The Expansion of the Mundell-Fleming Model
25.2.1 Scenario Analysis
25.2.2 Fixed Exchange Rate System
25.2.3 Floating Exchange Rate System
25.3 Analysis of Spillover Effect of Macroeconomic Policies Based on the Global Value Chain
25.3.1 Methods of Calculating Added Value
25.3.2 Stylized Facts in General Trade and Their Influence on the Spillover Effect of Macroeconomic Policies
25.3.3 Stylized Facts in Bilateral Trade and Their Influence on the Spillover Effect of Macroeconomic Policies
References
26 Three Key Topics for the G20 Macroeconomic Policy Coordination: Integration, Imbalance and Spillover
26.1 Global Rebalancing Analysis Based on the Global Value Chain
26.1.1 Overview of Global Rebalancing
26.1.2 The Scale of Imbalances in Major Countries Based on the Global Value Chain
26.1.3 Summary and Prospects
26.2 The Spillover Effects of QE in Developed Economies: An Analysis Based on the GVAR Model
26.2.1 Characteristics of the Implementation of QE in Developed Economies
26.2.2 Theoretical Mechanism and Effectiveness Evaluation of QE
26.2.3 Analysis of QE Spillover Effects
26.2.4 Analysis of the Spillover Effects of QE with the GVAR Model
26.3 International Coordination of Taxation on Multinational Corporations
26.3.1 Necessity of International Coordination of Taxation on Multinational Corporations
26.3.2 International Coordination of Tax Information Exchange
26.3.3 International Coordination of Responses to Base Erosion and Profit Shifting
26.3.4 Prospects of International Taxation Coordination and China’s Countermeasures
References
27 Countermeasures for China's Better Participation in International Economic Policy Coordination
27.1 Status Quo and Challenges of China’s Participation in International Economic Policy Coordination
27.1.1 Target Coordination in International Economic Policy Coordination
27.1.2 Behavior Equation of Policy Coordination: Inconsistency Between Model Setting and Time
27.1.3 Costs and Gains of Policy Coordination
27.1.4 Challenges Faced by China's Participation in International Economic Policy Coordination
27.2 SWOT Analysis of China’s Participation in International Economic Policy Coordination
27.2.1 International Environment of China’s Participation in International Economic Policy Coordination
27.2.2 SWOT Analysis of International Economic Policy Coordination
27.3 Countermeasures and Conclusion of China’s Participation in International Economic Policy Coordination
Reference

Citation preview

Yuyan Zhang

The Change of Global Economic Governance and China

The Change of Global Economic Governance and China

Yuyan Zhang

The Change of Global Economic Governance and China

Yuyan Zhang The Institute of World Economics and Politics Chinese Academy of Social Sciences Beijing, China Translated by Fangfei Jiang Chinese Academy of Social Sciences Beijing, China

Xi Chen Beijing Academy of Science and Technology Beijing, China

ISBN 978-981-19-0698-5 ISBN 978-981-19-0699-2 (eBook) https://doi.org/10.1007/978-981-19-0699-2 Jointly published with China Social Sciences Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: China Social Sciences Press. Translation from the Chinese language edition: “Study on the Change of the Global Economic Governance Structure and China’s Response Strategy” by Yuyan Zhang, © China Social Sciences Press 2017. Published by China Social Sciences Press. All Rights Reserved. © China Social Sciences Press 2022 This work is subject to copyright. All rights are reserved by the Publishers, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Contents

1

Introduction Global Governance: History, Logic and the Role of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Historical Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Global Governance and Its Logic . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Promoting the Reform of Global Governance System is the Trend of the Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Focusing on Global Economic Governance . . . . . . . . . . . . . . . . . . . 1.6 China’s Outlook on Global Governance and the Path Towards Global Economic Governance . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part I 2

1 1 2 6 10 15 18 23

Changes in Global Economic Governance Structure and Countermeasures

Connotation of Global Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Definition of Global Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 What is Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 Global Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Main Contents of Global Governance . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Actors of Global Governance . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 Forms of Global Governance . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Objects of Global Governance . . . . . . . . . . . . . . . . . . . . . . 2.3 Reasons for Global Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Emergence of Global Governance . . . . . . . . . . . . . . . . . . . 2.3.2 Reform and Improvement of Global Governance . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27 27 27 28 29 29 30 33 34 34 36 37

v

vi

3

4

Contents

Definition of Global Economic Governance . . . . . . . . . . . . . . . . . . . . . . 3.1 Actors of Global Economic Governance . . . . . . . . . . . . . . . . . . . . . 3.1.1 Formal Inter-governmental Organizations . . . . . . . . . . . . 3.1.2 Informal Inter-governmental Organizations . . . . . . . . . . . 3.1.3 International Non-governmental Organizations . . . . . . . . 3.1.4 Roles of Nation States in Global Economic Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Operating Mechanisms of Global Economic Governance . . . . . . . 3.2.1 Membership Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Decision-Making Mechanism . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Dispute Settlement Mechanism . . . . . . . . . . . . . . . . . . . . . 3.2.4 Supervision Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Main Areas of Global Economic Governance . . . . . . . . . . . . . . . . . 3.3.1 International Finance Governance . . . . . . . . . . . . . . . . . . . 3.3.2 International Trade and Investment Governance . . . . . . . 3.3.3 Climate Change and Environmental Governance . . . . . . 3.3.4 International Macroeconomic Policy Coordination . . . . . 3.3.5 Global Development Issues . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Historical Evolution of the Global Economic Governance Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Connotation of the Global Economic Governance Structure . . . . 4.2 Evolution of the Global Economic Governance Structure . . . . . . . 4.2.1 1870–1914: Era of Laissez-Faire Gold Standard . . . . . . . 4.2.2 1914–1939: Beggar-Thy-Neighbor Post-War Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.3 1945–1975: Bretton Woods System and Embedded Liberalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.4 1975–2008: Post-Bretton Woods System and Rising of Neo-Liberalism . . . . . . . . . . . . . . . . . . . . . . 4.2.5 2008-Now: Diversified Transformation of Global Economic Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Evolution Modes of the Global Economic Governance Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Hegemony-Led “Hard Governance” . . . . . . . . . . . . . . . . . 4.3.2 North Negotiation-Soft Governance . . . . . . . . . . . . . . . . . 4.3.3 North–South Cooperation-Soft Governance . . . . . . . . . . . 4.4 The G20 and the Global Economic Governance Reform . . . . . . . 4.4.1 Evolution of Issues Discussed by the G20 . . . . . . . . . . . . 4.4.2 Overview of Progress in Major Issues . . . . . . . . . . . . . . . . 4.4.3 Differences in Major Countries’ Demands for Global Economic Governance . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39 39 39 47 53 54 56 56 56 58 60 62 62 63 64 64 65 65 67 67 68 68 69 69 70 71 71 72 72 73 73 74 74 78 81

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6

Impetus for Evolution of the Global Economic Governance Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Three Contradictions in Global Economic Governance . . . . . . . . . 5.1.1 Contradiction Between the Free-Rider Tendency of International Public Goods and Collective Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 Contradiction Between Restrictions of International Rules and National Autonomy . . . . . . . . 5.1.3 Contradiction Between the Non-Neutrality of International Institutions and the Democratization of Global Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Power Restructuring and Evolution of the Global Economic Governance Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Hegemonic Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Club Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 Inclusive and Improved Governance . . . . . . . . . . . . . . . . . 5.3 Changes in Philosophy and Evolution of the Global Economic Governance Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Laissez-Faire Economic Philosophies . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Embedded Liberalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Neoliberalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 Post-Crisis Conceptual Reconstruction . . . . . . . . . . . . . . . 5.5 Domestic Political Transformation and Evolution of the Global Economic Governance Structure . . . . . . . . . . . . . . . . 5.5.1 Domestic Re-Distribution and Domestic Foundation of Global Economic Governance . . . . . . . . . 5.5.2 Practices of Embedding Global Economic Governance into Domestic Governance . . . . . . . . . . . . . . 5.5.3 Income Gap Expansion and Global Economic Governance Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

vii

83 83

83 84

85 86 86 88 88 89 89 90 90 91 92 92 92 94 95

Reform Orientation of Global Economic Governance . . . . . . . . . . . . . 97 6.1 Promoting Democratization in Global Economic Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 6.1.1 Advancing the Diversification of Global Governance Actors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 6.1.2 Enhancing the Legitimacy of Global Economic Governance Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 6.2 Enhancing Interests Inclusiveness of Global Economic Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 6.2.1 Advancing Fair and Equitable Interest Distribution Among Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

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6.2.2

Advancing the Compensation of Domestic Interests Through the Coordination of Internal and External Governance . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Countermeasures for Solving Global Issues . . . . . . . . . . . . . . . . . . 6.3.1 Improving the Effectiveness of the Governance Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Innovating Ideas to Usher in New Governance Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part II 7

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103 104 104 108 111

International Financial Governance and Countermeasures

Overview of the Evolution and Reform of International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Concept and Framework of International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Necessity to Reform the International Financial System . . . . . . . . 7.2.1 Multi-polar Pattern and Unipolar Currency . . . . . . . . . . . 7.2.2 Consequences of the Lagging Reform of the International Financial System . . . . . . . . . . . . . . . . 7.3 Key Points in the Reform of International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Diversified Reserve Currency System . . . . . . . . . . . . . . . . 7.3.2 Governance Reform of International Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Institutional Guarantee and Cooperation Mechanism Building of International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Factors Influencing the Evolution of International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Changes in International Economic Strength and Governance Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.1 Changes in the Relative Importance of Developed Economies and Emerging Economies in the Global Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.2 Different Groups of Countries Under International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Financial Crisis and Global Liquidity Management . . . . . . . . . . . . 8.2.1 Measurement of Global Liquidity . . . . . . . . . . . . . . . . . . . 8.2.2 Global Liquidity Changes and Financial Market Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115 115 119 119 120 123 123 126

129 132 133 135 135

136 137 139 140 141

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8.2.3

Relations Between Global Liquidity and Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 Factors Influencing the Evolution of International Financial Regulatory System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 Evolution of Micro-Prudential Supervision . . . . . . . . . . . 8.3.2 Evolution of Macro-Prudential Supervision . . . . . . . . . . . 8.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Defects and Challenges of Current International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Defects and Challenges in Current International Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1.1 The International Reserve Currencies: Unfair and Unstable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1.2 Exchange Rate System: Diverse Choices and Difficult Coordination . . . . . . . . . . . . . . . . . . . . . . . . . 9.1.3 International Balance of Payments: Long-Term Imbalance, Difficult to Sustain . . . . . . . . . . . . . . . . . . . . . . 9.2 Defects and Challenges in International Financial Regulatory System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.1 Problems in Macro-prudential Supervision . . . . . . . . . . . 9.2.2 Problems in Micro-prudential Supervision . . . . . . . . . . . . 9.2.3 Problems Caused by Insufficient Coordination of International Financial Supervision . . . . . . . . . . . . . . . 9.3 Defects and Challenges in International Capital Flow Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.1 Evolution and Status Quo of International Capital Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.2 Challenges of International Capital Flows . . . . . . . . . . . . 9.4 Defects in International Financial Governance Mechanism . . . . . 9.4.1 Defects in the IMF’s Governance Structure . . . . . . . . . . . 9.4.2 IMF’s Functional Deficiencies . . . . . . . . . . . . . . . . . . . . . . 9.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 Reform Direction of International Financial Governance . . . . . . . . . . 10.1 Reform Direction of International Monetary System . . . . . . . . . . . 10.1.1 Super-Sovereign Currency Plan . . . . . . . . . . . . . . . . . . . . . 10.1.2 Diversified International Monetary System . . . . . . . . . . . 10.2 Reform Direction of International Financial Regulatory System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.1 Reform Direction of International Financial Regulatory System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.2 Reform Direction of International Capital Flow Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

142 143 144 146 148 148 151 151 152 155 156 157 157 158 159 160 160 162 164 164 165 167 168 169 169 170 170 171 172 174

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10.3 Reform Direction of International Financial Governance Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.1 Reform of the IMF’s Governance Structure . . . . . . . . . . . 10.3.2 Strengthening its Own Resources . . . . . . . . . . . . . . . . . . . 10.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Countermeasures for China’s Better Participation in International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Positioning and Goal of China’s Participation in International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . 11.1.1 The Goal of China’s Participation in International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1.2 China’s Participation in International Financial Governance Should Be Based on Domestic . . . . . . . . . . . 11.1.3 China Should Stick to the Positioning as a Major Developing Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1.4 China Should Gradually Improve International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 SWOT Analysis for China’s Participation in International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.1 Strength (S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.2 Weakness (W) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.3 Opportunity (O) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.4 Threat (T) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.5 SWOT Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 Strategic Choice for China’s Better Participation in International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . 11.3.1 At the Domestic Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3.2 At the International Level . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 Policy Suggestions for China’s Better Participation in International Financial Governance . . . . . . . . . . . . . . . . . . . . . . . 11.4.1 Reform of the International Financial Institutions . . . . . . 11.4.2 Management of International Capital Flow . . . . . . . . . . . 11.4.3 Promoting Coordination and Cooperation of the Global Financial Safety Net . . . . . . . . . . . . . . . . . . . 11.4.4 Strengthening the Monitoring and Management of Global Sovereign Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

176 177 177 179 180 181 181 181 182 183 184 185 185 186 188 189 190 190 191 192 194 194 195 196 197 198 199

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Part III Progress and Countermeasures of International Trade and Investment Governance 12 The Development of International Trade and Investment . . . . . . . . . . 12.1 The Development of International Trade . . . . . . . . . . . . . . . . . . . . . 12.1.1 The Development of International Trade After World War II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 The Development of Foreign Direct Investment . . . . . . . . . . . . . . . 12.2.1 International Direct Investment Before World War I . . . . 12.2.2 International Direct Investment Between the Two World Wars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2.3 International Direct Investment After World War II . . . . 13 Major Platforms and Institutions for International Trade Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 GATT and Trade Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1.1 The Development of GATT . . . . . . . . . . . . . . . . . . . . . . . . 13.1.2 GATT’s Basic Principles on Trade Governance . . . . . . . . 13.2 WTO and Trade Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2.1 The Creation of the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2.2 The Main Contents of the WTO Agreement . . . . . . . . . . 13.2.3 The Basic Principles of WTO Trade Governance . . . . . . 13.2.4 Problems of Global Trade Governance Mechanism by the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 Regional Integration and Trade Governance . . . . . . . . . . . . . . . . . . 13.3.1 The Number of Regional Trade Agreements Continues to Grow Rapidly . . . . . . . . . . . . . . . . . . . . . . . . 13.3.2 Economic Integration Will Reveal More New Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 G20 and Trade Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4.1 The Main Operating Mechanism of the G20 . . . . . . . . . . 13.4.2 Major Summits Involving Trade Topics . . . . . . . . . . . . . . 13.4.3 G20 Hangzhou Summit . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Fields for International Trade Governance . . . . . . . . . . . . . . . . . . . . . . 14.1 Trade Rules in the Signed Agreements . . . . . . . . . . . . . . . . . . . . . . 14.1.1 Changes in the Way of Rule-Making . . . . . . . . . . . . . . . . . 14.1.2 Changes in the Content of the Rules . . . . . . . . . . . . . . . . . 14.2 Development of Trade Rules on Services . . . . . . . . . . . . . . . . . . . . 14.2.1 Cross-Border Trade in Services . . . . . . . . . . . . . . . . . . . . . 14.2.2 Trade in Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . 14.2.3 Rules for the Movement of Natural Persons . . . . . . . . . . . 14.2.4 Progress of Regulation on Telecommunications Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

205 205 208 211 211 212 213 219 219 219 220 223 223 224 225 226 228 228 229 230 231 232 233 234 237 237 238 238 240 240 244 245 247

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15 International Investment Governance Entity . . . . . . . . . . . . . . . . . . . . . 15.1 National Government and International Investment Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 Non-state Actors and International Investment Governance . . . . . 15.2.1 Intergovernmental International Organization . . . . . . . . . 15.2.2 Non-governmental Organizations . . . . . . . . . . . . . . . . . . . 15.2.3 Multinational Companies . . . . . . . . . . . . . . . . . . . . . . . . . . 15.3 Emerging Governance Entity for Investment: The G20 . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 International Investment Governance Field . . . . . . . . . . . . . . . . . . . . . . 16.1 The Main Content of International Investment Governance . . . . . 16.1.1 Promoting International Investment to Enhance Economic Growth Momentum . . . . . . . . . . . . . . . . . . . . . . 16.1.2 Advancing the Reform of the International Investment System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1.3 Reforming the Dispute Settlement Mechanism for International Investment . . . . . . . . . . . . . . . . . . . . . . . . 16.2 International Investment Governance Rules . . . . . . . . . . . . . . . . . . 16.2.1 Bilateral Investment Treaty . . . . . . . . . . . . . . . . . . . . . . . . . 16.2.2 Regional Investment Treaty . . . . . . . . . . . . . . . . . . . . . . . . 16.2.3 Global Multilateral Investment Rules . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Countermeasures for China’s Better Participation in Global Trade Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1 Rational and Effective Global Trade Governance Mechanism from China’s Perspective . . . . . . . . . . . . . . . . . . . . . . . 17.1.1 China’s Demands for Global Trade Governance Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1.2 How to Realize an Effective and Rational Global Trade Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.2 China’s Participation in Global Trade Governance . . . . . . . . . . . . . 17.2.1 Strategic Thinking on China’s Participation in Global Trade Governance Mechanism . . . . . . . . . . . . . 17.2.2 Specific Countermeasures for China’s Participation in Global Trade Governance Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

249 249 250 251 253 254 254 255 257 257 257 258 259 261 262 263 266 272 273 273 273 274 276 276

278 281

18 Countermeasures for China’s Better Participation in International Investment Governance . . . . . . . . . . . . . . . . . . . . . . . . . 283 18.1 Main Views on Future Direction of International Investment Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 18.2 Prospect for Negotiations on Global Multilateral Investment Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285

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18.3 China Promotes the G20 Mechanism to Participate in Global Investment Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 18.4 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290 Part IV International Climate Change and Sustainable Development Governance 19 Theories and Paradigms of International Climate Governance . . . . 19.1 Scientific Assessment of Global Climate Change . . . . . . . . . . . . . . 19.2 Particularity of Global Climate Change Issues . . . . . . . . . . . . . . . . 19.3 Concepts and Goals of International Climate Governance . . . . . . 19.4 Value Norms of International Climate Governance . . . . . . . . . . . . 19.5 Core Elements of International Climate Governance . . . . . . . . . . . 19.6 Models of International Climate Governance . . . . . . . . . . . . . . . . . 19.7 Participants of International Climate Governance . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

295 295 296 298 300 301 302 303 305

20 Institutional Evolution of International Climate Governance . . . . . . 20.1 Evolution of International Climate Regime Under the United Nations Framework Convention on Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.1.1 The United Nations Framework Convention on Climate Change and the First Commitment Period of the Kyoto Protocol . . . . . . . . . . . . . . . . . . . . . . . 20.1.2 Bali Roadmap and Negotiations for the Second Commitment Period of the Kyoto Protocol . . . . . . . . . . . 20.1.3 Durban Platform and Post-2020 International Climate Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.1.4 The Paris Agreement and New Arrangements for International Climate Governance . . . . . . . . . . . . . . . . 20.2 Climate Goals Under the United Nations Sustainable Development Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.2.1 Germination and Development on Ideas of Environmental Crisis and Global Sustainable Development Governance . . . . . . . . . . . . . . . . . . . . . . . . . . 20.2.2 Climate Change and a New Round of Reforms in the Worldwide Sustainable Development Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.2.3 Impact of the Sustainable Development Agenda on International Climate Governance . . . . . . . . . . . . . . . . 20.2.4 Policy Selection of Climate Governance Under the Framework of Global Sustainable Development . . . . 20.3 Climate Change Issues Under the Multilateral Trade Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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20.3.1 Global Trade Distribution and Trade Carbon Emission Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3.2 Climate Trade Measures Under the WTO Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.4 The G20 and International Climate Governance . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Implementation Mechanism of International Climate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1 Emission Reduction Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1.1 Emission Trading Scheme (ETS) . . . . . . . . . . . . . . . . . . . . 21.1.2 Clean Development Mechanism (CDM) . . . . . . . . . . . . . . 21.1.3 Carbon Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 Technical Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2.1 Technological Changes and Pollution Control . . . . . . . . . 21.2.2 Connotation of Low Carbon Technology and Key Fields of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2.3 Low Carbon Technology Transfer Mechanism Under the Convention Framework . . . . . . . . . . . . . . . . . . . 21.2.4 Financial Gaps and Obstacles to International Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.3 Financial Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.3.1 Progress on Climate Finance Issues at Previous Conferences of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . 21.3.2 Fund Mechanism Under the United Nations Framework Convention on Climate Change . . . . . . . . . . . 21.3.3 Financing Innovation Outside of the United Nations Framework Convention on Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Evaluation on the Effect of International Climate Governance . . . . . 22.1 Evaluation of the Effectiveness of International Climate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.1.1 Construction of an Armington Trade Climate Model with Multiple Countries and Multiple Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.1.2 Data Source and Parameter Calibration . . . . . . . . . . . . . . 22.1.3 Analysis of Simulation Results . . . . . . . . . . . . . . . . . . . . . 22.2 Equity Assessment of International Climate Governance . . . . . . . 22.3 Evaluation of “Intended Nationally Determined Contributions” Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.4 The Future Development Trend of International Climate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

330 332 336 338 339 339 339 342 343 348 348 349 351 354 355 356 357

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23 Countermeasures for China’s Better Participation in International Climate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.1 Objectively Understanding China’s Position in Global Climate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.2 Promoting China’s Low-Carbon Transformation with Focuses and by Stages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.3 Constructively Maintaining the Current International Climate Governance System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.4 Further Deepening Pragmatic Cooperation on International Climate Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part V

381 381 384 388 390 393

International Macroeconomic Policy Coordination and Countermeasures

24 Historical Evolution of International Macroeconomic Policy Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.1 Evolution of the World’s Economic Pattern and Order . . . . . . . . . 24.1.1 General Logic of International Economic Policy Coordination: Linkage, Spillover, Coordination and Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.1.2 Consolidated International Economic Relations and Policy Spillover Effect . . . . . . . . . . . . . . . . . . . . . . . . . 24.1.3 Trade and Regional Economy Integration: Comparisons Between Eurozone and East Asia . . . . . . . 24.1.4 International Economic Pattern Evolution and International Economic Order . . . . . . . . . . . . . . . . . . . 24.2 Evolution of the International Macroeconomic Policy Coordination Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.2.1 Principles of International Economic Policy Coordination: Necessity and Feasibility . . . . . . . . . . . . . . 24.2.2 Prerequisite for International Macroeconomic Policy Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.2.3 Principle and Transmission Mechanism of International Economic Policy Coordination . . . . . . . . 24.2.4 Difficulty in International Macroeconomic Policy Coordination: Welfare Effect and Its Asymmetry . . . . . . 24.3 Evolution of the International Macroeconomic Policy Coordination Practice and Relevant Comments . . . . . . . . . . . . . . . 24.3.1 International Economic Policy Coordination Before the Bretton Woods System . . . . . . . . . . . . . . . . . . . 24.3.2 The Era of the Bretton Woods System . . . . . . . . . . . . . . . 24.3.3 After the Collapse of the Bretton Woods System: 1970s and 1980s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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400 400 401 401 402 402 403 403 404 405 405 406 408

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24.3.4 Contemporary International Economic Policy Coordination: Since the 1990s . . . . . . . . . . . . . . . . . . . . . . 410 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 25 Spillover Effect in International Macroeconomic Policy Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.1 Literature Review on the GVC and Value-Added Trade . . . . . . . . 25.2 Global Value Chain and Spillover Effect of International Macroeconomic Policies: The Expansion of the Mundell-Fleming Model . . . . . . . . . . . . . . . . . . . 25.2.1 Scenario Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.2.2 Fixed Exchange Rate System . . . . . . . . . . . . . . . . . . . . . . . 25.2.3 Floating Exchange Rate System . . . . . . . . . . . . . . . . . . . . . 25.3 Analysis of Spillover Effect of Macroeconomic Policies Based on the Global Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.3.1 Methods of Calculating Added Value . . . . . . . . . . . . . . . . 25.3.2 Stylized Facts in General Trade and Their Influence on the Spillover Effect of Macroeconomic Policies . . . . 25.3.3 Stylized Facts in Bilateral Trade and Their Influence on the Spillover Effect of Macroeconomic Policies . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Three Key Topics for the G20 Macroeconomic Policy Coordination: Integration, Imbalance and Spillover . . . . . . . . . . . . . . 26.1 Global Rebalancing Analysis Based on the Global Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.1.1 Overview of Global Rebalancing . . . . . . . . . . . . . . . . . . . . 26.1.2 The Scale of Imbalances in Major Countries Based on the Global Value Chain . . . . . . . . . . . . . . . . . . . 26.1.3 Summary and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.2 The Spillover Effects of QE in Developed Economies: An Analysis Based on the GVAR Model . . . . . . . . . . . . . . . . . . . . . 26.2.1 Characteristics of the Implementation of QE in Developed Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.2.2 Theoretical Mechanism and Effectiveness Evaluation of QE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.2.3 Analysis of QE Spillover Effects . . . . . . . . . . . . . . . . . . . . 26.2.4 Analysis of the Spillover Effects of QE with the GVAR Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.3 International Coordination of Taxation on Multinational Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.3.1 Necessity of International Coordination of Taxation on Multinational Corporations . . . . . . . . . . . . 26.3.2 International Coordination of Tax Information Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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26.3.3 International Coordination of Responses to Base Erosion and Profit Shifting . . . . . . . . . . . . . . . . . . . . . . . . . 457 26.3.4 Prospects of International Taxation Coordination and China’s Countermeasures . . . . . . . . . . . . . . . . . . . . . . 459 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 27 Countermeasures for China’s Better Participation in International Economic Policy Coordination . . . . . . . . . . . . . . . . . . 27.1 Status Quo and Challenges of China’s Participation in International Economic Policy Coordination . . . . . . . . . . . . . . . 27.1.1 Target Coordination in International Economic Policy Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.1.2 Behavior Equation of Policy Coordination: Inconsistency Between Model Setting and Time . . . . . . . 27.1.3 Costs and Gains of Policy Coordination . . . . . . . . . . . . . . 27.1.4 Challenges Faced by China’s Participation in International Economic Policy Coordination . . . . . . . . 27.2 SWOT Analysis of China’s Participation in International Economic Policy Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.2.1 International Environment of China’s Participation in International Economic Policy Coordination . . . . . . . . 27.2.2 SWOT Analysis of International Economic Policy Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.3 Countermeasures and Conclusion of China’s Participation in International Economic Policy Coordination . . . . . . . . . . . . . . . Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

461 461 462 462 463 464 464 465 465 467 469

Chapter 1

Introduction Global Governance: History, Logic and the Role of China

1.1 Introduction Global governance is a term that has appeared frequently in the field of International Studies over recent years. The reason for the rise of global governance lies first and foremost in the increasing prominence of global issues, along with the deepening of economic globalization. Another important reason why global governance, as both the means and process of solving global issues, is attracting greater worldwide attention is that only through joint efforts of all countries could global issues of all kinds be solved or alleviated. The global nature of the issues per se and the global nature of the corresponding solutions have pushed International Studies into a new era, especially as the major players of the global game are striving to maximize their own interests by dealing with global issues. Similar to the development of many scientific disciplines, before the emergence of a mature or widely recognized new research paradigm, the best way to study global governance is to analyze relevant major areas or topics with existing analytical frameworks and conceptual systems while describing its historical origin and evolution, such as global monetary and financial governance, international trade and investment governance, global environmental and climate change governance, and international macroeconomic policy coordination. Meanwhile, it is worth noticing that the demand for theorizing or formalizing global governance research, as well as the need to define the research scope, has emerged, along with the inclusion of a rising number of complicated issues in global governance. One approach towards the theorization of global governance research is to view global governance as an issue of various players in the global game providing international public goods or club goods through collective actions, and to establish a research framework on this basis to deal with a wide range of global topics or international issues. In addition, a large number of cases in which game players, especially national actors, participate in global governance also serve as a “gold mine” for refining analytical concepts, generating meaningful propositions, and testing existing theories or propositions, which deserve to be explored with great efforts. Of course, a comprehensive and in-depth description and analysis of a specific topic or area of global governance, © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_1

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based on which insights are put forward, can also make outstanding contributions to the global governance research theories. As the world’s second largest economy still in a period of strategic opportunities and high-quality development, China’s participation in the reform and improvement of the global governance system and its philosophy, objectives, capacity, approaches and focus will have an important impact on the direction, path and rate of the evolution of global governance in the future.

1.2 Historical Review Generally speaking, human beings are currently living in an era of globalization, especially economic globalization. The term “globalization” here mainly refers to the historical process of growing interconnectedness or interdependence among countries and regions in the world, which is mainly manifested by the continuous refinement of the division of labor among countries or economies, the continuous removal of various institutional and technological barriers that constrain the cross-border flow of factors, and the growing consensus that people need to work together to address the increasingly pressing global issues. It is commonly believed that globalization originated in the late fifteenth century with the “Age of Discovery” and expanded rapidly with the colonialism of European powers, reaching its first climax in the second half of the nineteenth century. About one and a half century ago, it was already pointed out by Marx and Engels in The Communist Manifesto (2012) that “the need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere.” Back then, classic writers not only noticed the phenomena of what is called globalization today, but also revealed the nature of the phenomena, that is, the economic globalization of that time was nothing but a brutal and flagrant expansion and plundering of the capitalist mode of production. Competition under the law of the jungle can often lead to losses on both sides, thus failing to achieve the maximization of self-interests. Therefore, rules on trade and capital flow to constrain vicious competition emerge, such as some bilateral or multilateral agreements between imperialist countries. In a sense, these international agreements or treaties can be regarded as the prototypes of global governance. The outbreak of the First World War interrupted the process of globalization promoted by the imperialist powers and seriously undermined the initial signs of global governance, which was loose and rarely-participated back then, with limited areas involved. During the two world wars, most of the world’s major industrial countries followed beggar-thy-neighbor trade policies. The largest war in human history had sent a clear signal to the world that peace was a vital global public good, however, the fragmented world after the war greatly inhibited the need for global governance, and the major powers of Europe, Asia and North America, in the runup to the next war, had no time to focus on global governance. The outbreak of the Second World War and the human catastrophe in its wake finally made people realize the vital importance of peace as well as the urgency of rebuilding their homes quickly

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and returning to normal life. Against this backdrop, the first International Monetary and Financial Conference in human history was held in July 1944 in Bretton Woods, New Hampshire of the U.S., participated by representatives of major countries in the world except the Axis powers or the defeated countries. The conference not only established the international monetary system centered on the U.S. dollar, namely the Bretton Woods System, but also laid a sound basis for the UN-centered world peace mechanism, which was built soon afterwards. Following the end of the World War II, the Cold War divided the world into the “Western Bloc” led by the United States and the “Eastern Bloc” led by the Soviet Union. The global governance system, which had just started its journey in history, was then replaced by two parallel and confrontational governance systems, with the NATO versus the Warsaw Pact, the European Communities versus the Council for Mutual Economic Assistance, the U.S. dollar zone versus the Russian ruble zone, and so on. Global governance during the Cold War was a kind of “segmented global governance,” with the existence of two parallel and confrontational governance systems. Yet, during this historical period, the level, scale and scope of global governance has been enhanced unprecedentedly. The status of the United Nations as the main platform for global governance has been confirmed and the functions of the Bretton Woods system has been strengthened. Also, the two systems enjoyed expanded membership and representation, along with a growing number of issues they dealt with. Among them, China’s return to the United Nations in 1971 is worth mentioning in particular, replacing the so-called “Republic of China” as one of the five veto-wielding permanent members of the UN Security Council. In 1988, the Basel Committee composed of the central banks of 10 major industrialized countries published the Basel Accord (known as Basel I), which was an important step in transnational banking supervision or global governance in the area of international banking and finance. In view of this, the international landscape during the Cold War period can be broadly viewed as the establishment stage of the global governance system: the overall structure of global governance was established, although its function was often constrained by the confrontation between the Western Bloc and the Eastern Bloc. The end of the Cold War marked the beginning of a brand-new era. The clear division and confrontation between the East and the West disappeared along with the fall of the Berlin Wall in 1989. And the Western world led by the U.S. became the dominant force in world politics and economy in an instant. In a sense, people had the opportunity to build a world with a more integrated economy and a more secure peace for the first time. After the worries about the next world war faded away, people became keen on talking about how to harvest and make good use of the peace dividend brought by the end of the Cold War. One of the hot topics was how to further expand the market and subsequently enjoy the “gains from trade” by breaking down the barriers to trade and investment. The transformation of the General Agreement on Tariffs and Trade (GATT) into the World Trade Organization (WTO) in 1995 and China’s entry into the WTO in 2001 can be seen as typical examples of the accelerating pace of globalization and the strengthening of global governance. Apart from the obvious economic benefits, the developed Western countries led by the U.S.

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had another less overt yet much bigger ambition, namely to include and integrate the countries that joined the international system under its leadership after the Cold War, such as China, Russia as well as some Eastern European and Central Asian countries, into a new set of international rules that was more favorable to the West. In this process, global governance started to demonstrate its “instrumentality.” It is not so much that the financial crisis in 2008 started a new phase of global governance, but rather that it continued or strengthened the process and functioning of global governance. The Basel II formed in 2004 and the Basel III introduced in 2010 have clear differences in banking supervision and policy orientations, however, as the latter pays more attention to regulatory flexibility and market competition, there is no difference between the two in terms of institutional design to address global financial risks. Due to the financial crisis, the G20 Meeting of Finance Ministers and Central Bank Governors developed into the G20 Summit of the Heads of State and Government, which can be viewed as an important sign of the further enhancement and strengthening of global governance. In addition to the financial crisis, other factors that helped draw the world’s attention towards global governance in their respective fields and to varying degrees include: the continuous changes in the balance of power among major powers after the Cold War, the increasing severity of global issues such as climate change and terrorism, the negative consequences of the accelerated globalization since the fall of the Berlin Wall (such as the widening income gap between different countries or between different social groups within a country), and a wide range of global challenges (such as the threat of cyber security and the widespread awakening of people’s awareness of rights) resulted from the scientific and technological progress over the past three decades, especially the advancement and wide spread of Internet technology. The criticisms and concerns caused by the U.S. withdrawal from its global obligations during the Trump administration, from another perspective, also reflected the great attention that global governance receives. In a stricter sense, China’s participation in global governance began in 1971 with its return to the United Nations. From the founding of the People’s Republic of China to the early 1970s, China’s diplomacy was overall subject to the tension of the Cold War, where “either the East wind prevails over the West wind or the West wind prevails over the East wind,” and China was very doubtful about and even against the two parallel international systems dominated respectively by the U.S. and the Soviet Union. It was not until 1971 when the lawful seat of the People’s Republic of China in the United Nations was restored that China formally entered the global arena. From the early 1970s to the late 1980s, with the restoration of the lawful seat in the UN as well as the overall easing of the confrontation between the East and the West, China begun to take part in the operation of international mechanisms to a limited extent. During this period, since China had just returned to the international community, the main focus of China’s foreign practice was to learn about and adapt to international systems and rules. Despite its participation in the meetings, negotiations and discussions of various international mechanisms, generally speaking, China did not truly integrate itself into the international systems, with neither a strong voice nor a strong sense of participation in the discussions of the meetings, especially in the establishment and adjustment of the rules of governance

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mechanisms. In the 1990s, with the continuous deepening of China’s reform and opening up as well as the acceleration of economic globalization, China started to take part in a much wider range of international affairs to a greater extend. The active role of China during the Asian financial crisis from 1997 to 1999 not only helped the Asian countries in coping with the dilemma and getting out of the crisis, but also demonstrated China’s confidence and sense of responsibility in participating in regional and global governance as a major regional power. Since the year 2000, with steady advancement in economic development and the overall national strength, China has been taking a more active part in global governance. The entry of China into the WTO in 2001 can be regarded as a milestone in the integration of China’s economy into the world economy that goes down in history. The global financial crisis triggered by the U.S. subprime mortgage crisis in 2008 brought the G20 mechanism to the forefront of global governance. Given that the G20 had already become one of the most important platforms for global governance, China, which had become the world’s third largest economy, naturally became one of its indispensable and active members. In 2013, President Xi Jinping of China proposed the Belt and Road Initiative, thus providing a new driving force and a new approach for promoting and optimizing global governance. In 2014, China initiated to set up the Asian Infrastructure Investment Bank (AIIB). As the first international multilateral financial institution initiated and successfully established by China, the AIIB can be regarded, in a certain sense, as another milestone in China’s participation in economic globalization and global economic governance after its entry into the WTO. In a nutshell, the introduction of the Belt and Road initiative and the establishment of the AIIB, as well as China’s signing of the Paris Agreement on climate change in April 2016, have lifted the relationship between China and the rest of the world to a new level. The G20 Hangzhou Summit in 2016 witnessed China’s successful delivery to the world of its vision for addressing global issues and its demand for a stronger voice and greater rule-making power for developing countries and emerging economies. During the World Economic Forum held in Davos in January 2017, President Xi Jinping made further insightful elaborations on the problems of global economic governance: “The global economic landscape has changed profoundly over the past few decades. However, the global governance system has failed to embrace those new changes and is therefore inadequate in terms of representation and inclusiveness. Trade and investment rules have not kept pace with the new situation, resulting in acute problems such as closed mechanisms and fragmentation of rules. The global financial market needs to be more resilient against risks, but the global financial governance mechanism fails to meet the new requirement and is thus unable to effectively resolve problems such as frequent international financial market volatility and the build-up of asset bubbles. There is a growing call from the international community for reforming the global economic governance system, which is an increasingly pressing task for us. Only by adapting to the new requirements of the international economic landscape can the global governance system provide a strong guarantee for the global economy.” Later, in his speech at the UN Headquarter in Geneva, President Xi gave a systematic exposition of his blueprint for building a community of

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shared future for mankind from such perspectives as partnership, security landscape, economic development, culture exchange and ecological construction for the first time, which outlined the long-term vision for global governance.

1.3 Global Governance and Its Logic Sixty years ago, Thomas Schelling, professor of Harvard University, published a book titled The Strategy of Conflict (1980). One of his core ideas in this book is that the motivation of players to engage in a game and their choice of strategy are highly correlated with their common and conflicting interests in the game. In order to illustrate the coexistence of common and conflicting interests, Schelling discussed such an experiment in his book where two people who do not know each other share a hundred dollars, provided that the sum of the expected amount of money they write down must be less than or equal to one hundred dollars, otherwise neither gets a penny. The two players in the game can only get a certain amount of dollars by cooperating, or taking into account each other’s benefits, which indicates a common interest between the two sides. As for the specific distribution of dollars, the fact that the more one side gets, the less the other side gets shows that this is a zero-sum game, that is, there are conflicting interests between the two. This simple experiment reveals the fact that common and conflicting interests coexist, which is in fact a common situation for human beings: even for those pursuing maximization of self-interests, it is often a wiser choice to take into account the interests of their opponents. This has also been confirmed by the empirical result of Schelling’s experiment, as the vast majority of people wrote down an expected amount of $50. The coexistence of common and conflicting interests is true not only for individuals but also for sovereign states whose default goal is to maximize their respective interests. Global issues such as peaceful coexistence, climate change, ecological protection, cyber security, transnational crimes (e.g., terrorism and money laundering), a fair and open trade and investment system, the stability of the international monetary and financial system and so forth are all related to the present and future well-being of all mankind. However, the control and resolution of these global issues goes far beyond the capabilities of a single country or certain countries. Therefore, it is necessary to carry out broad international cooperation. The fact that each of the countries is a stakeholder shows that they share a common interest. At the same time, the realization of peace, the response to climate change, the establishment of an open trade system, the maintenance of a stable international monetary and financial system and so forth are not free lunches, but come with a cost. Once cost sharing is involved, conflicts between the various stakeholders will emerge, and then competition and even intense bargaining will inevitably take place. What makes the problem even more complicated is that the solution to the global issues above shares the typical feature of public goods provision. All countries and individuals can enjoy for free the benefits of such global public goods as peacekeeping and stemming climate change, considering their non-exclusive nature. Therefore, all

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countries are faced with an invisible incentive, which is trying to let other countries pay the cost of providing public goods while being free-riders themselves. As a result, there is a shortage of public goods, manifested as outbreak of wars or escalated threats of wars as well as unrestricted mass emissions of carbon dioxide and rampant terrorism, eventually damaging the well-being of all mankind. To illustrate this phenomenon, a series of concepts or theories have been created, such as “collective action dilemma,” “prisoner’s dilemma,” “market failure,” “tragedy of the commons,” or “fallacy of composition.” These increasingly acute problems that must be solved properly have a global nature. Thus, the resolution of these problems can only be realized through global collaboration. Within a given jurisdiction, one of the usual solutions to “common” problems is to establish a united and authoritative central government, which provides public goods for people of that jurisdiction on the basis of collecting resources through compulsory taxation. However, with the great number of sovereign countries in the world, this logic is difficult to follow, and it is not feasible to establish a world government under the current conditions. In order to solve global problems, people have to turn to other approaches. As an alternative to the nonexistent world government, global governance begins to enter the global arena. The global governance here refers to the sum of the self-enforcing institutions established by state actors or non-state actors to solve various global problems. These institutions are built on the consensus reached by stakeholders through negotiations. The consensus, in essence, is nothing but a balanced solution reached by various actors after weighing common and conflicting interests. There is a long list of global issues, some of which have been mentioned above. The degree to which a particular global issue is of interest to different state actors varies. A typical example is the UN Convention on the Law of the Sea, the importance of which is completely different for countries bordering the sea, like Japan, and for landlocked countries like Mongolia. The difficulty of eliminating or mitigating a particular global problem determines the cost of global governance. Meanwhile, the huge difference between various actors in terms of their scale or negotiating power also has a profound impact on the depth and breadth of their participation in global governance. Each actor has its unique power structure and decision-making mechanism, and the social cohesion and stability of each actor also varies a lot, based on which their distinctive patterns of international behavior are shaped. The interest and value of such actors as giant multinational companies with more money than God or religious groups with a huge number of followers also has an important impact on the international community. All these above can explain the following phenomenon: Global governance has a wide range of patterns and their effectiveness varies a lot. There are still blanks and deficiencies, or “governance deficits,” in global governance. And it is still very difficult to reach consensus and then form collective action. When it comes to collective action, you can’t help but mention Mancur Olson, the student and later the colleague of Thomas Schelling. Five years after The Strategy of Conflict was published, Olson published The logic of Collective Action (2012), his

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doctoral thesis guided by Schelling. In this book, Olson further deepened and developed some of Schelling’s ideas. His insightful propositions can be summarized as follows: Common interest is not the sufficient condition but the necessary condition of collective action. There are two sufficient conditions of collective action. One is that there are only a small number of players in the game. The other is the existence of the so-called “selective incentives.” The selective incentive here has two interrelated implications. First, the prospective yields are higher when players take part in collective action. Second, players who choose not to participate in collective action may face higher opportunity costs or even penalties. The small number of people participating in the game strengthens the selective incentives, as each player can enjoy a larger relative share of gains from collective action and it is easier to identify the contribution of each player to the output of collective action, which helps reduce free-rider problems. Furthermore, the cost of reaching consensus and eventually forming collective action is lower when there are a small number of players. The goal of global governance is to provide global public goods. In addition to insufficient supply of global public goods due to market failure in global governance, sufficient or excessive supply of certain global public goods can also be witnessed, such as biased international trade and investment rules. The mechanisms behind such a phenomenon are fully explained in Olson’s book. In the absence of incentives and a world government, based on the calculation of costs and benefits, a small number of conscious and capable players with a large interest in the game will form small-scale collective action and take an active part in providing particular “public goods” that can maximize their net benefits or minimize their losses. If those narrow-minded interest groups formed on the basis of specific selective incentives gain dominance, the resulting global governance in the form of international rules will be non-neutral or biased. The dominant powers of such kind of biased global governance will make use of non-neutral global public goods to boost their own benefits even at the expense of the interests of most stakeholders. In this context, global public goods in the form of international rules or order actually act as the tools for achieving the goals of certain interest groups. The question is, why would those state players whose interests are compromised accept an international institutional arrangement that is unfavorable to them? The straightforward answer is that joining forces to challenge unfavorable international institutional arrangements can also pose a collective action dilemma. Considering the fact that it is extremely difficult to form global collective action, especially considering that the world is essentially a market of monopolistic competition, the vast majority of collective actions involving global governance are “smallscale” collective actions. One of the typical examples is the G20. Another example is that regional governance institutions advocated by major regional powers keep emerging. This has resulted in the tension between incentives and justice, or, put another way, the weighing between effectiveness and representativeness, which is widely mentioned in the discussions of global governance. To handle this tension properly is a challenge to mankind. Whether we can cope with this challenge successfully depends on the wisdom, breadth of mind, commitment and boldness of all the players, especially that of major state players. In the face of such a challenge, China’s traditional way of thinking turns out to be very useful, as the highest level of game,

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from the Chinese perspective, is compromise, where everyone takes into account the feelings of other stakeholders in the rule-making process, rather than an either-or situation. Evaluation criteria play an essential role in the reflections on global governance. If the contributions made by each player to the provision of global public goods equal the benefits each player gains from it, then global governance can be seen as in a balance or an ideal state, because in such a context, all the players are able to maximize the benefits obtained from the provision of public goods, thus leading to a happy ending where everyone gets what they want. In the mechanism design theory of economics, balanced governance is roughly equivalent to incentive compatibility. In such an international system, problems hindering collective actions that promote common interests, such as free-rider behavior, moral risks and adverse selection, will no longer exist. Although it is very difficult to achieve balanced governance in reality, theoretically elaborating on the ideal state of global governance still provides us with a useful tool to evaluate the advantages and disadvantages of different forms of global governance and explore ways for further improvement. At least in principle, taking the deviated global governance back as close as possible to its ideal state should be the goal of all the players. In today’s world, profound changes have taken place in the balance of power between major powers. Some emerging economies are becoming increasingly indispensable for the resolution of global issues. They have a significantly greater interest in the current international system as well as an increasingly stronger awareness of maintaining and expanding their own interests through improving the global governance system. In this context, it is only natural that the demands for adjusting the current international order and gradually neutralizing the global institutional arrangements are emerging. However, countries that have already gained huge benefits from the current global governance system, on the contrary, want to maintain the status quo. If the dominant powers of the current international system or global governance mechanism are able to follow the trend of the times and to rationally negotiate and cooperate with the indispensable players, who used to have little say in global governance, on issues such as cost and benefit sharing and rights and responsibilities matching, based on the principle of extensive consultation, then selective incentives will be transformed into compatible incentives, which is bound to significantly enhance the legitimacy and effectiveness of the current and future global governance system. The role of the provider of global public goods is mainly taken by various international organizations co-founded by sovereign states, such as the United Nations (UN), the World Trade Organization (WTO), and the International Monetary Fund (IMF) linked to the UN. How well the international organizations function and how efficiently they operate attract great public concern. Since the outbreak of the global financial crisis in 2018, some international organizations have been widely criticized for failing to make early warnings and take proper remedial actions, reflecting that their provision of global public goods still remains to be further improved. To continuously improve the rules of order and decision-making procedures of international organizations, raise the efficiency of the implementation of their decisions, improve

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their performance appraisal and evaluation mechanisms, prevent them from being over-bureaucratic, and eliminate the soil for rent-seeking behaviors arising from the improper establishment of rules are all important approaches for both state actors (the principal) and the international organizations (the agent) to achieve balanced governance. In the book The Strategy of Conflict, Schelling also mentioned an important phenomenon that had been ignored by orthodox economics: The creation and destruction of wealth and order are two highly asymmetrical processes. The wealth accumulated by millions of people over the years can be easily ruined by the negligence of a child playing with fire. According to his estimation back then, a worker with a high school diploma can only create wealth that values a few thousand dollars through one year’s hard work. Yet, as long as he wants, he is able to destroy wealth that values thousands of times more. If someone can get a small part of the wealth that he threatens to destroy, then he will become a blackmailer. Schelling’s reminder is very crucial, since there do exist such players that can somehow destroy the world or bring huge damages to human beings. Undoubtedly, it is a meritorious cause for the well-being of all mankind to make such players as terrorists abide by the rules and behave themselves in a fair and effective global governance system. Similarly, it is also very meaningful to use the lessons we have learned from our global governance research in turn to enrich the theories of economics. Today, the interdependence between different countries has reached an unprecedented level. Both the various problems we face and the solutions to problems have a global nature. All the countries have their own national interests. But just as what Jean Monnet, who actively promoted European integration after the end of World War II, said in his autobiography Memoirs (1993), “we are on the same side rather than opposite sides of negotiations, as we are working together to solve the common problems we face. Sometimes, in order to form global collective action, it is necessary to reach a compromise among stakeholders through bargaining. But we cannot be satisfied with this. Rather, we should have a higher-level pursuit, which is that the solution of one global issue should not be based on compromises on another issue and the issue of a single country should be treated as a global issue. To this end, a few key powers in the international arena need to be more broad-minded and take on more responsibilities.”

1.4 Promoting the Reform of Global Governance System is the Trend of the Times In the past few decades, with the joint efforts of the international community, the global governance system has been continuously developing and improving. At the same time, as existing global issues become increasingly acute while new issues keep arising, global governance is faced with growing pressure and challenges. American historian Ian Morris writes in his book Why the West Rules—For Now that mass

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extinction is taking place, with a plant or land animal disappearing every 20 min. The best possible outcome is that only 9% of the 10 million species of plants and animals in the world will be extinct by 2050, while most biologists believe that 1/3–1/2 of the species will be extinct. The WTO Appellate Body has long been semisuspended because of the refusal of the United States to approve the appointment of new arbitration judges, thus seriously undermining the prestige and effectiveness of the WTO. Although these are just two examples of the accelerating deterioration of global issues, they have demonstrated the increasingly prominent contradiction between people’s growing demand for global governance and the insufficient supply of global governance or global public goods. The basic reason behind this is that the existing global governance system has failed to keep up with the changing trend of the times, and appears to be inadequate in dealing with global issues. First, global governance is still far from achieving a “full coverage” of global issues in all kinds of fields. When it comes to “gaps” in global governance, it refers first to the continuous lack of consensus among countries on issues such as the digital economy and, more broadly, the regulation of cyberspace, and then to the absence of some key powers in international agreements such as those on climate change. The nature of global governance as a public good explains its insufficient supply. Global governance is a global public good and thus typically non-exclusive in nature. There is a high cost to pay for maintaining world peace, maintaining the stability of the global trade and financial system and promoting sustainable development. However, all the countries can have free access to the benefits of these public goods. In other words, a country can enjoy the benefits of these products for free even if it has made no contribution to the provision of these products, thus leading to the “collective action dilemma” discussed in the previous section, which will inevitably constrain the supply of global public goods and ultimately result in a “governance deficit.” In a certain sense, one of the fundamental ways to bridge the “governance deficit” is to find a more reasonable balance between effectiveness and representativeness by establishing international rules or implementing reforms on the basis of consensus, so as to coordinate the interaction between different actors and balance their interests. Second, many existing global governance systems or mechanisms have aging functions and insufficient authority, and have become tools for maintaining and expanding the interests of a few countries or groups of countries with vested interests, and even “governance rigidity” has emerged. The current global governance system was mainly initiated and established by developed countries after World War II. After the establishment of these regimes, they have played an active role in coping with global issues and have maintained world peace, stability and development to a certain extent. Yet, in the meantime, it is also worth noticing that conflicts and even wars keep emerging in some hotspots. Various forms of trade, investment, and financial protectionism are still prevalent. And emerging areas such as climate, environment, internet information, polar regions and outer space are faced with growing challenges. The outbreak of the global financial crisis in 2008, and in particular the lack of international public health cooperation in the face of the COVID-19 pandemic in 2020, has profoundly revealed the obsolescence and inefficiency of some of the existing global governance mechanisms, which can hardly adapt to the changing global landscape.

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In particular, it should be noted that many global rules or mechanisms are inherently “non-neutral”, with hidden discriminatory or protective features. A typical example is the U.S. veto power over major decisions of the IMF. Third, despite the fact that the United States is a key power in the world, it not only refuses to assume its responsibilities as a great power, but also suppresses the key options in other countries’ foreign policies. Since Donald Trump took office as President of the United States, Sino-US relations have undergone profound changes, and the process of economic globalization has almost been interrupted by the great power game. The essence of economic globalization lies in the increasingly growing interdependence between countries and regions, which is manifested in the continuous removal or lowering of various barriers to trade and investment, implemented by means of the signing or upgrading of various bilateral, plurilateral or multilateral agreements on trade, investment and capital flows. An agreement or treaty is, in short, a system or order, and if the application of a particular system covers all or most countries around the world, it naturally becomes an element of global governance. When the potential benefits of global governance are enormous, with the highest level of international division of labor and specialization in history, a high degree of asymmetry in the interdependence between major powers, as well as a non-neutral quality, there are bound to be countries or groups of countries that use global governance as a weapon to strengthen their own power and to undermine their competitors. The attempt to use a set of “improved” or new international economic rules to lock China into the middle and lower end of the global value chain while ensuring that the U.S. always enjoys the high profits earned from high technology and the so-called “security” that comes with it has already become a major part of the U.S. strategy toward China and will continue to be a major theme in the Biden administration’s China policy. If the increasingly heated competition over international rule-making ends up badly, the “high-tech decoupling” between China and the U.S., and even the partial decoupling of the supply chains of goods and services in general, will turn from a discussion into a reality, and globalization, which is marked by economic integration, may come to an end. Fourth, although the reform of global governance has already begun in some areas, it is moving forward in twists and turns. Faced with difficulties and crises, all countries in the world are aware of the necessity and importance of reforming and improving global governance. President Xi Jinping has repeatedly pointed out clearly that with the increase of global challenges, strengthening global governance and reforming the global governance system has become the trend of the times. However, with counties or groups of countries with vested interests such as the U.S. and its European allies blocking the way, the governance structure of some global governance mechanisms has remained unchanged for a long time, and more often than not, even the established consensus on reforms cannot be implemented timely and effectively out of the consideration of their own national interests. The twists and turns in the reform of IMF quotas and voting shares are a good example. The U.S. Congress did not vote on and approve the 2010 Quota and Governance Reforms of the IMF until December 2015 and attached further conditions for greater supervision over the IMF. Even though the voting shares of emerging and developing economies

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have increased, their power index has not expanded in the same proportion. This gives us a glimpse of how difficult global governance reform can be, and there is still a long way to go to improve the global governance system. Fifth, there are significant differences in the goals or demands of various national actors, and it is very difficult to reach an agreement. In the current global landscape, the demand of all countries for global governance reform has been unprecedentedly strong. In an abstract sense, almost all countries have the willingness or demand to promote global governance and build a secure, free, just and prosperous world. However, as far as the specific goals are concerned, there are also differences and even conflicts among different countries in terms of their willingness. Different countries rank and understand these goals in different ways. Even for the same country, the ranking and understanding of these goals in different periods of time turn out to be different. For instance, the most pressing demand of extremely underdeveloped countries is the access to external assistance and enhanced national strength. For the vast number of developing countries, their priority is to achieve sustained economic growth and national prosperity. However, for industrialized developed countries like the U.S., it is more important to guarantee their relative advantages over others and maintain security, order and peace under the U.S. governance system. This means that the competition between different governance systems and governance priorities will reach its height in the next five to ten years. The competition is mainly manifested as the fight for a stronger voice in global governance reform. Typical examples include the ability to create international rules as well as the ability to control, make use of, and interpret the rules. With the world today marked by major changes unseen in a century, there are roughly four scenarios for the future of the global governance landscape. First, the COVID-19 epidemic will break down the existing multilateral and plurilateral, or global and regional systems, and countries around the world will turn to beggar-thyneighbor policies or even enter into a jungle war, with hegemonic countries acting with impunity, and might is right becoming the basic rule in dealing with international relations. Second, multilateral or global systems will collapse or exist in name only, and the multi-polarization of the world, characterized by the competition between major powers, will take the form of regional grouping. Regionalism itself will at the same time be reorganized. Some regional cooperation mechanisms will be strengthened or newly created, while some will be restructured or even be removed. Third, two or more parallel systems will emerge, marked by the mutual or at least partial decoupling of industrial chains. As a result, the multilateral system will be broken down or weakened. These parallel systems can be divided by multiple criteria, including mainly the understanding and implementation of the rules of the system, the socio-political and economic systems of the economies, as well as civilization, culture and ideology. Parallel systems can be further divided into balanced and unbalanced parallel systems. Balanced parallel systems refer to those where the comprehensive strength of each system is equal on the whole, while for unbalanced parallel systems, there is an obvious contrast between strong and weak systems. Fourth, the process of re-globalization will be initiated. The COVID-19 epidemic, as the world’s common enemy, and especially with the huge short-term impact it

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brings, has set the alarm bells ringing for human beings and made people realize that the world has long been a community with a shared future for mankind, and what we should do and can do is to join hands and work together to consolidate, improve and innovate the existing global multilateral system. Comparatively speaking, there is a relatively low possibility that the first scenario will occur. Among the other three scenarios, the strengthening and expansion of regional cooperation as well as the reform and improvement of the multilateral system is more favorable for China. Which scenario will eventually become mainstream depends on the competition between major economies, especially the competition between China and the United States. There is a steady improvement in China’s economic development and overall national strength, and this progress has been increasingly identified and recognized by the international community, which has laid the material basis for China to take a more active part in the global economic governance system. With the rapid rise of China in recent years, the post-Cold War international structure of “one superpower and several major powers” has been weakened. China has stood out from many other major powers and started to become the second superpower in the world. From the perceptions of the rest of the world on China, it can be seen that the rising national strength of China has been increasingly recognized by the international community. In the meantime, the rise of emerging economies as a group has also laid the partnership basis for China to participate in and take the lead in global economic governance in a more active manner. Apart from cooperation among BRICS countries, the Belt and Road Initiative guided by the principles of extensive consultation, joint contribution and shared benefits can be considered as a larger partnership network, with which many of China’s perspectives on global governance can be widely accepted by the international community. The global public goods that China advocates or acts as a major provider of meet the needs of the international community, especially the needs of the vast developing countries. The wide recognition from the international community and China’s increasingly important role in the world has created good opportunities for China to better participate in global economic governance. Governance mechanism plays an indispensable role as the core of global economic governance. For example, the AIIB established in 2014 is not only the first multilateral financial institution initiated by China, but also a high-standard international financial institution initiated by developing countries with the participation of developed countries. In addition, the Trump administration’s “America First” approach over the past four years and the tendency of the U.S. to prioritize their own national interests has objectively highlighted China’s presence in the international arena. The international obligations that a country needs to fulfill have disappeared from the concept of fair trade in Trump’s foreign policy. The ideal or theoretical basis of benefiting the world through free trade has disappeared too. And the U.S. no longer even bothers to pursue its national interests under the cover of promoting economic globalization. This is exactly why the world was deeply impressed by the remarks made by President Xi Jinping at the Davos Forum at the beginning of 2017 about global governance, the future of the world, the destiny of mankind and China’s solutions to global issues.

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1.5 Focusing on Global Economic Governance Global governance involves the solution to many global issues, among which global economic governance occupies a fundamental position. In a nutshell, global economic governance refers to the process by which various actors in the international community, mainly nation-states, negotiate and establish a series of international economic and trade rules or mechanisms to cope with and solve global economic problems. The discussion of global economic governance involves understanding its historical development, exploring its emergence and evolution, analyzing what challenges global economic governance faces in the context of a new globalization, looking into its future development trends, and proposing the direction of the reform of global economic governance system on the above basis, and finally providing theoretical references and policy advice for China’s participation in global economic governance. Specifically, the research on global economic governance mainly covers the following four areas: international financial governance and response strategies; progress of international trade and investment governance and response strategies; governance of global climate change and sustainable development and response strategies; and evolution, development and response strategies of international macroeconomic policy coordination. These four specific areas are chosen because they all have a significant impact on the development and operation of the world economy, which are issues of great concern to all countries and are also problems that can only be controlled or solved through collective action of all parties. International monetary and financial governance, as well as international trade and investment governance, are traditional areas of global economic governance, and there are corresponding formal and systematic governance platforms and mechanisms. On the one hand, this is conducive to the implementation of governance in these areas, but on the other hand, it also means that the pattern of interest distribution has already taken shape. The unreasonable and inappropriate parts of existing governance rules or mechanisms are often deeply rooted, and thus there is great resistance to the reform of the governance system. Governance of climate change and sustainable development, as well as international macroeconomic policy coordination, can be regarded as relatively new topics in global economic governance. It was not until after the 1990s that climate change and sustainable development attracted certain attention from the international community, while international macroeconomic policy coordination started to appear frequently in the initiatives and outcomes of international conferences such as the G20 and was formally included in the global development agenda only after the global financial crisis in 2008. Unlike traditional areas or topics of global economic governance, formal global governance rules and institutions have not yet been established concerning these new governance issues, so the effectiveness of governance depends largely on the stake the participants have in a certain issue as well as the characteristics of players in the game. Thus, these new governance issues have become an arena of intense competition among countries around the world.

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International financial governance has been one of the core issues of global economic governance since World War II. The reform of the international financial governance system is a slow historical evolution. The outbreak of the global financial crisis in 2008 exposed the shortcomings of the original international financial governance system, which undoubtedly acted as a historical turning point to further promote the reform of the system. International financial governance mainly includes two aspects, namely the reform of the international monetary system and the reform of the international financial system. Establishing a super-sovereign currency, reforming the special drawing rights (SDR) structure, and enhancing the role of nonUS dollar currencies, including the RMB, are important approaches to achieve reserve currency diversification. The reform of the international financial system mainly includes the reform of international financial institutions and the reform of crisis supervision and response mechanism. The previous financial crises have shown that the goal of crisis prevention and response cannot be achieved through the IMF alone, with problems such as untimely rescue, insufficient rescue funds and unreasonable rescue conditions. Improving crisis supervision and response requires the construction of a multi-level and multi-faceted mechanism. With the rapid economic growth and rising financial strength, China’s status in international financial governance has been significantly enhanced. Meanwhile, the global financial crisis has opened a window of opportunity for China to participate in international financial governance, and China’s goals and interests in its participation in international financial governance have become increasingly clear. International trade and investment are important engines of world economic growth, and liberalization and facilitation of trade and investment have long been the goals that the WTO has been committed to achieving. With the influence of the financial crisis, the current global trade and investment growth is sluggish, protectionism has re-emerged, and the “Doha Round” negotiations have stalled. The international investment field is divided by more than 3,200 bilateral agreements, with a serious trend of “fragmented” development, and there are great obstacles to multilateral cooperation in cross-border investment. The reform of global trade and investment governance mechanism and the reconstruction of a new international trade and investment order are receiving more and more attention from all walks of life. While the WTO multilateral trade negotiations are facing great difficulties, the G20 has been playing an increasingly important role in global trade governance. G20 member states have pledged to oppose all forms of trade protectionism and establish an open, transparent, inclusive, rule-based, non-discriminatory and WTO-based multilateral trading system at several summits. The G20 is also devoted to promoting cooperation and coordination in international investment, with the G20 Guiding Principles for Global Investment Policymaking, the world’s first programmatic document on multilateral investment policymaking, adopted at the 2016 G20 Summit in Hangzhou. The document established a general framework for global investment rules, which was a historic step towards bridging the divergence of interests among countries on investment policies and strengthening multilateral investment policy coordination, and will provide long-term institutional guidance for global investment governance. Due to the obvious non-neutrality of international trade and investment rules, multilateral

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and plurilateral negotiations among countries around WTO reform and so forth will be very intense. Climate change will not only affect the living environment and health of human beings, but will also profoundly affect the development path and development model of each country. Therefore, it is not only an environmental issue, but also an economic issue. Developed and developing countries bear varying degrees of responsibility for climate change, and the impact of climate change is uneven. More importantly, the ability of countries with different levels of development to cope with climate change is highly heterogeneous. Consequently, the positions of different countries as well as different interest groups within each country on climate change governance and the degree of their participation vary greatly. It is easy to imagine that the global governance of climate change will involve a difficult bargaining process. The core purpose of international governance of climate change is to circumvent the collective action dilemma encountered by countries in addressing climate change through the institutional binding and incentive effects of international agreements or conventions. On the whole, whether it is the United Nations Framework Convention on Climate Change (UNFCCC) or the subsequent Kyoto Protocol and Paris Agreement, or informal international rules on climate change, they have all laid out the core elements and mechanisms of international climate governance, namely emission reduction, technology and finance. In the arena of international climate governance, the competition for interests between different interest groups is in continuous dynamic change. The difference between developed and developing countries in defining the responsibility for emission reduction has directly led to the great difference in their attitudes toward financial and technical assistance. China is the largest emitter of greenhouse gases and one of the countries most vulnerable to climate change, facing pressure from both developed countries and other developing countries. How to ensure China’s stable economic development while taking the initiative to undertake emission reduction obligations and building a “fair, reasonable, effective and win–win” international climate governance framework is currently an urgent issue for China to address. Chinese President Xi Jinping announced in his speech at the General Debate of the UN General Assembly in 2020 that China would strive to peak its carbon dioxide emissions by 2030 and work towards achieving carbon neutrality by 2060. Such an ambitious goal has reflected China’s role as a responsible power and as a major player in environmental issues and in addressing climate change. International macroeconomic policy coordination refers to the process of consultation and coordination among countries around the world on macroeconomic policies such as fiscal, monetary and exchange rate policies in order to resolve the conflicts between each other in international economic interests and eliminate the negative effects of their respective macroeconomic policies on each other, so as to maintain and promote stable economic growth in each country. In the context of economic globalization, the macroeconomic policies of a country (mainly refers to a large country that opens to the outside world) usually have strong “spillover effects” and “backwash effects.” Therefore, it is necessary to control or eliminate the “negative effects” as much as possible by strengthening international macroeconomic policy

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coordination. International macroeconomic policy coordination has a long history. After the global financial crisis in 2008, countries across the world have increasingly realized the importance of international macroeconomic policy coordination and reached some consensus on it, with international macroeconomic policy coordination frequently witnessed in the G20 summits, global development agendas and other international agendas. There is a large amount of academic literature that can prove the importance and necessity of international macroeconomic policy coordination, and the historical experience of global economic development and international cooperation has also confirmed that international economic policy coordination has the effect of Pareto improvement under most conditions. However, in the real world, international macroeconomic policy coordination is faced with great difficulties. Asymmetries in scale among countries, different judgments on the economic situation and cross-country transmission effects, misjudgments of policy makers on the importance of and trade-offs among various policy targets and so forth are all important reasons for the difficulties in international macroeconomic policy coordination. As an increasingly important emerging developing country, China still faces great uncertainties about the costs and benefits of participating in international macroeconomic policy coordination. How to ensure the autonomy and independence of economic policies in the process of participating in international economic policy coordination is always an issue that needs to be taken seriously.

1.6 China’s Outlook on Global Governance and the Path Towards Global Economic Governance The strategic goal of China’s participation in global governance is to safeguard its sovereignty, security and development interests, and to achieve the great rejuvenation of the Chinese nation and promote the building of a human community with a shared future. Specifically, the national rejuvenation is mainly reflected in the following five aspects: (1) to realize the two centenary goals and the Chinese dream, namely national prosperity and the well-being of the Chinese people; (2) to maintain national sovereignty and security, including territorial sovereignty and sea power, and safeguard national unity; (3) to widely share the rights to make global rules through global governance, regional cooperation and decision-making procedures in international organizations; (4) to promote the internationalization of the Chinese Yuan (RMB) and make it one of the world’s key currencies; (5) to enhance China’s image and strengthen its moral appeal by improving soft power, innovating development patterns and spreading the Chinese road and the Chinese culture. When participating in global governance, China also needs to consider its positioning in the world, namely what kind of country China is. China’s international positioning has the following six dimensions: First, different from the capitalist developed countries that still play a dominant role in the world, China is a socialist country in terms of its values, philosophy, political system and social goals. Second, today’s

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China is also a country of reform and opening-up that is undergoing continuous changes. Third, based on a variety of indicators, China still has a lot of characteristics of a developing country. Fourth, in terms of development, China is a country in a period of rapid rise. Fifth, in terms of national unity, China has not yet achieved full unification and is faced with the threats of internal separatist forces. Sixth, in terms of international status, China is an indispensable major power with a long history in the international arena. For a long time, especially since the 18th National Congress of the Communist Party of China, China has actively participated in global governance and provided the world with the Chinese approaches to improve global governance, with great contributions to coping with the various challenges of the human society in the twenty-first century. Today, Chinese leaders are attaching greater attention to the important and far-reaching influence of global governance on the development of China and the world at large. In October 2015, General Secretary Xi Jinping chaired the 27th group study session of members of the Political Bureau of the CPC Central Committee with the theme of global governance structure and global governance system, and systematically elaborated on China’s ideology of making the global governance system fairer and more reasonable, which has further developed the outlook on global governance with Chinese characteristics. In Proposals for Formulating the 14th Five-Year Plan (2021–2025) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 adopted in October 2020, “adhering to multilateralism and the principles of extensive consultation, joint contribution and shared benefits, actively participating in the reform and construction of the global governance system, strengthening the application of international law, maintaining the international system with the UN at its core and the international order based on international law, and jointly addressing global challenges” has become China’s basic policy or position in the field of global governance. Adhering to the status of a major developing country is the prerequisite to China’s participation in global governance. Till now, there have been no substantial changes to this status. At the same time, China is also an influential major global power. These are the two basic positioning of China when participating in global governance. On the one hand, as the world’s second largest economy, China should gradually assume more reasonable international responsibilities. This is not only the key task of China’s participation in global economic governance, but also a display of China’s image as a major power with a strong sense of responsibility. On the other hand, China is still one of the developing countries. Thus, it should safeguard its own interests while protecting the common interests of the vast developing countries. China should not only expect the international community to meet the demand for its own development, but should also meet the expectations of the international community, especially developing countries, for China. Therefore, China should actively promote the global governance system to reflect the changing international political and economic landscape, continuously increase the voice and representation of emerging and developing countries in global governance, and protect the interests of the least developed countries in global governance.

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“Extensive consultation, joint contribution and shared benefits” are the basic principles of China in global governance. The three principles are indispensable for strengthening global governance and promoting the modernization of global governance systems and governance capabilities. The Chinese ideology of global governance is made up of these three principles. Extensive consultation means that the basic principles, key areas, rules and mechanisms and development plans of global governance should be decided based on the negotiations of all the participants and the consensus they reach. Joint contribution means that all the participants should work together and make full use of their advantages and potentials to reform and innovate the global governance system. Shared benefits mean that all the participants should fairly enjoy the fruits and benefits of global governance. The concept of “extensive consultation, joint contribution and shared benefits” advocates that we should draw on the wisdom of each other, give full play to the advantages and capabilities of each individual participant and share the benefits together. This has shown the openness and inclusiveness of China’s participation in global governance, which conforms to the trend of the democratization of international relations. To follow this concept, we should give full play to the enthusiasm and initiative of all actors, especially the developing countries, reflect on the concerns and appeals of all parties, safeguard the legitimate rights and interests of all parties in a better way, and enable all the participants to have a stronger sense of gain on the improvement of global governance. The Belt and Road Initiative is the top-level design for China’s participation in global governance. In September and October 2013, President Xi Jinping successively put forward the significant initiatives of building the “Silk Road Economic Belt” and “21st-Century Maritime Silk Road” together during his visits to Central Asian and Southeast Asian countries, which attracted great attention worldwide. The Belt and Road Initiative is consisted of policy connectivity, infrastructure connectivity, trade connectivity, financial connectivity and people-to-people connectivity. It is not only committed to promoting practical cooperation in all aspects, but is also committed to building a community of shared interests, shared future and shared responsibilities with political mutual trust, economic integration and cultural inclusiveness. All these above are closely related to international rules or mechanisms, and involve different dimensions of global governance. From an international perspective, the Belt and Road Initiative reflects China’s active contributions to international cooperation and the innovation of global governance, which is in line with the fundamental interests of the international community. At the domestic level, the Belt and Road Initiative is an important approach to coordinate the domestic and international situations, which is a top-level design for China’s participation in global governance, and also an important tool to speed up fostering a new development pattern where domestic and foreign markets can boost each other. The joint efforts made by China and the rest of the world to promote the Belt and Road Initiative have not only had a positive impact on global governance, but also highlighted China’s strong sense of responsibility. The balance of rights and obligations is the basic principle of China’s participation in global governance and is also a widely recognized norm of international

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law. With rising national strength, China has assumed increasingly more international responsibilities and obligations within its capabilities, and has contributed to promoting world economic growth and improving global governance. For example, China put forward the Belt and Road Initiative, initiated the establishment of the AIIB and the New Development Bank, and set up the Silk Road Fund. China is meeting and will continue to meet the needs of economic development and social stability of all countries in the world, especially developing countries. While assuming its responsibilities and obligations, China should also enjoy the corresponding rights. In the current global governance system, the developed countries led by the U.S. are dominating the various international rules and mechanisms, and are the main beneficiaries of the current global governance system. Meanwhile, it is difficult for the vast emerging economies and developing countries to enjoy fair treatment and exert an influence on global issues as they should. Adhering to the balanced approach to upholding justice while pursuing shared interests and gradually improving China’s voice and decision-making power in global governance is not only the prerequisite for China to take on more international responsibilities, but is also the only way to make global governance fairer and more reasonable. China’s path towards global economic governance has seven dimensions, with national interests as the pivot, economic and trade cooperation as the foundation, economic diplomacy as the means, the Belt and Road Initiative as the focus, new topics as the driving force, capability building as the support, and the common good of mankind as the vision. Taking national interests as the pivot means that it should be made clear that the fundamental goal of China by participating in and leading global economic governance is to create a favorable external environment for realizing the two centenary goals and the Chinese dream of the great rejuvenation of the Chinese nation. Thus, it should be our priority to promote national interests. In the long run, promoting the development of global economic governance towards being fairer and more reasonable is in line with China’s national interests. Whether fair and reasonable global economic governance can be achieved depends on whether China’s development will be interrupted or delayed and whether China can stick to the principle of prioritizing national interests while considering the interests of other countries. Taking economic and trade cooperation as the foundation means that we need to accurately grasp the dialectical relationship between development, currency and economy in global economic governance, identify the fundamental role of trade and economy in the three pillars, adhere to the principle of making currency and virtual economy serve the development of real economy and trade, and promote structural reforms and domestic industrial upgrading through economic and trade cooperation. The so-called three pillars of global economic governance include the development pillar, the monetary and financial pillar, and the economic and trade pillar, which correspond to the following international economic governance mechanisms respectively: (1) development financing networks composed of multilateral development finance institutions such as the World Bank and the AIIB; (2) financial security networks composed of multilateral contingent reserve arrangements such as the IMF and the ASEAN+3 Macroeconomic Research Office (AMRO); (3) regions

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of trade and investment facilitation and integration composed of important regional and bilateral trade agreements such as the WTO. Economic and trade issues mainly correspond to trade and investment governance among the three pillars of global economic governance. Taking economic diplomacy as the means indicates that in the process of global economic governance, we need to be good at turning economic strengths into the voice and influence in the international arena, gaining support from the international community for reforms of the global economic governance proposed by China at a small cost and allocating resources based on a global vision, so as to achieve the strategic goals of China in global economic governance. Taking the Belt and Road Initiative as the focus means that we need to establish partnership networks along the Belt and Road, implement the effective “selective incentives,” fully arouse the enthusiasm of the countries along the Belt and Road to jointly promote the initiative, promote the internationalization of the RMB based on economic and trade cooperation, and build a worldwide network of economy, trade and currency, so as to truly achieve the goal of promoting the high-quality development of the Belt and Road Initiative. Taking new topics as the driving force means that we need to make use of the retreat of developed countries such as the U.S. from global issues, give good elaborations on the connotations and values of the new topics, occupy the moral high ground and promote negotiations on new topics at a pace in line with China’s national conditions and development potentials. Specifically, the core of the overall planning and the promotion of the implementation of the free trade zone strategy and negotiations on bilateral investment agreements as well as the strengthening of multilateral and bilateral economic and trade negotiation mechanisms is to summarize and establish a set of economic and trade criteria that reflect the interests and values of China (and emerging developing countries) based on China’s existing free trade practices. With these criteria, we can then form a standard model that can be copied and spread to promote free trade zones and bilateral economic, trade and investment negotiations. Taking capability building as the support means that it is especially important for China to improve its capabilities in global governance, with a focus on strengthening rule-making capabilities, agenda-setting capabilities, publicity capabilities and coordinating capabilities. Just as President Xi Jinping said, China’s participation in global governance requires a large number of professionals and experts who are familiar with the Party and national principles and policies as well as China’s national conditions, with a global vision, proficiency in foreign languages, mastery of international rules and rich experience in international negotiations. We need to strengthen the cultivation of talents for global governance, deal with the insufficient supply of talents and create a talent pool, so as to support China with talents in global governance. Taking the common good of mankind as the vision means that although the goal of China’s participation and leadership in global economic governance is to solve the pressing realistic problems, we should still regard the building of a community of shared future for mankind as our long-term vision and “calibrate” governance behaviors in reality with a vision in line with the common values of mankind so as to prevent deviations from the right direction.

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To sum up, China has adhered to the outlook on global governance with Chinese characteristics, taken a more active part in global governance and promoted the continuous development and improvement of global governance, which follows the trend of human development and meets the expectations of the international community for China. Confucius pointed out over 2,000 years ago that “A humane person is one who helps others establish what he himself wishes to establish and to achieve what he himself wishes to achieve.” China’s global governance philosophy today is in line with the ideas of Confucius. As the host of the 2016 G20 Summit and a participant in various G20 summits, China will actively guide discussions on global governance issues and push ahead for more achievements that benefit people of all countries, so as to work together with other countries to create a better world.

References G20. 2016. G20 Guiding Principles for Global Investment Policymaking. http://www.g20chn.org/ hywj/dncgwj/201609/t20160914_3459.html. Accessed 11 Nov 2018. Marx, K., and F. Engels. 2012. The Communist Manifesto. New Haven: Yale University Press. Monnet, J. 1993. Memoirs, trans. and ed. Sun Huishuang. Chengdu: Chengdu Press. Morrison, I. 2010. Why the West Rules-for Now: The Patterns of History and What They Reveal about the Future. London: Profile Books. Olson, M., The Logic of Collective Action, in Calhoun, C. et al. (eds). 2012. Contemporary Sociological Theory. Malden: John Wiley & Sons, Ltd. Schelling, T.C. 1980. The Strategy of Conflict. Cambridge: Harvard University Press. Xi, Jinping. 2018. Share the responsibility of the time and promote global development. Keynote Speech at World Economic Forum 2017. http://www.xinhuanet.com/2017-01/18/c_1120331545. htm. Accessed 10 Nov 2018.

ZHANG Yuyan Academic Member of the Chinese Academy of Social Sciences (CASS); the Director-General and senior research fellow of the Insitute of World Economics and Politics (IWEP), Chief Expert of the National Institute for Global Strategy (NIGS), CASS, and Professor of University of CASS (UCASS).

Part I

Changes in Global Economic Governance Structure and Countermeasures

Preface Global economic governance is essentially the governance mechanisms or international rules implemented by the governance actors to solve global issues. Based on a brief literature review, the first two chapters are aimed at making the purpose and theme of this study clear, defining global economic governance, and proposing a theoretical analysis framework. This study mainly consists of three aspects of global economic governance, namely governance actors, governance mechanisms, and areas of governance (i.e. global issues). Chapters 3 and 4 mainly discuss the historical evolution of the global economic governance structure and its evolutionary drives from the practical and theoretical perspectives, respectively. More specifically, Chap. 3 analyzes the historical evolution of global economic governance structure based on four stages: 1870--1914, 1914--1945, 1945--1975, and 1975 to present. Chapter 4 explores the main reasons and drives for changes in global economic governance structure at theoretical levels, from perspectives of changes in the governance authority structure, changes in the degree of interests and occurrence of new global issues. In the end of this part, directions for global economic governance reform are proposed based on the discussions, analyses, and explorations stated previously.

Chapter 2

Connotation of Global Governance

2.1 Definition of Global Governance 2.1.1 What is Governance In 1995, the United Nations Commission on Global Governance published the report Our Global Neighbourhood, which defines governance at the practice level, as: “governance is the sum of the many ways individuals and institutions, public and private, manage their common affairs. It is a continuing process through which conflicting or diverse interests may be accommodated and cooperative action may be taken. It includes formal institutions and regimes empowered to enforce compliance, as well as informal arrangements that people and institutions either have agreed to or perceive to be in their interest.” United Nations Educational, Scientific and Cultural Organization (UNESCO) also agrees that governance is a structure and process to ensure accountability, transparency, responsiveness, rule of law, stability, fairness and inclusiveness, authority endowment and mass participation. In a broad sense, governance is a cultural and institutional environment where citizens could communicate with stakeholders and participate in public affairs. Governance is deemed a power relation. In 1989, the word “governance” was first adopted by the World Bank to describe the needs of Sub-Saharan countries for institutional reforms, as well as better and more effective public sectors. In the study, the World Bank (1989) defined governance as the political power to govern national affairs. United Nations Development Program (UNDP) also defines governance as the political, economic and administrative power to govern national affairs at all levels. Governance involves a range of complex mechanisms, procedures and institutions for citizens and organizations to articulate interests, reconcile differences, exercise legitimate rights, assume obligations, etc. Governments become the body that exercises this power. As pointed out by Krasner (2004), after a range of rules are established, we need a set of mechanisms to determine what those rules are, how to make and implement decisions, how to solve disputes, etc. At this point, we need governments for all those affairs. Fukuyama (2013) defined governance as © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_2

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the capacity of governments to set down and implement rules and provide services. Governments are the agency to carry out governance.

2.1.2 Global Governance Simply put, global governance is an extension of governance activities to the whole world. It has mainly two manifestations. First, governance is enabled by global organizations, such as the UN and IMF, or other mechanisms and political networks that cover the whole world or function globally; second, governance activities are carried out across countries and around the world. In other words, global governance is a political interaction among transnational actors aimed at solving issues that impact not only individual regions. Thakur and Van Langenhove (2007) argued that global governance refers to arrangements for cooperative problem solving on a global scale which might be the rules, organizations and practices of managing collective affairs by various actors. Therefore, global governance is the complex of formal and informal organizations, mechanisms, relations and processes among countries, markets, citizens, governments and non-governmental organizations, to articulate collective interests, clarify rights and obligations, and reconcile differences or disputes. Yet unlike domestic governance, global governance lacks a world government. Finkelstein (1995) argued that it’s exactly the lack of a world government that makes it appropriate to use the word “governance” as a substitute for government. He believed that global governance is to handle cross-boundary relations without a sovereign authority, and what global governance concerns at the global level is just what a national government is in charge of domestically. However, global governance is different from a world government. It’s not a single world order or a top-down authority structure. Instead, it’s an aggregation of activities, rules, formal and informal mechanism concerning governance at different levels in today’s world (Karen 2009). Rosenau (1995) saw global governance as a system of rules on human activities at all levels (from families to international organizations), in which goals with transnational impacts are fulfilled by exercise of control. In fact, a world government is not indispensable in global governance. Yet, international mechanisms are necessary for global governance. Neo-liberal institutionalism advocates represented by Young (1994) further emphasized that global governance actually is the aggregation of all kinds of international mechanisms, including inter-governmental mechanisms and international mechanisms participated by non-governmental organizations. Keohane and Nye (2003) defined governance as formal and informal procedures and mechanisms that instruct and limit collective activities of organizations, arguing that collective activities of all countries are limited by global governance mechanisms. McGrew (2002) stressed that global governance is actually to create a new international norm and authority. In the absence of a world government, the governance actors are trying to overcome governance failures through institutional arrangements that “develop norms

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of universal commitment and provide decision makers with high-quality information” (Keohane 1982), so as to effectively supply public goods around the world. Liberalists advocate applying the Theory of Justice of John Rawls to transform the self-interested nation-states, arguing that global governance seeks to constrain the actions of actors through global charters, laws and norms, that market justice needs institutional supervision, and that market fundamentalism and unilateralism no longer works in global governance. To sum up, considering the characteristics of actors, objects, goals and achieving forms, global governance could be defined as the aggregation of international institutions, rules or mechanisms, in the self-enforcement nature, established by a multicentered international community of states or economies to solve global issues; or the process of international players endeavoring to prevent international political market failures via collective actions in the absence of a world government.

2.2 Main Contents of Global Governance Global governance has three integral parts: who are to govern (actors of global governance), how to govern (forms of global governance), who are to be governed (objects of global governance).

2.2.1 Actors of Global Governance No matter for domestic governance or global governance, the actors are diverse. Rosenau (2003) pointed out that governance actors tend to be diverse. In addition to formal and authoritative governments, there are non-governmental organizations, associations, interest groups and other third-party organizations. Stokke (1995) also believed that governance means a number of social and public agencies and actors from but not limited to governments. In other words, governance actors are diverse, including governments, social organizations, enterprises and citizens. Global governance is an extension of governance activities to the whole world, and thus has more diverse governance actors. Held (1995) emphasized that global governance is a process of social coordination and cooperation to realize public goals. In this process, countries, international organizations, multinational companies, international commercial institutions and civil society organizations form a giant global governance network. Countries still play a key role in global governance, but there are more actors participating (Pei 2014). Nation-states remain the main actors in global governance, for sovereign states are not only members of multilateral institutions, but also the bodies that formulate policies and regulations related to global governance. The interplay among countries is a key impetus for the progress and direction of governance. Yet global governance underlines that international organizations, non-governmental organizations,

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multinational companies, etc., are also important participators of global economic governance, especially international organizations with a global reach. A large part of global governance is achieved through principal-agent-based international organizations. Those international organizations are platforms and carriers for carrying out global governance, which is impossible without them. The agency organizations of global governance mainly include inter-governmental and non-governmental organizations, which might be global organizations or regional ones. Non-governmental organization participators are mainly civil society organizations and private (multinational) enterprises. Civil society organizations mainly rely on public opinion to drive progress in certain global issues, such as Worldwide Fund for Nature, China Foundation for Poverty Alleviation and Oxfam. They’re increasingly an important impetus in global economic governance. Technical experts, multinational companies, etc., are also global governance actors with direct impact on global governance.

2.2.2 Forms of Global Governance Compared with domestic governance, global governance is in a “disorderly” state without a government. In the absence of a world government, all actors aim at gaining the maximum interests for themselves. Once divergent interests of many parties can’t be reconciled, the “fallacy of composition” or “tragedy of the commons” occurs. Only by harmonizing differentiated individual interests could global governance be charted to a sound development course. To this end, international institutions, rules and mechanisms are required to ensure smooth progress in global governance. As a matter of fact, we could tell from the definition that no matter for governance or global governance, institutions, rules and mechanisms are the key to ensure successful implementation of governance activities and fulfillment of the expected goals. Domestic governance mostly relies on rules and institutions formulated by national governments. Yet in the field of international relations without hierarchical institutions or authorities, global governance is the product of agreements among and practices of different countries, especially major powers, which covers inter-governmental rules and institutions and non-governmental mechanisms. Williamson (2000) divides the institutional economics into four levels: embedded institutions (informal habits, traditions and norms), formal institutional environment, governance and resources allocation and application. Governance activities are at the third level. In Williamson’s opinion, governance is to agree on institutional structure by contracts, connect governance structure and transaction behaviors, and guide and reshape the motivations of actors, so as to allocate and use resources. In short, governance stresses the coordination, guidance and normative functions of institutions. Stokke (1995) and Young (1994 and 2004) further argued that, governance is to establish and operate a set of codes of conduct regulate actions, assign tasks and guide cooperation, in an effort to climb out of dilemma of collective actions.

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Domestic governance is mainly about national government agencies exerting influence by using their political power on the basis of formal and mandatory laws, regulations and institutions. Compared with domestic governance, global governance lays more stress on the role of rules, meaning countries, non-governmental organizations, private sectors and other international governance participators cooperate with each other by following the binding rules. Those rules and institutions are mostly not mandatory, but depend more on negotiations among countries and their voluntary observance, which are different from the mandatory domestic governance rules. Global governance has the following forms (Karen 2009): (I)

Inter-governmental organizations

Inter-governmental organizations are international organizations set up by several countries or governments based on international treaties to fulfill certain goals. Such organizations include at least three member states, and operate in multiple countries. Inter-governmental organizations enjoy the independent status of participating in international affairs and activities within the scope specified by the treaties and purposes thereunder, have the ability to directly assume rights and obligations under international laws, rather than subject to the jurisdiction of the state power. Intergovernmental organizations include both single-purpose international organizations (such as OPEC) and multi-purpose international organizations (such as the UN), which have been the dominant form of global governance. These organizations have multiple functions, covering information collection, trend monitoring, service and assistance provision, dispute solving, etc., which are conducive to developing stable cooperation habits among nations. Intergovernmental organizations influence their members states via agenda setting; encourage and coordinate actions of members states by setting principles, norms and rules in relevant issues and fields and develop certain decision-making and implementation procedures; and restrain behaviors of member states by international peer review and even dispute settlement mechanisms. (II)

Non-governmental organizations

Non-governmental organizations, in contrast with inter-governmental organizations, are those voluntarily set up by social organizations or individuals from different countries to fulfill certain common goals. These organizations are formed to meet common expectations and demands of their member states to solve certain problems or develop certain causes. (III)

International law

International law is an umbrella term of laws and regulations applicable to sovereign states and other entities with international personalities, which falls into three categories: treaties, customary international laws and general legal principles recognized by countries. Treaties and other agreements subject to unanimous consent are legally binding, by which legislative bodies of international law could announce, amend or develop

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existing international law. Customary international laws are international laws applicable to international communities that are yet to be formed. They usually originate from certain clauses of early treaties, which are recognized as statutes afterwards. Yet some international law rules are developed from the similar practices of different countries. General legal principles recognized by countries only work in the absence of corresponding rules under customary international laws or treaties. Such principles must be general legal principles, not legal rules with a limited scope. They must also be recognized by quite a number of countries (at least including all major legal systems in the world). (IV)

International norms or “soft law”

International norms are codes of conduct recognized and observed by most countries in international interactions, such as the UN Charter and principles under many international conventions. They establish the expectations for behavior standards among nations, and further mutual understanding. Most international norms are not binding, and thus are also called international “soft law”. With further understanding of relevant issues, technical progress and especially changes in the political environment, such norms are likely to upgrade from “soft law” to “hard law”. (V)

International mechanisms

Krasner (1982) defined international mechanisms as principles, norms, regulations and decision-making procedures that could drive expected convergence of actors in certain fields in international relations. International mechanisms include both international conventions like the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal and monetary management institutions like the Bretton Woods System. An inter-governmental organization may be needed to solve certain issues, but any single inter-governmental organization does not constitute a mechanism. For instance, to solve the nuclear weapon proliferation, a number of international organizations and treaties are functioning, such as the International Atomic Energy Agency (IAEA), the Treaty on the Non-Proliferation of Nuclear Weapons and the Comprehensive Nuclear Test Ban Treaty. (VI)

Ad hoc groups, arrangements and global meetings

As international affairs are increasingly multilateral, a range of ad hoc groups and arrangements, inter-governmental global conferences, forums, committees, etc., have become important forms of global governance. Taking leadership summits like the Group of Seven (G7) and the Group of Twenty (G20) as an example, despite that they have a profound impact on global governance and hold meetings regularly, they are not formal inter-governmental organizations. (VII)

Global governance carried out by private sectors

Private sectors also play an important role in certain global governance fields. For instance, global accounting standards and standards for international credit ratings are basically set by private sectors.

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2.2.3 Objects of Global Governance Global governance is radically different from domestic governance. Global governance is to solve global issues. As pointed by Yu (2002), global governance concerns not only institutions, orders, structures, arrangements and mechanisms at the level of international relations, but also common issues and cross-border problems facing all mankind, mainly including (1) global security, involving inter-country or regional armed conflicts, nuclear weapon production and proliferation, production of and trade in weapons of mass destruction, etc.; (2) ecological environment, covering reasonable usage and development of resources, control over pollutant sources, protection of rare animals and plants, etc.; (3) international economy, including global financial markets, the polarization between the rich and the poor, global economic security, fair competition, debt crisis and international exchange rate, etc.; (4) cross-border crime, covering smuggling, illegal immigration, drug trafficking, human trafficking, international terrorism, etc.; (5) basic human rights, such as genocide, civilian massacre, disease transmission, hunger and poverty and international justice. Zhang and Li (2008), Wang and Cheng (2010) believed that global governance is to deal with global ecology, global crimes, global economic orders, global security, energy utilization, global poverty alleviation and disease transmission and other issues. Liao and Wei (2016) pointed out that global governance is a huge system consisting of economy, politics, climate, energy, resources, ecology, military services and other branches, and each branch has their own system. It’s notable that global governance actually inherits three directions of governance: governance of macro economy, natural environment and social affairs. Global economic governance could be understood as application and extension of global governance in the economic field. It is a reflection of global economic activities and governance relations. Chen and Shen (2014) pointed out that, global governance and global economic governance are two highly related concepts that cannot be separated. Theories of both global governance and global economic governance originate from practices of mutual coordination and cooperation among actors through international mechanisms. The former is to deal with comprehensive global issues and the latter, global economic problems. Global economic governance is the primary and core contents of global governance, but besides cooperation and coordination in economic fields, there is a need to collaborate on solving global issues in nontraditional security fields such as environment, energy, diseases and cross-border crimes, in addition to traditional security issues.

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2.3 Reasons for Global Governance 2.3.1 Emergence of Global Governance Global governance is aimed at solving global issues via mechanism or system design. Therefore, the occurrence of global issues is the basic reason for the emergence of global governance. Globalization brings about lots of global issues with crossborder nature, externality and spillover effects. Besides, progress in transportation communication and other technological civilizations have deepened international interdependence and accelerated the spillover of global issues. Global issues might cause systematic crises that threaten interests of all system members. Thus, actors are having stronger demands for solving global issues (Keohane 2002). Yet, global issues don’t necessarily lead to global governance, if there are obstacles to collective actions. Obstacles to collective actions mean it is hard to cooperate on taking collective actions. The key reason for such obstacles is that all potential beneficiaries of collective actions are expecting free-riding and unwilling to offer free-riding. Since common interests don’t necessarily lead to collective actions or constitute only a necessary condition for collective actions, the discussion of sufficient conditions for collective actions becomes the core of collective action theory. In this light, for global governance, we should first figure out what factors lead to success or failure of collective actions. We hold that actors in global governance would make comprehensive analysis on costs and benefits in such activities. If benefits are equal to or exceed costs, they would consider supplying global public goods, which would benefit other countries, and collective actions are thus carried out. If a country gets benefits less than its costs in global governance, it would not supply global public goods. And if it is the same case for other countries, there won’t be collective actions for sure. Yet at this point, such country could still be given selective incentives as proposed by Olson. For each international actor pursuing the maximum interests, selective incentives are usually the non-neutral institutions that provide additional benefits, or promises, persuasion or threats from other countries. Therefore, collective action can still occur if the benefits of a country’s participation in global governance exceed its costs by establishing a non-neutral institution that can increase its welfare, but do no harms to other countries’ welfare (Fig. 2.1). We need first make clear the concepts of benefits and costs of global governance. Governance costs are the sum of costs that all global governance actors incurred during their participation in solving global issues. They consist of two parts: (1) Transaction costs related to global governance. Transaction at least includes costs of obtaining, processing and using relevant information; costs of international players seeking domestic consensus for forming international negotiation positions or strategies; costs of communication, alliance or bargaining among international players; costs of supervision over implementation of global or regional treaties (conventions or accords). (2) Costs of participation in global governance. Unless one can have a free ride, every participating country would assume costs in global governance. We

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Fig. 2.1 Logic of governance actors (countries) participating in global governance

define them as the costs of participation in governance. The costs of participation in governance are mostly costs incurred or triggered by participating in the governance mechanism, such as membership fees paid by a country to join an international organization and funds provided for maintaining the functions of such organization; adjustments of international and domestic policies to participate in global governance. In a sense, the contributions made by countries to the provisions of global public goods could be deemed as the voluntary payment for global public goods, which are the costs for them to participate in global governance. Governance costs vary greatly from country to country due to different characteristics and stakes. Since the benefits and costs of participation in global governance are different, countries would end up in two situations where: (I)

Benefits are equal to or exceed costs: Collective actions are possible

Since a country could have net positive benefits by participating in global governance, it tends to offer global public goods and take collective actions with other countries. (II)

Costs exceed benefits: Collective actions are not possible in a natural way but could be taken by non-neutral institutional design

Obstacles to collective actions could be overcome by laying down institutions: First, institutions could define property rights, provide selective incentives and thus improve governance performance. In the absence of a world government, improvement in global governance performance is more reliant on reasonable and explicit institutional arrangements. Second, institutions provide a framework of repeated gaming, lay stress on the role of reputation in long-term transaction, lower moral risks and bring about more benefits in long-term gaming, thus meeting rational demands of actors. Thus, it is clear that institutions could affect actions, choices and interaction results of actors by changing people’s preferences and expectations. Third, institutions could also prompt actors to participate in global governance by altering actors’ interests and identity. Keohane (2006) has put it, when system culture is in place in the international community, countries would abide by norms because of moral restraints, instead of their narrow interests.

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In order to overcome synthetic dilemmas, seek consensus and make decisions, governance forms tend to be diverse and dynamic. First, governance diversity means difference in system forms, memberships, governance scopes, etc. All sorts of different global issues lead to various functions of international organizations to deal with them. Such differences are mainly seen in governance mechanisms, such as the relationship between governance enforcers/principals and international players/agents, and the governance structure of governance actors or international organizations, including participant qualification, power allocation and decisionmaking procedures. Global governance theories need to give logical explanations and empirically accurate descriptions to such phenomena. Second, “dynamic” means governance institutions are not static, but are evolving all the time. The institutional evolution is about new institutions replacing less optimal ones. In other words, it is the reason why one kind of governance form is selected over another. Global governance practices are actually activities where participants cooperate on seeking a relatively stable governance equilibrium. By making concessions, major actors (major powers) agree on a tacit comprised plan that could effectively gather global public goods and govern globalization.

2.3.2 Reform and Improvement of Global Governance We have made a brief discussion on how to form global governance above, yet the process is not always the same. If any of the global governance actors or objects change, reform or improvement of global governance is likely to take place. (I)

Global governance reform triggered by changes in governance actors

The change in governance actors refers to the change of global public goods providers attributed to changes in international power distributions. It happens in two situations. First, as the strength of a country that originally provided public goods declines, its willingness and ability to provide public goods also decreases accordingly. At this time, its cost–benefit conditions to participate in global governance vary and the original collective actions collapse. Yet if another country is rising in power, it would make choices as shown in Fig. 2.1. Second, original public goods providers maintain their power (no change in their cost–benefit conditions to participate in global governance), but some new countries (with growth in power) would like to assume the responsibility for public goods (to receive more benefits from participating in global governance). Then more public goods are supplied at the global level, which remarkably improves global governance. (II)

Global governance reform caused by new global issues

New issues need new forms of global governance. When a new global issue occurs, or original global issue changes in nature, global governance actors need to make choices as shown in Fig. 2.1, to decide if collective actions could be taken. Yet since

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degrees of interests are different, for new global issues, the governance actors won’t be the same. The degree of interests is the stakes for players in global issues, which is closely related to the issue attributes and player features. Different players, because of their player features, have different sensitivities to a certain issue. In other words, actors have different preferences for global issues to participate in.1 Varying in perceptions of the degree of interests, actors may be more active in providing certain global public goods and less in providing others. Therefore, new global issues may lead to occurrence of new global governance actors and change original governance patterns.

References Chen, Weiguang, and Lijuan Shen. 2014. Global Governance and Global Economic Governance Boundary: A Comparative Analysis Framework. Journal of Strategy and Decision-Making, 1: 24–36. Finkelstein, L.S. 1995. What is Global Governance? Global Governance 1 (3): 367–372. Fukuyama, F. 2013. What is Governance? Governance: An International Journal of Policy. Administration, and Institutions 26 (3): 347–368. Held, D. 1995. Democracy and the Global Order: From the Modern State to Cosmopolitan Governance. Palo Alto: Stanford University Press. Karen, K. 2009. The Politics and Processes of Global Governance. Colorado: Lynne Rienner Publishers. Keohane, R. 1982. The Demand for International Regimes. International Organization 36 (2): 141–171. Keohane, R. 2002. Introduction: Realsim, Institutional Theory and Global Governance. Power and Governance in a Partially Globalized World. London: Routledge. Keohane, R. 2006. After Hegemony: Cooperation and Discord in the World Political Economy, translated by Su Changhe. Shanghai: Shanghai People’s Publishing House. Keohane, R. and J. Nye. 2003. Redefining Accountability for Global Governance. Governance in a Global Economy: Political Authority in Transition. Princeton: Princeton University Press. Krasner, S. 1982. Structural Causes and Regime Consequences: Regimes as Intervening Variables. International Organization 36 (2): 185–205. Krasner, S.D. 2004. Sharing Sovereignty: New Institutions for Collapsed and Failing States. International security, 29(2): 85–120. Liao, Maolin, and Jigang Wei. 2016. China’s Role and Vision in Global Resource Governance. People’s Tribune, 27: 96–97. McGrew, A, and Held, D. 2002. Governing Globalization: Power, Authority and Global Governance. Polity Press. Pei, Changhong. 2014. Global Economic Governance, Public Goods and Chinese Opening Expansion. Economic Research Journal 3: 4–19. Rosenau, J. 1995. Governance in the Twenty-first Century. Global Governance: A Review of Multilateralism and International Organizations 1: 13–43. 1

There are two types of high degree of interests: one is that a country has a relatively strong capacity to provide certain public goods and it is easier for it to coordinate domestic policies; the other is that a country lacks comparative advantages and has relatively high vulnerability, due to the nature of its proprietary assets. These two situations would positively or adversely affect different countries’ preferences for participating in global governance, as well as the level of difficulty facing non-national actors in lobbying the nation to provide global public goods.

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Rosenau, P.V. 2003. The Competition Paradigm: America’s Romance with Conflict, Contest, and Commerce. Rowman & Littlefield. Stokke, S. 1995. Regimes as Governance System. Global Governance: Drawing Insight from the Environmental Experience. Cambridge: MIT Press. Thakur, R, and Van Lanenhove, L. 2007. Enhancing global governance through regional integration. In Regionalisation and Global Governance, Routlege, pp. 33–58. Wang, Guoxing, and Cheng, Jing. (2010). G20 Institutionalization and Global Economic Governance Reform, International Prospect, 3: 8–18. Williamson, O.E. 2000. The New Institutional Economics: Taking Stock, Looking Ahead. Journal of Economic Literature 38 (3): 595–613. World Bank. 1989. Sub-Saharan Africa, From Crisis to Sustainable Growth, A Long-term Perspective Study. Washington, D.C: the World Bank. Young, O. 1994. International Governance: Protecting the Environment in a Stateless Society. Ithaca: Cornell University Press. Young, O. 2004. Rights Rules and Resources in World Affairs’ Experience. Cambridge: MIT Press. Yu, Keping. 2002. Introduction to Global Governance. Marxism & Reality 1: 20–32. Zhang, Yuyan, and Zenggang Li. 2008. International Economic Politics. Shanghai: Shanghai People’s Publishing House.

Chapter 3

Definition of Global Economic Governance

3.1 Actors of Global Economic Governance This section discusses who are to govern, referring to the bodies in charge of setting global economic governance rules. Actors of global economic governance fall in three categories: First category, nation-states; the second category includes formal and informal inter-governmental organizations, such as the UN, World Bank, IMF, WTO, G20 and APEC; the third category is global civil society organizations (or international non-governmental organizations).1 Besides, multinational companies facilitate to organize relationships at all links on the global value chain and thus are the most important market force in global economic governance.

3.1.1 Formal Inter-governmental Organizations (I)

The UN system of economic governance

1.

Purposes

The UN claims the most representative, extensive and authoritative comprehensive international organization in the world. The purposes of the UN are: (1) to maintain international peace and security; (2) to develop friendly relations among nations based on respect for the principle of equal rights and self-determination of 1

To make it easier to analyze and highlight the key points, international non-governmental organizations in this paper are equivalent to global civil society organizations. Yet they are actually not the same. International non-governmental organizations are the most important and active bodies among global civil society organizations, with representative and explicit organizational goals, institutions, etc. Global civil society organizations refer to transnational institutions, organizations, associations, etc. for public good set up by private actors. There are numerous organizations in various kinds in the civil society, such as industrial associations, cultural and entertainment associations, neighborhood organizations and mutual aid groups, in additional to non-governmental organizations.

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peoples; (3) to achieve international cooperation in solving international problems of an economic, social, cultural, or humanitarian character; (4) to be a center for coordinating the actions of nations. It can be seen from the purposes of the UN that, the organization is not a specialized economic organization, but is dealing with all kinds of affairs like political, economic, cultural and security issues. As a matter of fact, the UN is to fulfill the three main goals, namely peace, development and cooperation, rather than only focus on economic issues. 2.

Economic governance functions

As the most representative global international organization, the UN has a universal membership and a wide range of governance areas. Such advantage has been remaining. Global economic governance functions of the UN include: (1) coordinating relations among national governments, formal international organizations and informal global civil societies, and facilitating establishment and improvement of the mechanism network of global economic governance actors; (2) formulating a large number of global economic governance regulations such as legal principles, rules and institutions to adjust the economic activities of various actors in the international community; (3) making effective contributions to solving a series of global economic issues, such as the 2030 Agenda for Sustainable Development. 3. (1)

Evaluation on results of global economic governance Contributions

The UN, being a significant drive for global economic governance and development, mainly performs its global economic governance duties via its affiliated organizations and specialized agencies. The UN makes the following contributions to global economic governance: First, assisting in development and driving economic development in developing countries. Since 1960, the UN has implemented four “development decade” plans, to accelerate economic development in developing countries and narrow the economic gap between them and developed countries. Moreover, the UN has set the Millennium Development Goals and many other global development strategies, aiming at pooling global forces to help developing countries achieve their goals of economic development and poverty alleviation. To serve its development strategies, the UN provides developing countries with funds and technological assistance. Second, strengthening the North–South dialogue and promoting the establishment of a new international economic order. One of the purposes of the UN is to coordinate member states, especially the relations between developing and developed countries, to promote international cooperation. And an effective measure to fundamentally boost international economic cooperation is to reform the old international economic order and bring a new economic order to the world. In the middle of the 1970s, the UN adopted the Declaration on the Establishment of a New International Economic Order, Program of Action, and Charter of Economic Rights and Duties of States, putting forward the basic principles of reforming the old international economic relations and building a new international economic order for the first time, laying

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political and legal foundations for the UN to strive for building a new international economic order. Based on them, the UN continues to promote the North–South dialogue and play its indispensable part in accelerating the establishment of a new international economic order and global economic development. (2)

Limitations

The organization of the UN grew out of the demands of the world economy in the late World War II. Yet the lack of influence on international situation changes seriously limited its efficiency, decision-making power and influence. Multilateral collaboration within the framework of the UN is considered the most complex and time-consuming form of multilateral diplomacy, with very high negotiation costs but without significant effects on many issues. The United Nations is facing the dilemma of insufficient governance funds. It is also often criticized for being at the mercy of major powers. Developed countries represented by the U.S. are main membership fee payers to the UN and occupy important positions in it, thus being able to exert great influence on the decision-making process and implementation of the UN, even making it a tool for them to seek economic interests. (II)

International Monetary Fund (IMF)

International financial institutions represented by the IMF are important carriers for international monetary and financial regulation mechanisms, making great contributions to solving global financial governance issues such as global exchange rate surveillance, temporary financing and crisis relief. 1.

Purposes

The major purposes of the IMF include: (1) to promote international monetary cooperation through a permanent institution that provides the mechanism for consultation and collaboration on international monetary issues; (2) to facilitate the expansion and balanced growth of international trade, and to contribute to the promotion and maintenance of high levels of employment and real income, as well as the development of the productive resources of all members as primary objectives of economic policy; (3) to stabilize international exchange rates„ to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation; (4) to assist member countries in establishing a multilateral payment and exchange system for current transactions and eliminate foreign exchange controls that hinder the growth of world trade; (5) to provide temporary financing to member countries under appropriate conditions, thus providing them with confidence in correcting maladjustments in their balance of payments without resorting to measures that endanger national or international prosperity; (6) in accordance with the above, to shorten the duration and lower the degree of disequilibria in the international balances of payments of member states. In summary, the basic goal of the IMF is to stabilize international exchange rates, and its fundamental duties are to provide members with short-term loans and respond to temporary disequilibrium of international balance of payments.

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Economic governance functions

Economic governance functions of the IMF mainly consist of three parts: (1)

(2)

(3)

3. (1)

Global exchange rate surveillance and stabilizing global exchange rates. Exchange rate surveillance is a basic task of the IMF since its inception. After the Bretton Woods System collapsed, to stabilize exchange rates remains one of its main tasks. Provision of temporary financing to mitigate disequilibrium of international balance of payments of member states. The IMF provides its members with foreign exchanges based on their quotas to help them cope with temporary disequilibrium of international balance of payments. Provision of crisis relief to assist countries in dealing with economic and financial crises, and post-crisis recovery, etc. After the outbreak of the crisis, the IMF could grant loans to countries in crisis on the premise of carrying out structural adjustment and reforms, so as to support them to prevent the crisis from spreading and achieve long-term growth by reforms. Evaluation on results of global economic governance Contributions

Since its inception, the IMF has been playing a core role in stabilizing global exchange rates, responding to global financial crises, and maintaining stability of global economic and financial institutions. (1)

(2)

(3)

(2)

Stabilizing global exchange rates. Undeniably, the IMF contributed to some extent to maintaining the fixed exchange rate system and stable international financial system in the post-war period through exchange rate surveillance and coordination and providing short-term capital account liquidation. Mitigating the balance of payments deficit. The IMF provides the deficit ridden nations with all kinds of loans, such as the ordinary loans, supplementary loans and oil loans, which to a certain extent reversed the balance of payments deficit of such nations and gave them a chance to adjust balance of payments and recover economy. Backing countries in crisis against further shock from global financial crises. As seen in rounds of financial crises, temporary financial assistance of the IMF for crisis-stricken countries helped them prevent the crisis from upgrading and spreading. The organization also required them to carry out in-depth economic reforms and structural adjustment, which got them back on the sound paths of economic development. Limitations

The IMF has long been criticized and questioned for its governance structure, loan granting conditions, bailout capacity, etc., and there are increasing calls for reforming the IMF. In general, the global economic governance of the IMF has these main defects:

3.1 Actors of Global Economic Governance

(1)

(2)

(3)

(4)

(III)

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Insufficient funds. As the IMF has no right to issue currency, the adequacy of its funding utterly relies on the contributions of member states. The serious limitation and dependence of its funding sources have led to funding insecurity, thus making it hard for the IMF to effectively perform its functions in global economic governance. Insufficient supervision functions. As shown by historical financial crises, the IMF did not effectively perform the global financial supervision functions due to the lack and misalignment of its functions. So how would the IMF adjust its supervision focuses and manners, strengthen supervision and early warning of macro economy of various countries, and further supervise global capital flows and coordinate financial regulators across nations could greatly impact the effectiveness of its global financial governance in the future. Insufficient crisis early warning and response capabilities. No matter in the Southeast Asian financial crisis or in the 2008 international financial crisis, not only did the IMF fail to predict the outbreak of crises, but also responded slowly with insufficient fundings in strict conditions and thus brought very little effect. Therefore, the IMF has been widely questioned for its crisis early warning and response capabilities. Asymmetrical allocation of quotas and voting rights among the IMF member states. Developed countries occupy a dominant position in the IMF’s quota shares and voting rights, thus having decisive influence on the decision-making. The U.S. even has a veto power. By contrast, developing countries severely lack voice and voting rights in the IMF, which obviously cannot reflect the economic strength and international contributions of developing countries, especially emerging economies. The World Bank

The World Bank was founded at the same time as the IMF, both being specialized international financial institutions affiliated with the UN. Its members must be members of the IMF first. 1.

Purposes

Purposes of the World Bank include: (1) to facilitate productive investment of member states and assist them in economic recovery and development; (2) to spur private foreign investments via providing guarantee, private loans and other private investments, and supplement funds for member states out of its own funds or raised funds when they are unable to get adequate funds in reasonable conditions; (3) to encourage international investment, support members to improve productivity, and accelerate their long-term balanced development of international trade and improvement of balance of payments; (4) to coordinate its own lending with other international loans. We could see that, the main function of the World Bank is to provide long-term development loans to member states, especially developing countries, supplement development funds for them and accelerate economic recovery and development of all countries.

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Economic governance functions

The World Bank, IMF and WTO are the three most important pillars in the international economic system. While the World Bank only consists of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), the World Bank incorporates the IBRD, IDA, International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA) and International Center for Settlement of Investment Disputes (ICSID), which focus on respective development fields. The first three of them are mainly to offer loans to member states, which is the main business of the group, and the last two are on a mission of helping member states attract investment and settle investments disputes. Founded in 1944, the IBRD mainly focuses on providing long-term loans for development projects to the developing countries (members) with higher per capita income. Founded in 1960 and affiliated with the World Bank, the IDA is in charge of providing long-term loans to the poorest developing countries at conditions superior to those of the IBRD. Set up in 1956, the IFC, despite being a subsidiary of the World Bank, has independent legal person status. While the IBRD and IDA mainly grant loans to government agencies, the IFC directly lends to private sectors, to strengthen private sectors in developing countries. The MIGA, established in 1988, is mainly to provide political risk guarantee to foreign private investors, including guarantee against the expropriation risk, currency transfer restrictions, defaults, war and civil strife risks, and offer member states with investment promotion services. The MIGA also assists investors and governments in settling disputes which might exert negative impacts on projects under its guarantee. The ICSID was founded in 1966. It is the only specialized international arbitration institution settling investment disputes between foreign investors and governments of the host countries. Its purposes are to promote mutual trust between governments of the host countries and foreign investors, build confidence of investors from developed countries in developing countries, and settle investment disputes via arbitration and conciliation, to channel international private capital into developing countries. 3. (1)

Evaluation on results of global economic governance Contributions

The World Bank has been committed to help developing countries develop economy and fight against poverty. To this end, besides offering developing countries with loans at interests way lower than those of commercial loans, the World Bank imparts political advises and development knowledge to them (the bank is thus dubbed the “knowledge bank”), playing a great part in boosting economic and social development in developing countries and global poverty alleviation. On the one hand, the World Bank annually grants tens of billions of dollars of low-interest loans to developing countries to support their economic and social development projects. On the other hand, it provides these countries with knowledge assistance and technical assistance, helping them make development policies, and enabling them to improve production technologies and train technicians, which all contribute to building development capacities of developing countries.

3.1 Actors of Global Economic Governance

(2)

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Limitations

Constrained by various factors, the World Bank is inevitably faced with some limitations in global economic governance. One of the major limitations is the loan problems. The World Bank often lends on premises like carrying out structural adjustment, namely following the Washington Consensus. Yet those premises deprive debtor countries of development autonomy. The World Bank tends to lend to the developing countries with good development potential and high project investment returns, such as Southeast Asian countries, which means its loans fail to meet development and poverty alleviation needs of poverty-stricken countries, thus yielding much reduced effects of its loans. Another limitation is the will of major powers has been dominating the decision-making process. Similar to the IMF, the voting rights and important positions of the World Bank are controlled by developed countries, so the World Bank is essentially under the administration of developed countries. Its decisions reflect the wishes and preferences of developed countries, while the voices and demands of developing countries are always overlooked. (IV) 1.

The WTO Purposes

Purposes of the WTO include: (1) to promote the world’s economic and trade development, raise standards of living, and ensure full employment and a large and steadily growing volume of real income and effective demand; (2) to adhere to sustainable development, promote the optimal use of the world’s resources, put resources into reasonable use and protect the environment; (3) to expand the production of and trade in goods and services; (4) to ensure the quotas of developing countries, the least-developed countries particularly, in the growth of international trade through feasible and effective plans, thereby meeting their needs for economic development; (5) to significantly cut tariff and reduce other trade barriers through mutually beneficial arrangements, and eliminate discriminatory treatment in international trade. In summary, the core goals of the WTO are to ensure free, reasonable and orderly development of international trade, and promote the establishment of an open, transparent, systematic, more dynamic and lasting multilateral trading system. 2.

Economic governance functions

The WTO has primarily three economic governance functions: making multilateral trade operation rules, coordinating multilateral trade negotiations, and settling trade disputes between countries via international trade arbitration. First, making multilateral trade operation rules. To accelerate the liberalization of multilateral trade, the WTO has made principles of reciprocity, transparency, market access, promotion of fair competition, economic development and nondiscrimination, to regulate the international trade activities of member states. Besides, it has entered into many multilateral trade agreements, such as the the Agreement on Agriculture, Agreement on Technical Barriers to Trade and General Agreement on Trade in Service, to guide and standardize international trade activities in specific fields.

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Second, coordinating multilateral trade negotiations. Members of the WTO serve as a platform for multilateral trade negotiations. Since the GATT was developed in 1947, 9 rounds of multilateral trade negotiations have been organized under the framework. After the WTO was established in 1995, the Doha Round negotiations were commenced under the WTO framework. Each round of multilateral trade negotiations had a different trade subject, and multiple trade agreements were concluded. As a result, the global tariff and non-tariff levels dropped and progress was made towards multilateral trade liberalization. Third, settling trade disputes between countries. The WTO has made sound dispute settlement mechanisms, and settled many major trade disputes via negotiation and judicial methods, serving as an effective guarantee for the implementation of multilateral trade rules and smooth operation of international trade. 3. (1)

Evaluation on results of global economic governance Contributions

Since its foundation, the WTO has been a key platform for global trade cooperation, and playing a positive role in global trade governance. The WTO advocates the global multilateral trade liberalization, and endeavors to promote global multilateral negotiation, making outstanding contributions to the construction of global multilateral rules and standardization and facilitation of global trade activities. Meanwhile, it helps to mediate and settle trade disputes between countries, and thereby has boosted the substantial growth of global trade and investment. The organization also monitors trade policies and practices of countries via its trade policy review mechanisms, which has to some extent restrained trade protectionism, mitigated shocks to the global economy from global financial crises and economic crises, and promoted quick recovery and stable development of the world economy. (2)

Limitations

Limitations of the WTO in global economic governance are mainly reflected in the following three aspects: First, stagnation of the Doha Round negotiations. The Doha Round multilateral trade negotiations determined eight negotiation subjects, including the market access for agricultural and non-agricultural products, services, intellectual property rights, rules, dispute settlement, trade and the environment, and trade and development issues. Among them, the focus was the market access for agricultural and nonagricultural products, which also represented the biggest dispute between developed and developing countries and resulted in the stagnation of the negotiations. Second, endless trade protectionism, especially in the field of agriculture. The WTO has always been stressing the importance of opposing trade protectionism, calling on member states to lift all kinds of trade barriers, and is object to new export limitations or export stimulation measures against WTO principles. Yet, not only are new forms of protectionism still emerging one after another, but also protectionism in agriculture has never been abated. Disappointingly, The WTO has been unable to do much about it.

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Third, the increasingly widening of issue introduction to the multilateral trade institutions, namely the domain of the WTO. The WTO is a multilateral organization of international trade, yet it stirs a finger in more and more affairs, not only covers trade and investment, but also involves services, intellectual property protection, government procurement, environment, etc.

3.1.2 Informal Inter-governmental Organizations These organizations could roughly be divided by member composition into three types: cooperative organizations among developed countries, as represented by the G7; cooperative organizations between developed countries and developing countries, such as the G20 and APEC; cooperative organizations among emerging economies, typically the BRICS. (I)

Economic governance of the G7

1.

Purposes

The G7 was originally formed to coordinate countries’ economic policies to solve world economic problems and resume economic growth. Therefore, in early days, its conferences focused on economic issues. Yet since the 1980s, with economic conflicts among nations aggravating, economic agreements have often been unable to yield expected results. Coupled with further strained relations between the West and the East, political and security problems have gradually been the theme of conferences of the G7. 2.

Economic governance functions

The first main function of the G7 is economic policy coordination. The main tasks of the G7 are to coordinate macroeconomic policies and foreign economic relations among member states, help countries to respond to crises and resume world economic growth. Economic policy coordination of the G7 is mainly about coordinating fiscal policies, monetary policies and other domestic macroeconomic policies at domestic levels, establishing stable international economic institutions, implementing financial crisis bailout, accelerating the establishment and smooth operation of the international trading system, as well as providing solutions to address other major international economic problems. The second function is to promoting global agenda setting, conclusion of global agreements and formation of international economic rules. For instance, the G7 has always been an active leader and promoter of the multilateral free trade system under the framework of the GATT/WTO. Faced with global economic disequilibrium, at the initiative of the G7, the well-known Plaza Accord and the Louvre Accord were signed in 1985 and 1987 respectively, so as to mitigate the trade deficit of the United States and limit the negative impacts of excessive depreciation of the US dollar on world economy. In the area of international finance, it has been calling for international

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financial system reforms, and has signed a number of agendas on reforming the international financial system and institutions. 3. (1)

Evaluation on results of global economic governance Contributions

As an important platform for coordinating international economy, the G7 has exerted contributive influence on reducing exchange rate fluctuation in Western developed countries, stabilizing international financial markets, responding to economic crises, etc. After the conclusion of the Plaza Accord in 1985, the seven member states jointly intervened in the foreign exchange market, and adjusted their monetary, financial, as well as other macroeconomic policies. With those efforts, they basically managed to stabilize the U.S. dollar and prevent international exchange rates from undue fluctuation. The seven nations managed to improve the trade deficit of the U.S. to some extent by coordinating exchange rates and trade policies, controlling fiscal deficit, opening markets and adjusting interest rates, which partially relieved the economic disequilibrium of countries across the world. The G7 promotes international financial stability and reforms by giving instructions and suggestions to international economic organizations such as the IMF and the World Bank. It mainly focuses on global issues, jointly respond to challenges of economic globalization, which has boosted the healthy development of economic globalization. (2)

Limitations

The G7 has neither permanent body nor secretariat to handle the day-to-day affairs. It is an informal meeting/forum whose declarations or resolutions are not binding on its member states. The G7 has many defects, including the following aspects: (1) (2) (3)

(4)

It was originally set up as a club for major democratic nations, but its strong ideological features have been fading. It used to be a relatively stable alliance in the Cold War, but has been reduced to relatively loose international security cooperation. Initiated by France and Germany, the G7 initiative has a serious disequilibrium in representativeness, with four members out of the seven from Europe, but emerging economies like China and Brazil excluded. Such symptoms as low growth, high debt and high unemployment are highly similar across the G7 countries. The consultations on the existing G7 platform can only alleviate the symptoms but cannot solve the substantive problems, lacking the ability to carry out macroeconomic coordination with the rising emerging economies.

With the marked variation in global economic power distribution, the gradual spread of scattered conflicts, and the increasing complication of social ideologies including terrorism, the original governance mechanisms are less and less efficient and no longer capable of responding to complex situations.

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(II)

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Economic governance of the G20

Founded in 1999, the G20 is a mechanism of informal dialogue under the Bretton Woods System. It does not have an explicit charter reflecting its basic ideas or requirements of ideology. It is unlike the UN or the G7 in this regard, because the UN has its charter and the G7 takes democratic nations as the banner. 1.

Purposes

The G20, consisting of the previous G8 and other 12 important economies, is an international economic cooperation forum convenient for its member states to have informal dialogues. It is aimed at encouraging open and constructive discussions and negotiations between developed countries and emerging nations on substantial issues like international economy, monetary policies and financial institutions, as well as seeking cooperation and promoting the reform and stability of the international financial system and sustained economic growth. 2.

Economic governance functions

Global economic governance functions of the G20 are closely centered on global economic growth and stability, falling into four types roughly: Type one, implementing and making progress in long-term agendas of global core economic governance, such as making sure each of the national governments makes macroeconomic policy coordination necessary for a sustainable and balanced growth. Such function dates back to a commitment at the 2009 G20 Pittsburgh Summit. The “strong, sustainable and balanced growth framework” put into implementation afterwards still works today. The core of the framework is a multilateral process through which the countries of the G20 determine the goals of the global economy and the policies that need to be implemented to achieve them. Type two, implementing and advancing prioritized agendas for global economic governance highly concerned by the G20 Presidency, such as rebalancing governance of the global economy proposed at the 2010 Seoul Summit and urging the relevant working group to carry out the tasks. In 2011, the growth framework working group, after a year of negotiations, managed to work out the reference guideline for governing global economic disequilibrium. The rebalancing governance is a manifestation of economic governance function which are highly professional and technical. Type three, supervising economic governance capacity building of international organizations. To meet practical needs, the G20 both guides existing international organizations to reform and transform, such as urging the IMF to reform to defuse disequilibrium, providing the WTO with political support, etc., and endeavors to create a number of supplementary governance organizations, such as the Financial Stability Board (FSB) and the Global Infrastructure Hub (GIH). Type four, the governing function of international rules. The G20 has gradually developed into an accepted platform of international standards and rules. At this platform, a range of international standards and principles such as the Basel III, SIFI and Paris Climate Agreement have been proposed and adopted.

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Evaluation on results of global economic governance Contributions

The G20 was originally founded to respond to global financial and economic crises, prevent global economic recession and accelerate global economic recovery. To this end, many extensive consensuses have been reached at the G20 summits, such as the massive economic stimulating policies, capital increase to the World Bank and the IMF to assist countries hit hard in the crises, strengthening of global financial regulation and promoting the reform of the international financial system. Those consensuses and cooperation efforts successfully refrained crises from further spreading and prevented the global economy from continuously and quickly slowing down, and contributed to gradual recovery of consumption, investment, etc., and economy as well. The first three G20 summits were focused on temporary fields of responding to global financial crises. Since the Pittsburgh Summit, the themes have extended to reforms of global economic governance institutions, not related to crises, such as the Doha Round negotiations, energy security and commodity price fluctuation, with some progress and consensus reached in these fields, which has greatly advanced the governance of global trade investment, finance, etc. (2)

Limitations

Instead of proposing or laying down decision-making mechanisms, the G20 operates according to the rules of procedure based on consensus. It does not have voting rights or other decision-making mechanisms. Similar decision-making mechanisms are adopted by the WTO. “Consensus” means a decision is only adopted if not opposed by any member. It ensures the principle of fairness, and is not as strict as “unanimous approval,” yet such mechanism is inevitably not that efficient. Thus, when discussing short-term issues, it might be delayed. The G20 is not sufficiently binding in terms of governance. Manifestos or action plans announced on the G20 platform are without a binding force, which could be difficult to put into effective implementation. Rivalries among countries could further delay effective cooperation. What’s worse, considering the regime difference among countries, even the top administrative leaders may be unable to prompt legislative reforms in the relevant fields domestically. The problem of “domestic law first” is hard to overcome in G20 governance. In other words, any country could find excuses to refuse the G20 agreements or declarations, making the implementation of G20 summit consensuses much less effective. The G20 is just a liaison network. It does not have a permanent secretariat or permanent employees, or management bodies for implementation or supervision. Its summits are totally undertaken by the presidency, which rotates among the member states. In consequence, the agenda setting, summit arrangements and publicity affairs totally depend on the influence and capacity of the organizing country, and there are no supervision or communication mechanism in place. Such rotational manner, despite well ensuring the flexibility of the G20, could cause governance discontinuity among major agendas and reduce the yields of governance investment.

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(III)

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Economic governance of the APEC

The APEC represents a key economic cooperation forum in Asia–Pacific and the top inter-governmental economic cooperation mechanism in this region. Yet the APEC, unlike the EU, NAFTA or other obviously exclusive and agreement-based regional trade or economic organizations, is a regional cooperation mode with its uniqueness. It follows the principle of voluntary, flexible and gradual participation internally, and upholds the principle of open regionalism externally, playing a positive role in boosting development and cooperation in and beyond the organization. 1.

Purposes

The purposes of the APEC are: (1) to promote economic growth and development in this region; (2) to spur the economic interdependence among member states; (3) to consolidate the open multilateral trade regime; (4) to reduce regional trade and investment barriers and maintain common interests of residents of this region. It is thus clear that the core goal of the APEC is to spur trade and investment liberalization and facilitation, which is the original intention to set up the organization, and thereby accelerate economic growth and improve people’s livelihood in Asia–Pacific. 2.

Global economic governance functions

As shown in its purposes that the APEC mainly aims at promoting trade, investment and economic development of this region, its economic governance functions are mainly to build sound regional cooperation mechanisms, accelerate market opening in Asia Pacific, and thus create a favorable external environment for economic development of each country. However, openness is one of the main principles of the APEC. In other words, its economic governance functions would also extend to the global economic governance level, including promoting trade and investment liberalization at the global level through regional spillover effects, strengthening coordination and cooperation with other global mechanisms, and leading the trend of global economic development. First, the APEC promotes global trade and investment liberalization by virtue of regional spillover effects. The spillover effect means the regional integration progress advocated by the APEC would indirectly affect the global integration progress. On the one hand, since the APEC is open in nature, its outcomes based on internal negotiation also apply to those beyond this region, which could expand the scope and influence of the regional integration. On the other hand, the APEC discusses increasingly more issues, no longer limited to regional economic cooperation, and among them many are global subjects. Therefore, the APEC is not a closed regional cooperation organization, but a global regional cooperation organization. And with its influence spreading, it is going to play a more important global role. Second, strengthening coordination and cooperation with other global mechanisms. For one thing, the APEC is increasingly active in interacting with international organizations, particularly the G20, in global economic governance. For example, China served as the presidency of the APEC in 2014 when Australia was in the same position at the G20 Summit. Both countries had close cooperation in conference coordination, especially the agenda setting. For another, the APEC also gives

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positive support to other international organizations. For instance, the organization advocates global trade liberalization, thus highly recognizing and actively supporting the multilateral trade negotiations of the GATT/WTO. 3.

Evaluation on results of global economic governance

The global economic governance functions of the APEC have not been given adequate attention to, and people from all walks of life still only concern its governance effect in the Asian-Pacific region. (1)

Contributions

For one thing, it is conducive to consolidating global economic governance functions of other international organizations. As mentioned above, the APEC, by close interaction with other international cooperation mechanisms, could provide some references and guidelines for global activities of other international organizations, and thereby make its global economic governance functions more in line with the general development trend and the development needs of countries across the world. Apart from that, the organization could provide regional policy support for governance of other global mechanisms, and help them better implement and advance their governance rules and mechanisms. For another, advancing global economic governance in a fairer and more balanced direction. Two thirds out of the 21 members of the APEC are developing countries, which could ensure the adequate voice of these countries. In another word, the APEC could act as a platform and tool for developing countries to challenge the existing global economic pattern dominated by developed countries, promoting global economic governance more favorable to the development of developing countries. (2)

Limitations

First, lack of technological cooperation. The core goals of the APEC are to boost trade and investment liberalization and strengthen economic and technological cooperation, but developed countries have always tried to limit cooperation to liberalization and skirted around technological cooperation. Therefore, while the APEC is promoting trade and investment liberalization in and outside the Asia–Pacific, technological cooperation inside and outside the region has seriously lagged behind the liberalization process. Second, the balance to be stricken between flexible and voluntary cooperation and non-binding implementation mechanisms. The open, flexible and voluntary cooperation principle of the APEC is based on differences in development levels, stages and demands of different members, which fully respects the decision-making power of each member. It is good for coordinating interests of all parties and promoting the conclusion of agreements. However, the voluntary and flexible cooperation manner means the agreements lack binding force, thus leaving the implementation effect very uncertain.

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3.1.3 International Non-governmental Organizations There is not a unified or explicit demarcation between civil societies and nongovernmental organizations. A civil society could be understood as a social entity consisting of citizens beyond governmental and market mechanisms (companies) (Zhao 2000), including all kinds of non-governmental organizations (such as labor organizations), associations, organizations, foundations, federations, etc., among which non-governmental organizations are the most important and socially influential. Transnational civil societies are embodiment of civil societies at the global level. They are transnational entities other than governmental mechanisms (nation states and international organizations consisting of nation states) and market mechanisms at global level. (I)

Roles of international non-governmental organizations in global economic governance

Core roles of non-governmental organizations are to cope with issues overlooked or shunned in the globalization process and promote global economic governance towards a more effective, fairer and more sustainable direction. 1.

Non-governmental organizations make global economic governance more effective

Non-government organizations are the “third force” beyond the government and the market. In addition to providing advises and proposals for global economic governance in the forms of political consultation, lobbying and campaigning, etc., they would pay attention to issues overlooked by the government or ineffective governance, so as to make global economic governance more effective. 2.

Non-governmental organizations make global economic governance fairer

For one thing, non-governmental organizations pay attention to the rights and voices of developing countries in international organizations’ rule setting, and influence the rules of international organizations in various ways. For another, non-governmental organizations also pay attention to the vulnerable groups in each country around the world and convey their needs at the global level. In general, by participating in global economic governance as important entities, non-governmental organizations help diversify global economic governance actors and decentralize the governance, and thus make it more democratic and fairer. (II)

Ways for international non-governmental organizations to participate in global economic governance

Non-governmental organizations participate in global economic governance mainly in three ways: consultation and advice, lobbying, and cooperation with international organizations.

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1.

Consultation and advice. Many non-governmental organizations enjoy the counselor position at international organizations, and can provide information and policy advice to national and international organizations. Some nongovernmental organizations could also attend conferences or forums convened by international organizations, at which they can express opinions and give advice. Lobbying. Non-governmental organizations would lobby governments or international organizations through guiding public opinions, protests, online publicity, etc., to accept their governance philosophies. Cooperation with international organizations. Compared with government agencies, non-governmental organizations may have special professional skills in certain fields. They operate flexibly and go deep among the masses, and boast comparable advantages in project implementation. Therefore, national or international organizations would often cooperate with non-governmental organizations on project planning and implementation. Besides, non-governmental organizations could supervise the implementation progress of decisions, agreements or commitments made by countries or international organizations, to ensure a fair, just and effective global economic governance.

2.

3.

3.1.4 Roles of Nation States in Global Economic Governance The principle of sovereignty represents the fundamental principle of international relations, so sovereign states are the most important players in global economic governance. Yet global economic governance itself is a process of transnational coordination and cooperation and jointly solving global issues, which is impossible for individual sovereign states relying solely on their own strength. Global economic governance must depend on certain transnational cooperation mechanisms. Such mechanisms might be formal international organizations or loose and informal ones. In the two different cooperation mechanisms, relations between sovereign states and international organizations would also differ. (I)

Relations between countries and formal organizations: principal-agent

In global economic governance, the principal-agent relations mean the sovereign states transfer some sovereignty to international organizations, entrusting them to coordinate the multilateral cooperation among sovereign states, help them better deal with global issues or seek more development interests for them. In such relations, the sovereign states are the principals and international organizations the agents. When founding international organizations, international treaties or accords would be entered into for members to abide by, which specify the rights and obligations of the sovereign states and international organizations. Those treaties and accords could be deemed a contract between the sovereign states and international organizations. In the principal-agent relations, both the principals (sovereign states) and the agents (international organizations) would incur some costs and get some benefits. Costs

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to the principals (sovereign states) are mainly part of the sovereignty transferred, meaning they might be limited to some extent when performing national functions, and contribution quotas and donations to international organizations. Benefits for sovereign states include: (1) international organizations could serve as a communication platform for them, provide them with cooperation mechanisms and methods, and lower the transaction costs between two sovereign states; (2) many international organizations could provide sovereign states with professional advice and instructions with their expertise; (3) international organizations could, with their sharing mechanisms, make it convenient for member states to share development experiences and information, to help member states avoid economic risks and better promote healthy and sustainable development domestically. (4) international organizations could also provide member states with crisis responding funds and plans, helping them getting out of crises. Costs to the agents (international organizations) are mainly costs of exercising the “sovereignty”, such as coordinating member states on policies and actions and helping them to develop, as well as management costs to operate and expand influence. Benefits for international organizations are the “sovereignty” transferred by the member states, which enables them to restrain and affect actions of the sovereign states according to the contract between the two parties, the opportunity of obtaining authority and legitimacy, and receiving funds from the member states. On the surface, the sovereign states are weakened in sovereignty for part of their sovereignty has been transferred, but such delegation is out of their voluntary and rational choice. It is for greater development benefits at less costs. More importantly, despite that sovereign states have transferred some sovereignty to international organizations, international organizations themselves do not have independent decision-making power, and they are representatives of interests and intentions of the former. To be specific, the transfer from the sovereign states to international organizations, namely the establishment of the principal-agent relations, is independently determined by the countries. All accords, conventions and treaties issued by international organizations are formulated or adopted by their member sovereign states. Within international organizations, the actual participation of international organizations in global economic governance is also determined by power distributions and interactions between sovereign states. In a word, the sovereignty transfer would not weaken the sovereignty of sovereign states, but is a transcendence of the traditional national sovereignty standard, which is actually a “return” to national interests at a higher level (Zhang 2004). So sovereign states still dominate the international system and are the most important governance actors in global economic governance (Sun 2013). (II)

Relations between countries and informal international organizations: international coordination

Informal international organizations are mostly lack of a formal organizational framework, and thus without bodies to accept or exercise “sovereignty”. Therefore, sovereign states and informal international organizations are not principal-agent relations. Informal international organizations depend on voluntary coordination among

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members. To be specific, sovereign states regularly meet at summits, forums, etc., to discuss and exchange ideas on the major global issues or challenges concerning them all, coordinate their stances, reach consensuses and take collective actions. The resulting documents or commitments are not reached by formal voting, but totally depend on negotiation and consultation among members. The follow-up actions are not binding or similar to punishment mechanisms in formal international organizations, but voluntary common actions of members. The G7 and the G20 are typical representatives of coordinated diplomacy among major powers, demonstrating some fundamental features of coordinated diplomacy: the exclusive groups formed by independent and equal major powers to respond to crises and ensure the international order and systemic stability through institutionalized summit diplomacy.

3.2 Operating Mechanisms of Global Economic Governance Mechanisms of global economic governance are diverse in nature, including membership of governance actors, decision-making mechanism, dispute settlement mechanism, implementation mechanism, supervision mechanism, and so forth.

3.2.1 Membership Mechanism Membership of international organizations is to be obtained by founding or joining the organizations. The founding members are usually the contracting member states/parties of international organizations at the beginning of their founding, which commit to fulfill the obligations stipulated in relevant agreements. The acceding members are the member states/parties that apply to enter a certain international organization and, after a series of negotiations (with existing member states) and resolutions, commits itself to fulfilling the corresponding obligations and agreements. Legally speaking, the rights of an acceding member and a founding member are equivalent. However, during the negotiation process, special requirements are usually imposed to the acceding members, who may thus assume more obligations than founding members. Most international organizations have both founding members and acceding members.

3.2.2 Decision-Making Mechanism In solving global issues, the decision-making mechanisms adopted are usually the consensus mechanism and the voting mechanism. The latter is further divided into the

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weighted voting mechanism and the equal voting right mechanism (the unanimous approval and the majority approval mechanism). Among them, “consensus” is the basic and leading principle. (I)

Consensus mechanism

The consensus mechanism is to adopt an agreement (or some agreements) without voting through a series of negotiations and consultations. It has been widely adopted in the negotiation rounds and environmental negotiations of the WTO. The consensus mechanism can reflect the true intentions and the needs of all parties by considering and coordinating their demands during the negotiations. The proposals reached through this mechanism are more likely to gain consensus, thus facilitating effective implementation afterwards. But of course, to reach consensus among all members is a time-consuming process, and it may easily trap into deadlock or even end in failure. (II)

Voting mechanism

The voting mechanism could fall into the equal voting right mechanism and the weighted voting mechanism. Under the equal voting right mechanism, countries have equal voting power as each country has only one vote, so it is also known as the “one country (or person), one vote” mechanism. This mechanism is commonly adopted by organizations such as the UN, the World Customs Organization, the International Civil Aviation Organization and the BRICS New Development Bank. Under the weighted voting mechanism, the voting power of each member state varies, which often depends on their financial strengths and contributions to the organization. The weighted voting mechanism underlines efficiency and is characterized by voting rights based on contribution shares as the basic decision-making tool, with a varying number of votes granted to voters depending on their contribution. The share of votes reflects both the economic strength of a country and determines its rights and obligations in the international organization. This mechanism is mainly used in UN affiliated institutions and modern corporate systems such as shareholders meetings featuring “one share, one vote”. The equal voting right mechanism has reflected the sovereign equality principle stressed in international laws, but the differences in member states’ national comprehensive strengths and their contributions to international organizations would lead to the mismatch between contributions and rights. Therefore, the mechanism of equal voting rights has been abandoned in many international organizations. Indeed, the weighted voting mechanism has defects too, for it gives excessive power to a few countries. The biggest problem is that while developed countries, even a single country could control all decisions, developing countries are unable to participate in the decision-making process concerning international affairs. So how to strike a balance between the weighted voting mechanism and the equal voting right mechanism, as well as taking into account both fairness and efficiency is a key area for the reforms of international decision-making mechanisms in the future.

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3.2.3 Dispute Settlement Mechanism According to the different subjects of disputes, international dispute settlement mechanisms can be divided into two categories, namely the mechanism to resolve disputes between foreign private investors and host governments, such as the investment dispute settlement mechanism of the World Bank, and the mechanism to resolve disputes between sovereign states, such as the WTO dispute settlement mechanism.2 At present, the dispute settlement mechanism of the World Bank and that of the WTO are the two most widely applied dispute settlement mechanisms in the world. Yet it is worth mentioning that the draft Multilateral Agreement on Investment, an investment dispute settlement mechanism of the OECD, and those mechanisms of the NAFTA could also apply to both kinds of disputes mentioned above. (I)

Investment dispute settlement mechanism of the World Bank

To handle the increasing investment disputes between foreign investors and host governments, the Executive Board of the World Bank adopted the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention) in 1965. And the International Center for the Settlement of Investment Disputes (ICSID) was set up to settle investment disputes between states and nationals of other nations, which is currently the only international arbitration body to resolve investment disputes between foreign investors and host governments. Yet the Washington Convention only applies to disputes between a State party to the Convention (a State) and a private investor (of another State party), and settles investment disputes by arbitration. The convention provides for two types of investment dispute settlement, namely mediation and arbitration, which both are independent procedures. Disputing parties are entitled to request mediation only, and to request mediation first and then arbitration if the mediation fails. Very few of the cases filed to the ICSID are ultimately resolved by mediation. The vast majority were done by arbitration. Thus, the focus here is on the arbitration procedures, which are similar to the mediation procedures.3 The arbitration procedures commence with one party submitting a written request to the ICSID Secretariat. If the matter in dispute in the written request falls within the jurisdiction of the ICSID, the Secretary General has to register the request and timely inform both parties. Afterwards, the Secretariat has to establish an arbitral tribunal as soon as possible to hear the case in accordance with the arbitration procedures and rules of conciliation set forth in the Washington Convention. After the case has been heard, the arbitral tribunal issues a final award, which must be adopted by an affirmative vote of a majority of all the arbitrators of the tribunal and signed by the arbitrators who voted in favor. Then the Secretary General would send a copy of 2

On May 26, 1995, it is decided at the OECD ministerial conference to commence the negotiation on the draft Multilateral Agreement on Investment (MAI). But the draft was amended again and again and was not finalized. 3 Sections 2 and 3 of the Washington Convention specify the mediation and arbitration proceedings respectively for reference.

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the final award to both parties, which is binding and must be strictly enforced by the parties to the dispute, without the possibility of appealing the award or pursuing other remedies than those provided for in the Washington Convention. (II)

Dispute settlement mechanism of the WTO

The dispute settlement mechanism of the WTO is regarded as the “crown jewel of WTO.” The Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) adopted in the Uruguay Round negotiations in 1994, as the most basic core document of the WTO dispute settlement mechanism, constitutes the legal basis of the WTO dispute settlement mechanism together with Articles 22 and 23 of the GATT. The specific procedures of the WTO dispute settlement mechanism include compulsory consultations, optional good offices, mediation and conciliation, panel procedures, appeal procedures, enforcement and monitoring of decisions, as well as remedial procedures. Each stage should follow the corresponding principles and time limits. Consultation is a mandatory first step in dispute settlement and is conducted through the Dispute Settlement Body (DSB). In the event that the parties fail to resolve their dispute through consultation, they may also turn to mediation through the DSB before the establishment of the panel. Mediation is an informal dispute settlement procedure where with the consent of all parties to the dispute, they voluntarily choose a neutral third party to coordinate each other and help them reach an agreement. Good offices, mediation and conciliation can commence or be terminated at any time, with a great deal of flexibility. In the event that the two aforementioned stages fail to resolve the dispute, the complaining party may request the DSB to establish a panel of experts, and the dispute resolution will enter the panel stage. The panel shall assist the DSB in carrying out its duties, make an objective assessment of the matter in dispute, prepare a report on the investigation (three copies: narrative report, interim report and final report), and circulate the final report to the members, after which the DSB begins to consider whether to accept the report. If a disputing party is dissatisfied with the panel’s report, it can file a notice of appeal to the Appellate Body (established by the DSB), which must review the panel’s report, complete the case and distribute its report within a specified time limit. Where a panel or Appellate Body report has been adopted, the parties to the dispute shall notify the DSB of their intention to comply with the DSB’s recommendations or rulings as well as the specific measures and deadlines for correction within a reasonable period of time from the adoption of the report. When the losing party fails to implement the ruling after a reasonable period of time, the parties concerned may seek an agreed compensation package through negotiations.4 If no compensation package is reached within a reasonable period of time, the parties may request the DSB to authorize the suspension of concessions against the losing party in retaliation.5 4

The remedy is actually a more preferable treatment the losing party gives to the complaining party, such as relaxing control over market access or providing more trade opportunities. 5 Retaliation means to force the losing party to make certain concessions on trade benefits, but the concession suspension should be commensurate with the extent of the damage caused. If a party objects to the decision, it’s allowed to file for arbitration.

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Although the dispute settlement mechanism of the WTO is mostly applied to international trade disputes, it also covers some investment disputes concerning trade (not all international investments), namely the Agreement on Trade-Related Investment Measures (the TRIMS) adopted during the Uruguay Round negotiations in 1994. Differences between the investment dispute settlement mechanism of the WTO and that of the World Bank are as follows. First, the ICSID of the World Bank better applies to the disputes between host governments and private investors, while the DSU of the WTO mainly applies to the investment disputes between sovereign states represented by investment controls. Second, while the ICSID of the World Bank mainly settles investment disputes via arbitration, the DSU of the WTO mainly resorts to quasi-judicial mechanisms. Third, the aribitration procedure of ICSID is without strict time limits, which might lead to prolonged cases, while the DSU sets strict time limits and procedures for case hearings, thus more efficient. Last, for the ICSID, there is not a powerful enforcement body, while the DSU provides for deadlines and corresponding measures to implement the resolution, which can be enforced more smoothly.

3.2.4 Supervision Mechanisms Supervision mechanisms of international organizations could roughly be divided by the object and manner of supervision into the bilateral/national supervision mechanisms, regional supervision mechanisms and multilateral/global supervision mechanisms. (I)

Bilateral supervision mechanisms

The bilateral supervision mechanisms, also known as the national supervision mechanisms, serve as the main supervision manner of international organizations. They are performed via negotiations, namely international organizations negotiate and discuss with individual member states on their macroeconomic policies or specific issues regularly and comprehensively, and provide policy advice to member states accordingly. The bilateral supervision is an obligation of all member states. The supervision negotiation usually takes place once a year aimed at each member state, and sometimes interim discussions are required. The most typical national supervision mechanism in global trade is the Trade Policy Review Mechanism (TPRM) of the WTO. The TPRM, the trade negotiation mechanism and the dispute settlement mechanism, are three important operation mechanisms that ensure the smooth operation of the WTO. It is a specialized procedure on the national basis to regularly and comprehensively review trade policies and practices of the WTO members and their influence on the multilateral trade system in rotation. Its goals are to spur the WTO members to make trade policies and measures more transparent, and urge them to fulfill their commitments and better comply with WTO rules, thus contributing to the stable operation of the multilateral trade regimes. The trade review mechanism of the WTO is essentially a supervision mechanism for

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trade policies and practices of its member states, and the only venue for all WTO members to review the trade policies. Notably, the trade policy review mechanism is “soft” supervision without legal binding force, thus not binding on the member states, which makes it less effective. In the field of international finance, the most typical supervision is the bilateral supervision of the IMF over its member states’ exchange rates, which aims at ensuring the orderly exchange arrangements and stable exchange rate system, and eradicating foreign exchange controls that are hindering international economic and trade development. To ensure “external stability” is the core principle of IMF bilateral supervision. To stabilize the exchange rate system, each member state must ensure the external stability, meaning not to adopt policies that might cause disruptive fluctuation of exchange rates, covering pure exchange rate supervision. That means the supervision scope of the IMF supervision mechanism has gone way beyond pure exchange rate policies, and monetary policies, fiscal policies, trade policies and other internal and external policies of the member states may all affect external stability. Main ways of IMF bilateral exchange rate supervision include: (1) first, regularly checking if the exchange rate policies of the member states comply with the obligations under the Article 4 of the Agreement of the International Monetary Fund, and providing them with instructions and advises based on these exchange rate policies; second, requiring the member states to provide economic data related to exchange rate stabilizing according to its data disclosure standards, and thus the IMF could timely supervise and coordinate; and third, regularly or irregularly negotiating with member states, so that the IMF could understand the economic development status and policies of the member states and give pertinent suggestions. Notably, the supervision mechanism of the IMF mainly targets developing countries, especially emerging economies. Its supervision over developed countries severely lags behind, which is fully shown in the latest subprime mortgage crisis and global financial crisis. (II)

Regional supervision mechanisms

The regional supervision mechanisms are mainly to supervise and negotiate on economic policies of regional international organizations. We could see that regional organizations are actually under supervision at two levels by international organizations, namely the bilateral supervision over each member state of the regional organizations and the regional supervision over the whole organizations. Taking the regional supervision mechanism of the IMF as an example, regional supervision means that the IMF supervises and negotiates about common economic policies implemented under regional arrangements like monetary unions, such as discussions with regional organizations or arrangements like the European Union, Eurozone, West African Economic and Monetary Union, Central African Economic and Monetary Union, and Eastern Caribbean Monetary Union. (III)

Global supervision mechanisms

The multilateral or global supervision mechanisms are to supervise the global economic performance. The multilateral supervision of the IMF is to supervise and evaluate the development status of the global economy and international capital

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market, mainly by the semi-annual World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR). While What WEO publishes is the analysis and forecast of the staff on economic prospects of the world, major regions and different countries, and the GFSR focuses on analyzing, evaluating and publishing all kinds of developments and risks in the international financial market. The multilateral supervision mechanism of the G20 is mainly to spur major international organizations to step up supervision of international financial systems, especially the macroeconomic policies of the reserve currency country, and regulation of systematically important financial institutions and international sources of hot money. In other words, in terms of supervising global economic institutions, the G20 has developed its own supervision mechanisms, besides urging other institutions to give play to and improve their supervision functions and further cooperating with them on supervision. It should be emphasized that the supervision mechanism of the G20 is informal, because its supervision is unlike that of the IMF or the WTO, which is a binding procedure. It is more of a forum-style initiative, and its implementation is not compulsory, but decided independently by each member state.

3.3 Main Areas of Global Economic Governance As the traditional global economic governance areas, international trade and finance are always the focus of concern by all walks of life. There are formal international trade and finance organizations (the WTO and the IMF) and rules and mechanisms. By contrast, other governance areas like investment and development are not taken that seriously for many reasons. Necessary governance organizations and principles are still to be set up. This part focuses on international finance, international trade and investment, climate change and environmental governance, international macroeconomic policy coordination and international development, and details about the governance issues in these five areas.

3.3.1 International Finance Governance International financial governance is mainly focused on three important issues: international financial supervision, financial crisis responding and international monetary system reform. International financial supervision is mainly divided into supervisions over financial institutions (micro level), over financial markets (medium level) and over financial institutions (macro level). To be specific, supervision at the micro level is aimed at improving risk management capacities of individual financial institutions; setting quantified liquidity supervision standards and building abilities of individual financial institutions to respond to short-term liquidity shock; increasing transparency of financial institutions and strengthening market restrictions. Supervision at the

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medium level is to determine reasonable financial supervision scope, with particular attention to be paid to properly supervising the shadow bank system such as hedging funds, private equity funds, etc.; managing financial derivatives market and spur legal and standardized transaction behaviors; strengthening supervision of credit rating institutions; enhancing the consistency among standards of different financial competent departments to reduce the room for arbitrage among different financial markets. The core goals of supervision at the macro level are to lower systematic risks, particularly to step up supervision over systematically important financial institutions and ensure a more strict and effective supervision; build the bail-in mechanism and defuse the moral risk from “too big to fail”; prevent risk spreading among global systematically important financial institutions. To respond to global financial crises, we need to prevent financial crises, give emergency solutions and ensure recovery after crises. To step up international financial supervision serves as an effective way to prevent financial crises. Where financial crises are inevitable, international organizations are to be relied on as the “last lender”. However, the IMF didn’t function well as a “last lender”. So how to reform the IMF to make it a better “last lender” is an important issue to be dealt with in international financial governance. Lastly, the recovery solutions after crises. To respond to financial crises, we need to solve issues like how to ensure the feasibility of the recovery solutions, how to balance the independent development rights and the assistance plans of the IMF, and how to step up international cooperation on co-responding to crises and avoiding the beggar-thy-neighbor foreign policies. To reform international monetary system is to reform the international reserve currency system dominated by U.S. dollars. This is an age-old problem. There are three types of solutions to reform international reserve currency system: maintaining the existing international reserve currency system without reform; building diverse reserve currency institutions; creating international reserve currencies transcending sovereignty, and to further reform the SDR, which might be a good solution.

3.3.2 International Trade and Investment Governance International trade and investment governance focuses on: establishment of multilateral trade and investment rules, fight against trade and investment protectionism and promotion of trade and investment facilitation. First, establishment of multilateral trade and investment rules. International organizations like the GATT/WTO and the World Bank have tried to establish the multilateral investment rule system, but all ended up with a failure. Global investment governance is still based on some bilateral investment treaties now. Second, eradication of trade and investment barriers and promotion of trade and investment facilitation. To fight against the trade protectionism is to spur countries to actively lower all kinds of tariff and non-tariff barriers, adopt the free trade policies and co-work to promote the global trade liberalization. To eradicate investment barriers is to get rid of artificial barriers to investment, boost free flow of capitals around the world and realize investment liberalization. Third,

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promotion of trade and investment liberalization. There is not a unified definition of trade and investment liberalization, but basically it is to simplify and coordinate all procedures of and barriers to international trade and investment, mainly to simplify and coordinate trade and investment procedures and formalities, improve legal and administrative institutions, and standardize and enhance infrastructure.

3.3.3 Climate Change and Environmental Governance (I)

Responsibility allocation

The main issue to solve in environmental governance is the responsibility allocation, namely how to allocate the rights and responsibilities of developed countries and developing countries in global environmental governance. Considering that countries vary in governance capacity, historical responsibility, etc., a “common but differentiated responsibilities” principle is adopted in international community, requiring developed and developing countries to shoulder different responsibilities for global environmental governance, especially for responding to climate change. Yet this principle has different focuses on developed and developing countries respectively, meaning it generally stresses the common responsibilities of the former and differentiated responsibilities of the latter. The different focuses lead to a serious responsibility sharing dispute between the two groups of countries over quantified emission reduction tasks and funds and technical assistance. (II)

Financing for climate change and environmental governance

To implement global environmental agreements and conventions already in place, huge investment of funds is the fundamental guarantee, besides laying down institutions and mechanisms. It is a heavy economic burden for the massive developing countries, especially those still in poverty. Therefore, how to make reasonable financing mechanisms, promote the diversity of financing manners and bodies and ensure more funds channeled into future environmental governance are problems that must be solved. Furthermore, how to attract private sectors and development institutions to join in global environmental governance, and how to coordinate government agencies, private sectors, non-governmental organizations and development institutions and build a diverse global partnership relationship are extremely critical.

3.3.4 International Macroeconomic Policy Coordination International macroeconomic governance is essentially a matter of international macroeconomic policy coordination. International macroeconomic policy coordination, with the governments of each country (or region) or international economic organizations as the main body, refers to the process where countries around the

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world negotiate and coordinate with each other on macroeconomic policies such as fiscal policy, monetary policy, exchange rate policy, etc., or adjust the existing economic policies as appropriate, or take joint policy initiatives to intervene in the market, on the premise of recognizing the interdependence of the world economy, in order to solve the contradictions and problems between countries in terms of international economic interests, ensure the smooth operation of world economy, eliminate the negative effects of their respective policies on each other, and maintain and promote stable economic growth in all countries. From its definition, it can be seen that international macroeconomic policy coordination mainly involves fiscal policy coordination, monetary policy coordination and exchange rate policy coordination. The specific coordination targets cover economic growth rate, inflation rate, government fiscal deficit, monetary target and exchange rate, etc.

3.3.5 Global Development Issues Global development governance could be summarized as: establishment and implementation of global development agendas; sources of funds needed for development, namely the development financing issue. In terms of establishment and implementation of global development agendas, countries around the world need to prepare the framework documents to guide the global and national development within a period of time via discussion and negotiation. To establish the global development agendas is one of the main tasks of the UN. Since the 1990s, the UN has established three global development agendas, the environment sustainable development agenda under the 1992 Agenda 21, the Millennium Development Goals specified in the 2000 Millennium Declaration, and the sustainable development agenda adopted in the 2030 Agenda for Sustainable Development in 2015. After agendas are made, how to finance for development is a key issue, such as how to mobilize resources of all stakeholders, realize diversity of financing bodies, and innovate development financing manners.

References Sun, Yiran. 2013. Characteristics of Global Economic Governance from International System to World System. Journal of International Relations 1: 83–96. Zhang, Lihua. 2004. Non-Zero-Sum Game: Rethinking the Relations Between State Sovereignty and International Organizations. Social Science Front 2: 253–257. Zhao, Liqing. 2000. Several Issues on the Construction of Non-governmental Organizations in China. Jiangsu Social Sciences 7: 73–78.

Chapter 4

Historical Evolution of the Global Economic Governance Structure

4.1 Connotation of the Global Economic Governance Structure The institutional framework is the core of the global economic governance structure, and has a lasting effect on the performance and benefits allocation of solving global issues. Global economic governance structure is manifested as institutional forms that vary across different issues, areas or historical periods. The institutional forms of global economic governance are embodied as both the relations between governance actors/agents and international players/principals, and also the governance structure within the governance actors or international organizations, including participants’ qualification, power allocation, decision-making procedures and the scope and intensify of governance (Zhang and Ren 2015). Multilateral institutions established after World War II, represented by the IMF and the IBRD, pioneered a formal international system based on the principal-agent relationship, which became a core feature of the governance mechanisms under the Bretton Woods System. The informal coordination mechanism established by the G7 provided a less costly institutional design for international macroeconomic policy coordination. And the G20 that emerged after the 2008 financial crisis has further developed the informal mechanism of the G7, and formed a compound informal governance mechanism by connecting G20 agendas with existing multilateral institutions. Norms in the institutional frameworks are also an important part of global economic governance structure. To follow what principles, theories or norms in governance is the primary issue facing global economic governance. Different schools of thought on political economy have emerged in the long history of human understanding political and economic laws. Those thoughts are the reflection of both mankind’s rational understanding in a certain period of time and certain political and social foundations. For instance, such post-war economic governance norms as the embedded liberalism and neo-liberalism were adopted by international organizations as the guidelines in different periods, and defined the mainstream policy frameworks of global economic governance at that time. © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_4

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International institutions are non-neutral in nature, thereby offering a stable pattern of interest distribution in global economic governance over a certain period of time. Such a stable and systematic interest distribution pattern is an important manifestation of the structure of global economic governance. The non-neutrality of international systems will, not only promote collective actions by selective incentives, but also bring about an unbalanced distribution of benefits allocation and erode the legitimacy basis of global economic governance. A stable governance performance and benefit distribution pattern would come out in global economic governance, but such structure is not fixed. With changes in bargaining power pattern and economic philosophies on the global level, corresponding adjustments would be made to the institutional frameworks and structural characteristics of global economic governance. The 2008 international financial crisis put the global economic governance structure at a critical stage of reshaping and transformation. As an emerging country, China must take active steps to enhance its role in reshaping the global economic governance on the basis of grasping the laws and trends of the changing structure of global economic governance.

4.2 Evolution of the Global Economic Governance Structure The evolution of the structure of global economic governance is actually a process of institution replacement or institution adjustment. In practices, such evolution is manifested as not just the change in international institution forms or governance modes, but also as the mutual supplement or replacement of governance mechanisms for the same issues.

4.2.1 1870–1914: Era of Laissez-Faire Gold Standard The global economic governance featured with the gold standard system before the World War I emerged on the basis of the special political and social foundation at that time. In the second half of the nineteenth century, Europe was ushered in a golden age of explosive integrated economic growth. This period of time is known as the first economic globalization. Yet the highly integrated economy was not accomplished by inter-governmental coordination mechanisms in politics. Instead, it operated following the self-adjusting law of the market. Confidence in the gold standard system is not from any international institution, but from the commitment by national governments to converting domestic currencies into gold at fixed exchange rates. The core feature of the gold standard system is that central banks could buy gold at fixed prices and individuals could freely import or export gold (Cohen 1977). Under the gold standard system, international and domestic economies autonomously serve

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the goal of international monetary stability and not intervene in the spontaneous regulation mechanism of international markets. Imbalance of international trade and disequilibrium of balance of payments could be improved by flow of gold.

4.2.2 1914–1939: Beggar-Thy-Neighbor Post-War Period The World War I put an end to the highly open and interdependent integrated economy before the war. The war hit the economy hard and the economic deterioration led to political instability. Unstable ruling of national governments made government officials, on the path of revitalizing global economy, tend to take the beggar-thy-neighbor measures to relieve domestic political and economic pressures. Global economy in this period of time was lack of an open international trade system and a stable and effective international monetary system. The fundamental reason is the lack of political foundation for countries to coordinate policies. International institutions did not play an important role in the governance of international economic affairs. The economic and financial organizations within the League of Nations worked a little in early 1820s, yet in the political and economic chaos between the two world wars, the league with its limited resources and legality was unable to take effective international economic coordination actions (Ravenhill 2008). The trade protectionism was rampant between the two wars, culminated at the adoption of the Smoot-Hawley Tariff Act by the U.S. in 1930. Meanwhile, since there was no international coordination, the international monetary system kept fluctuating, which exerted negative impact on economic recovery in each of the countries. Countries maintaining the gold standard system were faced with great reserve maintenance pressure, and later member states of the gold group had to give up the gold standard. Without the restrictions of the gold standard system, the countries had more macro policy autonomy. Yet only by macro policy coordination could they enable the recovery of world economy. However, the UK, the U.S. and France did not agree to take collective actions. Then countries started to use their unilateral expansion policies and increased competitiveness by expanding and devaluing their domestic currencies. Such competition among countries aggravated the exchange rate fluctuation and led to their business conflicts.

4.2.3 1945–1975: Bretton Woods System and Embedded Liberalism The design of the post-war Bretton Woods System fully reflects the US’ proposition for the reconstruction of the post-war international system and the two core principles, namely embedded liberalism and the commitment to multilateralism.1 The two core 1

See Ruggie (1982, 1992).

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principles opened up a new era of global economic governance. Embedded liberalism embodies the liberalism principle of opening domestic economy to international trade and investment so as to allocate resources, as well as the compromise to maintain domestic economic goals such as domestic social welfare and full employment. That is exactly the international coordination to implement economic policies on the basis of ensuring the political consensus among all nations, after taking lessons from the unsustainable situation led to by submitting domestic goals to international principles before the World War I, and the unilateral policies to fulfill domestic economic goals between the two world wars. That is what Ruggie called the “embedded liberalism”, which is to work out a multilateral form meeting the needs of domestic stability (Ruggie 1982). After the World War II, a major change in international economic relations was the institutionalization of international economic cooperation and coordination, which is an embodiment of the multilateralism feature of the Bretton Woods System. No matter in the relatively stable world economy before the World War I or in the turbulent world economy between the two world wars, an institutional international coordination platform was absent. Under the Bretton Woods System, there were two major international financial institutions, the IMF and the World Bank, and the international trade system GATT, an informal mechanism. These multilateral institutions shared an important feature, namely international coordination was not on the basis of unilateral interests or special exclusive interests of part of the countries, but based on principles agreed by all members. The international institutions as the multilateral commitment have greatly promoted cooperation and political coordination among nations.

4.2.4 1975–2008: Post-Bretton Woods System and Rising of Neo-Liberalism Since the early 1960s, the Bretton Woods System continued to suffer serious balance of payments crisis. Under the floating exchange rate system, governments had more decision-making power to support with fiscal policies and monetary policies, to strike a balance between domestic and international markets. As a result, mutual interference and even conflicts among policies of different countries often happened and maladjustment of international economic policies was serious. Major developed economies founded the G7 in 1975, an informal international mechanism, to coordinate macroeconomic policies. Since then, the G7 has played a very important role in international macroeconomic coordination. Since the 1980s, global economic governance has been based on the Washington Consensus backed by the neoliberalism. On the one hand, developed countries following the leadership of the U.S. vigorously promoted financial deregulation and cross-border capital flow. On the other

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hand, they urged developing countries to start structural adjustment through international organizations, requiring them to carry out the marketization, privatization and democratization reforms.

4.2.5 2008-Now: Diversified Transformation of Global Economic Governance The 2008 global financial crisis got countries better aware of the importance of macroeconomic policy coordination, especially the coordination between emerging countries and developed industrial countries. The existing G7 and OECD frameworks aimed at macroeconomic coordination among the major developed countries do not work anymore for the new development of global economy. The biggest challenge facing global economic governance is how to promote cooperation between major emerging countries and developed countries via institutional arrangements, so as to defuse the global economic disequilibrium. The rise of emerging forces in global politics and economy and the present troubles facing global economic governance make it a trend to reform traditional international economic governance mechanism. Currently, reforms of international economic governance mechanism have made some achievements. First, representation quota of emerging economies in the IMF increases. With quotas of emerging countries increasing, two board seats once occupied by European countries are given up to them. This is the most important governance reform plan since the foundation of the IMF 65 years ago, and also the biggest quota transfer plan to emerging markets and developing countries. Then, the G20 replaced the G8 to be major platform of international economic cooperation and coordination. Such replacement did increase the rights of emerging economies to participate in global economic governance, and offer a platform for macro policy coordination between developed countries and emerging economies. But no matter in reform practices or theories, many disputes remain and it is still hard to reach consensus.

4.3 Evolution Modes of the Global Economic Governance Structure Change in the structure of global economic governance platforms could be divided in to three stages: 1945–1975, the first stage and the “hard governance” period dominated by the U.S. and with formal international organizations and rules, as represented by the Bretton Woods System after the World War II; 1975–2008, the second stage and the “soft governance” period featuring loose and informal coordination mechanism co-dominated by the U.S. and Europe, as represented by the G7; 2008-now, the third stage and the period of expanded and loose “North–South soft governance” by

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developed and emerging economies, stood for by the G20, the G7 and BRICS nations (Pang and Wang 2013). In the first two stages, despite that the governance forms and contents were not all the same and actors and platforms to promote the economic governance differed, it is always the Western countries that played the dominant roles and the it is essentially the “North dominated governance” mode promoted by Europe and the U.S. By contract, the third stage is the “North–South co-governance” stage backed by the informal coordination mechanism between developed and emerging economies, mainly represented by the G20.

4.3.1 Hegemony-Led “Hard Governance” The international order after the World War II was centered on the U.S., which has always been the core of international governance in the Western world, and U.S. dollar is at the center of world monetary pattern. As the dominant power in the international system since World War II, the U.S. has established most of the international mechanisms and rules in accordance with the interests of itself and its allies. The UN mechanism with the “consistency among major powers” power operation mode at its core served as the pillar of maintaining post-war order and implementing global governance for a long time. At this stage, the U.S. had absolute economic strength advantage in the West, and was the main or even the only supplier of public goods to the West. After the 1960s, thanks to the rising national liberation movements and the collapse of the colonial empire system, the number of sovereign states soared, which has greatly changed the international landscape. The major turmoils, fragmentation and reorganization of all strategic forces and national groups in the world were shocks to the international order and systems built by the powerful victorious countries after World War II, and further exposed the deficiencies of UN mechanisms in global economic governance.

4.3.2 North Negotiation-Soft Governance In the 1970s, although the UN, used to be the most authoritative inter-governmental multilateral cooperation organization in the world, maintained its position as the central platform of global governance, its increasingly low governance efficiency gave strong hint to many countries. At this time, the G7 representing a new global governance mode different from the UN emerged. Compared with formal international organizations like the UN, IMF and World, global governance actors like the G7 are known for their informal “soft governance”, namely without rigorous charters or administrative organs. Leaders meet regularly or irregularly to discuss and cooperate on certain issues to solve regional or global issues. Since the late 1990s, along with the acceleration of economic globalization and rising of emerging countries, the gap between emerging economies and developed

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countries was remarkably narrowed. The serious lack of seats of emerging countries in the G7/8 was widely challenged, and thereby its agenda-setting capacity in the international community and its legality and credibility were weakened. Against such backdrop, the G7/8 strengthened its dialogue with emerging countries, and the “G8+5” dialogue mechanism came into being. In general, the “G8+5” mechanism represented a recognition of developed countries of major emerging countries and a new way of developing countries to participate in international affairs. Yet objectively speaking, the “G8+5” mechanism did not change the unfair situation where developed countries dominated and developing countries had to follow.

4.3.3 North–South Cooperation-Soft Governance After the breakout of the 2008 global financial crisis, countries around the world recognized that the existing international system and governance mechanism no longer worked in the new globalization situation or could respond to new challenges and problems caused by the rapid development of globalization. Global major economies needed a representative and agile global platform to deal with crises. Against such backdrop, the more representative G20 with more emerging countries participating in quickly moved to the center of the historical arena, shouldering the heavy responsibility of building global confidence, coordinating all parties and coresponding to crises in a time of stress. A leapfrog development from the G8+5 to G20 marked the transition from a time dominated by major Western powers to an era of North–South co-governance. Despite that the G20 mechanism still gives major powers superiority over emerging countries, which is actually a miniature version of the global institutional arrangement, under this mechanism emerging countries for the first time have the chance to communicate and negotiate with major powers face-to-face on global mechanisms, and enjoy the relative equality to participate in global mechanism restructuring, international crisis management and world power sharing.

4.4 The G20 and the Global Economic Governance Reform The G20 is a governance platform that incorporates North–South cooperation and encourages cross-border cooperation. Issues discussed by the G20 have gradually shifted from financial crisis prevention to policy coordination and system reform over time. The choice of topics began to extend from special issues to general ones, and the reform of international rules and systems and macroeconomic coordination have become a continuous and stable topic of discussion.

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4.4.1 Evolution of Issues Discussed by the G20 Issues responded to at G20 summits fall into two stages and three periods: stage one consisting of the two periods focusing on response to short-term fluctuations, namely response to global financial crisis in 2008–2010 and response to European debt crisis in 2010–2012. The hot issues in this stage are crisis response, rebalancing, strengthening global financial regulation and public debt management. The main issues dealt with by the G20 in 2008 and 2009 were joining forces to respond to crises and boost world economic growth. As the European debt crisis got worse, after 2010 the G20 took international financial supervision and public debt management arising from the global financial crisis as its core tasks. As the European sovereign debt crisis was more fierce in 2012, its main issue to deal with became spurring strong, balanced and sustainable economic growth and restoration and reform of international financial institutions. Stage two sees the G20 transforming towards long-term governance (2013-now). As the global economic recovery got more uneven and complex and the stimulating economic policies were withdrawn in 2013, the long-term growth has been a major issue to be dealt with on the G20 platform. Some issues are long-term issues, such as macro policy coordination, trade, development, international financial institution reform, energy and anti-corruption. Yet the summit presidency would propose new core concerns, such as the financial security network proposed by South Korea in 2010, inclusive finance proposed by France in 2011, natural disaster risk management by Mexico in 2012, international tax cooperation and climate change financing by Russia in 2013, promotion of infrastructure investment by Australia in 2014, concerning national investment by Turkey in 2015 and Innovation Issue by China in 2016. As some new issues lasts for a long time, the issue scope of the G20 starts to expand. Although this trend may cost more, it will encourage member states to better participate in global economic cooperation.

4.4.2 Overview of Progress in Major Issues (I)

Strengthening Macroeconomic Policy Coordination

The summits of the G20 Leaders were held against the backdrop of a devastated world economy, so what leaders concerned most was taking measures to recover economic growth and avoid further deterioration of global economy. At the Washington Summit, national leaders pledged to take measures to stabilize the financial system, stimulate domestic demands through monetary policies and fiscal policies, while emphasizing the important role of international organizations like the IMF, World Bank and other multilateral development banks in overcoming the financial crisis. At the London Summit, the national leaders committed to an unprecedented fiscal expansion, maintaining expansionary monetary policies and stabilizing financial systems. The G20 released the “Framework for Strong, Sustainable and Balanced

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Growth” at the Pittsburgh Summit and detailed it at the Toronto Summit. This framework is the foundation of discussion on macroeconomy at follow-up summits. Under this framework, monetary policy commitments of each of the countries fall into the following five categories: First, fiscal policy commitments, namely the developed economies commit to fiscal consolidation and solving medium-term fiscal sustainability, the developed and emerging economies with fiscal space commit to taking necessary measures to support growth, and each of the nations are to limit debt to GDP to a sustainable level; second, monetary policy commitments, meaning accelerating economic recovery while stabilizing prices; third, structural policy commitments, committing to promoting investment, strengthening the fundamentals and improving productivity and competitiveness; fourth, commitments on balance of payments by countries with current account surplus to increasing domestic demands and by countries with current account deficit to encouraging deposit; fifth, commitments on exchange rate policies to establishing market-oriented exchange rate institutions and flexible exchange rates, and avoiding competitive currency depreciation. Besides, these countries need to pay attention to the global effect of their own policies, and reasonably manage and control the policy spillover. (II)

Improvement of international financial regulation

To strengthen macro prudent regulation to prevent systematic risks is the biggest consensus in the international financial regulation reforms. Goals of macro prudent regulation are not limited to the prevention of operation risks of individual financial institutions. Instead, they emphasize the systematic security of the whole financial system, and aim at preventing crises by making comprehensive financial stabilizing policies. At the beginning of the crisis, the G20 was committed to strengthening financial regulation and reached consensus on macro prudent regulation: improving the macro prudent regulation function of central banks and changing the procyclicality of regulation. With regard to central banks’ task of strengthening their prudent regulation responsibilities, the regulation on “systematically important institutions” to avoid “too-big-to-fail” institutions was stressed. Besides, the cooperation emphasized regulation over shadow banks. After the financial crisis, to formulate and implement global unified financial regulation rules has been an important part of international financial regulation reforms. The Basel Accord served as a global unified rule to a very large extent. (III)

Reforms of the international monetary system

The G20 has always taken reforms of the international monetary system as an important agenda. At the Seoul Summit, the G20 leaders announced to commit to building a stabler and more vibrant international monetary system. At the Cannes Summit, the international monetary system was discussed as a prioritized issue by the G20, with capital flow management, international financial institution reform and SDR discussed in an in-depth way. Reforms of international financial institutions mainly fall into reforms of existing institutions and of the governance structure. First, resources of existing international

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financial institutions are actively expanded, to give better play to role of these institutions in crisis response. Second, reform of SDR, covering efforts to expand SDR quantity and size; to expand its application scope and strengthen its function, to lower effect from exchange rate fluctuation; to specify the composition and weights of the SDR monetary package, in which the biggest issue is to determine which countries’ currencies are to be included, especially currencies of emerging nations. Third, further enhancing the supervision function of the IMF and reforming the crisis relief mechanism. At the Los Cabos Summit, the national leaders underlined to enhance the existing supervision framework and consolidate the bilateral and multilateral supervision mechanisms. Crisis relieves include granting loans to crisis-stricken countries and providing them with policy advises and technical assistance, with the former increasing their flexible credit lines (FCL) and precautionary and liquidity lines (PLL), and latter setting up capacity building academies to supervise and manage training and technical assistance, to help member states build their capacities and make critical economic and financial institutions. (IV)

Maintenance of an open trade environment

In 2016, the G20 set up the Council of Trade Ministers and the Trade and Investment Working Group, further strengthening governance cooperation in trade and investment fields. Trade issues discussed by the G20 include: First, opposing trade protectionism and promoting trade growth. The G20 leaders always commit to opposing efforts to stimulate export by adding investment, goods and service trade barriers or setting new export limitations or taking measures violating WTO regulations, and commit to minimizing negative impact of domestic policies on trade and investment. Second, maintaining the multilateral trade system and protecting the core position of the WTO. The G20 leaders support to improve the WTO. The WTO should play a better role in making trade relations and policies more transparent, improving the ways of carrying out day-to-day business, and improving the effectiveness of dispute settlement mechanisms. Active efforts have been devoted to the Doha Development Agenda, with progresses already made. Third, promotion of inclusive trade development. For instance, the G20 promises to keep providing trade promotion assistance, to support trade facilitation and boost global trade. (V)

Promotion of long-term investment

The G20 Investment and Infrastructure Working Group (IIWG) specializes in international coordination related to infrastructure and investment. In early days, its focus was on financing issues, such as resources development of multilateral development institutions, standardization of public–private partnerships and assets securitization. Since 2014, focuses of the IIWG under the G20 framework have started to shift to infrastructure and productive investments. The year 2016 saw further cooperation on investment by the G20. At the Hangzhou Summit was the G20 Guiding Principles for Global Investment Policymaking announced, which stated 9 non-binding principles for investment policy environment. It claimed the first attempt and progress globally in multilateral investment documents on investment mechanism development.

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Spurring sustainable development

At the 2010 G20 Seoul Summit a Development Working Group was set up. The development issues discussed by the G20 are very broad in contents. One of them is to provide assistance to developing countries, and is seen as a critical job to boost global economic recovery and future economic growth. To this end, the national leaders discuss both the importance of millennium development goals and on infrastructure investment, food security, inclusive green growth, etc. First, they reiterate the importance of millennium development goals. The national leaders reiterate the historical commitments and their official development assistance commitments under UN millennium development goals, stress the critical role of developed countries to fulfill their assistance commitments, and call on emerging economies to further assist other developing countries. Second, they provide development financing to underdeveloped countries. At the London Summit, the G20 leaders decided to provide 50 billion dollars to low-income countries for social security and trade and security development. They worked hard to ensure the poorest counties having the access to resources for social security, and urged the World Bank and other regional banks to further coordinate and cooperate on financing, project implementation, etc. (VII)

Employment promotion and social security

Employment promotion announced at the G20 summits falls into: First, promoting employment via structural reforms. The structural reforms are aimed at establishing more inclusive labor markets, making more active labor market policies and launching better education and training projects. Second, paying attention to employment of main groups of people, particularly the youth. The unemployment and employment issues of the youth were mentioned repeatedly at all previous summits. Third, stepping up social security. At the Los Cabos summit, the national leaders promised to keep working on international policy consistency, coordination and cooperation and promote international information sharing, to help low-income countries build the social security capacity. They committed to creating opportunities for women, SMEs and developing countries to participate in economic activities by means of inclusive finance. (VIII)

Energy and climate change governance

Cooperation on energy: First, the G20 commits to increasing the transparency and stability of energy market, including regularly disclosing complete, accurate and updated oil and natural gas data, and strengthening and improving regulation of institutions in the energy market. Second, increasing the energy utilization. The G20 leaders at all previous summits promised to reasonably adjust and gradually cancel the low-efficient fossil fuel subsidy encouraging wasteful consumption. Third, increasing investment in clean energies. The national leaders promise to further invest in clean energies, renewable energies, energy efficiency improvement, and low-carbon clean energy infrastructure.

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Commitments to climate change are mainly seen as the active efforts to spur the countries to conclude agreements on climate change. They stated at both the London Summit and Pittsburgh Summit that they would work hard to come to agreements at the 2009 UN Climate Change Conference in Copenhagen. After the Copenhagen conference, The G20 leaders announced at the Toronto Summit that they had publicly supported members of the Copenhagen Accord to reiterate their support for the very accord and its implementation, and also appeal to other members to support too. Meanwhile, they promised, on the basis of the goals and regulations under the United Nations Framework Convention on Climate Change, “common but differentiated responsibilities” and their respective capacities, to participate in negotiations under that convention. To this end, the national leaders also made use of the inclusive process of the Cancun Conference to make sure results would be achieved. At the Cannes Summit, The G20 leaders worked further to ensure the success of the Durban Climate Change Conference, and implemented the discussion results of the Cancun and Durban conferences at the Los Cabos Summit. (IX)

Reforms of the G20 governance mechanism

At its beginning, given its Finance Ministers and Central Bank Governors Meeting, the G20 was believed to be able to restructure the Post Bretton Woods System (also called the Bretton Woods System II). It focused on international economic financial governance. The 2010 Toronto Summit recognized the G20 as the “primary forum of international economic cooperation”, meaning it is a leading informal global economic governance and negotiation platform. The G20 not only depends on its member states to negotiate and cooperate, but also provides intellectual supports via all kinds of international organizations. It emphasizes negotiation and cooperation. As cooperation goes on, under the G20 framework are a number of supporting cooperation mechanisms worked out, such as the Youth 20 (Y20) created by Canada in 2010, the Business 20 (B20) by South Korea when it was the presidency in the second half of 2010, the Labor 20 (L20) by France in the 2011 presidency, the Think 20 (T20) by Mexico in 2012, the Civil Society 20 (C20) by Russia in 2013, and the Women 20 (W20) by Turkey in 2015. In 2015, Turkey also set up the Woman 20 (W20). Those organizations are independent of the G20 (the G20 assumes no responsibility to their comments), yet they are highly related and the legality of those organizations is from the G20.

4.4.3 Differences in Major Countries’ Demands for Global Economic Governance As China’s economic openness increases, China is increasingly concerned about external economic environment and internal and external economic connections, and pays increasing attention to core economic governance issues. First, there is the need for international economic policy coordination. Policy coordination between

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countries is not only helpful to reducing impact from economic and policy conflicts, but also good for enhancing economic governance capacities by mutual learning. Second, it is necessary to guarantee of the openness and stability of the global market for goods and services. China needs a stable and open external economic environment to develop its economy. Third, it is needed to maintain of the robustness and fairness of the international financial system. China still lags behind the developed Western countries in financial market, and Renminbi is not a mainstream international currency yet, so China needs not only to strengthen its financial influence, but also to guard against the various financial risks that this entails. Lastly, it is necessary to ensure the accessibility of commodities and their stable supply. With the rapid development of China’s economy, its demand for energy, food, etc., grows quickly. How to obtain international resources at fair and reasonable prices to meet the huge gap in domestic demand would be a major international economic issue on the agenda of China in the next decade. The EU particularly underlines “good governance” in international governance. The White Paper on European Governance states five basic principles to support the good governance: openness, participation, accountability, effectiveness and coherence. The EU tends to connect trade and political issues with development issues, to export values by means of trade plus assistance. Yet in 2006, the EU published the Strategy for a Globalized Europe. Abandoning its previous trade policy focuses like social justice, multilateralism and development and other non-trade policy objectives, it started to emphasize market access and immediate economic benefits in its foreign trade policies. In the stagnant economy after the debt crisis, the EU acted more aggressively in seeking export and investment agreements, and other strategic concerns took a back seat to economic security. The EU was seemingly dedicated to multilateral trade liberalization, but its post-crisis new rules were obviously discriminatory against non-EU countries and enterprises. The implicit protectionism visibly rose. The United States’ concerns and propositions on global economic governance include responding to global network threats, and combating terrorism and trade secret stealing; investing to build a global cooperation mechanism for poverty alleviation and pandemic control; cooperating with Asian-Pacific allies on ensuring rules of marine dispute settlement, nuclear proliferation prevention, disaster relief and climate change are complied with; resuming confidence in the global financial system and protecting economy from the protectionism; creating a fair competition environment through high-standard trade arrangements, opposing threats from governmental subsidies of other countries to market orders and so on. When it comes to the power structure of global economic governance, the U.S. places special emphasis on its own leadership and emphasizes that the pillars of its leadership are American values, for which it is committed to marketing its democracy and open market system globally. Japan participates in global governance in a unique way, as it seldom proposes or take the lead to develop or improve global economic governance mechanisms, but it does not shun its responsibilities. For one, it hopes to enhance its image as a strong political power in the international community through participating in building global economic governance mechanisms. For another, it never goes beyond the

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global economic governance system dominated by the U.S., basically following all global economic governance policies of the U.S. However, with the rising level of domestic public debt and the consequences of prolonged stagnation of economic growth emerging, Japan’s willingness to provide public goods for stabilizing and developing global and regional economy is fading. Russia is active in spurring global economic openness and liberalization. It supports the removal of trade barriers, the promotion of technology and investment flows, and the free movement of people. But it holds that there hasn’t been an effective global trade and economic crisis responding mechanism that could overcome structural contradictions in the global economic system and prevent global economic crises from occurring or spreading, and the development of a sound and effective global economic governance mechanism needs to be carefully considered. Russia believes that so far the international economic governance system is mapping into a triangular structure: the UN, the G20 and the three major international economic organizations (WTO, IMF and WB). Russia argues that over time, the triangular structure could evolve into a comprehensive and stricter global economic governance system, in which the UN holds the top authority, and the G20 and the three major international economic organizations serve as enforcement bodies. A new functional structure and interactive relationship is to be formed among them, and to this end, a new charter on economic order is needed in the international community to define this relationship. In global economic governance, India’s philosophy fully manifests its importsubstitution development mode, emphasizing the limited economic openness and taking meeting domestic demand as the overriding premise. Some scholars recognize India’s fast economic growth, but point out it is sluggish in diplomacy. The reason behind it is the dual character of economic development mode of India, swinging between opening-up and seclusion. It often hesitates in terms of the depth and breadth of its participation in global governance, which limits its scope of global diplomacy to some extent. In global trade field, India is dissatisfied with some existing global governance systems and rules, and is trying to revise the rules after integrating into them, and even tries to alter the original pattern. Australia pays attention to issues ranging from trade liberalization to climate change. The Brisbane Action Plan will give instructions to the G20 members on how to cooperate on promoting investment in infrastructure, boosting trade, improving competition environment and providing more employment opportunities to females and young people. It pays special attention to employment and growth issues, hoping that the G20 members could achieve the critical economic goal of a 2.1% economic growth by 2018 by promoting employment. Besides, the effective use of energy as well as education are also the concerns of Australia in global economic governance.

References

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References Cohen, B. 1977. Organizing the World’s Money: The Political Economy of International Monetary Relations. New York: W, W. Norton. Pang, Zhongying and Ruiping Wang. 2013. China’s Strategic Response to Global Governance. International Studies 4: 57–68. Ravenhill, J. 2008. Global Political Economy. Oxford: Oxford University Press. Ruggie, J.G. 1982. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order. International Organization 36(2). Ruggie, J.G. 1992. Multilateralism: The Anatomy of an Institution. International Organization 46(3), 561–598. Zhang, Yuyan and Lin Ren. 2015. Global Governance: An Analytical Theoretical Framework. Quarterly Journal of International Politics 3: 1–29.

Chapter 5

Impetus for Evolution of the Global Economic Governance Structure

5.1 Three Contradictions in Global Economic Governance In global economic governance, contradictions between the free-rider tendency of global public goods and incentive mechanisms, between the constraints of international rules and national autonomy, and between the non-neutrality of international institutions and the democratization of global governance are the driving force for the continuous adjustment of global economic governance.

5.1.1 Contradiction Between the Free-Rider Tendency of International Public Goods and Collective Actions In the age of globalization all kinds of global issues are emerging, which are crossborder in nature and bring with them externality and spillover. Emerging global issues have gone beyond the capacity of individual countries in terms of manageability, and can only be controlled through cooperation. How to ensure the provision of international public goods via negotiation and cooperation among nation-states has become the biggest challenge in today’s international community. Yet in order to solve global issues through providing international public goods from various countries, predicaments hindering collective actions must be overcome. In the field of international economics, there are numerous pure public goods that are non-competitive and non-exclusive. The supply of those public goods often leads to the problem of free-riding. When rational member states tend to enjoy the benefits of free-riding at no governance costs for a long time, supplying countries will be less motivated to provide international public goods. Therefore, when providing such pure public goods, the cost sharing issue must be properly dealt with and predicaments hindering collective action must be avoided by eradicating free-rider phenomena. The selective incentive mechanism is an important way to promote the supply of public goods. It compensates public goods providers by giving them special benefits, © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_5

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thus ensuring the continuous supply of public goods. During the process of global economic governance, due to discrepancies in the strengths of countries as well as the non-neutrality of systems, responsibilities and rights are difficult to match, often leading to mismatches between responsibilities and rights. Although in a sense, motivating part of the members to share the governance costs through suitable nonneutrality and selective incentives is a necessary condition for the provision of public goods, it is hard to control the level of such institutional non-neutrality and selective incentives, making it easy for them to become the “protective umbrella” of those with vested interests.

5.1.2 Contradiction Between Restrictions of International Rules and National Autonomy Although economists repeatedly emphasize the benefits of global economic openingup, economic globalization has varied impacts on national autonomy and exert different pressures on domestic economic adjustment in countries of different sizes and economic structures. At the national level, countries need to cooperate on maintaining a free and open trade system and a stable international monetary and financial system. Yet every country has the responsibility to serve its own national interests and meet its domestic voters’ needs, in addition to the power to make foreign economic policy decisions without interference from higher authorities. Therefore, countries tend to circumvent the rules in order to reap more benefits. Besides, from the domestic level, policies such as trade liberalization are capable of bringing about huge effects in domestic allocation, whereby all necessary structural adjustments to domestic industry will bring about political resistance from the party negatively affected. During the course of economic liberalization, all countries are under huge domestic pressure, and as such wish to take some protective measures while other countries open their markets. It is very likely for a nation to break its promise of economic opening-up given the “domestic politics first” principle. If all countries pursue free-riding or beggar-thy-neighbor policies, then the free and open international economic system would collapse in the end, thereby damaging all countries. Therefore, all countries must cooperate within a set of self-enforced international rules via negotiation, so as to manage the operation of the international economic system. Economic globalization causes changes in the roles of countries as well as in the nature of sovereignty. On the one hand, economic globalization changes the strategic measures of a country to ensure its economic development, and weakens the controlling power of national sovereignty over economic life, leading to the flow of some power into international markets as well as transnational and international organizations. On the other hand, national sovereignty remains the dominant actor on the world political stage and the supreme authority in domestic politics. Under the impact of economic globalization, we need the countries to play a stronger social

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protector role and make effective economic adjustment through the framework of macro-economic policy. In a context where nation-state identity is still the dominant concept in the international system, national leaders should first be responsible for their domestic supporters and voters to realize their national interests. Excessive promises of international cooperation and power delegation would meet serious domestic political resistance. Therefore, economic globalization forces countries to participate in global governance in order to balance national autonomy and economic interdependence while seeking development in opening-up.

5.1.3 Contradiction Between the Non-Neutrality of International Institutions and the Democratization of Global Governance Institutional non-neutrality could ensure the generation of selective incentives, thus giving additional benefits to public goods providers and facilitating collective actions. The supply of international institutions often depends on the political intentions of major powers, and major powers often have asymmetrical returns when making systematic arrangements. Therefore, institutional non-neutrality could be the incentives for the supply of international public goods, thereby motivating major powers to supply public goods. The attitude of the U.S. towards global economic governance mechanisms adjusts to changes in its interests. One of the main purposes of the US for taking the lead in building international institutions is to restrict and limit other countries (Grieco and Ikenberry 2003). Of course, it is also restricted by such rules to some extent. When the governance mode for a certain issue is not in its national interests, it would probably suspend its supplying of international public goods. When benefits of supplying international public goods drop, countries could shrink the benefiting scope of public goods they provide by raising the membership threshold, thereby establishing bilateral cooperation networks, etc., in order to convert public goods into products for its clubs and to re-allocate interests. The impact of asymmetrical power with regards to institutions will bring about dissatisfaction among losers or countries forced to make adjustments. If international institutions are too unfair in allocation, member states would protest, call for reforms and even exit. For example, reforming the IMF has become an important agenda in the realm of global economic governance. The allocation issue brought about by global economic governance mechanisms is also seen in the North–South relations. Southern and Northern countries are in different situations when it comes to sovereignty, economic stages, etc., so it is impossible to circumvent the difference in opportunities and capacities of different types of countries participating in global economic governance. Creating inclusive interests has been a core issue for dealing with the North–South relations in the international economic order.

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Distribution problems within the mechanisms of global economic governance will become more salient during the period of power transition between established and rising powers. When the power structure in international institutions changes, rising countries would hope to reform the distribution pattern of existing international institutions, so as to gain more representation and decision-making rights in the international institutions. Generally, changes in the power structure would cause changes in the distribution pattern of international institutions, but since institutions have the characteristic of path dependence, it would be very hard to promote reform through alternative options. In particular, as regards different issues, the institutional access thresholds and network externalities are different, in turn affecting the ability of the rising countries to use external options to promote institutional change. In general, the distribution of interests brought about by institutional non-neutrality is an important motivation to set and reform global economic governance mechanisms. Global economic governance mechanisms should both reflect the special interests of the strong or the providers of public goods, and maintain some inclusiveness towards interests, leaving room for others to obtain benefits.

5.2 Power Restructuring and Evolution of the Global Economic Governance Structure The evolution of the structure of global economic governance is closely related to the restructuring of international power. Global economic governance at any stage depends on a certain power base. When the power structure changes, the original political foundation backing the existing global economic governance mechanisms disappears, and the philosophies, rules, decision-making procedures and interest allocation of the original global economic governance could vary in turn. From the long-term perspective, the transformation of international system has three obvious trends: the actors tend to be more diverse, and the coverage continues to expand and the international system is increasingly interconnected. The transformation of the international system is increasingly complex, constraints to the traditional power logic are increasing in manifestation, the power structure tends to be flatter, and the regulatory capacity of the international system is enhancing.

5.2.1 Hegemonic Governance Hegemonic powers have great impacts on the mechanisms of global economic governance. The core objectives of global economic governance are to offer international public goods and solve global issues. Solving global issues has spillover effects and caters to the demands of common interests, but is likely to bring about the problem of free-riding. To solve the free-rider problem, a potent monitoring and enforcement

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mechanism is needed, which in turn is conditional on strong international leadership and solid political consensus. The power of leading countries comes essentially from power asymmetry. Power asymmetry could force countries to further cooperate in coordination games and collaboration games through excluding non-cooperationists and resorting to the threat of force.1 The international gold standard system was developed based on British hegemony at the end of the nineteenth century. It was the UK that commenced the gold standard institution in 1816. Thanks to the UK’s strong industrial foundation and absolute dominance in international trade, sterling quickly became an international currency equivalent to gold and was held as a foreign exchange reserve by countries, winning the UK considerable seigniorage revenues. As a hegemon of the day, the UK shouldered the responsibility for maintaining a free and open international economy. To mitigate the impact of gold circulation on domestic prices and the economy, central banks could have responded through prudent monetary policies, thereby escaping from the punishment of the gold standard system around that time and weakening the function of the price-coin flow mechanism (Gilpin 2006b). However, the UK took the leading responsibility in keeping the system functioning in the late nineteenth century. The unrivalled commodity and capital markets of the UK and the critical role of the Bank of England in managing international capital flows enabled the UK to lead other countries in abiding by the rules of the international currency system. Meanwhile, the confidence of other countries in the ability and willingness of the UK to maintain the ratio of sterling to gold was another key for the stable operation of the currency system. Between the two world wars, there was a marked decline in British hegemony, while the status and role of the United States in the international economic order became more prominent. Yet despite the decline of the hegemonic position of the UK, the U.S. had not reached a domestic consensus on being a hegemonic power. The lack of competent hegemonic powers willing to be the global leader in the international system led the system of global economic governance into a chaotic period featuring beggar-thy-neighbor policies. The Bretton Woods system with U.S. dollars as the core was established after the second world war, and the U.S. completely replaced the UK as the sole hegemon of the international currency system. The establishment and operation of the Bretton Woods system depended on the establishment of American hegemony and the political consensus of the UK and the U.S., as well as that of the whole western coalition. Almost all advocates of hegemonic stability theory believe that in order to supply international public goods such as free trade and monetary and financial stabilization, a major power must dominate. The major power must have a great interest in a free 1

The coordination game, also referred to as the dilemma to avoid together, means a situation in which both actors hoping a certain outcome not to occur would have common interests in the occurrence of such outcome. The collaboration game, also called the dilemma of the common good, is a situation where independent decisions of the actors would lead to the Pareto Inefficiency equilibrium outcome, and only collaboration could realize equilibrium outcomes contributive to both parties. See Qu Bo, “Cooperation Issues, Power Structures, Governance Dilemmas and International Institutions”, World Economy and Politics, No. 10, 2010, pp. 27–28.

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and open world economy, and must be willing to invest funds and political resources in creating and maintaining a free and open international economic system (Gilpin 2006a). According to Kindleberger, the reason why the leading country would like to create a free and open world economy is both to win the economic benefits for itself and to fulfill its responsibility in promoting the economic interests of the whole world.

5.2.2 Club Governance When hegemon declines, the hegemonic power has to resort to its allies to share governance costs and governance benefits accordingly. These powerful countries form a club and shape the global economic governance agenda via adjustments through collective decisions. The structure of club governance features seclusion and exclusiveness. Member states of the club could often dominate the process of global economic governance, and enjoy some privileges, while those outside the club are excluded. After the collapse of the Bretton Woods system, the hegemonic powers adopted the club governance mode with the G7 at the core. The U.S. had already been declining in its economic position since the 1950s. This trend lasted from 1975 to 2008. After the collapse of the Bretton Woods system, the U.S. was active in cooperation with other developed countries and orchestrated a policy coordination network with the G7 at its core. The G7 countries not only closely cooperated with each other in the field of macro policy coordination, but also garnered common policy preferences by joining organizations like the IMF, World Bank and OECD as major shareholders in order to lead in issues of global economic governance.

5.2.3 Inclusive and Improved Governance Along with the development of globalization, hegemony or club based global governance is increasingly challenged for its legality and validity, in turn creating chances for the structure of inclusive and improved governance to become mainstream. As economic strength grows, emerging and developing economies have become important stakeholders in the global economy and thus the needs, both external and internal, to participate in global economic governance activities increases. Emerging economies act vigorously to promote reforms of global economic governance, engage more developing countries in international economic organizations and win them more voices, and drive the global governance institution to develop towards a fairer and more reasonable future. The rise of emerging economies has changed the international power structure and promoted the restructuring of the pattern of global economic governance. Global economic governance has gone beyond the era of hegemony and entered an era of

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multilateral discussion. The G20 has replaced the G7 as the primary platform for global economic governance (Cui and Xing 2011), having created a more inclusive policy coordination network. The establishment of the New Development Bank and the Asian Infrastructure Investment Bank are also changing the traditional architecture of international development governance. To sum up, the American financial crisis has exacerbated the defects of the existing global economic governance mechanism in terms of inclusiveness, capacity, authority and legitimacy, and power politics among the great powers are re-intensifying and particularly visible in the new round of rule competition. The entire system of global economic governance is again showing symptoms usually seen in the phase of reconstitution following erosion of the old order.

5.3 Changes in Philosophy and Evolution of the Global Economic Governance Structure Fundamental economic and political principles and philosophies would surely affect the structure of global economic governance. Economic philosophies change with social reforms, recognition and political cycles. The post-war global economic governance norms transited from embedded liberalism to neoliberalism, which profoundly reflects the economic philosophy foundation behind global economic governance.

5.4 Laissez-Faire Economic Philosophies Economic philosophies, with their own evolution cycles, have independently contributed to the transformation of global economic governance. Changes in political values and culture, new academic studies and new social ideological trends could all dramatically alter the existing global economic governance mechanism. According to the understanding of Cohen, the gold standard system was an embodiment of the dominant laissez-faire of the day (Cohen 1977). Before the popularity of the Keynesianism, national governments followed the laissez-faire principle and interventionism. The advent of Keynesianism acted as a conceptual support for national intervention in the economy. Keynesianism believes that governments could eradicate unemployment, economic recession and other market drawbacks by adjusting government spending, interest rates, currency supply, etc. When governments start to use control measures to adjust the economy, domestic economic growth and full employment will transcend international monetary stabilization to become the primary goal for governments to achieve. The rule foundation that the gold standard system requires to operate is thus damaged.

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5.4.1 Embedded Liberalism The Bretton Woods system after the World War II created a norm system on the basis of embedded liberalism, emphasizing that countries should, while fulfilling their commitments to multilateralism and making progress towards economic integration, build a social security network domestically to protect their citizens from the negative impacts of liberalization, or make it up to those impacted by globalization through redistribution methods (Sun 2011). Driven by historical lessons from the beggar-thy-neighbor policies during the Great Depression and the common belief in a free market, countries like the UK and the U.S. reached the consensus to create a free and open international economic system. Meanwhile, the increasingly popular Keynesianism and the public recognition of and expectation for governments’ pursuing of social goals enabled governments’ responsibilities to expand to goals of domestic stabilization, such as stabilizing domestic prices, ensuring full employment and providing social security. Therefore, governments needed to maintain policy autonomy to intervene in the domestic economy. It was the mainstream economic thought at that time to strengthen governments’ mechanisms to supervise and regulate the world economy. The international monetary and financial system at that time maintained fixed exchange rates while allowing countries to keep controlling their capital, so as to ensure the autonomy of domestic macroeconomic policies. During the negotiation on the GATT trade mechanism, the philosophy of embedded liberalism was also introduced by retaining policy measures such as maintaining balance of payments, facilitating domestic social security and ensuring full employment. The economic ideas of embedded liberalism are implemented both in the guiding principles and actual operation of the three main international organizations under the Bretton Woods system.

5.4.2 Neoliberalism The Bretton Woods system came to an end in 1971. Afterwards, at the initiative of the U.S., the Group of Seven (G7) was formed in 1975 by the major industrial countries, and led the transition from fixed exchange rates to a floating exchange rate. Later, the embedded liberalism upheld by the Bretton Woods system was also replaced by neo-liberalism. Global economic governance after the World War II had experienced embedded liberalism and neo-liberalism and now was in an uncertain period of competing ideas (Sun 2011). From the evolution of global economic governance since the creation of the Bretton Woods system we could see, considering both social goals and economic goals remained at the core of the philosophy debate and evolution. In the context of economic globalization, different countries’ cultural and intellectual traditions, national status, economic structure and development stage as well as differing bases of domestic political support, lead to conceptual divergence among countries in terms of the roles of government as protector and maintainer

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of justice in economic globalization, as well as level of support towards laissez-fair economic integration. In particular, given that neo-liberal economic philosophies were widely criticized and challenged in the latest financial crisis, how countries can build new mainstream economic philosophies through negotiation and cooperation is still an important force leading the reform of the structure of global economic governance.

5.4.3 Post-Crisis Conceptual Reconstruction The American financial crisis weakened the legitimacy of neo-liberal economic philosophies as represented by the Washington Consensus and led the international community into a new round of rebuilding economic governance and development philosophies. For one thing, the 2008 American financial crisis and the 2010 European debt crisis spurred the international community to reflect on the prevailing neoliberal economic philosophy. For another, the rise of emerging economies strengthened the legitimacy and influence of the developmental state model. In the wave of globalization, some emerging economies resisted the pressure to liberalize economically exerted by international organizations. They defended their autonomy to make national economic policies, and brought about fast economic development through different levels of national intervention. The success of the state-led development model as such led scholars to question the developmental model advocated by the Washington Consensus, which refocused the competition between economic philosophies towards the themes of international political economy.2 Furthermore, during the financial and debt crises, in the quest to provide financial assistance and ensure international financial stability, governments of major countries including the U.S. and Europe widely intervened in, assisted and stimulated the market, which obviously violated the confinement of government behaviors in terms of neo-liberal economic philosophies. And the government foreign exchange reserves and sovereign wealth funds of emerging economies played a major role in stabilizing the international financial market and made a substantial contribution to stabilizing the U.S. dollar dominated international monetary system, thereby further highlighting the significance of state-led economic models in the era of globalization.

2

The second issue of International Political Economy Review in 2013, with “BRICS and Washington Consensus” as the theme of the contribution, discussed how BRICS countries selectively adopted the Washington Consensus policy recommendations and the impact on the international development model.

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5.5 Domestic Political Transformation and Evolution of the Global Economic Governance Structure The nation-state system remains the basis of the international system. The most important goal of the sovereign states is to satisfy the demands of domestic supporters and voters. Therefore, the domestic political foundation is the primary guarantee for effective operation of global economic governance. One of the most important tasks in global economic governance is to make the international economic coordination rules in line with the domestic political economic structures, so as to ensure the stable operation of a free and open international economic system.

5.5.1 Domestic Re-Distribution and Domestic Foundation of Global Economic Governance The current system of global economic governance is faced with the enormous pressure of reform and adjustment due to the failure to effectively respond to the domestic political conditions and needs of countries at different stages of development. Economic globalization will bring benefits and losses to different individuals, triggering the expansion of the domestic income gap and adjustment of the social structure. As the country’s engagement in economic globalization moves from one stage to the next, the social and political structure reforms triggered by the domestic distribution effect of economic globalization will influence the economic globalization and relevant policies of the country in the end. The unequal wealth allocation worldwide caused by economic globalization is eroding the domestic political foundations of global economic governance. Especially in crises, citizens object to the national government’s bearing too much international responsibilities, requiring them to devote major resources to national economic development and full employment. And macroeconomic policy co-ordination gets extremely difficult. Moreover, within countries, those harmed without getting compensation would be more likely to take collective actions and lobby the governments for protectionist measures. When it is impossible for global economic governance mechanisms to win support within countries, international cooperation commitments by sovereign states at the international level will be difficult to fulfill, thus giving rise to governance obstacles.

5.5.2 Practices of Embedding Global Economic Governance into Domestic Governance Global economic governance is an extension of domestic governance. The effective operation of global economic governance mechanisms relies on stable and firm domestic political and social foundations. Therefore, it is necessary to embed global

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economic governance into domestic political and social development and demands. When the foundations of domestic political and social forces change, global economic governance has to adjust accordingly, otherwise it will be hard to implement. At the end of the nineteenth century, operation of the international gold standard system relied on the special domestic political and social conditions of that time. Just as Ruggie put it, the gold standard system works in a world with few social goals (Ruggie 1982). Welfare states had not emerged and societies had lower requirements and expectations for governments. The right to vote was also limited, so governments could adopt policies whereby the domestic economy voluntarily served international stabilization. Afterwards, as European countries enacted domestic political reforms, universal suffrage was extended, the working class gained more presence in the political field, and people’s expectations for governments’ guarantee of full employment changed. Accordingly, the domestic goal of using currency to meet domestic employment needs and stimulate economic growth transcended the international goal of ensuring currency stability and gold convertibility, creating increasing pressures on fulfilling the commitments of international balancing. Under domestic political pressures, leaders had to give up the external objective of maintaining exchange rate stability and turn to unilaterally achieving domestic policy objectives. The Bretton Woods system formed after the Second World War precisely met the industrial countries’ needs of domestic social and political reform. The war mobilization gave rise to populist politics. Universal suffrage was extended and the political influence of the working class improved. Meanwhile, with the rise of Keynesianism, the public had higher expectations for their governments, and countries thus no longer had the domestic political foundations for surrendering domestic political autonomy to comply with international rules in the time of the gold standard system. The domestic demands for full employment and economic growth required that the Bretton Woods conference work out a set of multilateral rules ensuring domestic stability (Ruggie 1982). After the 1970s, the rise of global economic governance featuring neo-liberalism was closely related to the emergence of transnational corporations and financial interest groups. After the Bretton Woods system came into operation, New York financial institutions feared that putting capital under control in the United States would be incompatible with the goal of making New York an international financial center, and that the bank of New York’s European capital escape profits from the manipulation, so they refused to impose restrictions on large capital inflows from Western Europe (Helleiner 1994). With the balance of payments crisis worsening at the end of the 1960s, the U.S. started to adopt temporary capital control policies. To seek out alternative overseas business, American banks and transnational industrial companies began to open up the Eurodollar market. Development of the Eurodollar market made it hard to stabilize exchange rates and finally shook the market foundation of the Bretton Woods Institution. Besides, the Vietnam war launched by the U.S. and the “great social movement” in the country exacerbated its fiscal deficit, further expanded the international payment deficit and finally threatened the credit of U.S. dollars. To maintain its loose domestic macro-economic environment, the U.S. had to give up its international commitments on a fixed exchange rate. In the

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post-Bretton Woods system period, the international financial interest groups and multinational corporations represented by Wall Street in the U.S. actively called on the country to spur other countries to give up governmental intervention in the markets, and adopt trade and investment liberalization and financial deregulation policies. Therefore, the American government moved actively to promote the political scheme with the Washington Consensus at its core among countries through international organizations such as the IMF, World Bank and OECD.

5.5.3 Income Gap Expansion and Global Economic Governance Reforms The outbreak of the global financial crisis in 2008 further exposed the shock to domestic markets from in-depth globalized development. The crisis revealed the development disequilibrium among nations and increasingly unequal income allocation within nations. The Bretton Woods system once gave a strong boost to the international development agendas. Yet as the U.S. gradually got away from the international development agendas, development philosophies under the system were set aside. The U.S. started to promote development philosophies featuring economic theories with free markets and structural adjustment as the founding principles among underdeveloped countries. The role of nations in development agendas got less important. The North–South disequilibrium was not effectively relieved with the in-depth development of economic globalization. Boosting global poverty alleviation and balanced economic development remained key agendas of the international community in the new century. Unfair domestic wealth distribution was a major side effect of economic globalization, which in turn affected countries’ domestic support for economic globalization and their enthusiasm for global economic governance. Although the U.S. always benefited the most from economic globalization, its domestic wealth distribution gap was widening rapidly. Such problems as the wealth gap and unequal income continued to worsen and were widely witnessed on a global scale. Inequality of global wealth distribution triggered by economic globalization erode the domestic political foundations relied upon by global economic integration, making it increasingly difficult to maintain spontaneous or laissez-faire economic openings. It became necessary for countries to step up macroeconomic policy coordination, further coordinate economic globalization and domestic social goals, resist the rise of trade protectionism and economic nationalism, and maintain a free and open international economic order.

References

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References Cohen, B. 1977. Organizing the World’s Money: The Political Economy of International Monetary Relations. New York: W. W. Norton. Cui, Zhinan and Yue Xing. 2011. From G7 Era to G20: The Transition of International Financial Governance Regime, World. Economics and Politics 1: 134–154. Gilpin, R. 2006a. Global Political Economy: Understanding the international Economic Order, translated by Yang Yuguang and Yang Jiong. Shanghai: Shanghai Century Publishing Group. Gilpin, R. 2006b. The Political Economy of International Relations, translated by Yang Yuguang. Shanghai: Shanghai Century Publishing Group. Grieco, J. and J. Ikenberry. 2003. State Power and World Markets: The International Political Economy. W. W. Norton and Company. Helleiner, E. 1994. States and the Reemergence of Global Finance: From Bretton Woods to the 1990s. Ithaca: Cornell University Press. Ruggie, J.G. 1982. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order. International Organization 36 (2). Sun, Yiran. 2011. Conceptual Changes in Global Economic Governance: Rebuilding Embedded Liberalism? Foreign Affairs Review 3: 83–96.

Chapter 6

Reform Orientation of Global Economic Governance

6.1 Promoting Democratization in Global Economic Governance 6.1.1 Advancing the Diversification of Global Governance Actors (I)

Shouldering the Responsibility of Global Economic Governance Under the Guidance of a New Type of Relationship Between Great Powers

Global governance cannot possibly be absolutely dominated by one party over a long period. As a matter of fact, due to differences in strength, interest and value, the G20 has generally been differentiated into three subgroups: the G7 and European Union that represent the interests of western status quo states, the BRICS countries standing for the interests of rising developing countries, and other middle powers. Among them, the G7 and the BRICS countries are two key pillars of the G20. The shift in global power will take place over a long period of time, as well as the evolution of the global governance system. Thus, such coexistence of multiple informal governance groups will last for perpetually. It is very important for emerging powers to learn to coexist with established powers and accumulate global governance experience to become key participants and constructors of global governance, rather than become dissenters and out-of-system revolutionists (He 2014). China and the western developed countries should establish a new type of relationship between great powers with different areas of focus based on win–win cooperation, expanding fields of cooperation and properly handling of disagreements, thus working together to facilitate global governance. Nowadays, the China-US relations are still characterized by overall stability, local friction, competition among cooperation and checks and balances during collaboration. They expand common interests and deepen the foundation for cooperation through dialogues and exchanges, thus gradually building a diplomatic strategy framework for “healthy development in spite of fluctuations” (Yuan 2012). In fact, © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_6

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China and the United States remained divided over the UN reforms, the G20 and other global governance mechanisms, as well as over lots of global hot issues including the Iranian nuclear issue, the North Korean nuclear issue and the unstable situation in Syria. Despite divergence, contradiction, competition and conflict, China and the United States also resort to cooperation and consultation. That is to say, “living in harmony but maintaining difference, fighting but not breaking” remains the core keynote for the China-US relations. China and the United States highly recognize themselves as two of the most important and most representative great powers in the world, although they understand the connotations of “a new type of relationship between the great powers” in different ways. Establishing and developing a new type of relationship between the great powers, in line with the requirements of the era and living up to the general expectations of the international community, is an unprecedented cause and is of invaluable demonstrative significance. The EU is a major force in the international system, while the China–Europe relations are one of the most important bilateral relations in the world. China should shift its attention to Europe to promote the establishment of a new type of relationship between great powers. China should see through and make use of Europe’s complex attitude that it intends to cooperate with China and needs China’s help but will not easily get discouraged and have scruples about their future, and promote political, cultural, and educational exchanges through economic and financial cooperation. In this way, China should discuss interest exchange with Europe on a greater scale and a higher level, draw Europe over to its side, and shape it into an important node of a new type of relationship between China and other great powers, as well as into a critical partner in the Silk Road Economic Belt. In the next 10 years, based on equality, mutual benefits, and mutual respect, upholding the principles of peaceful development and win–win cooperation, China should take the building of Sino-Europe relations as an instrument to seek common interests and strategic consensus, develop models of cooperation that transcend ideology and differences in social systems, and establish consultative, prospective, and effective cooperation mechanisms in the area of crisis management and control. (II)

Promoting the Cooperation Between BRICS Countries, and Uttering Global Economic Governance Appeal on Behalf of Developing Countries

After the financial crisis broke out, global economic governance entered a new stage. Emerging developing countries led by the BRICS countries have become major participants in the globalization process, important providers of global public goods, and key promoters of the reform of global governance mechanism. China regards the cooperation mechanism between the BRICS countries as an exemplary model for “South-South cooperation,” as well as an important channel for promoting the democratization of international relations and the diversification of development models. Such cooperation will provide huge positive energy and serve as an efficient catalyst for global governance reforms if it can be sustained and generate more positive achievements. Thus, global governance will make an epoch-making breakthrough. In general, the cooperation between the BRICS countries currently still focuses on economic and financial cooperation, as well as domestic construction and economic

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development. Moreover, it is further highlighted that the overall development of the BRICS countries will drive the development of relevant emerging countries, thus achieving “common prosperity” for all developing countries. However, the BRICS cooperation is neither regional cooperation nor limited to economic cooperation. Instead, as an all-round cooperation, it can contribute a lot to the establishment of a supportive global economic governance system, thus providing assistance in developing global climate policies and eliminating poverty all over the world.

6.1.2 Enhancing the Legitimacy of Global Economic Governance Structure Under the long-term erosion of hegemonic ideology, the global economic governance of the United States has become the main catalyst for solving domestic problems. The US pursues international cooperation mainly for the purpose of implementing and maintaining those powers which can help it to externalize its internal problems or manipulate other countries’ policy through dollar hegemony or opening the door of other countries through the “Washington consensus.” For a long time, China has focused more on enhancing its capacity for introspection, self-construction and cobuilding by means of cooperation within international economic governance. As for participation in global economic governance and cooperation, China hopes to create an open and stable external environment that is suitable for contemporary economic development and it also aims to promote the reform of its domestic economic institutions and make them more accurately adapt to the needs of the contemporary economy and society. These are two completely different attitudes towards global economic governance. China has gradually grown from a passive recipient to an active builder of global economic governance over more than 30 years. How to accurately understand the global economic development and establish a governance structure and discourse institution that conform to the needs of contemporary global economic development are not only significant issues to be solved by China, but are also a part of the expectations of other countries for rising powers. In the era of diversified economic governance, which goals should China take as the core pursuit of participating in global economic governance? From the aspect of global economic governance, a good global economic order should recognize or accept the necessary attribution of interests, and determine or recognize the attribution of interests and corresponding responsibilities through legal procedures, provide necessary rules and supervision for maintaining the normal operation of the market, and ensure that the values and autonomy of different countries are not affected within the defined scope (such as principle of nonmaleficence). China, as a responsible global power, needs to play a leading and key role in the formation of a new model of global governance. If China wants to take advantage of the changes in the global economic governance structure in the next five to

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ten years, it needs to try to enhance its governance concepts. Specifically, the “five development concepts” can be regarded as the basic principles of China’s participation in global governance and can be converted into international public goods. China will enrich the formulation of various international rules through its own practice, and enhance innovative, balanced, interconnected and inclusive development through global transformation and self-improvement, in addition to enriching the development patterns of global governance cooperation. Firstly, China should lead the reform of the global governance mechanism through innovative development. Innovation is the primary driving force and the top priority for the steady economic growth of all countries. Besides, innovation is also the core element for promoting the updating of and institutional reform of global governance concept. Apart from theoretical innovation, ideological innovation, scientific and technological innovation and financial service innovation, China also needs to realize that ideological emancipation can promote the innovation of ideas and the reform of mechanisms. China chose innovative growth as a priority issue for the first time at the G20 Summit in 2016, expecting to formulate a new blueprint for innovative growth of the world economy by taking the chance of the new industrial revolution and the digital economy. Secondly, China should advance universal balanced and win–win development through coordinated development. “Coordinated development” is the way of “five development concepts,” which can realize the balanced and harmonious development. Generally, on the one hand, China needs to uphold the overall interests of developing countries, continue to consolidate progress in the reform of the global economic governance structure, to promote the voice and discourse power of developing countries in the global economic governance structure, and to enhance the collective rise of emerging countries. On the other hand, China also needs to pay attention to communication and coordination with European and American countries, look for common topics and actively respond to the concerns of developed countries, and try to coordinate the positions of emerging countries and developed countries. Thirdly, China should promote and publicize the concept of green development. China issued the first presidential statement on climate change in the history of the G20, which contributed to the early entry into force of the Paris Agreement. At the same time, China has increased investments in renewable energy, taken various measures simultaneously to improve the environment and control pollution, and supported and benefited small and medium-sized countries in the transfer of technologies supported by financial support for low carbon and environmental protection. These efforts have been widely welcomed all over the world. As a developing country, China has made its utmost efforts to tackle climate change. It has not only obviously reduced energy consumption and carbon dioxide emissions per unit of GDP in the past decade, but also announced the establishment of a RMB 20 billion South-South cooperation fund to support other developing countries to tackle climate change. Under China’s initiative, the G20 set up a Green Finance Study Group (GFSG). Green finance was included in the G20 communique as a priority for the first time at

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the meeting of G20 finance ministers and central-bank governors held in Shanghai in March this year. Fourthly, China should link the pattern of open economic development with global economic governance. Currently, profound changes are occurring as regards China’s relations with the world. China has unprecedented interconnection and interaction with the international community. Besides, China relies on the world more and participates in international affairs more frequently, and the world also has relied on and influences China more. Whiling observing and planning its reform and development, China must take into account and make comprehensive use of both international and domestic markets, both international and domestic resources, and both international and domestic rules, and at the same time also needs to develop a global perspective and strategic thinking. Finally, China should regard sharing development as the ultimate goal of the “five development concepts”. “Sharing” can make global governance more just and reasonable through institutional rearrangement. Sharing development aims to eliminate differences, gaps, and inequality. The realization of “sharing”, which is a good ideal, needs the guarantee from institution, order, rules and other aspects. In recent years, guided by the principle that development should be of direct benefit to the people, China has done a lot to eliminate poverty, promote employment, ensure and improve people’s livelihood, implement several targeted poverty reduction programs, and achieved relatively remarkable achievements. China’s poverty alleviation and development pattern cannot be copied, but it can provide a template through experience for other countries. The concept of shared development followed by China in domestic construction is still applicable in the field of global governance. China and all other countries need to combine strength with wisdom, increase representation in medium and high-end economic regulation, decision-making rights in politics and security, and the right to speak in ideological and cultural discourse. Also, all countries should enhance representativeness, improve fairness and promote democratization, so that all people around the world can enjoy the fruits of development in a fairer and more just way.

6.2 Enhancing Interests Inclusiveness of Global Economic Governance 6.2.1 Advancing Fair and Equitable Interest Distribution Among Countries Due to the complexity and systematization of global economic governance, as well as the differences of comparative advantages in different fields for China, it is advisable for China to participate in global economic governance in priority areas such as trade, investment, energy, and finance. Firstly, China should advance internal and external opening-up mutual promotion in accordance with the spirit of freedom and

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openness. As a beneficiary country and contributor to economic globalization, China has always been at the forefront of advancing the liberalization and facilitation of trade and investment. China should build a new strategy of international trade under the framework of an open economic system, which emphasizes the combination of internal and external opening-up, thus promoting reform through opening-up. In the face of the western trend of “anti-globalization”, China should continue to vigorously promote free trade and the open flow of international investment, and improve the governance of global trade and investment. Hence, China needs to advance mutual promotion of internal and external opening-up, more effectively integrate the strategy of “bringing in” and “going global”, promote the orderly and free flow of international and domestic factors of production, efficient allocation of resources, deep market integration, and more quickly cultivate new advantages leading international economic cooperation and competition, so as to promote reform through opening-up. Besides, China needs to accelerate the negotiation of free trade areas to participate in the formulation of new international trade rules and adapt to the trend of expanding international trade rules from border barriers to behind border barriers. China should not only advance reform through opening-up by means of negotiations on free trade areas and bilateral investment treaties, but also promote domestic reform by relaxing restrictions on market access, regulating the operation of state-owned enterprises, and enhancing environmental and labor protection, accelerate the improvement of the modern market system, and contribute to a unified and open free market system with orderly competition. Secondly, taking the lead in the new energy field, China should further advance the overall benefits of comprehensive energy governance. Considering the decisive and important role of energy in a country’s economic development, social life and national defense, countries pay high attention to energy security and raise it to the strategic level of national security. In today’s world, energy issues are global and strategic, and new situations in the energy field may produce a considerable influence on international actors. Thus, China should support the new energy industry as the key of technological innovation through policy and preferential mechanisms. The energy industry features deep integration with other technologies and closer integration with upstream and downstream industries. Therefore, it can form a developmental trend of cross-disciplinary, cross-field and cross-sector horizontal diffusion and mutual integration, and help to advance the trend of resource agglomeration and institution integration in related industries. China should provide the preferential institution and policy care to the above four industrial sectors as key cultivation objects from the perspectives of finance and taxation, actively create a good “software” environment for the scientific and technological innovation of the above fields and encourage them to take the lead in achieving technological innovation and industrial breakthroughs. Thirdly, China should accelerate the benign development of international financial business through the internationalization of the RMB. In the international financial field, China has been reforming the international monetary system actively yet prudently. China also continues to actively advance the internationalization of the RMB by uniting other developing countries and emerging economies, attracting European countries, and persuading the United States. It speeds up the convertibility

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of RMB under capital accounts, which is a necessary condition for the internationalization of the RMB. One of the important areas that countries actively participate in global economic rebalancing is to reform the dollar-led international monetary system. Advancing the use of the RMB as the denominated currency of bulk commodities and promote the RMB in business such as in trade and investment of bulk commodities is a significant symbol of the internationalization of the RMB. In fact, the internationalization of the RMB is a vital way to enhance China’s position in the future international monetary system. However, it is wise to follow the principle of gradual, steady and controlled change, gradually change the unreasonable international financial order, advance the establishment of a diversified international monetary system, expand the usable range of the special drawing rights and promote the process of directly using the RMB as an exchange medium of external payments. As for advancing the reform of international financial institutions, enhancing the supervision over major reserve currency countries and urging developed countries to strengthen their own risk control are required.

6.2.2 Advancing the Compensation of Domestic Interests Through the Coordination of Internal and External Governance The relationship between domestic governance and global governance is the central subject of global governance studies. Instead of replacing domestic governance, global governance and domestic governance complement and promote each other. China’s domestic governance itself has the value and significance of global governance, and its role in global governance depends on domestic governance to a considerable extent. On the one hand, as the largest developing country in the world, China’s good governance of one fifth of the world’s population is a considerable contribution to global governance. On the other hand, China can introduce its successful practices and experience in domestic governance to the world, providing reference for international organizations and other countries which face similar problems. Hence, in the era of globalization, China will advance the integration and mutual learning of domestic governance and global governance while seeking a holistic approach to both the domestic and international situations. A huge number of professionals who are familiar with the principles and policies of the Party and the state, understand China’s national conditions, have a global perspective, and are proficient in foreign languages, international rules and international negotiations are required for global governance. In addition, it is necessary to establish a training system for technical officials and professionals who adapt to internationalization, have a global vision and strategic thinking, and understand China’s national conditions. China should enhance the construction of talents for global governance, break talent bottlenecks, and guarantee enough reserve of talent to provide talent support for China’s participation in global governance. Currently,

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China needs to accelerate the reform of the current system and establish a global talent and leadership training mechanism as soon as possible, especially for the leadership of international organizations.

6.3 Countermeasures for Solving Global Issues 6.3.1 Improving the Effectiveness of the Governance Mechanisms (I)

Fully Leveraging Two Global Multilateral Governance Platforms: the UN and the G20

China should make full use of its core status in the UN and the G20, and strive to give play to its dual core roles in these two mechanisms. The UN and the G20 represent two different types of international mechanisms in global governance. The UN is the most representative and authoritative inter-governmental international organization in the world. It plays an irreplaceable core role and possesses an incomparable advantage in the global governance. Such a legitimacy advantage is built upon the generality of member states and the popularity of the United Nations Charter. However, it lacks efficiency in response to emerging global issues, hence the name “the capacity deficit in global governance.” In contrast, the G20, as an informal multilateral summit mechanism based on noncompulsory obligations, can to some extent make up for the UN’s lack of efficiency in terms of global governance, thus becoming a powerful supplement to the UN system. On this basis, by cooperating with developed countries led by the G7, developing countries led by the BRICS countries and middle powers represented by MIKAT (an abbreviation of the first letters of five countries: Mexico, Indonesia, South Korea, Australia, and Turkey) for common governance, China can achieve a balance between the interrelations of two multilateral governance platforms, namely, the UN and the G20 (Ding 2015a, b, c). On the other hand, although the G20 accounts for a majority of global GDP, 174 countries still do not participate in it. The G20 mechanism will lose its legitimacy and mobility if other countries’ interests cannot be considered. As a result, it is impossible for the G20 to replace the UN. Nevertheless, as a major decision-making mechanism in the future world economy, the G20’s functions and powers will possibly overlap with those of the UN as it tends to be increasingly multi-functional and professional. The G20 summit mechanism will interact with the UN Security Council to promote each other, thus shaping a favorable situation for China to play a key role in global economic, financial, and political security fields, serving as “two rotating wheels” for China, and constantly consolidating and enhancing China’s influence and position in international affairs. China should strengthen the cooperation between concerned parties and member states, make full use of the G20 while maintaining the authoritativeness of the UN, and coordinate these two mechanisms for division of labor and

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cooperation. They play their respective roles and form a pattern in which the UN takes charge of the overall situation while the G20 focuses on economic development (Huang 2015). (II)

Consolidating the Foundation for China’s Regional Cooperation with its Neighbors

China is currently evolving from a major regional power to a global political and economic great power, so it faces urgent development tasks and requires peaceful and stable surrounding environment. However, China is also the country with the most intricate security conditions in its periphery, as well as the most contradictions and disputes and the most conflicts among major countries across the world (Ruan 2014). Therefore, the surrounding territory has become the underlying cause and key factor that directly affects China’s development trajectory and strategic intention, as well as an important condition, prerequisite and guarantee that decides whether strategic opportunities will survive (Zhong 2010). As a composite power on land and sea, China needs to break the geographical division and barriers between the east and west, and focus on the coordinated and balanced geographical layout of the east and west wings as well as the land and sea, to form a strategic pattern in which both land and sea affairs are considered, and both the eastern coastal area and the western border area are integrated and comprehensively interactive (Ding 2014). Hence, President Xi Jinping proposed the strategy of the “Belt and Road Initiative” with great foresight during his visit to Central and Southeast Asian countries in 2013. Rather than an entity and a mechanism, the “Belt and Road Initiative” is a concept and initiative of cooperation and development. By relying on the existing multilateral mechanisms of China and relevant countries, and with the help of the existing and effective regional cooperation platforms, it aims to borrow from the history of the ancient “Silk Road” symbol to carry the banner of peaceful development, actively develop economic partnership with the countries along with the “Silk Road,” jointly build a community of shared interests, shared future and shared responsibilities that features political mutual trust, economic integration and cultural inclusiveness. The two-dimension strategy of the “Belt and Road Initiative” is not only based on the traditional friendship of “creating an amicable and prosperous neighborhood” of the “Silk Road” in history, but also considers “stabilizing the neighborhood based on the Asia–Pacific” in the reality. The “Belt and Road Initiative” connects South Asia, the Asia–Pacific, the Middle East, and other sub-regions, realizes regional economic integration by developing economic and cultural cooperation between China and neighboring countries from the east and west, and also connects the economies of Pacific rim countries and Europe. The common development strategy in Asia not only helps the neighboring countries of China expand by sea and land, but also helps the neighboring countries of China to connect and dock with the Eurasian regions, thereby forming a more tightly interlaced network of a community of interests. Therefore, it is a top-level innovation of regional and global governance and benefits the long-term interests of all parties.

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Reinforcing the Mechanism Construction of the BRICS Countries

The first is inward-looking mechanism or outward expansion. The BRICS cooperation mechanism is neither a “club” serving specific countries nor a closed and anti-foreign “faction”, instead, it is a multilateral coordination mechanism upholding voluntary negotiation and openness and inclusiveness. Hence, from the perspective of expanding the scope of the group and maintaining high level expansion of the mechanism, it is necessary for the BRICS cooperation mechanism to expand its size step by step to further enhance the geographical representation of the organization and its capacity coverage. As regards the issue of increasing membership of the BRICS in the future, one idea is that the BRICS countries will maintain their current size without adding any new members. Countries willing to join the organization can establish early directional connection with the BRICS as a dialogue partner or an observer. Based on developing and improving relevant rules and regulations and under sufficient conditions, the BRICS can accept new members following existing standards. According to this point of view, expansion in size without careful consideration will result in inestimable trouble. Although this idea is easier and more likely to succeed, there are also problems like poor representative persistence and opinion swings. Another idea is expanding its size over time because only by expanding the small group to include more developing countries can it have a stronger voice on the international stage. Therefore, experts suggest that the BRICS should accept a few middle powers like Mexico and Indonesia and all developing nations of the G20 in the future. Generally, instead of taking outward expansion as a priority or a matter of urgency, the BRICS countries are more inclined to tap the potential of strengthening the construction of internal functions, and straightening out the institutions, mechanisms, routes and channels to assist their joint actions. Just as Russia’s contact person for the BRICS affairs said, the time is not yet ripe, and the BRICS countries have no intention of “expansion.” The increase and decrease of the BRICS members should be decided by the “natural development” of the mechanism. The second is the need for the establishment of a permanent secretariat. It is a traditional topic within the development history of the BRICS mechanism as well as an issue concerning its future. For this issue, there are two trains of thought. One is changing the BRICS into an economic cooperation mechanism or a loose but undispersed community of common interests, which is grounded on the fact that the institutional cooperation mechanism takes the leadership summit as its core, the special senior officials meeting as the support and think tank annual meeting and other dual-track channels as the auxiliary. The preliminary institutionalization is not only conducive to its development and expansion, but also conducive to preventing the differentiation of western countries. Another idea is that informality, one of the BRICS’ major characteristics, takes the forum as its existing form. A rotating presidency mechanism is implemented and plays a leading role in actual agenda setting. On the contrary, it is meaningless to carry out institutionalization forcibly. The form of forum should be kept, and the institutionalization should be decided based on future cooperation process. The reason is existing cooperation framework can meet the BRICS’ demand of dialogue and negotiation at all levels. Presently, its

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key task is in sparing no efforts to find common interests and strengthen strategic common ground to step up pragmatic cooperation. In general, it is inadvisable for China to set up the BRICS secretariat. First, the BRICS’ forum operation mode is more conducive for China to participate in global governance. Although China and other BRICS members have common interests, they also have disputes and differences. Strengthening cooperation with relevant countries in a flexible and informal operation mode can not only promote the development of bilateral relations between China and interested parties and the BRICS countries speak with one voice but also avoid direct contrast risks caused by some historical and realistic factors. Second, it can be suggested that the consideration should be given to setting up an executive director in the BRICS financial secretariat to handle all daily issues, with a deputy director served by assistant of the finance minister and the central bank governor, the secretariat executive committee formed by the executive director and the deputy director to co-lead and co-manage document drafting, foreign affairs administration, important newspaper sorting out and other matters of the institution. The third is how the BRICS countries deal with their relationships with other organizations. How to deal with and coordinate the relationship between the BRICS countries and international multilateral or regional organizations and specific functional mechanism became an urgent issue influencing the BRICS mechanism’s enhanced development direction. In contrast, the G7 attaches great importance to strengthening liaison with international multilateral institutions and is good at taking the advantage of its special identity and influence of the international mechanism to develop policy will and consensus of the G7 summits into guiding principles and action plans of global governance. In other words, if the BRICS countries plan to further expand the legality and influence of their governance, they might consider strengthening the construction of dual-track dialogue platforms and communication channels between the BRICS countries and relevant institutions without affecting existing cooperation efficiency and effectiveness. It is an important way and effective method to improve its influence by constructing an interactive relationship with other international organizations. China can promote the establishment of the dialogue and cooperation mechanisms of the “BRICS + X”, with the BRICS countries president and annual rotating presidency or director of the secretariat of each regional organization as representatives participating in the conference. Documents and materials, draft decisions and detailed rules and regulations to be discussed at the annual conference should be submitted to the joint conference of the coordinator for BRICS affairs for review. The annual conference should be organized by relevant organizations appointed by the rotating presidency, and its invitation scope can be expanded gradually in due course. Meanwhile, with the constant improvement of cooperation at all levels between the BRICS countries, the BRICS Think Tank Council, or other institutions under it can be appointed as permanent observers to attend communication activities like webinars, technology transfer and knowledge sharing promotion conferences organized by regional multilateral organizations.

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Moreover, detailed topics for discussion of global governance need to be carried out by multilateral organizations. The BRICS mechanisms should strengthen governance efficiency and enhance ties with international institutions with global influence. It can be suggested that the BRICS should follow the form of “1 + 6” Round Table Dialogue of the G20 Hangzhou Summit to establish a “5 + 6” annual regular dialogue mechanism among senior officials relating with the political and economic fields solely attended by six major economic and financial institutions including the BRICS countries, specialized units under the EU and economic and development cooperation organizations. The annual rotating presidencies will act as the specialized coordinator responsible for contacting international institutions to invite the above-mentioned six heads during each annual BRICS summit to gather to conduct in-depth discussion on how to adjust unfair and unreasonable arrangements existing in current global governance systems and changing the situation whereby the global economic governance pattern has lagged behind the global economic pattern since World War II.

6.3.2 Innovating Ideas to Usher in New Governance Channels (I)

Guiding the BRICS Countries to Strengthen Global Governance Cooperation with Middle Powers

Since the twenty-first century, middle powers have increasingly become a significant force influencing the global governance system by relying on the favorable situation of the collective rise of emerging countries (He 2015a, b). For example, in terms of the issues of United Nations Security Council reform, “Uniting for Consensus” campaign led by middle powers such as South Korea, Mexico, Pakistan and Argentina became the pioneering force in breaking the scheme that Japan, Germany, India and Brazil want to unilaterally obtain permanent security council seats by means of binding. In November 2010 South Korea, as the rotating president, vigorously promoted the middle powers in the G20 to re-collectivize in an attempt to form a “moderately strong group” through mutual unity in order to achieve a balance of power against the BRICS and the G7 countries thereby leading to a tripartite solution (Pang and Wang 2013). During the UN General Assembly in September 2013, MIKAT, a regular foreign ministers meeting of five countries led by The Republic of Korea (ROK) and composed of Mexico, Indonesia, Australia and Turkey, announced the birth of a new mechanism of “middle power cooperation”. In general, China and the middle powers are not the “establishment” or interest integrator of the existing system. The two sides, in principle, pursue fair and reasonable nondiscriminatory international system rules, emphasize gradual and coherent reform to the existing system and arrangement of international standards. Besides, both sides basically claim economic development and social stability as the priorities of the G20. Both agree that promoting fairness and justice in the international community

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and enhancing the interests and well-being of peoples of all countries should be the starting point as well as the goal of global governance reform. Both tend to limit the scope of G20 governance to economic affairs, fiscal and financial fields. Therefore, China and the middle powers may become partners whose interests are closely linked to a certain extent and share a common future. Based on the BRICS, China can consider uniting the middle powers to win more strategic space in global governance reform (Ding 2015a, b, c). In addition, China can support South Korea’s participation in the establishment of a middle power network and form a cooperation and dialogue mechanism with BRICS within the G20. This will ensure an effective reponse to strategic pressure from the G7 and help promote the development of the international order towards a direction that is more conducive to emerging countries and middle powers. (II)

Shaping New Global Governance Models via the Belt and Road

Different from the “Marshall plan” of the past, China’s “Belt and Road Initiative” neither divide based on ideology, nor set up confronting camps. In fact, its political philosophy, action style, project flow pattern and the multilateral cooperation mechanism conform to the aim and intention of democratization of international relations, so it is a motion and plan for the new global development. The “Belt and Road Initiative” aims to enhance the level of industrial structure and sustainable development ability of the countries along the “Belt” and “Road.” It contains China’s claims of independent development at home and its desire to optimize the external environment. It is in line with the times and respond to the wishes of the public. Moreover, not only does it embody the “dual-track” thinking of safeguarding internal stability and protecting external rights simultaneously, but also has the dual characteristics of realistic pertinacity and long-term direction. Rather than limit itself to China’s own development, the issues involved and to be solved in the “Belt and Road Initiative” are common to global cooperation, such as the widening wealth disparity, transnational immigrants and organized crime, the shortage of resources and climate/environmental degradation. The “Belt and Road Initiative” is an innovative and effective channel of properly resolving global challenges, as well as a vital means to help achieve the United Nations 2030 Sustainable Development Goals (Wang 2016). In this sense, it is a road leading to a community of shared future for mankind. It embodies China’s lofty ideals and unremitting pursuit of building a better world, and contains the aspiration of people all over the world to live a happy life. China has completed the transformation and upgrading of its industrial structure and development model from learning and catching-up to innovation-orientation after more than 40 years of reform and opening-up. China has accumulated material resources and comparative advantages in areas such as technology, equipment, capital, and management experience to help countries along the Belt and Road to realize independent and sustainable development. Furthermore, China also has strong institutional guarantees and governance experience to support the development of more countries. China proposes the “Belt and Road Initiative” in hopes of enhancing international cooperation, docking each other’s development strategies,

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complementing each other’s advantages in factors and resources and promoting the common development of all parties. The “Belt and Road Initiative” is not only a mechanism to promote China’s opening-up from the south to the north and gradient cooperation from the east to the west, but also an innovative platform to achieve the dislocated and coordinated development between China and the countries along the belt and road. (III)

Promoting Global Governance Reform under the Guidance of Building a Community of Shared Future for Mankind

A “community of shared future for mankind” refers to accommodating the legitimate concerns of others and promoting the common development of all countries while pursuing one’s own interests and development. Such initiative is a tailored policy and action guide for countries based on their local conditions, which advocates to achieve inclusive, interconnected, and sustainable global growth based on equality, orienting opening-up, with cooperation as the way, with sharing as the goal, and under the premise of respecting and supporting the people of all countries to choose their own social system and development path. On the one hand, the practice of building “a community of shared future for mankind” needs China’s support, and requires China to drive the common progress of human society through its own development (Li 2017). China actually already has relatively strong political and economic advantages, the key still being how to enhance soft power through the increase of hard power, how to use the increasing national comprehensive power to shape and influence the international order, turning it into a usable operational guide for the global situation and development trend, thereby promoting the achievements of China’s rise and the advancement of world development, highly complementing each other’s economic and social development as well as the political interest security complex. As a matter of fact, the Chinese people have always had two dreams, namely, the “Chinese dream” of realizing the great rejuvenation of the Chinese nation, and the “world dream” of building a community of shared future for mankind. The realization of the former depends on the construction of the latter, and the realization of the former can also bring dividends and opportunities for world development, which is of global significance to human development (Ruan 2016). On the other hand, the concept of building “a community of shared future for mankind” is the outcome of the spirit of win–win cooperation. It is not only the common ideal and value pursuit of all mankind, but also the guideline for China’s realistic diplomatic actions. Thereby, it has shaping and inspiring significance for maintaining and using the strategic opportunity period. Under the guidance of new ideas advocated by the concept of building “a community of shared future for mankind”, China should keep in mind both domestic and international situations, ensure development and security at the same time, firmly insist on the general principles of peaceful development and the national revival, as well as enhancing its initiative position in the structure of international strategy. The Construction of “a community of shared future for mankind” is determined by China’s cultural traditions and national conditions, as well as its urgent need and persistent pursuit to adapt to the

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trend of world development. Meanwhile, it has also reflected the common will of all and the integration of individual interests, rather than China’s “opinion” or “own idea”. Therefore, the realization of a “community of shared future for mankind” is a sufficient condition and a necessary guarantee for China to ensure a “strategic opportunity period” of peaceful development, and it also carries China’s lofty ideal and unremitting pursuit of building a better world. Advocating the construction of “a community of shared future for mankind” is an intelligent choice made by China based on its own development needs and realistic national conditions. Originating in the profound and inclusive traditional culture and political wisdom of China, it is rooted in the historical Chinese gene of peace and friendship, and strengthens the sense of presence and fulfillment between China and the world. Furthermore, it takes the short-term realistic goal of “China’s strategic opportunity period” and the long-term blueprint of building “a community of shared future for mankind” into account. It also meets the aspiration and common interests of people of all countries, and highlights people’s respect for the core values and institutions of human civilizations. Therefore, China should firmly adhere to the theme of building “a community of shared future for mankind,” and strive to continue and maintain “China’s strategic opportunity period” with the legitimate aspirations and reasonable concerns of people around the world for a happy life, and connect with the development prospects, spiritual sustentation and security expectations of the world, and then form the good cycle and benign interaction of “ a community of shared future for mankind” and “strategic opportunity period.”

References Ding, Gong. 2014. The role of middle powers in China’s peripheral diplomacy. World Economics and Politics 7:24–41. Ding, Gong. 2015a. MIKTA gradually become a new governance force. China Social Science News. Ding, Gong. 2015b. The 3rd party power on the G20 platform. Outlook Weekly 49: 55. Ding, Gong. 2015c. Will MIKTA be a new partner of China’s G20 diplomacy. World Affairs 24: 66–67. He, Yafei. 2014. The impact of the development of China-US relations on the world pattern in the new century. The US China Press. He, Yafei, 2015a. Power enhancement of moderate power and global governance. China Business News. He, Yafei. 2015b. The South China Sea and China’s strategic security. Asia and Africa Review 3: 1–8. Huang, Wei. 2015. Global economic governance led by G20 and China’s expectations. Journal of International Economic Cooperation 6: 4–9. Li, Xiangyang. 2017. “The vision of a community with a shared future for mankind guides the direction of global governance reform. People’s Daily. Pang, Zhongying and Ruiping Wang. 2013. China’s strategic response to global governance. International Studies 4: 57–68. Ruan, Zongze. 2014. What kind of neighborhood will China build? International Studies 2:11–26. Ruan, Zongze. 2016. Community of shared future for the mankind: China’s world dream. International Studies 1: 9–21.

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Wang, Yiwei. 2016. The belt and road initiative reshapes the discourse power of economic globalization. HongQi WenGao 21: 33–36. Yuan, Peng. 2012. Strategic thinking on building a new type of Sino-U.S. Relations between great powers. Contemporary International Relation 5: 1–8. Zhong, Feiteng. 2010. The political economy of China’s periphery diplomacy in the New Century. South Asian Studies 3: 1–16.

Part II

International Financial Governance and Countermeasures

Preface The outbreak of the global financial crisis in 2008 further exposed the shortcomings of the original international financial governance system. With rapid economic growth and rising financial strength, China has greatly improved its position in international financial governance. The outbreak of the global financial crisis opened a window of opportunity for China to participate in international financial governance. In this context, it will help the Chinese government to make early preparation and strive to achieve a breakthrough in the new round of reform of the international financial governance mechanism to strengthen the study on the existing international financial governance system and put forward specific reform and improvement suggestions. The purpose of this study is to go through the factors influencing the evolution of international financial governance system, systematically analyze and assess the challenges and deficiencies in international financial governance, evaluate and probe into relevant plans to reform the international financial system, and grasp the trends and changes in the evolution of international financial governance so as to propose a feasible strategic choice for China to participate in international financial governance. The study consists of four chapters. Specifically, Chap. 1 puts forward the macro framework and basic principles of international financial governance reform by analyzing the concept of international financial governance and the historical practice of international financial governance, which lays a foundation for the subsequent analysis. Chapter 2 analyzes the factors influencing the evolution of international financial governance from a relatively macro perspective, including changes in the international economic structure and the evolution of international financial regulatory system. Although these factors have been changing, the outbreak of the global financial crisis in 2008 is undoubtedly an important milestone. On this basis, Chaps. 3 and 4 further analyze the deficiencies and challenges in the current international financial governance, and give targeted suggestions on reform. Chapter 5 systematically illustrates China’s positioning and goals in participating in international financial governance, uses a SWOT analysis to summarize the gains and costs,

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and proposes countermeasures for China to participate in international financial governance reform. Our important conclusions are as follows. First, in terms of the international reserve currency system, China and other stakeholders should actively give impetus to the diversification of the international monetary system and promote the special drawing rights to play a greater role in the system. We believe that this multi-currency system will be more conducive to improving the stability of the global financial system than the dollar-dominated international monetary system. Second, in terms of the exchange rate system and the balance of payment adjustment mechanism, it is necessary to pay attention to the differences in the economic and financial markets in various countries, and consider to formulate indicators related to structural imbalances to improve the balance of payment adjustment mechanism. Third, in terms of international financial institutions, it is necessary to further promote the reform of the IMF’s governance structure, strengthen the IMF’s legitimacy, credibility and effectiveness, and give a better play to the IMF’s role in international financial governance. Fourth, in terms of international financial supervision, it is necessary to gradually include shadow banking into the regulatory system to prevent cross contagion among various financial products. The reform of the international financial regulatory system needs to coordinate the balance between national standards and international standards to maintain the stability of the global financial system.

Chapter 7

Overview of the Evolution and Reform of International Financial Governance

The evolving history of international financial governance after World War II has witnessed important theoretical changes in the international monetary system, and has also revealed major trends of the system changes. In the past decades, the rise of developing countries and emerging economies, who have become an important driving force for the reform of international financial governance, has changed the international economic structure. The international financial crisis that broke out in 2008 also provided an opportunity for the reform of the international financial governance system. This chapter, on the basis of reviewing the concepts of international financial governance, identifies the problems in the existing international financial governance, and illustrates the main aspects for the reform of the international financial governance in the future.

7.1 Concept and Framework of International Financial Governance International Financial Governance is also known as Global Financial Governance,1 which is generally regarded as the extension and application of global governance in the field of international finance. On the basis of global governance, the United Nations Institute for Training and Research (UNITAR) believed that international financial governance should provide support for the predictability and stability of the international monetary system, facilitate payments for international economic transactions, oversee the international financial system to protect the interests of savers and investors around the world, and allocate credit efficiently and fairly among all potential borrowers. Held and Young (2009) believed that the existing system of global financial governance has proved largely inadequate to predict, moderate, or 1

In this article, the concept of international financial governance is equivalent to the concept of global financial governance, and there is no intentional distinction.

© China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_7

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contain financial instability. Effective global financial governance requires a shift to a better balance between private financial activity and public financial governance. For the moment, the globalization of financial markets has integrated the global economy in unprecedented ways, and yet the rules and institutions that monitor and regulate financial market activity have not kept pace. In this light, in order to further promote the development of global financial market activity and to avoid the risks in the process of development, narrowing the gap between globalization and institutionalization has become an unavoidable issue in international financial governance. Frieden (2016) believed that the fundamental purpose of international financial governance is to ensure global financial stability. However, due to insufficient technical capabilities and insufficient political incentives, the supply of public goods for international financial governance in the international community is rather insufficient. Frieden pointed out that it is necessary to strengthen the supply of public goods for international financial governance in the following aspects. The first is to provide lender-of-last-resort facilities to support the liquidity of the international financial system. The second is to strengthen regulatory coordination to avoid major regulatory differences and private sector regulatory arbitrage. The third is to promote macro-prudential supervision and international capital flow coordination. The fourth is to enhance macroeconomic policy coordination. Chinese scholars have also elaborated on the concept of international financial governance. Xu et al. (2016) believed that global financial governance refers to a process that national governments, international organizations, non-governmental organizations, transnational companies, as well as other market entities participate in the management of global financial affairs through coordination, cooperation, and consensus-establishing to avoid and prevent systemic financial risks, maintain economic and financial stability in order to establish or maintain a sound international financial order. Zhang and Tan (2016) believed that international financial governance refers to the establishment of rules, systems and mechanisms to effectively manage the global currency affairs and financial activities, such as coordinating various relations of interests at the global, regional and national levels. It aims to promote the healthy development of the global economy, trade and investment by maintaining the stability and fairness of global currency and finance. Zhai (2014) believed that international financial governance refers to a mechanism of rules, methods, and activities in the international financial system when multi-actors jointly respond to world economic issues and challenges in global financial reform based on equal dialogue, consultation and cooperation. Based on the concepts of international financial governance given by these scholars, it is necessary to further clarify the actors and content of international financial governance, as well as how to conduct governance, so as to provide a framework for the subsequent analysis of this study. Participants of international financial governance. Scholars generally believe that there are many types of players participating in global governance, including countries, international organizations, companies, individuals and so on (Zhang and Ren 2015). International financial governance mainly involves the following participants: The first is national governments and related government departments, among

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which the most extensive and important participants are financial departments, central banks, and financial regulators in various countries. The second is formal or informal international organizations, among which the most extensive and important participants are the International Monetary Fund (IMF), the Bank for International Settlements (BIS), and the Financial Stability Board (FSB). Other than that, other organizations and social groups, including multinational companies, multinational social movements and numerous non-governmental organizations, also seek to exert influence on international financial governance. All of these constitute the main actors of international financial governance, and have advanced the process of international financial governance from different fields and at different levels (Wang 2013). Content of international financial governance. Scholars agree in general that the content for international financial governance should cover the entire international financial field, but pay different attention to specific topics according to their own research focus. Overall, scholars believe that the main research content of international financial governance includes the following three parts. The first is the reform of the international monetary system, especially the international reserve currency system. The second is the reform of the international financial system, notably the global financial regulatory mechanism, including financial derivative product management and credit rating management, especially the improvement and reform of financial supervision. The third is the reform of international financial governance mechanisms, including both the reform of international monetary and financial institutions (e.g., the IMF) and the reform of the decision-making body of international financial governance. This study believes that the international monetary system and the international financial system are the two most important research objects of international financial governance. The international monetary system (IMS) is a set of rules and institutions to deal with the balance of payments. One of its key purposes is to provide a framework that meets the conditions for promoting the transactions of goods, services and capital between countries and maintaining global financial and economic stability. In addition, the IMS also aims to promote an orderly adjustment to shocks. The international financial system (IFS) is mainly a system in which international standard-setting institutions adopt different measures to set standards for the global financial market, support market access, and promote financial supervision and regulatory coordination (Moloney 2016). It is mainly related to international financial markets and international financial supervision, and so forth. According to the description above, this study is mainly divided into the following parts (Fig. 7.1). The first is the main content of international financial governance defined by this research, namely the international monetary system and the international financial system. The second is the reform of the governance bodies related to the governance content above. The governance body related to the international monetary system is mainly the IMF, while the governance body related to the international financial system is mainly the BIS and the FSB. In addition, such organizations as the World Bank, the OECD, and the International Organization of Securities Commissions are also important governance bodies. Although as the main body of governance, these organizations and institutions are also targets to be “governed” while promoting international financial governance. In recent years, with the change

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Fig. 7.1 Architecture of international financial governance

of global economic structure, it has become more and more difficult for the international financial governance mechanism to adapt to the needs of the governance situation. The backward governance mechanism not only fails to reflect the changes in the global economic structure in time, but also affects its governance effectiveness. It should be pointed out that there is another type of governance body worthy of attention, namely a series of informal international coordination mechanisms represented by the Group of Twenty (G20), which can be further subdivided into the Group of Seven (G7), the BRICS Group (BRICS), and the MIKTA.2 These mechanisms do not often directly focus on the specific fields of global economic governance, but promote other governance bodies such as international organizations and government agencies to boost reforms in related fields through international coordination. We classify such kind of governance body as the governance coordination body. This study proceeds as follows. First, we review the evolution of the global economic governance concepts and the changing trend of global economic structure to provide a realistic and theoretical background for the reform of international financial governance. Secondly, we identify the defects and deficiencies of current international financial governance from the three aspects of the international monetary system, international financial system, and international governance mechanism. Finally, we put forward suggestions for reforming the international monetary system, the international financial system, and the international financial governance mechanism, as well as corresponding countermeasures and suggestions according to China’s situation.

2

MIKTA, a cross-reginal consultative platform of middle powers, is an informal partnership established among Mexico, Indonesia, Republic of Korea, Turkey and Australia. However, compared with G7 and BIRCS, there is a loose cooperation mechanism in the MIKTA.

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7.2 Necessity to Reform the International Financial System In the past decades, the rapid rise of emerging economies has changed the world economic structure. However, the international financial order has continued the pattern with developed countries at the center, and developing countries and emerging market countries at the periphery. The US dollar remains the main international reserve currency, and the governance of international financial institutions is still under the control of developed countries. There is a clear mismatch between the economic structure and the financial power. At the same time, countries all over the world had to deal with the continuing global imbalance until the international financial crisis broke out in 2008. The dollar is still the dollar of the US, but when the United States no longer undertakes the obligation to stabilize the exchange rate as it did in the Bretton Woods system, the problem has become a global issue (Gao 2015).

7.2.1 Multi-polar Pattern and Unipolar Currency The rapid rise of emerging economies has broken the original pattern of world economic power. It is mainly manifested in the following three aspects. Firstly, there is a narrowing gap between the total economic size of emerging economies and developing countries and that of developed markets. In 1980, emerging economies accounted for 36.2% of the world’s GDP in terms of purchasing power parity, and developed markets accounted for 63.8%. Since the 1990s, the GDP sizes of emerging economies and developing countries have demonstrated an upward trend, while developed countries have demonstrated a downward trend as a whole. In 2002, the GDP share of emerging economies and developing countries exceeded that of the G7 for the first time. In 2008, the GDP share of emerging economies and developing countries rose to 51.2%, exceeding that of developed countries of 48.8% for the first time. As of 2020, emerging economies and developing countries already accounted for nearly 60% of world GDP, while the proportion of developed countries was only slightly higher than 40%. Secondly, emerging economies and developing countries are growing at a rate higher than that of the world average. From 1980 to 2014, the world economy achieved an average annual growth of 3.5%, while emerging economies and developing countries achieved an average growth of 4.6%, among which the growth rate of emerging economies in Asia was as high as 7.4%; the growth rate of developed countries was 2.5%, among which the growth rate of core G7 countries was 2.3%. Thirdly, there is a rising position of emerging markets in global trade. With the continuous development of world economic integration, the scale of trade in emerging markets continues to expand. More importantly, from the perspective of trade flows, emerging markets have become important surplus countries. Correspondingly, the scale of foreign exchange reserves of emerging economies is expanding. The accumulation of foreign exchange reserves enhances the resistance

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Table 7.1 Shares of main currencies as the international currency in the world Dollar Euro

Pound Yen RMB

Proportion of foreign exchange reserves in the total 63.98 foreign exchange reserves of member countries (in the 3rd quarter of 2015)

20.34 4.72

3.77 1.11*

Proportion of foreign exchange transactions in total transaction volume (in 2013)

33.4

23

23

2.2

Proportion of lending in total lending (in September 2015) 48

30

–

5

–

Proportion of outstanding amount of securities issued in the total securities (in June 2015)

22

–

13

1

87

51

Source Gao Haihong, Heritage of Bretton Woods system, World Economy and Politics, 2015 (3). Note *This data is the result of an investigation conducted by the IMF. The proportion of the RMB in the foreign exchange reserves of member countries was announced after October 1, 2016

of these markets to external shocks. Simultaneously, it enables emerging markets to become important global creditors, forming a pattern in which “poor countries” finance “rich countries.” However, in the field of international finance, the US dollar is still the pegged currency of the exchange rate system in most developing countries and emerging economies, and it is also the main reserve asset of surplus countries. It can be seen from Table 7.1 that in global official and private transactions, the U.S. dollar still occupies a core position in comparison with the euro and the yen. Among the 188 member countries of the IMF, 61% of the foreign exchange reserves are held in dollars, 23.1% of the member states clearly peg their domestic currencies to the U.S. dollar, nearly half of the foreign exchange transactions are related to dollars, and 59% of bank loans are provided in dollars, 39.1% of international securities markets are issued in dollars (slightly lower than 41.8% of euros).

7.2.2 Consequences of the Lagging Reform of the International Financial System The lag of the reform of the international monetary system is mainly manifested in three aspects. First, the reserve currency and liquidity issues that existed during the Bretton Woods system have not been effectively resolved. Furthermore, under the dollar standard, global liquidity is somehow closely related to the domestic policies of the United States, which increases the spillover of U.S. domestic policies. Secondly, the problem of balance of payment adjustment has not been resolved. The United States relies on the dollar’s international currency status to finance its current account deficit through capital inflows; surplus countries with high savings continue to accumulate foreign exchange reserves in order to prevent the balance of payment crisis, which in turn flow to the United States in the form of dollar assets. Finally, the Triffin dilemma involving the issue of confidence remains unresolved.

7.2 Necessity to Reform the International Financial System

(I)

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Issue of inequality

One of the features of the dollar standard is that as an issuer of sovereign currency, the Federal Reserve System (often referred to as the Federal Reserve or simply “the Fed”) has become the main creator of global liquidity. In the absence of international institutions to exercise the function of supervising the central bank to create liquidity, it has produced three results. First, dollar liquidity is linked to the U.S. current account deficit. As long as surplus countries are willing to accept and hold dollars, the created U.S. liquidity can always flow back to the United States in the form of dollar debt. This becomes an important source of global imbalance (Gao 2015). Secondly, since the U.S. dollar is a world currency, and the United States does not undertake the obligation to stabilize the exchange rate of the U.S. dollar, the U.S. thus is able to absorb capital inflows without worrying about causing domestic inflation, as the externalities of U.S. policies are mainly undertaken by its partners. Thirdly, the huge trade deficit and the accumulating debt burden of the U.S., together with the U.S. government’s “goodwill neglect attitude” towards the exchange rate, has caused the long-term depreciation of the value of the U.S. dollar since February 2002. This has brought huge capital losses to countries with large foreign exchange reserves that take dollar assets as main investment targets. American economist Krugman (2009) called it “The Dollar Trap” in his article in the New York Times. (II)

Issues of instability and confidence

Since the U.S. dollar is the main currency for global reserve, settlement and pricing, the Fed has thus become the de facto lender of last resort in the world. During the financial boom, excessive dollar liquidity encourages leveraged financing and accumulation of financial bubbles. Meanwhile, it also brings hidden troubles to the financial crisis. When financial turmoil or even crisis erupts, the instant tightening of dollar liquidity requires the Fed to provide timely support for dollar liquidity, so as to prevent market unfreezing and systemic bankruptcy. In fact, since the international financial crisis in 2008, the Fed and other central banks have been providing liquidity support through currency swaps, which has become an important means to prevent the spread of the financial crisis. However, as liquidity shortages are usually difficult to quantify, especially in times of crisis, market exhaustion has the psychological characteristics of self-reinforcing. Given the Fed’s obviously limited resources, investors’ fleeing to safe assets will lead to severer market turbulence (Gao 2015).

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Robert Triffin, professor at Yale University, found that the dollar debt (the balance of dollars in foreign hands) relying on the United States meets the world’s excess reserve demand, but the binding force of dollar gold parity is greatly reduced in the case of limited gold supply. Consequently, the stability of the dollar value is adversely affected, which is destructive to the normal operation of the international monetary system (Triffin 1997). The Triffin dilemma also exists when the exchange rates are floating. Theoretically, the international monetary system that relies on a single sovereign currency to exercise the function of international reserve currency has inherent defects itself. As mentioned above, as the issuer of the dollar reserve currency, the United States needs to continuously provide liquidity to the world through its current account deficit. With the accumulation of the U.S. deficit, the value of the dollar is damaged, which endangers the dollar’s status as a reserve currency. In addition to the current account deficit, the capital account has also become an important channel for the United States to export the dollar liquidity in recent years. As the demand increases for reserve assets, the requirement for safe assets with financial solvency guarantee increases as well. This creates a paradox: the increase in demand for reserve assets requires an increase in the issuance of government bonds with such solvency; the more bonds are issued, the greater the impact is on solvency (Obsfeld, 2011). Considering the debt size of developed countries and future trends, we are facing a state of no solution. (III)

Issue of asset safety

Since the outbreak of the international financial crisis in 2008, global safe assets have undergone changes in the supply and demand structure and quantity. On the one hand, there is an increasing demand for reserve assets in emerging markets out of preventive needs. During the crisis, reserve assets providers (central banks and financial institutions) have also turned into demanders, leading to a sharply rising demand for safe assets. On the other hand, on the supply side, reduction of sovereign debt levels has led to a decrease in providers for qualified safe assets, and the deleveraging of financial institutions has also caused the supply of safe assets to shrink. In the past decade or so, the 10-year treasury yields in the United States, Germany, and the United Kingdom, which are the world’s major safe assets, have shown an overall downward trend, which to a certain extent reflects the limited supply against more demands for safe assets (Fig. 7.2). Especially during the 2008 financial crisis, investors’ preference for risk decreased while the demand for safe assets surged. The U.S. dollar assets are usually the main safe-haven assets. The so-called saying of “there are no good assets, but better bad assets” reflects investors’ worries about the quality of reserve assets. To a large extent, it implies the shortage of safe assets in international financial system (Gao 2015).

7.3 Key Points in the Reform of International Financial Governance

8.0

%

美国

123

英国

德国

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1998

2000

2002

2004

2006

2008

2010

2012

2014

Fig. 7.2 Safe assets: the 10-year treasury yields issued by governments of the U.S., Germany and the UK. Source Wind Info. Note *The three countries listed in the picture are (from left to right): The U.S., The UK and Germany

7.3 Key Points in the Reform of International Financial Governance The core issue Triffin worried about in those years was the contradiction between the continuous expansion of the world economy and the adequacy of international liquidity. More than half a century later, this contradiction still exists. Especially after several crises, discussions on the reform of international monetary system seem to have come back to the original point. Currently, the core contents of reconstructing the future international financial system are to reform the existing dollar-led reserve currency system, to reorganize and add multi-level international financial institutions, and to establish a multi-level global financial safety net.

7.3.1 Diversified Reserve Currency System It requires a diversified reserve system to reform the dollar-led reserve currency system. And it is an important path selection to achieve diversified reserve currencies to establish a super-sovereign currency, reform special drawing rights, and enhance the role of non-dollar currencies including the Chinese Yuan (RMB). (I)

Establishing a super-sovereign currency

The proposition of replacing currencies issued by sovereign countries with a supersovereign currency has a long history. When the Bretton Woods system was constructed after World War II, John Maynard Keynes proposed to establish a

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Bancor program for the world currency. According to the program, Bancor, as a super-sovereign currency, could serve as a unit of account for international trade and investment among member countries. Keynes also suggested to set up the International Clearing Union as the executive agency of the super-sovereign currency. Subsequently, based on Keynes’ proposal, Triffin proposed to establish a new means of payment independent of national currency in addition to gold. According to him, “all countries can deposit reserves in the IMF in the form of international savings convertible for gold if they do not want to hold them in the form of gold” (Triffin 1997). In this way, member countries’ contributions to the IMF could turn to a deposit system as the basis for lending to member countries. Its advantage lies in that while it is freely convertible as gold in the world, it will not affect its solvency when creditor countries provide too much lending. However, similar to Keynes’ program, it requires an international institution beyond national sovereignty for implementation, thus the biggest obstacle to conquer is “actually political rather than economic” (Triffin 1997). After the financial crisis in 2008, the idea of super-sovereign currency was brought up again. Zhou Xiaochuan, Governor of the People’s Bank of China, proposed to establish a super-sovereign reserve currency in his article in 2009 (Zhou 2009). In practice, the super-sovereign currency must first be able to perform the four major functions of currency: medium of exchange, unit of account, store of value, and value standard. Secondly, it must be supported by an executive agency, which must have a nature beyond national sovereignty, and have a credit higher than a sovereign state. The establishment of the euro can be said to have established a partial supersovereign currency in the European region. However, in terms of institution building, apart from implementing a unified monetary policy by the European Central Bank, the Eurozone has not yet established a real super-sovereign institution. At the global level, the super-sovereign currency, as a motion to reform the reserve currency system, is more like an ideal goal. The motion conveyed the important message that China, as the largest emerging economy, is unsatisfied with the unsustainability of the current dollar standard secured by the national credit of the United States. (II)

Reforming special drawing rights

The special drawing rights (SDR) was created in 1969 with the original intention to supplement the lack of dollar liquidity. In the past 40 years, SDRs have been used in a very limited scope. They are mainly used for account transactions among the central banks of the IMF member countries, and a small number of bonds denominated in SDRs issued in history. In contrast with the establishment of super-sovereign currency, the plan to reform special drawing rights is more feasible (Gao 2015). In order to expand the function of the SDR, the first thing is to solve the representation of its basket of currencies. In the early days after the establishment of the SDR, its valuation basket only considered the trade shares of the currency issuing countries in the world. According to this criterion, the SDRs included 16 currencies from 1969 to 1980. In 1981, the IMF revised the valuation basket. In addition to considering the importance of trade shares, it also included the capital market indi-

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cator. In this way, the number of currencies in the basket was reduced to five. In 2000, the euro replaced the German mark and the French franc, and the basket of currencies consisted of four currencies, namely the U.S. dollar, the euro, the British pound sterling, and the Japanese yen. In 2011, the IMF revised the valuation standards again. At present, this standard mainly considers two factors: the volume of trade in goods and services of the currency issuing countries, and the proportion of member countries holding the currency as a reserve currency. In 2015, the IMF once again reviewed the composition of the SDR currency to dynamically reflect the status of member countries in global trade and finance and expand the types of currencies in the valuation basket. It then decided to include the RMB into the SDR basket. Now the RMB has officially become an international reserve currency recognized by the IMF. In order to reform the SDR, the second thing to consider is to expand its scale. Since its establishment, the IMF has made only three allocations of SDR: (1) SDR 9.3 billion allocated from 1970 to 1972; (2) SDR 12.1 billion allocated from 1979 to 1981; (3) SDR 161.2 billion allocated in 2009. Considering that nearly one-fifth of the member countries that joined the IMF after 1981 have never received a quota, the IMF provided these countries with a one-time special drawing right of 21.5 billion in the name of special allocation in August 2009. By the end of 2009, the cumulative SDR quota was USD 204 billion. Compared with the demand for liquidity in the world economic growth, the increase in SDR quotas only partially supplements the liquidity demand of the U.S. dollar. It is worth noting that the United Nations International Monetary and Financial System Reform Group chaired by Joseph Stiglitz provided a relatively systematic plan for reforming SDR. According to Stiglitz’s report, the IMF needs to expand its scale at the speed of issuing an additional 200 billion of SDRs each year in the short term. This will satisfy the increasing demand from member countries for reserve assets while separating the reserve currency supply from the U.S. current account deficit. The IMF has been establishing the Global Greenbacks as a new reserve currency and setting up the Global Reserve Fund (GRF) for long. The GRF is responsible for managing new global currencies. Member countries submit a certain amount of their national currencies to it every year, and the GRF distributes the equivalent of global greenbacks to each member country. Regarding the reform of special drawing rights, another remarkable proposition is to create a substitution account for special drawing rights under the framework of the IMF (Kenen 2010). Under this account, countries with dollar reserves can deposit a portion of their reserves in exchange for corresponding special drawing rights. This design helps countries to decentralize their reserve assets. However, the lack of liquidity of SDRs and a tradable secondary market has hindered the further expansion of its reserve currency function. Nevertheless, the reform of SDR should be one of the breakthroughs in the reform of the international reserve currency. As this reform is carried out under the existing framework of international institutions, it requires active cooperation of the IMF member countries.

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Enhancing the role of non-dollar sovereign currencies

Given that there is a lack of practical operating basis to establish a super-sovereign currency on a global scale, as well as very limited possibility to expand gold as a reserve currency, it has become a realistic choice to diversify the reserve currency system, so as to increase the importance of non-dollar currency in the international reserve system (Gao 2015). The establishment of the euro has its historical significance. As a reserve currency, the euro accounts for only 24% of the reserves of the IMF member countries. But in the international bond market, it has become the largest currency of bond issuance in the world. The importance of emerging economies has increased greatly in international trade and financial transactions, laying foundations for their currencies to perform more international functions. Although currencies of emerging economies play a very limited role regarding reserve currency functions, the currency status of emerging economies has risen in settlement and pricing. The RMB has quickly occupied a place in many international currency functions, and the cross-border movement of it has developed rapidly. As a reserve currency, the RMB has become a component of the reserve currency basket of countries such as the United Kingdom, Japan, India, Nigeria and Malaysia. As a currency for trade settlement and investment, the RMB trade settlement has accounted for 25.5% of China’s cross-border trade, and the RMB-denominated ratio in direct investment has accounted for nearly 10%. In the international payment system, the RMB has risen from the 35th place in 2010 to the 5th place in 2016. About one third of the financial institutions conduct payment transactions with mainland China and Hong Kong SAR in RMB globally. As of June 2016, 34 bilateral RMB swap agreements had been signed between the People’s Bank of China and central banks of other countries. The RMB could be directly traded with currencies of major developed countries such as the euro, the British pound, the Japanese yen, and the U.S. dollar. The offshore RMB market has developed rapidly, while Hong Kong has become the most important offshore RMB center. In addition, the RMB business is also emerging in Singapore, Taipei, London, Luxembourg, Paris and Frankfurt. As the largest emerging economy and developing country, the internationalization speed and scale of China’s currency will determine the diversification process of the international monetary system to a considerable extent.

7.3.2 Governance Reform of International Financial Institutions Financial stability is a kind of public goods, which requires the willingness of countries to provide through cooperation, as well as an international institutional body that operates effectively. There are two feasible ways to enhance financial stability. One is stock reforms of existing financial institutions, and the other is incremental reforms featuring emerging economies and developing countries.

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Progress of quota share and governance reforms in the IMF

The outbreak of the global financial crisis in 2008 pushed the IMF reform to a fast lane, with quota and governance reforms being the core of various adjustments. In the past 70 years, the IMF has conducted 14 reviews of fund quotas, of which nine were adjusted for quota shares. The 13th review in 2008 did not increase the total contribution quota shares, but added the quota shares of emerging market countries after the review, and its reform plan was fully implemented in 2011. In December 2010, the IMF conducted the 14th quota review, and a package of reform plans was approved, which included doubling the total fund payment limit, adjusting the proportion of member countries’ contribution quotas, and changing the way of electing executive director seats. According to the original plan, this program should have been implemented in 2014. However, due to procrastination of the United States, it was postponed until 2016. It should be pointed out that although the scale of the IMF’s available resources has expanded, it is still seriously divorced from the dynamics of world economic development. As an instance, from 1998 to 2013 in the 11th quota evaluation of the IMF, there was a great reduction of correlation between the total quota shares contributed by member countries and the total world GDP, the growth volume of world trade, the official reserve growth, and the size of capital flow (Nelson and Weiss 2015). This shows that even with temporary quotas such as NAB, GAB, and bilateral agreements, there is still a gap between the IMF’s overall assistance capacity and the potential demands of member countries. The 14th review in December 2010 decided to double the contribution limit to 476.8 billion SDRs (USD 656 billion). As for temporary borrowing arrangements, the United States did not participate in the bilateral borrowing agreement with the IMF. The budget proposal passed by the U.S. Congress in 2016 took the United States’ participation in the NAB as an additional condition, which not only increased the difficulty in promoting the follow-up work of the IMF’s quota reform, but also restricted the expansion of the total resource capacity of the IMF. (II)

Evaluation on the reform of the quota share and voting power of the IMF

After the 13th quota review in 2008, as a post-facto adjustment, the IMF increased the proportion of 54 countries including China to pay quota shares. In December 2010, the 14th quota review of the IMF decided to shift more than 6% quota shares from over-represented countries to under-represented countries. The overall quota shares of developed countries dropped from 60.5% to 57.7%, and correspondingly voting power dropped from 57.9% to 55.3%. The quota shares of emerging markets and developing countries increased from 39.5% to 42.3%, with their voting power increasing from 42.1% to 44.7%. The 2010 reform especially kept the 2.3% quota shares of low-income countries unchanged, reflecting the IMF’s special protection of low-income countries. The 2010 reform plan of the IMF, which was originally planned to be implemented in early 2014, was postponed to 2016. It is worth noting that the U.S. Congress attached conditions while passing the IMF reform plan. The U.S. Congress proposed

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that if the United States decides to continue to participate in the New Borrowing Arrangement (NBA) after 2022, it has to obtain the authorization of the Congress. Meanwhile, the U.S. government’s representative at the IMF is obliged to report to the Congress on the IMF’s unconventional lending (including provisional borrowing agreements). This approach of the U.S. Congress reflects its skeptical attitude about providing more funding contributions to the IMF. Even though the United States has promised to double its contribution to the IMF, its new contribution to the IMF will be greatly reduced if the United States withdraws from other assistance arrangements, including the NBA. The new quota reform plan has not changed the veto power of the United States. According to the new quota distribution, the United States still has 17.4% of quota shares and 16.47% of voting rights. In this way, the United States still maintains a veto power for major issues when the IMF requires 85% of the votes to approve. On the other hand, this reform involves an increase in the quota share of 54 emerging markets and developing countries, which will greatly improve the overall under-represented situation of this group. Four emerging economies of China, India, Russia and Brazil will be among the top 10 countries. But even if the new adjustment plan takes effect in 2016, China is still an under-represented country. Overall, the IMF’s quota adjustment has conformed to the changes in the economic strength of member countries and reflected its intention to favor emerging markets and developing countries. To a certain extent, it has corrected the irrational distribution of voting power, and strengthened the ability and position of the IMF in global financial governance as well. (III)

Reform and evaluation of the governance structure of the IMF

In the 2010 reform package, in addition to quota adjustments, governance structure reform was also an important part, which included eliminating the existing nomination system for five executive director seats, changing all 24 executive director seats to an all-elected system, reducing two seats in European developed countries, and increasing the diversity of country members of the Executive Board. The abovementioned governance structure reform is very important to improve the fairness of executive director election, and to enhance the status and representation of emerging markets and developing countries in the governance structure. More critically, the implementation of the above-mentioned governance reform plan determines whether the quota reform plan can be finally implemented. This is because, from the perspective of decision-making procedure, the IMF must first complete the amendment of the relevant articles of Agreement of the International Monetary Fund (hereafter referred to as “Agreement”). According to the Agreement, it involves the reform of the governance system to change the election method of executive directors. It requires 85% of the votes represented by three-fifths of the member countries (113 member countries out of 188) to approve, and the election rules and clauses on the executive board shall be revised accordingly in the Agreement. Only when the amendment of the Agreement is completed can it be possible to enter the next procedure, namely, voting on quota adjustments. This requires 70% of votes to approve. It can be seen that the United States has 16.75% of the voting rights in the amendment

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of the Agreement, which enables the United States to have a unique and decisive role in the advancement of the IMF reform. Although the IMF intended in the new reform plan to increase the diversity of national backgrounds of executive directors, the IMF’s practice of governance by Europeans continues to this day in terms of candidates for top management. Governance reform focuses on improving the rationality of governance structure. With the increasing importance of emerging markets and developing countries in global financial governance, if the IMF can be chaired by a candidate with a background in these economies in the future, it will be the best demonstration that the IMF’s governance reform keeps pace with the times. (IV)

Incremental reform of international financial governance

While conducting stock reform on the existing system, establishing new institutions through incremental reform is another important way for emerging economies and developing countries to realize their aspirations to rebuild the international financial system. In 2014, there were two breakthroughs in the construction of new cooperative financial institutions in which China was mainly involved. One was the establishment of the BRICS Development Bank, also known as the New Development Bank (NDB), announced by China, Brazil, Russia, India and South Africa. The other was the establishment of the Asian Infrastructure Investment Bank (AIIB) under the initiative of China. These two institutions are considered as important signs which have reflected the wills of emerging economies in international financial governance in addition to the World Bank, the Asian Development Bank and the IMF. The Contingency Reserve Arrangement (CRA), with a total value of USD 100 billion, was set up at the time when the BRICS Development Bank was established, which has multiple implications for the reform of the international financial system. This is an incremental reform. The CRA is not a competition, but is complementary to the IMF. From the perspective of the amount of short-term liquidity support, the IMF has a greater assistance capability. However, in contrast to the size of the global economy, the IMF still has limited resources and needs to be supplemented by other sources. The newly established CRA will serve this purpose. Secondly, this is a mild reform. The outstanding symbol is that in the provisions of the CRA, 70% of the lending limit is still linked to the IMF’s lending conditions, which reflects the inheritance of the important legacy of the Bretton Woods system, rather than against it (Gao 2015).

7.3.3 Institutional Guarantee and Cooperation Mechanism Building of International Financial Governance (I)

Establishing a global financial safety net

Establishing a global financial safety net is an important approach to achieving the goal of global liquidity management. In general, an effective global financial safety

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net is composed of multi-level response mechanisms. Measures at the national level are the first line of defense against global liquidity risks. When domestic financial institutions face liquidity dry-up, the country’s foreign exchange reserves are the most important resource for government assistance. However, under normal circumstances, the country’s foreign exchange reserves are just a drop in the bucket to deal with the liquidity crisis. For example, in the fall of 2008, when the banking institutions in the Republic of Korean experienced a liquidity shortage, the ROK government had to seek for foreign aid in order to bail out banks in need after it exhausted foreign exchange reserves in a short period of time. Cross-border cooperation is the second line of defense against global liquidity risks. Bilateral cooperation, regional cooperation and global multilateral cooperation are three important mechanisms that are both independent and interrelated. Bilateral mechanism refers to the monetary authorities of two countries adopting the form of swaps and providing the other party with unconditional and low-interest financial aid of a certain amount with a certain maturity, usually after assessing the severity and contagion of liquidity shortages in financial institutions. Bilateral assistance has the advantage of high timeliness. In the 2008 global financial crisis, the Federal Reserve System of the U.S. adopted bilateral currency swaps with Japan, the Republic of Korea, and European countries in crisis respectively to relieve the dollar liquidity shortage of private financial institutions in these countries and avoid the liquidity crisis from evolving into a solvency crisis. The People’s Bank of China assumed the de facto role of lender of last resort by signing the RMB currency swap agreements with other monetary authorities. Regional assistance is particularly important when countermeasures at the national level are exhausted. In Asia, the outbreak of the Asian financial crisis from 1997 to 1998 gave birth to the establishment of a regional monetary cooperation mechanism. In 2000, the ten ASEAN member countries jointly established the Chiang Mai Initiative (CMI) in cooperation with China, Japan and South Korea. The 2008 global financial crisis prompted a smooth transition from the CMI to a multilateralization mechanism (CMIM), as well as the establishment of the ASEAN + 3 Macroeconomic Research Office (AMRO). In Europe, the European Financial Stability Facility (EFSF) was established in 2010 with an assistance capacity of 440 billion euros to aid countries and institutions that experienced liquidity crises under the European debt crisis. In 2013, the EFSF successfully converted into a permanent financial stability mechanism, namely the European Stability Mechanism (ESM), which has become a permanent liquidity support mechanism in the Eurozone. (II)

Enhancing the regulatory function of international financial institutions

The Basel Committee on Banking Supervision under the BIS has formulated a regulatory framework and regulated the global banking system through a series of standards. Since 2008, the Basel Committee on Banking Supervision has successively issued the Principles for Sound Liquidity Risk Management and Supervision, and the International Framework for Liquidity Risk Measurement, Standards and Monitoring (Basel III) to set a comprehensive framework for banks’ liquidity risk management and supervision to carry out the unified, operable and effective liquidity risk

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management and supervision on a global scale. Under the above framework, the Basel Committee has put forward new standards for banks’ core capital ratio and liquidity monitoring to reduce counterparty risks for banks, control leverage ratio for banks, establish a buffer zone for banks against liquidity shocks, and slow down cyclic fluctuation of liquidity. In addition, the FSB under the BIS is responsible for monitoring shadow banks to control the unlimited expansion of banks’ balance sheets and improve the transparency and effectiveness of financial derivative business supervision. It not only prevents liquidity crises, but also strengthens financial institutions’ ability to address crises to monitor the health situation of international financial institutions. (III)

Joint assistance under multiple mechanisms

Global liquidity assistance is financial assistance of a certain amount with low interest rates and additional conditions provided by international financial institutions after a crisis, especially when there is large-scale and highly contagious liquidity tightening. Global assistance has the advantages of risk sharing and relatively abundant assistance amount. The IMF is the most important liquidity provider for crisis prevention and crisis assistance in the world. In order to play its role more effectively, the IMF has accepted criticism from developing countries such as Asia for its rigid lending model and tough additional conditions. Not only has it relaxed the conditions of assistance loans and provided flexible credit line (FCL) for developing countries, it has also extended assistance to those who have good economic fundamentals but with a high probability of a crisis, providing them with precautionary credit line (PCL). While improving the flexibility of liquidity assistance, how to ensure the effectiveness of assistance is a difficult problem faced by assistance mechanisms at all levels. The traditional approach of attaching tough conditions to the fund assistance provided is no longer suitable for the new liquidity crisis characteristics. However, there is still a lack of consensus on how to carry it out and avoid the new moral risk brought about by the lack of restraints. On the one hand, the countries in crisis are eager to obtain sufficient funds instantly without excessive conditions. On the other hand, the contributing countries need to constrain the use of funds without affecting their attractiveness. (IV)

Lender of last resort

A controversial issue directly related to the above problems is who will act as the lender of last resort when global liquidity problems occur. At the global level, the IMF has been acting as the global lender of last resort by providing assistance lending to countries in crisis. In addition, as the creator of global liquidity, the Fed should also be responsible for injecting liquidity in case of liquidity dry-up and be the lender of last resort for global dollar liquidity. In fact, the Fed has always been playing this role. After the collapse of Lehman Brothers, the Fed began a series of bailouts for private financial institutions. When the debt crisis deepened in the Eurozone, the Fed and the European Central Bank lowered the dollar swap rate in order to reduce the cost of European countries to obtain dollar liquidity through currency swaps. It is worth

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noting that as private liquidity is essentially financing willingness, liquidity shortage could not be measured by quantity. Even if taking various risk preference indicators into consideration, it is still difficult to accurately quantify the degree of liquidity shortage. Therefore, the Fed’s ability to assume the lender of last resort is still quite limited. In this case, the intervention of non-reserve currency issuing countries, even if only non-reserve currency assistance could be provided to the countries in trouble, could still play an important role in stabilizing market confidence. The People’s Bank of China has assumed the role of lender of last resort through bilateral RMB swaps. Such currency swaps mainly use the RMB, rather than the U.S. dollar as the payment currency, but the economies that have liquidity problems are mainly lack of dollar liquidity. Even so, such bilateral RMB currency swaps still have played an important role in stabilizing the market confidence.

7.4 Conclusion The Bretton Woods system is the most important legacy of the international financial order after the WWII. The international monetary system centered on the golddollar standard has played a positive role in the post-war world economic growth. However, whether it is the Bretton Woods system period or the floating exchange rate era, market turmoil continues and financial crises occur frequently. The international financial system originally aimed to correct maladjustments in the balance of payments, ensure financial stability, and promote international trade and investment. Nevertheless, it was weak in previous crises and even buried more hidden problems for persistent global imbalances. In the past four decades, emerging economies have achieved economic rise through rapid economic growth, quick expansion of trade scale, and large-scale accumulation of foreign exchange reserves, which has changed the world economic structure. Driven by high reserves, most emerging economies have exported capitals to deficit markets such as the United States, becoming global creditors, and forming a pattern of “poor countries” to finance “rich countries” amidst global imbalances. At the same time, emerging economies are being more and more integrated into the global market. As a large emerging economy, China has become a country of systemic importance. Changes in economic strength require corresponding changes in the international financial order. However, according to historical experience, the establishment of a new financial system often lags behind changes in economic strength. For instance, in the late 19th and early twentieth centuries, the United Kingdom dominated the international monetary system for a longer time than the time when it had control over the global economy. The United States had already replaced the United Kingdom as the world’s largest power long before World War I, but its financial strength was mainly formed during World War II. The Bretton Woods system marks the decisive position of the United States in the global financial system as the world’s largest creditor after the war with the establishment of the gold-dollar standard system as the core.

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Reforming the existing U.S. dollar-led reserve currency system, reorganizing and adding multi-level international financial institutions, as well as establishing a multilevel global financial safety net are the core content of the future reconstruction of the international financial system. Establishing a super-sovereign currency, reforming special drawing rights, and enhancing the role of non-dollar currencies, including the RMB, are important path choices for realizing the diversification of reserve currencies. At the same time, based on stock reform of existing financial institutions, carrying out incremental reforms that highlight the importance of emerging economies and developing countries and establishing new financial institutions are important ways to reform global financial governance. During the reconstruction of the international financial system, how to resolve global financial risks is a major challenge faced by policymakers in various countries. Moreover, the establishment of a multi-level global financial safety net plays an important role in preventing the deepening of the crisis and preventing the spread of the crisis.

References Frieden, J. 2016. The governance of international finance. Annual Review of Political Science 19: 33–48. Gao, Haihong. 2015. Legacies of the bretton woods. World Economics and Politics 3: 4–29. Held, D., and Young, K. 2009. Global financial governance: principles of reform. http://www.lse. ac.uk/IDEAS/publications/reports/pdf/SR001/SR001_held.pdf. Accessed 5 May 2019. Kenen, P. 2010. An SDR based reserve system. Journal of Globalization and Development 1(2): 1–14. Krugman, P. 2009. China’s Dollar Trap. New York Times. Moloney, N. 2016. International financial governance, the EU, and Brexit: The ‘Agencification’ of EU financial governance and the implications. European Business Organization Law Review 17(4): 451–480. Nelson, R., and M. Weiss. 2014. IMF Reform: Issues for Congress. Washington, DC: Congressional Research Service. Obstfeld, M. 2014. The international monetary system. Chicago: University of Chicago Press. Triffin, Robert. 1997. Gold and the dollar crisis-the future of convertibility. Beijing: The Commercial Press. Wang, Hao. 2013. A literature research on China’s participation in global financial governance. Finance Perspectives Journal 7: 38–45. Xu, Xiujun et al. 2016. The BRICS studies: theories and issues. Beijing: China Social Sciences Press. Zhai, Dong. 2014. Development trend of global financial governance system and China’s countermeasures. Social Sciences Abroad 4: 70–77. Zhang, Liqing, and Xiaofen Tan. 2016. Global financial governance report (2015–2016). Beijing: People’s Publishing House. Zhang, Yuyan, and Lin Ren. 2015. Global governance: a theoretical analysis framework. Quarterly Journal of International Politics 3: 1–29. Zhou, Xiaochuan. 2009. Thoughts on the reform of international monetary system, the People’s Bank of China. http://www.pbc.gov.cn/publish/hanglingdao/2950/2010/20100914193900497315048/ 20100914193900497315048_.html. Accessed 1 June 2018.

Chapter 8

Factors Influencing the Evolution of International Financial Governance

The existing international financial governance mechanism originated from the Bretton Woods system established in 1944. After the disintegration of the system in 1973, the international financial governance mechanism has changed, but advanced economies still occupied the leading position in international financial governance and the governance concept of liberalism has been increasingly reinforced. With the promotion of the IMF, the Washington Consensus has been regarded as the norm by almost all countries. However, the financial crisis that originated in the United States soon swept across the world from 2007 to 2008, bringing a huge impact on the existing international financial governance. Changes in multiple factors required it to make adjustments to meet the development reality in the current world economy. This chapter analyzes the evolution trend of factors affecting international financial governance after the outbreak of the 2008 international financial crisis. It includes both the “hard changes” in global economic structure, and the “soft changes” in the concept of global economic governance, which have jointly promoted the continuous evolution and improvement of the international financial governance system.

8.1 Changes in International Economic Strength and Governance Pattern After the 2008 international financial crisis, the world economy is still in a period of deep adjustment in the post-financial crisis era. Although the world economy experienced a short-term recovery in 2010, the downturn risk has enhanced in the world economy due to severe global situations—increasing turbulence in the international financial market, rising volatility in commodity prices, increasing terrorist activities, spread of debt crisis and uncertainty of economic growth. It is difficult for the world economy to recover to the pre-2008 growth rapidly. On the contrary, due to the gradual weakening of growth momentum in some developed countries, the world economy will grow at a low rate for a long time. Meanwhile, new changes have taken © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_8

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place in the global economic structure. The financial crisis has not only accelerated the transformation of the global economic growth pattern and development path, but is also changing the long-lasting global economic imbalances and unfair distribution of benefits.

8.1.1 Changes in the Relative Importance of Developed Economies and Emerging Economies in the Global Economy On the one hand, almost all of the developed economies are facing a series of problems such as high unemployment rate, debt crisis, and aging population to various degrees, resulting in weak economic growth. After the outbreak of the 2008 financial crisis, the factors that previously supported the growth of developed economies have somehow changed. First, the technological and industrial revolution that started at the beginning of the last century has come to an end, and its role in boosting the economy has gradually weakened. Second, globalization has entered into a new stage. In recent years, the increasing regional trade agreements, such as the TransPacific Partnership Agreement (TPP) and the Trans-Atlantic Trade and Investment Partnership Agreement (TTIP), have deviated from globalization and weakened the status of the World Trade Organization (WTO) to a certain extent. Third, the structural problems accumulated under the previous rapid economic growth have been gradually exposed, such as labor market problems, shortcomings in the social welfare system, high deficits, high unemployment, high debts and so forth. On the other hand, the gradual rise of emerging economies will have a very important impact on the future economic structure of the world. In terms of development potential, emerging economies have a stronger growth momentum than the G7 due to their diversification. They could drive the development of neighboring economies, benefit from each other’s economic development, and make full use of their own advantages to play a role in the global value chain to obtain benefits, representing the trend and direction of the world’s future development to a certain extent. Emerging economies, composed of more than 30 countries with the BRICS as the core, are featured with rapid development and high returns on investment. In the past decades, emerging economies have continued to rise, rapidly increasing their position in global trade, and their share of trade volume has continued to grow, becoming an important engine for global economic growth. However, we should also note that with the in-depth adjustment of the world economy after the 2008 financial crisis, there has been a general trend of economic growth slowing down in emerging economies. Such problems as insufficient internal growth momentum, vulnerability to external impacts, and irrational economic structure will still trouble emerging economies for a long time. At present, almost all emerging economies are facing the pressure of economic structural adjustment. Meanwhile, various uncertain factors are also increasing along with changes in

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external economic and financial conditions. Despite of a series of uncertainties, the economic growth of emerging economies is still at a relatively high level, and the medium- and long-term economic prospects are still promising. Emerging economies account for the vast majority of the world’s population and still have obvious labor advantages. The demographic dividend is one of the important reasons for ensuring the economic growth at a relatively high rate. In addition, most emerging economies also have abundant natural resources and energies, which is an important foundation to promote economic development. With the development of late-comer advantages and “learning by doing,” there will be a narrowing gap between emerging economies and developed economies in terms of technology and knowledge, and emerging economies will gradually bring into play their own economic development potential. Overall, the world economy has entered into a period of deep adjustment, and global economic growth has decelerated sharply. Although there may be a pullback afterwards, it will be unlikely to restore the high-speed growth before the financial crisis. At the same time, the growth rate of emerging market economies has seen a sharp fall as well, with a narrowed gap of economic growth in developed economies. The world economic pattern will not undergo disruptive changes in the short term. Since developed countries led by the United States have advanced technologies, sufficient funds and high-quality labor force, they have strong self-regulating ability after the crisis. It will still be a long-term and complicated process for fundamental changes in the world’s structure. Therefore, it is not possible for the world economy to undergo fundamental changes in the short and medium term. The developed economies will continue to occupy the dominant position in the world economy, and the emerging and developing countries will not bring a fundamental impact on the status of developed economies. However, with some subtle changes, the gap between emerging powers and developed economies will gradually narrow.

8.1.2 Different Groups of Countries Under International Financial Governance Groups of countries play an important role in international financial governance. After the collapse of the Bretton Woods system in 1973, along with the rise of Western Europe and Japan and the relative decline in the economic status of the United States, developed economies such as the United States, Japan and Europe established the Group of Seven (G7) to jointly govern the global economy. However, after its peak time in the 1990s, the role of the G7 in global economic governance began to decline. The outbreak of the 2008 financial crisis further proved that the G7 composed of developed countries alone cannot effectively address the crisis. Global policy coordination and crisis relief must involve such emerging market countries as China, and hence the Group of Twenty (G20) came into being. (I)

The Group of Seven (G7)

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Consisting of the United States, Japan, the United Kingdom, Germany, France, Italy and Canada, the Group of Seven (G7) was established at a time of turbulent world economy in the second half of the 1970s. At that time, the Bretton Woods system had just disintegrated, and the world financial market was in a state of chaos. The new round of multilateral negotiations on the General Agreement on Tariffs and Trade also encountered difficulties. When the Middle East War broke out in 1973, the Organization of the Petroleum Exporting Countries substantially increased oil prices and imposed an oil embargo on countries such as the United States that supported Israel, bringing a huge impact on the economies of Western countries. In this context, the major western developed economies experienced the worst economic recession in the 1970s after World War II. In order to avoid repeating the mistakes of the Great Depression in the 1930s, the leaders of developed countries such as the United States, Europe, and Japan decided to establish the Group of Seven after several rounds of negotiations. From its establishment to the mid-1990s, the G7’s status has not been challenged as the GDP of the seven countries has been at the top of the world. However, with the rise of emerging economies, the global economic structure has undergone tremendous changes. The G7 does not occupy the absolute dominant share of global GDP any more. Under such circumstances, it has been difficult for the G7 to maintain its title of “Global Economic Governance Center.” It has been increasingly losing control and dominance in many fields (Li 2011). However, since the G7 itself is strongly against new changes, there is great resistance to the development of a new system. After the establishment of the G7, it was only in 1998 that the transformed Russia was included for political reasons and then it was developed into the Group of Eight (G8). However, due to the different political, cultural and historical backgrounds, the former G7 countries often discussed economic and financial issues separately. After the slow rise of emerging countries like China in the 1990s, the G7 still did not make relevant structural changes, and it has become increasingly unable to meet the needs of global economic governance. (II)

The Group of Twenty (G20)

After the 1997 Asian financial crisis, The Group of Twenty (G20) was established to prevent the recurrence of similar crises and to promote the stability of the international financial and monetary system through international economic policy coordination. The G20 conference was originally attended by finance ministers and central bank governors of member countries. After the outbreak of the 2008 financial crisis, international economic cooperation including emerging market economies attracted the attention of developed countries such as the United States and some European countries. Since then, the ministerial meeting of the G20 was upgraded to a summit meeting, which has achieved positive progress in global economic governance. In November 2008, the G20 Leaders’ Summit was held in Washington D.C. for the first time. At that time, the G20 summit was used more as a “crisis management meeting.” Later, due to the efforts of emerging economies in the G20, and its performance in the crisis being recognized by the original member countries, the

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G20 formally became the “main platform for international economic cooperation” at the third Leaders’ Summit in Pittsburgh in 2009. The member countries of the G20 play a pivotal role in the world economy, and that is why it can replace the G7 to become the world’s major platform to coordinate international economy. Since the 1990s, the total economic size of the 19 members in the G20 have remained a relatively stable share of the world economy, at around 80%. If the EU members are included in the G20, the proportion will reach at least 90%. According to the forecast of Dadush and Stancil (2010), the annual economic growth of the G20 is expected to reach 3.5% in 2050, while its total economic output will increase from USD 38.3 trillion in 2009 to USD 160 trillion, which means that the G20 is going to play a greater role in the world economy in the future. At the same time, the status and roles of emerging economies and developing countries in the G20 will be further enhanced. By 2050, over 60% of economic growth will come from six emerging economies and developing countries including Brazil, Russia, India, China, Indonesia, and Mexico.

8.2 Financial Crisis and Global Liquidity Management Before the outbreak of the financial crisis in 2008, global liquidity was adequate and international borrowing costs were quite low. This was also a period when financial bubbles accumulated. After the collapse of Lehman Brothers in 2008, the deleveraging of developed markets led to an instantaneous dry-up of global liquidity and rapid accumulation of systemic risks. In response to the crisis, countries adopted loose monetary policies and stimulative fiscal policies. Stimulated by new liquidity, financial markets in developed countries were stabilized, but emerging markets entered into a period of credit expansion prematurely due to large short-term capital inflows. In 2011, as the European debt crisis further deteriorated, European fiscal stability and bank restructuring brought a new round of deleveraging and led global liquidity to a new squeezing cycle. Subsequently, the global economic recovery entered an uncertain period. Developed countries generally lowered interest rates to extra-low levels, and in the meantime adopted continuously increasing quantitative easing policies. The super loose monetary environment has stimulated an increase in global liquidity. In contrast to the sluggish recovery of the real economy, global credit has entered an upward cycle, and asset bubbles have continued to accumulate. Although the Fed took the lead in launching a quantitative easing policy and raised interest rates at the end of 2015, the global low interest rate environment has not been reversed, which has delayed the process of getting rid of the crisis to a considerable extent. Changes in global liquidity are closely linked with the financial crisis. Such important questions as how to measure global liquidity, how to grasp the cyclical changes in global liquidity, and how changes in global liquidity influence financial stability are what international financial institutions and financial authorities of all countries need to answer properly.

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8.2.1 Measurement of Global Liquidity The outbreak of the financial crisis in 2008 once again highlighted the importance of global liquidity management. In response to the crisis, the G20 established a working group for International Monetary System Reform and Liquidity Management and entrusted the Bank for International Settlements (BIS) to conduct research on global liquidity issues. In May 2011, the Committee on the Global Financial System (CGFS) under the BIS established an ad hoc group to conduct research on global liquidity measurement, motivation and policy implications. Subsequently, the BIS (2011) released a research report which analyzed the concept of global liquidity, and divided it into official liquidity and private liquidity based on working bodies. According to the definition of the BIS, official liquidity refers to the liquidity created and provided by the monetary authority. The central banks in various countries are the only body that can create official liquidity, while international financial organizations, such as the IMF, are the bodies to mobilize available assistance funds and SDRs to supplement private liquidity when necessary. Private liquidity mainly refers to the willingness of financial institutions to conduct cross-border financing, including financing liquidity, market liquidity, and risk liquidity, which respectively represent the financing capacity, financing size, and degree of financial leverage of private institutions. This kind of division proposed by the BIS is of framework guiding significance. However, in reality, the boundaries between different types of liquidity are not so clear. In particular, global liquidity is not the aggregate liquidity of all countries, which has greatly increased the difficulty of measuring liquidity on the global level (Gao 2012). In actual operation, the BIS recommends to consider two measurement standards simultaneously: quantity-based standard and price-based standard. The quantity standard measures the cumulative scale of liquidity, while the price standard reflects liquidity conditions. For example, official liquidity, measured by quantity standard, can observe changes in monetary base, broad money, or foreign exchange reserves. If measured by price standard, it is possible to observe changes in official interest rates and short-term interest rates in monetary markets. It is more complicated to observe changes in private liquidity, which could only be judged by combining the quantity scale with the price scale. Observable quantity-based indicators include bank liquidity, maturity mismatch, market financing amount for commercial paper and bank leverage ratio. Observable price-based indicators include London Interbank Offered Rate-Overnight Indexed Swap Spread (Libor-OIS spread), foreign exchange market swap basis, bond-credit default swap basis (Bond-CDS basis), fund manager survey, bid-ask spread, volatility index (VIX), financial asset prices and interest spreads, real estate prices, and corporate price-earnings ratios. Since October 2013, the BIS has been releasing quarterly review on global liquidity indicators to track the dynamics in global liquidity.

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8.2.2 Global Liquidity Changes and Financial Market Risks Since the outbreak of the 2008 financial crisis, it has become a common practice for the developed countries to implement traditional low interest rate policies and non-traditional quantitative easing policies to stimulate the economy and alleviate the crisis. Since 2014, as the economic situation has been improved in some countries, the Fed has begun to withdraw from the quantitative easing policy. However, the economic recovery has been slow in Europe and other major developed countries such as Japan. Hence, the European Central Bank and the Central Bank of Japan continued to implement quantitative easing measures, and the monetary policies diverged among major countries. Entering 2015, the Fed began to send the signal of rate hike. At the same time, the sharp decline in international oil and commodity prices somehow raised deflation expectations, which made the diverging trend of monetary policies more obvious. At the end of 2015, the Fed finally ended its long-lasting low-rate policy and raised its fund interest rate. However, the monetary policies in other countries and regions still remained loose. As the economic recovery of the Eurozone was uncertain, and the effects of the three arrows of Abenomics’ monetary and fiscal policies aiming at stimulating the economy are limited, the global central banks maintained a relaxed attitude and continued to release liquidity to the market. Emerging market countries experienced a slowdown in economic growth in 2014, which also prompted these countries to maintain relatively easy monetary policies. Nevertheless, the problem was that large-scale liquidity did not enter the real economy. Instead, it strengthened the formation of the financial cycle, stimulated asset bubbles, increased financial leverage, and further increased financial risks. For one thing, the leverage ratio of financing in the international financial market has risen. Since 2007, the Chicago Board Options Exchange Volatility Index (VIX), which reflects market volatility in the next 30 days, has demonstrated a declining trend after two periods of high-frequency fluctuations. By mid-2014, it has basically fallen to the pre-crisis level. Although VIX saw a rise in 2015, it is still at a relatively low level in the medium and long term, demonstrating liquility adequacy in the market. According to the measurement of the BIS, global liquidity declined sharply at the beginning of the global financial crisis in 2007, and then depression continued until 2013. Since 2014, global liquidity has entered an upward channel until June 2015 (BIS 2015). Leveraged financing is characterized by a high default rate. Thus, it is an important engine leading to credit crisis. For another, changes in global liquidity have significantly increased the spillover effects on emerging economies. Since 2008, capital flows in emerging markets have undergone large-scale outflows, inflows and re-outflows. In particular, the flow of private portfolio assets has been sensitive to the Fed’s policy adjustments. The overall net capital flow of the private portfolio in emerging markets, including Asia, Latin America, and Europe, showed a net outflow trend from mid-2013 to the first quarter of 2014, but there was a substantial net inflow from the second quarter of 2014. However, the forward-looking guidance of the Fed expected that it would begin to step into the rate hike channel in 2015, which led to greater divergence in monetary

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policies between the Fed and other stakeholders such as European countries and Japan. Entering 2016, some countries such as Japan fell into a state of negative interest rates. Under the dual guidance of exchange rate differences and interest spreads, more capital flowed to the U.S. market and outflowed from emerging markets. Both the overall credit growth and growth of issuance of debt securities in emerging markets declined, and currencies in emerging markets generally depreciated against the U.S. dollar in the foreign exchange market. Consequently, these factors have been mutually reinforcing with capital outflows in emerging economies, leading to their accumulative financial vulnerabilities. Moreover, as more than half of emerging economies’ liabilities to the international financial market are denominated in dollars, the scale of their liabilities is highly sensitive to the U.S. dollar exchange rate, which has posed significant challenges to domestic financial stability in these countries.

8.2.3 Relations Between Global Liquidity and Financial Stability Excessive expansion and severe contraction of global liquidity will cause financial turmoil, even leading to the outbreak of systemic crisis with severe financial repression and widespread contagion effect (IMF 2011). Specifically, at the global level, changes in liquidity have the following effects on financial stability: (I)

Surge in global liquidity is a prelude to the outbreak of the financial crisis The tightening of national monetary policies and changes in financial market credit conditions have had a significant impact on private capital flows. For example, loose monetary and easy credit conditions will encourage financial institutions to allocate high-risk investments, increase leverage ratio, and expand their balance sheets. The previous crises in the past four decades, such as the second oil crisis in 1979, the U.S. stock market crash in 1987, the Asian financial crisis from 1997 to 1998, the Nasdaq crisis in 2000, and the global financial crisis in 2008, are all closely related to the previous bursts of global liquidity. After the crisis broke out, liquidity would squeeze instantly, resulting in a severe credit contraction. Credit contraction will severely repress the financial market, causing systemic risks and even threatening the real economy. In order to prevent systemic risks, monetary authorities need to provide assistance by directly injecting liquidity into the market, and follow up with supportive monetary policies and stimulative fiscal policies after market liquidity recovers while the latter continues to release liquidity to the market. In the context of the uncertain growth of the real economy, the new liquidity is constantly seeking spreads between markets and instruments, which is extremely speculative (Gao 2012).

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(II)

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Private liquidity has a strong contagion effect This kind of contagion is first shown as cross-border transmission. Any change in interest spreads and exchange rate differences between different markets will trigger the flow of private capital. Cross-border transmission is most obvious especially in markets with loose capital control. Also, it is manifested as contagion between markets. Liquidity difficulties often start in the short-term credit market. Banks’ financing difficulties are usually accompanied by currency mismatch and maturity mismatch. Under this circumstance, liquidity changes in the credit market will have shocks on the medium- and long-term debt securities market, foreign exchange market and other financial markets. The mutual holding of liquidity among institutions makes the problem more complicated (Gao 2012).

(III)

The financial vulnerabilities of developing countries and emerging economies have increased Most developing countries have small domestic financial markets with insufficient market depth and breadth. This enables these countries to have high domestic savings, but they cannot be effectively converted into investment in their domestic markets. These countries, especially for those with relatively loose capital control, generally have a low tendency to invest locally, their national financial systems have relatively high-risk exposure to external markets, and are more susceptible to shocks of international liquidity (Gao 2012). From the perspective of capital flows in emerging markets in East Asia, Latin America, and Eastern Europe before and after the crisis, among various forms of capital flows, direct investment was relatively stable and private capital fluctuates greatly. More importantly, after the capital control is relaxed in some countries, not only has their capital liquidity increased substantially, but it has also led to a surge in the total size of capital flows. It is worth noting that the scale of total capital flows is more volatile and procyclical than net flows. Especially in extreme cases, sudden stop of capital and capital flight are extremely destructive to a country’s financial stability, which was especially obvious during the 1997–1998 Asian financial crisis. Faced with the passive situation, emerging markets are in a passive position in capital flow management, and their policy choices are very limited.

8.3 Factors Influencing the Evolution of International Financial Regulatory System Attributed to the gradual deregulation of the domestic financial market, the deepening of financial liberalization, as well as the advancement in technology, the development of cross-border financial services and investment portfolio have been constantly improving. While creating high profit opportunities, the structural changes in the

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global financial market have also brought huge potential risks to financial transactions. The Latin American debt crisis in the 1980s, the Asian financial crisis in the 1990s, and the global financial crisis that broke out in 2008 all illustrated that financial liberalization is accompanied by huge risks, which not only impacts global financial stability and the macroeconomic stability of various countries, but also exerts tremendous adverse influence on the real economy. This reality has urged the financial regulatory agencies in various countries to reflect and innovate, which has promoted the continuous evolution and improvement of the international financial regulatory system.

8.3.1 Evolution of Micro-Prudential Supervision The evolution of micro-prudential supervision is mainly driven by the Basel Committee, which has undergone a series of reforms from Basel I in 1988, Basel II in 2004 to Basel III in 2010. The main purpose of micro-prudential supervision is to reduce the risk exposure possibility of individual banking institutions and enhance the safety and stability of banking institutions. The core of the reform is to improve the regulatory framework through continuously enhancing various regulatory indicators represented by capital adequacy ratio. At present, the regulatory concept and standards proposed by the Basel Accord have been gradually adopted by many national regulatory authorities, and have become the main blueprint for risk monitoring and regulation in various countries. Meanwhile, the process of gradual adjustment following the crisis has also made the Basel Accord a collective representative of the regulatory concepts in various periods. The Basel Committee originally formulated the Basel Accord for two purposes. The first was to formulate a bank’s minimum “capital adequacy ratio” (i.e. the ratio of capital-to-risk weighted assets) by stipulating calculation methods and criteria to ensure the healthy operation of the international banking system. The second was to formulate uniform criteria to eliminate unequal competition among banks in the international financial market. Obviously, the core of the Basel Accord is the “capital adequacy ratio.” Therefore, “capital supervision” has become the primary core of the evolution from Basel I to Basel II. (I)

Technological innovation: from Basel II to Basel III

The Basel I agreement released in 1988 set the risk weights of on-balance-sheet assets and off-balance-sheet items according to the credit risks of different assets, and got the asset scale after the total weighted risk, and stipulated the capital adequacy ratio of each commercial bank of being no less than 8%, among which the ratio of core capital to risk asset should be no less than 4%. Since Basel I adopted the risk-adjusted capital adequacy ratio as the regulatory standard for international banks for the first time, and included off-balance-sheet businesses into the scope of supervision, it has undoubtedly made great progress in comparison with the traditional regulatory

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methods that use asset-liability ratios. Therefore, since the launch of Basel I, “capital adequacy ratio” has become a concept widely accepted by national regulatory authorities across the world. The IMF and the World Bank mainly adopted the Basel Accord to evaluate the capital adequacy as well when judging the stability of the banking system of various countries. In the 1990s, the academic community realized technological innovations about the bank risk measurement. Based on this, the Basel Committee also re-formulated a new capital agreement framework. In 2004, Basel II was launched, which was a full revision of Basel I. According to the original revision intention that capital requirements should be closely linked with risk management, a complete three-pillar regulatory framework for capital adequacy ratio was established in Basel II. The first pillar is the minimum capital requirement The standardized approach and internal rating-based approach were revised according to the requirement to maintain the capital adequacy ratio of 8% in the original regulation. Among them, the revised standardized approach has increased sensitivity to various risk categories, and the revised internal rating-based approach has allowed large banks to use advanced internal credit risk models to determine risk weights. The second pillar is supervisory review Its purpose is not only to ensure that banks had sufficient capital to deal with various risks, but also to encourage banks to develop and use better technical means in monitoring and controlling risks to promote internal risk assessments. The third pillar is market discipline Basel II has recognized that market discipline had good potential in enhancing capital supervision and other monitoring work. It is aimed at increasing the transparency of risk status for commercial banks by advocating an information disclosure system. (II)

Reflections on the crisis of Basel III: dual supervision of capital adequacy ratio and systemically important institutions

The outbreak of the international financial crisis in 2008 prompted the Basel Committee to rethink the rationality of its original agreement. In September 2010, the Basel Committee finally reached a new agreement on global banking supervision, namely Basel III. The new Accord added intensified supervision over systemically important financial institutions while continuously emphasizing the requirement of capital adequacy ratio, so as to reduce the moral risk of “too big to fail” in the crisis. Primarily, in order to prevent a recurrence of the crisis, in the new regulatory framework, the Basel Supervisory Committee substantially increased the requirements for Basel III regulatory indicators. It can be summarized as three specific measures. First, three minimum requirements on capital adequacy ratio have been specified with higher requirements. According to the requirements of Basel Accord III, the minimum common equity requirement for a bank’s adequacy ratio is 4.5%,

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tier 1 capital ratio is 6%, and the total capital ratio is 8%. According to the requirements of Basel Accord III, the capital adequacy ratio of systemically important banks in each country should be no less than 11.5%, and that of non-systemically important banks should be no less than 10.5%. Second, Basel Accord III reached a consensus on the calculation method and regulatory standard on leverage ratio, and introduced a concise regulatory standard on leverage ratio, i.e. to monitor commercial banks in accordance with a leverage ratio of 3% (tier 1 capital/total assets). Third, Basel Accord III established two quantitative indicators for liquidity risk supervision. One is the liquidity coverage ratio, which requires that “the ratio of the high-quality asset reserves held by the bank to the net capital outflow in the next month shall be no less than 100%;” the other is the net stable financing ratio, which requires “the ratio of the stable capital available to the bank to the stable capital required for business development must be greater than 100%.” Additionally, Basel Accord III strengthened the supervision over systemically important financial institutions, and tried to reduce the moral risk of “too big to fail” by allowing global systemically important banks to accept higher regulatory requirements for capital adequacy ratio. Regarding the “too big to fail” issue of systemically important financial institutions, the Basel Committee reached a consensus which required the establishment of a complete set of measures of “strengthening risk warning before the crisis, reducing risk spread during the crisis, and setting up a post-crisis handling mechanism.”

8.3.2 Evolution of Macro-Prudential Supervision Macro-prudential supervision is the reflection of international financial regulators on the global financial crisis. Compared with the traditional micro-prudential regulatory model, macro-prudential supervision mainly focuses on the entire financial system, rather than the individual financial institution, with a target of preventing the overall systemic risks of the financial system (Table 8.1). Specifically, macroprudential supervision could be analyzed and studied in two dimensions, namely the time dimension and the cross-sectional dimension. (I)

Macro-prudential supervision in the time dimension

Macro-prudential supervision based on the time dimension not only examines the accumulation of overall risks over time, but more importantly, it focuses on the procyclical issue, namely considering how systemic risks have expanded through the financial systems or through the risk transmission between financial systems and real economies. Therefore, the regulatory measures in the time dimension should address the problem of how to restrain the inherent pro-cyclical effect of the financial system. Due to the coherence of the time dimension itself, the role of macro-prudential

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Table 8.1 Comparison of macro-prudential supervision and micro-prudential supervision Macro-prudential supervision Micro-prudential supervision Direct target

To prevent the outbreak of crisis in financial system

To prevent the outbreak of crisis in the individual financial institution

Final target

To avoid GDP loss

To protect consumers (investors or depositors)

Risk model

Endogenous (to a certain extent)

Exogenous

Relevance among financial institutions and relations with common risk exposure

The relation is essential

Common risk exposure among financial institutions is thought to be irrelevant

Measuring criteria for prudential control

A top-down measuring method is used based on the whole system scope

A bottom-up measuring method is used based on the individual financial institution

Source: The Basel Committee

regulatory interventions based on the time dimension will have obvious sustainability. In this regard, after the 2008 financial crisis, international financial regulators began to focus on cycles for regulatory intervention, and successively proposed the counter-cyclical regulatory framework. A series of regulatory standards, such as capital adequacy ratio and leverage ratio, have been provided to overcome or restrain the pro-cyclicality of the financial system. (II)

Macro-prudential supervision in the cross-sectional dimension

Macro-prudential supervision based on the cross-sectional dimension needs to consider how risks should be distributed in the financial system within a certain period, i.e. the issue of risk contagion among different institutions in the financial system. The core of macro-prudential regulatory measures in the cross-sectional dimension is to deal with the common and interconnected risk exposures of financial institutions within a certain period. On the one hand, these risk exposures may be direct risk exposures of these institutions in the same or similar asset categories, and on the other hand, they may be indirect risk exposures caused by business overlapping. Based on the analysis from this perspective, the macro-prudential regulatory policy of the cross-sectional dimension mainly solves the problem of how to formulate a prudential regulatory framework to limit the risk loss of the entire financial system locally, thereby controlling the “tail risk” effect. The specific regulatory measures might include the following five aspects. The first is to increase the banking capital conservation during the economic upward phase through counter-cyclical capital supervision to cope with the loss absorption requirements during the economic downward phase, and to reduce the banking bankruptcy risk. The second is to implement more comprehensive and stricter macro-prudential

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regulatory measures over systemically important banking institutions. The third is to start to adopt forward-looking macro-prudential regulatory indicators such as provision rate. The fourth is to strengthen and improve the banking stress test and implement full coverage of stress scenarios, evaluate the overall macro ability of the banking sector or financial sector against risks. The fifth is to fully develop a cooperative model of international supervision, expand the G7 to G20 to increase the voice of emerging economies, and strive to achieve a truly new pattern of global governance.

8.4 Conclusion The international financial crisis that broke out in 2008 is undoubtedly an important milestone in the change of international financial governance, but before that, there have been some changes in the factors affecting international economic governance. For instance, after the 1997 Asian financial crisis, both global economic structure and governance concepts have undergone subtle changes. The outbreak of the 2008 financial crisis is undoubtedly a gathering point and a breakthrough point. Since then, the trend of changes in various factors affecting international financial governance has become increasingly obvious, promoting the development of international financial governance towards a more equitable and effective direction. After the international financial crisis in 2008, the world economy has been in a period of deep adjustment, and there have been changes in the relative importance of developed economies and emerging economies in the global economy. Some important emerging economies, such as China and India, have shown a continuous upward trend in their share of world GDP, while that of developed countries has been declining year by year. With their huge development potential and economic diversification, emerging economies have been changing the original economic structure dominated by developed economies, which requires corresponding adjustments in the international financial governance structure. This can be seen from the development of the G20 into a major platform for international economic cooperation after the global financial crisis and the substantial increase in the voting power of emerging and developing economies by the IMF. As an important practice of international financial governance, international financial supervision has quickly responded to this. The international financial crisis has shown that financial liberalization is accompanied by tremendous risks, which forces financial regulatory agencies to continuously promote the evolution and improvement of the international financial regulatory system.

References Bank for International Settlements. 2015. Quarterly Review, September. Dadush, U. and B. Stancil. 2010. The World Order in 2050. Washington, DC: Carnegie Endowment for International Peace.

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Domanski, D., I. Fender, and P. McGuire. 2011. Assessing Global Liquidity. BIS Quarterly Review, December. Gao, Haihong. 2012. Global Liquidity Risks and Countermeasures. International Economic Review 2: 28–41. IMF. 2011. Analytics of Systemic Crisis and the Role of Global Financial Safety Nets, Prepared by the Strategy, Policy, and Review Department, March 31. Li, Yincai. 2011. Structural Change and the Evolution of Governance System: From G7 to G20. Issues of Contemporary World Socialism 4: 91–103.

Chapter 9

Defects and Challenges of Current International Financial Governance

The international financial crisis in 2008 further exposed the shortcomings of the international monetary and financial system, highlighting the necessity to strengthen and improve the current international financial governance mechanism. This chapter analyzes the major defects and challenges of today’s international financial governance from four aspects: the international monetary system, international financial regulatory system, international capital flow management, and international financial governance mechanism.

9.1 Defects and Challenges in Current International Monetary System The 2008 financial crisis was undoubtedly a harsh test for the already unstable international monetary system, but it has also become a driving force for reforming the existing international monetary system. In spite of the increasingly close international economic ties among various countries and the rapid growth of cross-border capital flows, the shortcomings of the international monetary system continued to emerge. The crises in emerging economies such as the Latin American debt crisis and the East Asian financial crisis have given birth to the endless calls for reforming the current dollar-dominated international monetary system in the international community. However, these crises have not touched the foundation of the international monetary system. Not until 2008, when the financial crisis broke out in the United States, the epicenter of the international monetary system, did the international community realize the necessity and urgency of reforming the international monetary system.

© China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_9

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9.1.1 The International Reserve Currencies: Unfair and Unstable (I)

The remaining Triffin dilemma

The Jamaican system remains a dollar-centric system. Compared with the Bretton Woods system, this system is freer and more flexible, but lacks order. The U.S. dollar is no longer pegged to gold, the exchange rates among currencies of various countries became floating and adjustable, and the scale and speed of capital flows increased exponentially. On the one hand, it comes from the rapid development of economic and financial globalization and liberalization. On the other hand, it is due to the vigorous urging of International institutions like the IMF to promote international capital flows prior to the U.S. financial crisis. Yet, the current system has not solved the Triffin dilemma fundamentally. Under the Bretton Woods system, the development of the U.S. real economy (current account surplus) was a guarantee to maintain the international value of the U.S. dollar. However, under the current system, the United States uses international capital flows to increase the dollar’s international solvency, thereby providing guarantee for the international circulation of the U.S. dollar. The foreign investment of the United States is mainly based on foreign direct investment with high risk, long duration and poor liquidity, while foreign investment that flows to the United States is mainly based on securities investment with low risk, short duration and good liquidity. The former obviously has a higher return on assets than the latter. Therefore, although the net international investment position of the United States is negative, the difference in return on assets may still ensure that its international debt is maintained at a sustainable level. Similar to the Bretton Woods system, the current system also has a Triffin dilemma tipping point. At this point, the income from foreign assets held by the United States is exactly equal to the interest expenditure paid by the United States to foreign investors holding dollar assets. This dynamic balance ensures that the international debt of the United States will no longer grow. However, it is a kind of “blade” balance, which would be broken due to changes in the rate of return on assets, or more likely due to the increase in demand for reserve assets from peripheral economies. Compared with developed economies, emerging and developing economies have a stronger demand for reserve assets, which has become an important driving force for the growth of global dollar reserve assets. It brings dual pressures to the international monetary system. Firstly, the excessive demand for dollar assets, together with the unconstrained supply of reserve assets by the United States, has resulted in continuous expansion of dollar exports and the continuous increase of the US international net debt, which will greatly hurt the confidence of the U.S. dollar as an international reserve asset. Secondly, with the changes in the flow pattern of the U.S. dollar, competition among international currencies has transformed from competition in the real economy to competition in financial strength. To ensure the status of the U.S. dollar as an international currency, the United States has to vigorously develop the financial system to enable foreign capitals to continuously flow to the United

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States at a relatively low cost. This leads to two types of risks. The first type of risk comes from the financial system. The great development of the financial market characterized by financial innovation has not only promoted the development of the U.S. economy, but also enabled the entire national economy to gradually prioritize the financial sector. In the absence of effective financial supervision, it has caused excessive development of finance, which has brought hidden troubles to the U.S. economy and the global economy. The second type of risk comes from the consumer sector. The development of the financial system and the reduction of financing costs have increased the debt consumption capacity of the United States. As the domestic real economy shrinks, the abnormal increase in consumption can only be met through the foreign trade sector, which has further deteriorated the trade balance of the United States. Therefore, a vicious circle comes into being: increase in dollar repatriation → development of the financial system → increase in debt consumption → increase in foreign trade deficit → increase in dollar output → increase in dollar repatriation → … There are two types of potential risks in the above cycle. One is the Triffin dilemma, i.e. whether the existing system supports such a large-scale export of dollars. The other potential risk comes from the excessive development of the financial system, which will lead to the creation of financial bubbles. The bubble bursting will spread to the world through financial channels, as is the case for the U.S. financial crisis. Therefore, although the current international monetary system has the Triffin dilemma, the risk has not broken out here (the result of the outbreak should be a sharp depreciation of the U.S. dollar), but broke out in the U.S. financial system. (II)

The increasingly prominent unequal relations between rights and obligations under the international monetary system

Under the current international monetary system, major issuing countries of international reserve currencies, such as the United States, have monopolized revenues of international seigniorage, but have not fully assumed the responsibility of stabilizing the global economy. The U.S. has low financing costs worldwide with the help of outflow of dollar cash and the issuance of treasury bonds. A large number of international settlements are denominated in dollars, which reduces the exchange rate risk of the American companies in foreign trade and investment. However, the United States has not fully fulfilled its obligation to maintain the stability of the international monetary system. Li and Yin (2010) believe that the current international monetary system is incentive incompatible, that is, the monetary policy of the United States mainly considers its own domestic economic situation, but does not consider its impact on the global economy. Take the history of monetary policy in the United States since the new century for example. The U.S. monetary policy has undergone several rounds of cyclical adjustments from the bursting of the Internet bubble in 2000 to the end of 2014, but the overall trend has been excessively loose. This has led to that the exchange rate of dollars has been generally weak in the past 15 years, and the U.S. dollar index dropped from 110 in 2001 to 80 in early 2014 (Fig. 9.1). After the 2008 financial crisis, the

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Fig. 9.1 Dollar index from January 2000 to January 2016. Source Wind Info

U.S. monetary policy characterized by the quantitative easing (QE) program caused a sharp depreciation of the U.S. dollar, thereby reducing the interest burden and debt pressure of the U.S. government. However, this policy has led to the flood of global liquidity, continuously affecting international commodity prices and asset prices, and at the same time brings a huge shock on emerging market countries with huge foreign exchange reserves in dollars, causing their foreign exchange reserves to shrink. By using this method of debt reduction to grab the wealth of its creditors in disguise, the U.S. has shifted the crisis to other countries around the world. (III)

Highlighted instability in the current system

Under the current international monetary system, on the one hand, there are no more constraints on the exchange of dollars for gold, and the United States has no obligation to maintain currency stability. As an international currency, the U.S. dollar lacks the necessary restraint mechanism. On the other hand, the low-cost capitals provided by peripheral countries to the United States have weakened the fiscal discipline of the United States. The two factors have led to global excess liquidity of the U.S. dollar, and the scale of international capital flows has expanded rapidly. Meanwhile, as countries around the world can freely choose exchange rate regimes, reserve currencies have been used as low-risk assets, while peripheral currencies have been regarded as risky assets for speculation. As a result, arbitrage is popular, and the scale and volatility of international capital flows are all on the rise. At present, global foreign exchange transactions and capital flows are obviously far beyond normal needs of economic fundamentals, which has laid hidden dangers for the outbreak of global financial risks. The instability under the dollar standard system has become more obvious during the financial crisis, and it has exacerbated the continued spread of the financial crisis. Taking the 2008 international financial crisis as an example, major developed economies generally adopted quantitative easing policies in response to the crisis. The excessive liquidity of the U.S. dollar led to increased depreciation and inflation risks of dollars. The value of dollar assets shrank worldwide. Developed countries such as the United States took advantage of this to reduce their debt burden

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and transfer the crisis to foreign countries. Emerging market countries with rich foreign exchange reserves suffered losses, becoming increasingly concerned about the continued depreciation of the U.S. dollar. At the same time, American investors who suffered tremendous losses from the financial crisis adjusted their global asset portfolio and sold assets globally in pursuit of liquidity, resulting in shocks to the global financial system. However, under the current system, since an international lender of last resort mechanism is missing, the international crisis assistance and management are quite ineffective. The IMF mainly acts as the international lender of last resort, but as it does not have the ability to create currency by itself, it cannot quickly create liquidity for the market when a crisis occurs. The slow assistance actions and insufficient assistance efforts of the IMF have been confirmed during the 1997 financial crisis. The 2008 financial crisis once again exposed the IMF’s shortcomings as a global mechanism for liquidity assistance. The lack of liquidity assistance arrangements has led to a rapid increase in the preventive demand for foreign exchange reserves in emerging market countries.

9.1.2 Exchange Rate System: Diverse Choices and Difficult Coordination After the collapse of the Bretton Woods system, the floating exchange rate system was legalized and gradually became the mainstream of the exchange rate system in developed economies. However, there are big differences in the choice of exchange rate system among countries in the world. Under the current institutional arrangements, the international community has not established an effective coordination mechanism for the exchange rate system. The monetary policies in major issuing countries of international currencies are mainly based on their own economic development, without taking into account its influence on other countries. Therefore, exchange rate fluctuation among major international currencies often brings negative spillover effects to other countries, which causes emerging economies as the price receivers in international financial markets to be deeply and negatively affected by exchange rate fluctuation. Therefore, whether developing countries choose a free-floating exchange rate system or adopt a pegged exchange rate system, there are potential contradictions. Some countries have chosen a soft pegging or a flexible floating exchange rate system, but it is still difficult for them to completely avoid the risks of international exchange rate fluctuations and the impacts of speculative capitals. After the financial crisis, the international community once widely called for establishing a global management system for exchange rate coordination, but very few developed countries responded due to domestic policy considerations.

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9.1.3 International Balance of Payments: Long-Term Imbalance, Difficult to Sustain The centrality of the U.S. dollar in the international monetary system has caused longterm disequilibria in the balance of payments. Since the decoupling of the U.S. dollar from gold, the United States has provided dollar liquidity to the world through an unbalanced balance of payments. This means that domestic investment in the United States is higher than domestic savings, and externally, it shows that the United States has a long-term balance of payment deficit. Therefore, before the outbreak of the 2008 financial crisis, the balance of payments showed a trend of long-term imbalance, the U.S. current account continued to have a deficit, the current account of emerging economies continued to have a surplus, and the current account of the Eurozone was basically balanced. In addition, the financial liberalization and loose monetary policy in the United States have encouraged speculative behaviors, leading to bubbles in real estate and stock market. The rise in asset price has generated a wealth effect. Household consumption has increased, and the U.S. fiscal deficit has also surged. The increase in household and government spending has expanded imports and generated a huge trade deficit, thereby further exacerbating the global economic imbalance. Disequilibria in the balances of payments could trigger two types of problems. For one thing, from the perspective of countries with trade surplus, chronic trade surpluses have formed huge foreign exchange reserves. Excessive foreign exchange reserves could easily lead to the risk of inflation and asset price bubbles, and affect the independence of monetary policy as well. Such negative effects have enhanced the cost and price of maintaining a long-term surplus. In addition, huge foreign exchange reserves will also increase the losses caused by the depreciation of the U.S. dollar. For the purpose of decentralizing investment to avoid falling into the “dollar trap,” it will be significantly less attractive for U.S. financial assets to surplus countries. For another, from the perspective of the United States, this imbalance means that the United States directly exports dollar liquidity through purchasing foreign goods, which is a process of accumulating debts. With the increasing deficit rate in the federal government and the deteriorating external balance sheet of the United States, the credit basis of the U.S. dollar has been shaken, leading to an increasing potential instability with the international monetary system. Therefore, after the outbreak of the 2008 financial crisis, the call for reshaping the global financial system and reforming the international monetary system has come back again in the international community. As the crisis broke out in the United States, the center of the international monetary system, the focus of this reform is the US dollar’s international currency status. For example, the international community has begun to call for greater attention to the role of special drawing rights. Since the international standard currency is the key to the international monetary system, it also means that the road to reform in the future will not be smooth.

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9.2 Defects and Challenges in International Financial Regulatory System The 2008 international financial crisis exposed various defects and deficiencies in the international financial regulatory framework. Since the end of the 1970s, with the rise of economic globalization and financial liberalization, financial innovation has been changing rapidly, various complex financial products have continued to emerge, and deregulation has gradually become the mainstream of thoughts and policies. However, financial liberalization has not only promoted the development of financial innovation, but also brought out new potential systemic risks in finance. Some institutions, markets and instruments that are not under effective or sufficient supervision have become important channels to generate and spread systemic risks in a specific market environment.

9.2.1 Problems in Macro-prudential Supervision The global financial crisis has exposed some problems and challenges facing various regulatory bodies in macro-prudential supervision. Firstly, how to determine the way and timing for macro-prudential instruments to intervene in the market. Regarding the use of macro-prudential instruments, the regulatory body is faced with the dilemma of whether to follow the established institution as the guideline or to mainly reply on contingent decision-making. Institutional guidance can improve market expectations of intervention instruments and transparency, but at the same time there are risks of regulatory arbitrage and deliberate avoidance. Contingent decision-making is more flexible, more targeted, and more deterrent, but it is also more vulnerable to external pressures and more demanding for the decisionmaking power of the supervisory body. In addition, frequent interventions are not conducive to market stability, and it might damage the credibility of the regulatory authority. Meanwhile, considering that the systemic risk of the financial market at the macro-prudential level is not a simple sum of all risks at the micro level, it is necessary to select the appropriate Minsky moment no matter what kind of control instruments are used to adjust. Yet, the current theoretical and empirical research results still cannot provide sufficient support for the reasonable measurement of systemic risk. Secondly, how to avoid the possibility of regulatory arbitrage. As the international financial supervision becomes increasingly stringent and the system itself becomes more complex, there will inevitably be differences in regulatory requirements between different regulatory bodies and implementing departments. For example, the macro-prudential regulatory standards in developed countries and developing ones cannot be simply unified, which will naturally expand the space for regulatory arbitrage. Therefore, it is necessary to match the application of international standards with national standards, determine a series of minimum standards that can be implemented, take into account the differences in the regulatory indicators

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and macro-prudential tools set by various regulatory bodies, and harmonize and unify the regulatory standards of accounting guidelines, information transparency to maximally avoid the regulatory arbitrage. Finally, how to find solutions to the ever-increasing regulatory cost and regulatory difficulty. With the continuous implementation and deepening of global regulatory measures, in the macro-prudential regulatory framework, there are tremendous challenges in the coordination among financial institutions, financial markets and economic entities, as well as in the identification, measurement, and response of systemic risks in the process of supervision. It will bring about a corresponding increase in regulatory cost and difficulty to improve the level of regulatory technology and the number of participating departments. Such issues as how to maximize the regulatory role in the process of macro-prudential supervision while reducing regulatory costs and difficulties are currently widely concerned by various regulatory bodies.

9.2.2 Problems in Micro-prudential Supervision In contrast to macro-prudential supervision, micro-prudential supervision has always been at a relatively mature level. After the outbreak of the 2008 financial crisis, in response to the deficiencies in capital quality, leverage ratio indicator, and risk response capability exposed during the crisis, the major regulatory agencies represented by the Basel Committee have implemented corresponding measures to improve the micro-prudential supervision. However, when setting micro-prudential regulatory standards, the regulatory bodies with developed countries being the core often take the interests of developed countries into account to address the strong pressure in this aspect, so there might be some shortcomings and deficiencies at the technical level. On the one hand, although the risk provision for financial markets has greatly increased, the regulatory indicator of leverage ratio represented by tier 1 net capital, as one of the core standards for capital supervision, has deviated from the basic requirements of financial accounting. Such a phenomenon of regulatory deviation is not alone. How to avoid the “abnormal operation” of regulatory indicators during international financial supervision is one of the challenges facing micro-prudential supervision. On the other hand, not enough attention has been paid to financial consumers and investors in the existing model of micro-prudential supervision. At present, no regulatory bodies have established independent regulatory agencies that guarantee the rights and interests of financial consumers and investors, and there are few targeted laws and regulations that guarantee the rights and interests of financial consumers and investors. In other words, there is a regulatory gap in this regard for microprudential supervision. Due to the absence and omission of financial supervision, it is common to see violations of the rights and interests of financial consumers and investors from developing countries represented by China. In order to ensure

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the stable and sound operation of the international financial regulatory system, and to better address the challenges posed by the existing defects and deficiencies of the regulatory system, sufficient attention should be given to these omissions in micro-prudential supervision.

9.2.3 Problems Caused by Insufficient Coordination of International Financial Supervision Considering the inconsistency between international standards and national standards, the empirical evidence shows that there is no universally optimal regulatory model available in the current international financial regulatory system. How to coordinate and cooperate between various regulatory bodies and financial markets of different development levels needs to consider various factors such as the regulatory system, political background, economic and cultural aspects. However, the current international financial regulatory system still lacks complete legal guarantee and a sound institutional framework and enough operability. The coordination and cooperation among various regulatory bodies is still at the level of the principled framework, and there is no perfect institutional arrangement and implementation details at the micro level. The operability needs to be improved. The 2008 financial crisis has undoubtedly exposed the defects of the financial system in typical developed countries such as the United States in terms of regulatory framework and management concept. First of all, each regulatory body works on its own, respectively adopting suitable regulatory instruments, but cannot implement regulatory ways with uniform international standards. This results in either a regulatory vacuum in the field of international financial supervision, or loopholes in the transnational regulatory mechanism, creating room for arbitrage in the regulatory system. Secondly, the missing coordination mechanism among regulatory bodies has led to the inability to effectively coordinate the overall regulatory system of the global financial market. Moreover, the international standard-setting institutions represented by the IMF, BIS, and the Basel Committee do not have smooth communication mechanisms with each other, laying hidden dangers for systemic risks in the global financial market. Finally, as the superpower, the practice of the United States has also increased obstacles to the coordination and cooperation of international financial supervision. On the one hand, the U.S. is unwilling to easily accept the shackles of international regulatory agencies limited by its own hegemony in the international system. On the other hand, in order to weigh various interest groups, the United States is also utilizing its own influence and discourse power to export international regulatory standards based on its own national standards to the global financial market.

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9.3 Defects and Challenges in International Capital Flow Management After 1973, the Bretton Woods system disintegrated and the international monetary system changed to a floating exchange rate system. At the same time, financial globalization and liberalization were rapidly expanding around the world. An increasing number of countries began to abandon capital account controls, and turned to support financial opening instead. This has made the cross-border flow of capital increasingly active, but it has an impact on macroeconomic stability and poses a challenge to regulators as well.

9.3.1 Evolution and Status Quo of International Capital Flow In the 1980s, the size of capital flows during the peak time once reached more than 5% of GDP in both developed economies and emerging market economies. However, the true climax of global capital flows started in the 1990s, and there have been three global capital flow waves since then: the first began in the fourth quarter of 1995 and ended in the second quarter of 1998 with the Asian financial crisis as a turning point; the second started in the fourth quarter of 2006 and ended in the second quarter of 2008 with the U.S. financial crisis as a turning point. The third started in the third quarter of 2009 and has been continuing. The rapid rise in the international investment position is a prominent feature of this round of capital flows, and it is also the realistic background for the analysis of international capital flows. In the context of increasingly popular international lending and the increasing proportion of foreign assets in the portfolio held by investors, international capital flows have shown the following three dynamic characteristics. First, the size of gross capital flows is huge and growing rapidly. According to the calculations of the IMF, the total amount of global capital flows tripled between 1995 and 2005, and reached a peak around 2007, accounting for about 20% of the global GDP at that year. In contrast, the total current account balances of countries only accounted for 3–5% of the global GDP. Although the gross capital flows slowed down significantly during the global financial crisis in 2008, its size has almost come back to the pre-crisis level in recent years. Second, the gross capital flows in different types of countries have shown great heterogeneity. Before the global financial crisis, although developed countries experienced a continuous decline for the share in international trade, the gross capital flows accounted for 75% of the total global assets. After the crisis, the gross capital flows in Asian emerging markets grew rapidly, but the gross capital flows in developed countries have always maintained more than 60% of the total global capitals. Third, the gross capital flows fluctuate violently, demonstrating a clear procyclical trend. Broner et al. (2013) conducted an empirical analysis of the cyclical characteristics of gross capital flows. Compared with net capital flows, a country’s total capital

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inflow and total capital outflow are not only highly correlated, but with obvious procyclical features. When the economy is booming, the level of cross-border trade and international credit rises, and the gross capital flows increase accordingly. When the economy is down, the degree of investors’ risk aversion rises, the price of financial assets falls, and the gross capital flows decline significantly. Moreover, there are also significant differences in different kinds of volatility. There is obvious volatility and periodicity in the short-term total capital flows of bank credits and corporate debts. By contrast, the volatility of the long-term total capital flows, such as the direct investment and equity investment, is weak and remains stable for a considerable period of time. Compared with developed countries, the volatility of total reserve capital flows in emerging countries is relatively high. The above-mentioned empirical facts have also been affirmed by a series of related studies. Traditional documents divide the driving factors of gross capital flows into push factors and pull factors. The push factor is the global factor that affects the gross capital flows, that is, the factor that affects the international capital supply. The pull factor is the country-specific factor that affects capital flows, that is, the factor that affects international capital demand. At international conferences such as the IMF annual meeting and the G20 summit after the global financial crisis, economists have heated discussions about which types of factors were more important to a country’s gross capital flows. Mantega, the Finance Minister of Brazil, representative of policy makers in emerging countries believed that the monetary policy cycle in developed countries was the main reason for the drastic fluctuation in gross capital flows in developing countries. Bernanke, ex-President of the Fed, representative of policy makers in developed countries insisted that changes in global investors’ risk attitudes be the main reason for driving gross capital flows. Based on the existing study, the relative importance of different driving factors depends on the type of gross capital flows (long-term or short-term), the investigation timing (turbulent period or quiet period), and the income level of a country (developed country or emerging country). Different from country-specific pull factors, global push factors can better explain the size and direction of total short-term capital flows in specific countries. In fact, the global factors represented by the economic variables of developed countries reflect the different stages of the global financial cycle. Therefore, the volatility of total short-term capital flows largely reflects the cyclical changes of global factors (Rey 2015). Many studies have pointed out that total long-term capital flows are mainly determined by country-specific pull factors. Total long-term capital flows such as FDI and equity investment are not sensitive to V I X factors, but are significantly positively correlated with a country’s economic growth rate, investment environment, and institutional quality. This can be understood as the total short-term capital flow pursues hedging and arbitrage, and the total long-term capital flow is to share the growth dividend. In addition, the investigation timing will also affect the relative importance of the driving factors. Cerutti et al. (2015) believed that when the volatility of the global financial market rises sharply, international capital flows to a “safe haven,” and the interruption of gross capital inflows to emerging markets is usually not selective, which means that fundamentals of economies exert little impact on the total amount of overseas capital withdrawals.

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No matter how the emerging markets raise interest rates, it will not prevent the interruption of gross capital inflows to maintain the value of the local currency. Similarly, when major global economies implement large-scale quantitative easing policies, the size of total capital inflows to emerging markets is mainly related to such factors as the country’s interest spreads and expected exchange rate changes. Even countries with declining economic fundamentals are faced with the surging gross capital inflows as well. But this does not mean that the government’s efforts to improve economic fundamentals are useless. The relative importance of different driving factors is also related to the country’s income level. Zhang and Xiao (2014) emphasized this in their study. Broner et al. (2013) also believed that developed countries dominate the size and direction of global capital flows with a large number of capitals and developed financial markets. Compared with developed countries, global factors play a more important role in determining the patterns of gross capital flows in emerging countries. The countryspecific differences in emerging markets can only be fully reflected when the global financial market is relatively stable. As for developed countries, owing to the little difference in investment environment and institutional quality, country-specific factors such as interest spreads and exchange rate expectations play an important role in gross capital flows.

9.3.2 Challenges of International Capital Flows International capital flows are vital to the impact of a country’s external vulnerability. Specifically, such importance is reflected in the following aspects. First, the composition and structure of gross capital flows indicate the external redemption risks to a country. Gourinchas and Jeanne (2013) believed that before the 2008 financial crisis, the academic community emphasized too much on the issue of “external imbalance” and ignored the issue of “external imbalance of liquidity.” Before the crisis, a prominent feature of gross capital flows in various countries was the increase in the proportion of total short-term capital flows represented by debt and bank credit. This increased the possibility of currency and maturity mismatches in a country’s external assets and liabilities, and significantly affected the solvency of a country’s financial institutions. When financial institutions holding long-term assets lacked sufficient liquid assets to meet short-term repayment obligations, the problem of “external imbalance of liquidity” arose. Under this circumstance, financial institutions could only address liquidity crises by making fire sales of assets, restructuring debts, and seeking for new financing, but correspondingly it has caused such adverse effects as falling asset prices, devaluated local currency, and rising interest rates. It is worth noting that countries with current account surplus also have the aforementioned risks, because a country’s external risk exposure is determined by the structure of the country’s external balance sheet. Second, gross capital flows can reveal the distribution of systemic risks across countries. According to Borio and Disyatat (2015), a complex risk transmission

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relation can be established between countries through financial asset transactions. If country A with current account surplus and deficit country B have transactions for financial assets while they are trading with each other, then the financial risk is limited between the two countries of A and B. But if country A and country B finance trade activities through the financial center of country C, then country C also acts as the counterparty of country A and country B. Therefore, the external vulnerability of the three countries as a whole is mainly determined by country C with current account balance. If country C also conducts related transactions for financial assets with country D, country E in the system, the solvency and financial market situation of country C will have a chain effect on many countries. The central European countries played the role of country C before the 2008 financial crisis. Third, total pro-cyclical capital flows have increased the volatility of the domestic financial market. When there is loose liquidity in the international financial market, a large number of overseas short-term capitals flow into countries with high interest spreads, which promotes the real exchange rate appreciation of the country’s currency, and the rise of financial assets and real estate prices. Meanwhile, the government often uses cheap credit funds to implement pro-cyclical fiscal policies. When the risk attitude of international investors changes and the total short-term capital flow reverses, market liquidity will quickly evaporate in the short term when a country will face such problems as depreciation of its currency, a sharp drop in stock index, and an increase in sovereign debt default rate. The volatility of the financial market will cause high economic costs. It is worth noting that the boom-and-bust cycle caused by total short-term capital inflows occurs both in countries with current account surplus (such as China and Sweden) and in countries with a current account deficit (such as Latin America). Typical examples are the quantitative easing policy implemented by the Fed and the taper tantrum that happened in May 2013. Fourth, international banks transmit credit situations and country-specific risks across countries in the process of total media capital flows, which has become an important channel for financial contagion. The high-leverage operation of the bank makes it extremely vulnerable in the face of such unfavorable exogenous shocks as narrowing of the deposit-to-loan spreads and depositor runs. However, banks are of systemic importance in a country’s financial system, especially international banks that cross-hold assets and liabilities with different financial institutions. Therefore, the sound operation of international banks is directly related to the external vulnerability of the host country’s economy. Supposing that the parent bank of an international bank in country A borrows the U.S. dollar at an interest rate of 1 + i in the wholesale dollar market, lends it to its subsidiaries located in country B and country C at the interest rate of 1+ f , and the subsidiaries then lend it to borrowers respectively in country B and country C at the interest rates of 1 + r B and 1 + rC . In this credit chain, the credit supply situation and lending rate of 1 + r B from country B depend not only on country B’s economic situation and the borrower’s ability to pay back, but also on the following factors: (1) the global liquidity situation or global banking leverage cycle; (2) country A’s economy situation; (3) the operating situation of the parent bank; (4) country C’s economic situation and the default risk. These factors will indirectly affect country B’s credit supply and lending rate of 1 + r B through

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financing cost of 1 + i. More importantly, the above factors not only affect the credit availability to country B, but also play a role in other financial institutions in country B by changing its solvency of subsidiaries. It can be seen that multinational banks increase the sensitivity of a country to external factors in the process of total media credit capital flows.

9.4 Defects in International Financial Governance Mechanism The IMF is currently the most important international financial governance mechanism. It is the core of the post-war international monetary system. It is also regarded as the three pillars of the post-war international economic order, together with the World Bank and the World Trade Organization. After the collapse of the Bretton Woods system and the frequent occurrence of financial crises in recent years, the role of the IMF as a preventer and manager of international financial crises has received more and more attention. However, due to the unsatisfactory performance of the IMF in previous crises, countries have gradually realized that there are still many shortcomings in its governance and functions, which have hindered the development of the world economy and financial order.

9.4.1 Defects in the IMF’s Governance Structure First, the reform of the IMF’s governance structure has lagged behind. Since the establishment of the Bretton Woods system, the world political and economic environment has undergone tremendous changes. In the process, although the IMF’s governance structure has been adjusted, it has still lagged behind the actual situation of world economic development on the whole. It was mainly shown as developed economies still occupied a dominant position in the IMF’s governance structure, and their share ratio was seriously overestimated. The voice and voting power of emerging economies in the IMF were not properly reflected. Although the 2010 reform plan increased the share of emerging countries to a certain extent, the situation did not improve significantly. According to the IMF data, the total share of the BRICS countries in 2016 was only 15.09%, while the share of the United States reached 17.74%, and shares for other developed economies were respectively 6.59% for Japan, 5.69% for Germany, and 4.31% for both Britain and France. The voice of developing countries in the IMF still cannot compete with developed countries. As a global international financial institution, the IMF should earnestly consider the situation of developing countries, increase their shares, voting rights and proportion in the IMF management, and gradually improve the position of emerging market countries in global economic governance.

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Second, the IMF lacks fairness and rationality in the voting system. Primarily, the voting system of the IMF appears to be equal in power and responsibility, but in fact it has been very controversial since its establishment. The economic strength of a country determines the share of members, thereby determining the voting power and the size of loans that could be obtained, but this also enhances the dominant position of the major economic powers in IMF decision-making, and reduces the voice of emerging economies, as well as the possibility of obtaining loans. Therefore, it does not achieve true equality. Subsequently, there is no inevitable connection between the amount of funds contributed by countries and the degree of assistance they need. Some countries with relatively weak economies have received less financial assistance because of their small share, which can be seen to be a drop in the bucket for solving the country’s financial difficulties. However, developed countries have strong economic strength and may not need financial assistance, which has not only resulted in a waste of resources, but also further reflected the lack of equity in the decision-making mechanism. Third, the IMF mostly adopts the form of consultation and negotiation, and the negotiation process and content are often not disclosed, which can easily lead to black-box operations. There is a lack of an authoritative and open mechanism to evaluate economic policies of member countries and investigate the crisis situations, and the content of many decisions or resolutions involves the domestic economic and political conditions of member countries. That is why most of them are reluctant to disclose it. Consequently, the degree of openness and transparency of the IMF is not enough, thus reducing the equity and credibility of its decision-making. Information asymmetry after the outbreak of the crisis is also an important reason why it is difficult for the IMF to respond effectively and rapidly.

9.4.2 IMF’s Functional Deficiencies The outbreak of the 2008 financial crisis has indicated the necessity of the IMF to further improve its function construction in crisis assistance and crisis management. (I)

Insufficient crisis assistance effort of the IMF

The fundamental purpose and function of the IMF are to provide temporary financial support to correct maladjustments in the balance of payments in various countries. However, as the IMF itself does not have the right to issue currency and cannot create liquidity, it may not be able to act as the international lender of last resort. After the governance and quota reforms were approved to take effect in 2010, the IMF’s quota resources doubled, which further strengthened the IMF’s role as the global financial safety net. Facing the frequent occurrence of economic crises, the overall rescue force of the IMF has been insufficient, and it still needs to further enrich its financial

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resources. However, the expansion of the scale of financial resources takes costs and is also constrained by many conditions. In general, the expansion of the IMF’s available resources (such as share capital increase, special drawing rights allocation) depends on the actual situation of world economic development, but in actual implementation, this concept is too broad and lacks operability. Therefore, in most cases, the IMF tends to make conservative estimations and refuse to expand resources (one of the reasons for the IMF to give up resource expansion is that countries which control most of the IMF’s decision-making power are less dependent on its financial resources). Meanwhile, even if the IMF makes a decision to increase resources, it requires domestic approval from various national governments. Domestic judicial procedures have restricted or even hindered the expansion of the IMF’s resources. (II)

Unreasonable assistance conditions of the IMF

The current system allows developed countries to have control over many of the IMF’s decisions. At the same time, since developed economies, especially for the United States, are implementing liberal economic policies, the economic assistance from the IMF to countries in crisis is accompanied with many additional conditions that are conducive to developed countries. For example, the assistance plan requires the recipient country to open its financial sector, promote the privatization process, adopt a free trade policy, reduce tariffs, remove import and export restrictions, and restrict government’s intervention to create conditions for foreign products to enter the country smoothly and erode the domestic market. It is usually difficult for developed countries to reach these conditions with recipient countries in equal bilateral trade. Besides that, it is also related to the intimacy of its interest relations with developed countries whether and how much the recipient country can receive assistance. For example, if the recipient country is a neighboring country of the United States or a major exporter, and its economic situation is directly related to the economic situation of the United States, then the United States and the IMF will provide it with assistance. Therefore, many countries are unwilling to be further constrained by the harsh conditions of developed countries in the face of economic crises. (III)

Crisis warning capability of the IMF to be urgently strengthened

Due to the defects in its institutional structure, the IMF is lack of sufficient capability to give early warning, supervise, and acquire information before the outbreak of a crisis, and the mechanism is far from perfect to assess the domestic economic situation of member countries and investigate the crisis situation, while supervision over international hot money is not in place, resulting in that there are no warnings before the crises, and they cannot be quickly and effectively contained and resolved after the crisis. A report issued by the IMF’s Independent Evaluation Office (IEO) in February 2011 assessed the IMF’s regulatory role from 2004 to 2007. The report revealed that the IMF did not see any signs before the breakout of the crisis in 2008. The IMF was still relatively optimistic about the economic situation in various countries before October 2007. Not until the financial market chaos occurred, the standpoint changed to “more prudent.” From this point of view, before the outbreak

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of the 2008 financial crisis, the IMF had not played its due role in supervision and early warning, thus delaying the timing of economic adjustments. (IV)

Structural issues in the use and allocation of IMF’s financial resources

Quota shares are the core of the IMF’s organizational structure, which not only determine the maximum size and voting power of the member country’s capital contribution to the IMF, but also determine the limit of loans that member countries could obtain from the IMF if necessary. Therefore, quota shares have built up a connection between capital contribution and resource utilization, which is in line with the basic “right-obligation” relationship. However, in reality, there is no necessary connection between the amount of a country’s contribution and the amount of assistance it needs during a financial crisis. It is conceivable that although the United States contributes the most to the IMF, but its dependence on assistance resources from the IMF may be the lowest. While, for some small countries, assistance from the IMF may be the most dependent resource during financial turmoil or crisis. However, due to their small amount of capital contribution, the scale of financial assistance that they could obtain from the IMF is often rather inadequate.

9.5 Conclusion International financial governance mainly focuses on three important topics, including the international monetary system, the international financial regulatory system, and the international financial governance mechanisms. As the 2008 international financial crisis has further exposed the shortcomings of the current international financial governance system, the call for reform has become stronger. The current international monetary system takes sovereign currency as the currency for international reserve, settlement and pricing. Its inherent defect is that the currency issuing country has to keep issuing money to meet the growing requirements of international trade and investment activities, while maintaining the stability of the value of the currency, which is contradictory. At the same time, the unequal relationship between rights and obligations under the current international monetary system has become increasingly prominent. Major international reserve currency issuers, such as the United States, monopolize international seigniorage revenues, but have not fully assumed the responsibility of stabilizing the global economy. Due to the lack of necessary constraints and supervision mechanisms, the US dollar policy has a great spillover effect, which has not only exacerbated the instability of the international monetary system, but also increased the continuous spread of the financial crisis around the world. International financial supervision is a guarantee to ensure the stable operation of the international financial system. Since the 1980s, the trend of financial liberalization, the continuous innovation of financial derivatives, the rapid development of information technology and the rapid rise of emerging markets have brought the speed and scale of international capital flows to an unprecedented level. However,

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the outbreak of the international financial crisis in 2008 indicated that the current international financial regulatory system has failed to effectively suppress the global financial risks. There are still many shortcomings in international finance, such as the lack of effective supervision over abnormal fluctuations in the international financial market and effective constraints on speculative capital, the lack of coordination and communication among the financial regulatory authorities in various countries over international financial supervision, as well as the existence of regulatory arbitrage. International financial institutions represented by the IMF are important carriers of the international financial governance system. Their functions directly affect the operation and effects of the international financial system. Therefore, reforms of the governance mechanism and operating mechanism of international financial institutions have become the most important topic and breakthrough in international financial governance. Generally speaking, the defect in the IMF’s governance structure is first reflected in the irrational distribution of its quota shares and voting rights. Developed countries have a dominant position in the IMF’s quota shares and voting rights, while the position of emerging economies has not been reasonably reflected for a long time. In addition, there is still the problem of inadequate funding in the IMF. Since the IMF does not have the right to issue currency, the adequacy of its funds depends entirely on the contributions of member countries, which makes it difficult to effectively perform its functions. Meanwhile, the IMF needs to further promote reforms in terms of crisis assistance conditions, use and distribution of financial resources in order to better play its role in international financial governance.

References Borio, C., and P. Disyatat. 2015. Capital Flows and the Current Account: Taking Financing (more) Seriously. BIS Working Papers, 525. Broner, F., D. Tatiana, E. Aitor, and S. Sergio. 2013. Gross Capital Flows: Dynamics and Crises. Journal of Monetary Economics 60 (1): 113–133. Cerutti, M.E., M.S. Claessens and M.L. Laeven. 2015. The Use and Effectiveness of Macroprudential Policies: New Evidence. International Monetary Fund. Gourinchas, P.O., and O. Jeanne. 2013. Capital Flows to Developing Countries: The Allocation Puzzle. Review of Economic Studies 80(4): 1484–1515. Li, Daokui, and Xingzhong. Yin. 2010. The International Monetary System in the Era of PostFinancial Crisis: What Policy Options Does China Have? Journal of Financial Research 2: 31–43. Rey, H. 2015. Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence. NBER Working Paper No. 21162. Zhang, Ming, and Lisheng Xiao. 2014. Push Factors of International Capital Flow: A Comparison of Emerging Markets and Developed Economies. Journal of World Economy 8: 151–172.

Chapter 10

Reform Direction of International Financial Governance

An efficient and well-functioning international monetary system should include reasonable rules, orderly operating mechanisms and strong supporting institutions to effectively restrain global economic imbalance and maintain world economic and financial stability. In the reform of existing mechanisms, more considerations should be given to the trend of multi-polarization in the economic field—the increasing influence of emerging economies and developing countries in the global economy. At the same time, it should be noted that the current reform of the international monetary system has such problems as slow progress, difficulty in reaching effective consensus among various countries, as well as the lack of actual reform achievement.

10.1 Reform Direction of International Monetary System After the collapse of the Bretton Woods system, the dollar-based international monetary system has been working until today, which to a large extent, has made important contributions to the prosperity of global commodity trade and the rapid growth of international capital flows. At the same time, the international monetary system has also shown many signs of instability— frequent crises, ongoing imbalance of current accounts and misalignment of exchange rate, high volatility of capital flows and currencies, and unprecedented huge accumulation of reserves. Since the outbreak of the 2008 financial crisis, these signs have exposed the inherent deficiencies in the international monetary system more clearly, and have brought new international impetus to the reform of the international monetary system.

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10.1.1 Super-Sovereign Currency Plan It is difficult for a single-standard credit currency to solve the Triffin dilemma. In order to solve this problem, Zhou (2009) and others once proposed the idea of a super-sovereign currency, which aroused a large international response. The supersovereign currency should be an international reserve currency which is decoupled from sovereign countries and can maintain currency stability for a long time. The use of super sovereign currency will make the issuance of international currency not controlled by the monetary policy of a single country, and income by seigniorage can be reasonably distributed among countries, which has obvious advantages. Many studies (Li and Yin 2010; Li et al. 2010) mentioned that under current conditions, SDR is most likely to become the carrier of international super-sovereign currency. In order to develop toward an international super-sovereign currency, SDR should be reformed in the following aspects: expanding its own transaction scope and scale to become a means of payment in international settlement and financial transactions; expanding the SDR pricing basket, taking into account the currencies and economic volume of the major economies in the world; and reforming the IMF’s voting mechanism to make it more fair, efficient and transparent. It could be found from the current slow progress of SDR reform and the IMF reform that it is difficult to transform SDR into a super-sovereign currency through reform in the short term. Even if the above reform directions can all be completed, it is just the first step to transform the SDR into a super-sovereign currency. The real realization of a super-sovereign currency requires a series of reformulations of various countries’ monetary policies, exchange rate systems, and global liquidity management. Therefore, it is costly and difficult to achieve in the short term.

10.1.2 Diversified International Monetary System While a super-sovereign currency is difficult to achieve in the short term, a diversified international monetary system including the U.S. dollar, the euro and the RMB is an alternative that is more realistic and easier to achieve. The diversification here specifically refers to the three pillars of the U.S. dollar, the euro, and the RMB, all serving as the base currency. While acknowledging the status of the U.S. dollar as an international currency, this system also avoids the inefficiency of the supersovereign reserve currency in international coordination. The advantages of this system include greater tolerance, independence of the credit of a single sovereign country, and freedom from the influence of any single country’s monetary policy. Considering the influence of the existing euro, China’s growing economic strength, and the steady advancement of the RMB internationalization, it is more hopeful to reach a consensus on this kind of reform. In contrast with a single international monetary system, a diversified international monetary system will have a higher stability. Meanwhile, compared with other reform

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plans, currency diversification is also a reform plan that is more realistic and less difficult to advance. Studies have shown that the status of international currencies is closely related to a country’s economic strength, and the current diversification of the world economic structure coincides with that of international currencies. According to the data from the IMF, in the mid-1980s, the U.S. economy accounted for as much as 35% of the world’s total economy. Since then, it has been fluctuating and declining, and has fallen to less than 25% by far. After the establishment of the Eurozone, its economic aggregate once accounted for about 20% of the world’s total economy, but has declined since the breakout of the European debt crisis. In contrast, the economic strength of emerging economies has grown rapidly, and the currencies in some emerging economies have begun to emerge in the international monetary field. With the continuous advancement of currency internationalization in emerging economies, hopefully a diversified international monetary system could be formed in the future in which the U.S. dollar, euro, and currencies of emerging economies complement each other. As an emerging economy, if China wants to play a more constructive role both in the reform of the international monetary system and in the reform of international financial governance institutions such as the IMF, contributing to the formation of a diversified international monetary system, the best choice for China is to continuously improve the internationalization level and international influence of the RMB. More specifically, China has to continuously enhance the comprehensive competitiveness of its economy, further advance the constructions of the Belt and Road and the offshore RMB market. In addition to the reform of the international reserve currency, the reform of the exchange rate system and the balance of payments adjustment mechanism should also be actively promoted. No exchange rate system is applicable to a country at all times. The choice of a country’s exchange rate system should match its own national conditions and policies. Therefore, it is necessary to form a globally unified and coordinated exchange rate system and to take care of the economic and financial market situations in different economies as well. To this end, it is necessary to form a reasonable exchange rate coordination and stabilization mechanism at the global level. The reform of the international balance of payments adjustment mechanism should be considered together with the reform of the exchange rate system to adjust global economic imbalance.

10.2 Reform Direction of International Financial Regulatory System Since the 2008 financial crisis, the reform of the international financial regulatory system has moved forward with difficulty in the game between political authorities and regulatory bodies. However, it is undeniable that the determination of developed

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economies such as the United States and European countries to reflect on the financial crisis has not changed, and the direction of reforming international financial supervision and international capital flow management system will not be reversed. Only the pace and means of reform are what might change.

10.2.1 Reform Direction of International Financial Regulatory System Since the crisis, the issue of international financial regulatory reform has become one of the most important issues in global governance. At present, the reform of macro-prudential supervision, shadow banking system supervision, and the balance of domestic and foreign supervision are the focus of attention of all parties. In the future, the reform direction of the international financial regulatory system will mainly focus on the three following aspects. (I)

Balance between macro prudence and micro prudence

The financial crisis has proved that no matter how perfect the micro-prudential supervision is, the overall stability of the financial system is still vulnerable if macroprudential supervision is not supplemented or strengthened. International financial regulatory reform represented by the Basel III also shows that micro-prudential supervision cannot be separated from the support of macro-prudential instruments. Microprudential supervision criteria can provide stable and sustainable financial intermediary services for the real economy. The coordination of macro-prudential instruments and policies is based on the existing micro-prudence. The balance between macro-prudence and micro-prudence can promote each other and enhance mutual regulatory effects. The organic combination of macro-prudential instruments and micro-prudential supervision can promote coordination between various regulatory bodies, and the innovation and progress of different regulatory technologies and instruments. On the basis of existing micro-regulatory bodies, each regulatory body should gradually begin to build macro-prudential regulatory instruments with the goal of preventing and controlling systemic risks and maintaining the stability of the entire financial system, and further reduce the hidden risks of the international financial system when counter-cyclical dynamic control mechanism and accounting method reform cooperate with each other. While improving the effectiveness of macro-prudential regulatory instruments and the diversification of micro-prudential regulatory policies, the two should complement each other, and coordinate with each other, and strengthen risk supervision over systemically important financial institutions and other market entities. It will continuously improve the operating effectiveness and safety of the global financial system through establishing an international financial regulatory framework that balances macro-prudence and micro-prudence.

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Balance between banks and non-bank financial institutions

Lessons from the current financial crisis show that the moral hazard of “too big to fail” will expose the entire financial system to risks. The government’s measures to assist giant financial institutions will corrode public welfare and the interests of taxpayers. However, the business contents of bank financial institutions and non-bank financial institutions are closely connected and mutually penetrated. Once a risk occurs in a non-bank financial institution, it can be easily passed into the banking system. If the regulatory body only supervises the banks, it may be difficult to achieve the goal of financial stability. Therefore, international financial regulatory reform should not only focus on the banking system, but also pay sufficient attention to the risks of non-bank financial institutions, especially shadow banking institutions. In order to solve this problem in a more targeted manner, major financial regulatory bodies around the world have reached a consensus to select the global systemically important banks with big influence and increase the supervision over them. There are higher requirements on systemically important banks for risk governance structure and prudential regulatory indicators than those of ordinary banks to prevent the occurrence and spread of systemic financial risks. As systemically important banks undertake the core functions of the financial system, it is necessary to handle and effectively resolve them in a timely manner once risks occur, and enhance the transparency and predictability of risks. On this basis, formulate recovery and resolution plans for possible business failures of these banks, so that they can quickly help them or resume normal operations after the occurrence of the risks, or exit the market more smoothly and orderly. (III)

Balance between national standards and international standards

Countries have different attitudes towards whether financial supervision need to follow international standards. Opponents think that if international regulatory standards are blindly copied without considering country-specific situations, the original regulatory framework may deviate from the domestic financial system. If the internationally accepted regulatory standards are implemented differently from country to country, profit-seeking and risk-taking behaviors in the financial market may migrate to countries with loose regulatory methods due to the existence of regulatory arbitrage, thus threatening the stability of the entire financial system. Therefore, there is still a long way to go in the entire reform of financial supervision. In view of this, on the one hand, the future international financial regulatory reform should take into account the concession space between the standards of various regulatory bodies and international standards based on the legal, political, cultural, and national conditions of various countries. On the other hand, it should also consider special situations under special conditions at special times, such as the differences in standard implementation between developing and developed countries, and the differences in standard levels during the crisis and normal time. Only by coordinating the balance between national standards and international standards can the supervision be improved effectively in the reform of international financial supervision so as to improve the stability of the entire financial system.

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10.2.2 Reform Direction of International Capital Flow Management Since emerging countries have small financial markets and the channels are not smooth for residents’ foreign investment, emerging countries mainly absorb them through deteriorating current account deficits in case surging foreign capital inflows. When external shocks cause the stop of foreign capital inflows, the real economy will undergo a contractionary reverse adjustment. Since it is not possible to use domestic currencies in international lending, emerging countries often have such problems as maturity mismatch and currency mismatch in their external balance sheets. In this case, it becomes essential for emerging countries to manage capital flows. (I)

Coordination of capital flow management with macro-prudential regulatory measures

After the global financial crisis, the IMF put forward the concept of capital flow management (CFM). It differs from traditional capital control policies in that capital flow management includes some macro-prudent measures (MPM) to prevent systemic financial risks and maintain the stability of the financial system. Moreover, capital flow management is formulated for specific capital flow risks within a period of time. It is more flexible and targeted than capital control in terms of instrument selection and policy validity, and can reduce the loss of efficiency in capital allocation brought by capital control.1 Many emerging countries formulated relevant capital flow management measures in accordance with the recommendations of the IMF. However, the optimal timing and effectiveness of capital flow management have always been the focus of debate in the academic community. Scholars represented by Ostry et al. (2010, 2012) believed that when the total capital inflows in emerging countries rise rapidly in the short term, their governments should first use monetary and fiscal policies to adjust the fundamentals of the economy. In short, if there is no overheating in asset prices, the government should lower interest rates to reduce the interest spread with developed countries; if the exchange rate is not overvalued, then the government should allow the spot appreciation of the domestic currency to curb arbitrage transactions; and if the foreign exchange reserves are still insufficient, the government should convert part of the total capital inflows into foreign exchange reserves to enhance the external solvency of economies. Only when the above-mentioned macroeconomic conditions are not met, or when there is a time lag in the functioning of domestic factors, is it the most reasonable to adopt capital flow management. The purpose of capital flow 1

In fact, capital flow management and macro-prudential policy have many similarities. Some scholars divide the macro-prudential policy into two parts: internal and external, according to the criterion of whether the source of financial risk is located at home or abroad. The external part is the intersection of capital flow management and macro-prudential policy. Such measures as provision of reserves for domestic banks’ liabilities in foreign currency and restrictions on the leverage level of domestic banks’ external assets are considered as capital flow management and macro-prudential policy as well.

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management is to buy time for the adjustment of economic fundamentals. Ostry et al. (2012) further pointed out that capital flow management is not conducive to diversifying country-specific financial risks, and it will inhibit the financial adjustment channel of the total capital outflow and the total capital repatriation of domestic residents. Therefore, emerging countries should not use capital flow management frequently or for a long time. (II)

Capital flow management should consider the pro-cyclicality of the economy

From the perspective of pro-cyclical capital inflows, Jeanne et al. (2012) pointed out that emerging countries have a tendency to over-borrow during economic prosperity, and consider insufficiently about the relations between borrowing behavior and systemic risks. In the absence of domestic financial supervision, it can easily cause the mutual amplification mechanism of credit size and asset prices when emerging countries open capital accounts, laying hidden dangers for the outbreak of the financial crisis. Therefore, they advocate a countercyclical taxation on total capital inflows, and the tax rate on total short-term capital inflows such as debt and bank credit should be higher than that on total long-term capital inflows such as equity and direct investment. Korinek (2010, 2015) explained the necessity of capital flow management from the perspective of pecuniary externality generated by capital outflow. He believed that when domestic residents make investment and financing decisions, exchange rates and asset prices are regarded as given, neglecting the influence of individual behaviors on exchange rates and asset prices. When adverse exogenous shocks cause total capital outflows, domestic residents facing pressure of repaying foreign debts will sell assets denominated in local currencies in the foreign exchange market, causing exchange rates and asset prices to fall. The fall in exchange rates and asset prices in turn inhibits the borrowing capacity of domestic residents through the channel of balance sheets, thereby reducing the demand for domestic goods and assets, and further restraining exchange rates and asset prices. In order to avoid the vicious circle of falling exchange rates and asset prices, emerging countries has to restrict total capital outflows. (III)

Capital flow management should focus on coordinating with other macroeconomic policies

In addition to capital flow management, some scholars have also proposed other policy options for emerging countries to deal with capital flow volatility. Simon et al. believed that in order to avoid the financial market turmoil caused by capital inflow volatility, emerging countries could regulate the resident capital outflows to offset the impact of total foreign capital inflows (IMF 2013). When the foreign capital inflow surges, domestic residents could accumulate foreign assets to export some excessive capitals to prevent possible credit and asset price inflation. When overseas capital flows is interrupted, domestic residents could repatriate some foreign capitals to make up for the domestic financing gap and avoid economic recession caused by insufficient solvency. They refer to this method of stabilizing capital flow violability through

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capital account changes as the “financial adjustment channel.” In order to give full play to the “financial adjustment channel” of the private sector, emerging countries should improve the quality of their systems, enhance the credibility of countercyclical fiscal and monetary policies, adopt more flexible exchange rate systems, and improve the domestic regulatory system to increase capital account openness in an orderly way. At the same time, Alberola et al. (2015) believed that emerging countries can actively use official reserves to manage total capital flows. The main difference between the “reserve adjustment channel” and the “financial adjustment channel” is that the former is led by the government, while the latter is led by the private sector. The adjustment mechanisms of the them are essentially the same. These two solutions are both useful supplements to capital flow management, and their effectiveness is also confirmed by the practical experiences of some emerging countries such as Chile and Malaysia. In fact, after the 2008 financial crisis, the academic community has realized the necessity of capital flow management in emerging economies. Since the free flow of capital not only improves the efficiency of capital use, but also weakens the financial stability of a country, the regulatory authority needs to find the optimal policy balance between the two. The debate on the timing of using capital flow management is essentially to explore the relative importance of various means that affect the size and direction of capital flow. On the one hand, much importance should be attrached to country-specific factors when adjusting economic fundamentals to address capital flow violability, and direct management is the second choice. On the other hand, we should also pay attention to capital flow per se and increase some frictions in the process of capital flow so as to weaken the capital flow volatility from the source.

10.3 Reform Direction of International Financial Governance Mechanism Since the 1990s, there have been closer and closer international economic exchanges, so are the ties among countries. The world economy has formed an inseparable network with wide-ranging implications. A small crisis may lead to very serious consequences. Both developing countries and developed countries may be hit hard by their huge economic aggregates and over-dependance on the global market. As an important pillar of the international economic order, the IMF undertakes the important task of maintaining international financial stability. It has a far-reaching international impact and has received extensive attention from the international community. However, the IMF has performed unsatisfactorily in the frequent economic crises in recent years and revealed its shortcoming in many aspects, thus making reform inevitable.

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10.3.1 Reform of the IMF’s Governance Structure In September 2005, the IMF announced the Report by the Managing Director on the IMF’s Medium-term Strategy, which opened the prelude to the IMF’s recent reforms. The main purpose of the governance structure reform was to enhance the voice and representation of emerging markets and developing countries in the IMF, and to further strengthen the legitimacy, credibility and effectiveness of the IMF. From 2005, the IMF mainly carried out the reforms of quota shares and voting rights from 2006 to 2008 and the reforms of quota shares and governance in 2010. In the future, on the basis of the previous reform programs, the IMF should further enhance the voice of emerging and developing economies in the global financial governance system to be consistent with the world economic structure. Currently, emerging and developing countries are still under-represented in participating in global financial governance. As emerging and developing economies account for a rising share of the total economy, their role in the global governance process should be reflected.

10.3.2 Strengthening its Own Resources After the outbreak of the 2008 financial crisis, the construction of a global financial safety net was put on the agenda. It is a combination of a series of financial resources and institutional arrangements, aiming to provide various financial assistance to countries during the financial crisis. The main force of the safety net is the IMF. Moreover, after the international financial crisis and the European debt crisis, an increasing number of member countries requested financial support from the IMF. Therefore, the IMF has been forced to continuously expand the available financial resources in recent years. In order to further strengthen the role of the IMF in the global financial safety net, the first suggestion is to improve the supply mechanism of the IMF’s available financial resources. It is recommended to refer to the calculation formula of the existing quota shares to establish a growth mechanism for the total quota shares of the IMF, including the variables of economic growth, international trade, international capital flows, with a certain year (or a certain cycle) as the spot, to calculate the growth of the quota share in each cycle according to the growth mechanism.The second advice is to reform the current quota determination formula to more clearly define the role of the quota formula. It is recommended to reform the quota formula and reorganize the function of the quota share. On the one hand, the quota share should be the basis for defining the size of each country’s capital contribution and voting rights. The corresponding quota formula only reflects the size of a country’s funding capacity. On the other hand, the mechanism for a country’s demand for capital should be redesigned to reform and even divest the financing rights function of quota shares. Moreover, reforming and divesting the financing rights function of quota shares are also required.

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The second suggestion is a specific analysis of specific circumstances, and corresponding financing arrangements will be made according to the situation of a country’s application for rescue projects. For a country’s rescue, the first consideration should be the severity, nature, and duration of the impact (crisis) the country is facing, rather than the country’s share in the IMF. For large rescue projects, consider setting up a comprehensive project rescue team led by the IMF to attract regional financial arrangements, sovereign states and even the private sector to participate, and even issue bonds. A larger borrowing multiplier is allocated to the small countries with less capital contribution but more dependence on external financial resources, so as to ensure that these small countries can receive sufficient financial resource support in case of financial crises. For another, analyze specific circumstances, and make corresponding financing arrangements according to the actual situation of a country’s application for assistance projects. To provide a country with assistance, consideration should primarily be given to the severity, nature, and duration of the impact (crisis) the country is facing, rather than the country’s share in the IMF. In case of large assistance projects, it can be considered to set up a comprehensive project assistance team led by the IMF to attract regional financial arrangements, sovereign states and even the private sectors to participate, or even issue bonds.The fourth is to separate financing needs from the quota formula, which may lead to insufficient resources available to the IMF. In order to further supplement the available resources of the IMF, it can be considered to set up a new account independent of the general account (quota) and the SDR account (special drawing rights). It can refer to the operation of financial arrangements in the European region. Part of the funds in the account comes from the initial capitals of various countries, and another part is from bonds issued and funds raised in the name of the IMF. The bonds will be priced in special drawing rights. This could not only supplement the IMF’s financial resources, but also further give full play to the role of SDRs in the international financial system.III. Improving lending conditions. In order to enhance the assistance effect, concerning the assistance plan, the IMF should also improve the current situation of blindly pursuing the economic liberalization in recipient countries and forcing them to accept unfair loan conditions. This will only increase the resistance of these countries and is not conducive to the sustainable development of the IMF. Thus, the IMF should take a gradual approach to urge recipient countries to carry out economic reforms, help them increase the degree of economic liberalization, stabilize the mood of the domestic government and the public, and give recipient countries certain independence. At the same time, the IMF should continue to improve its lending tools, including optimizing conditions, increasing projects, and expanding the scale. To expand financial support to member countries, it should try to meet the needs of member countries, appropriately increase the lending projects and the scale of assistance, help more member countries through the crisis, and maintain the stability and development of the international financial system. Countries in crisis can appropriately take proper and effective measures to carry out reforms in accordance with their domestic actual conditions, instead of blindly following the IMF’s plan.

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Although the international economic structure has undergone tremendous changes,the world economy has been greatly impacted, and the IMF has endured immense criticism, this backdrop has also provided opportunities and pressure to reform the IMF, forcing the IMF to find suitable reform methods as soon as possible. On the basis of implementing the 2010 reform plan, it is necessary to explore a more reasonable way for the IMF to better help the world financial system develop in a stable, reasonable and balanced direction, and lead the healthy and continued economic development in various countries. Yet, it is still a long-term exploration which requires member countries and the IMF to carry out the unremitting cooperation and efforts.

10.4 Conclusion The reform of international financial governance mainly focuses on three important aspects, namely reforming the international monetary system, the international financial regulatory system, and the international financial governance mechanism. The 2008 financial crisis has further promoted the step of international financial governance reform, and the global economy has gradually moved towards a more stable and balanced direction. However, the issue of global governance is complex and changeable. In the future, there is still a necessity to further deepen consensus among countries in the world to jointly promote the healthy and continuous development of the global economy. The reform of the international monetary system mainly focuses on the selection of international currencies, the reform of the exchange rate system, and the reform of the balance of payment adjustment mechanism. As the current international monetary system dominated by the U.S. dollar has exposed great deficiencies, building a super-sovereign international monetary system or a diversified international monetary system could be the possible way out. Countries should be allowed to choose an exchange rate system based on their own national conditions so as to form a reasonable exchange rate coordination and stabilization mechanism at the global level. In the future, formulating indicators related to structural imbalances could be taken into account to improve the balance of payments adjustment mechanism. The reform of the international financial regulatory system mainly focuses on macro-prudential supervision and shadow banking system supervision. Compared with traditional micro-prudential supervision, macro-prudential supervision pays more attention to preventing systemic risks, and mainly uses such macro-prudential instruments as supervising counter-cyclical capital and adjusting dynamic provisioning to supervise the financial system. The balance between macro-prudence and micro-prudence can mutually promote each other’s regulatory effects. International financial regulatory reform mainly focuses on the risks of non-bank financial institutions, especially shadow banking institutions. Governments and financial regulatory agencies in various countries have gradually incorporated shadow banking into the regulatory system to prevent cross contagion among various financial products. The

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reform of the international financial regulatory system needs to coordinate the balance between national standards and international standards to maintain the stability of the global financial system. The frequent economic crises in recent years have prompted the IMF to rethink its role in maintaining global financial stability. Since September 2005, the IMF has been working hard to promote reforms of its own governance structure, and has been committed to enhancing the voice and representation of emerging markets and developing countries to strengthen its own legitimacy, credibility and effectiveness, and continuously enhance its role in international financial governance.

References Alberola, E., E. Aitor and M. José. 2015. International Reserves and Gross Capital Flows Dynamics, BIS Working Paper, No. 512. IMF. 2013. The Yin and Yang of Capital Flow Management: Balancing Capital Inflows with Capital Outflows. In: World Economic Outlook: Transitions and Tensions, IMF. Korinek, A. 2010. Regulating Capital Flows to Emerging Markets: An Externality View. Mimeo: University of Maryland. Korinek, A and D. Sandri. 2015. Capital Controls or Macroprudential Regulation? IMF Working Paper, No.15/218. Li, Daokui, and Xingzhong Yin. 2010. The International Monetary System in the Era of PostFinancial Crisis: What Policy Options Does China Have? Journal of Financial Research 2: 31–43. Li, Yongning, et al. 2010. Super-sovereign Currency, Multiple International Monetary System, RMB Internationalization and China’s Core Interests. International Financial Studies 7: 30–42. Jeanne, O., S. Arvind and W. John. 2012. Who Needs to Open the Capital Account?. Washington, DC: Peterson Institute for International Economics. Ostry, D., R. Ghosh, M. Chamon and S. Qureshi. 2010. Tools for Managing Financial-stability Risks from Capital Inflows. Journal of International Economics 88 (2): 407–421. Ostry, D., R. Ghosh and A. Korinek. 2012. Multilateral Aspects of Managing the Capital Account. IMF Staff Discussion Notes. Zhou, Xiaochuan. 2009. Thoughts on the Reform of International Monetary System, the People’s Bank of China. http://www.pbc.gov.cn/publish/hanglingdao/2950/2010/201009141939004973 15048/20100914193900497315048_.html. Accessed 1 June 2018.

Chapter 11

Countermeasures for China’s Better Participation in International Financial Governance

With its rapid economic growth and good performance in the 2008 financial crisis, China’s position in international financial governance has been improving greatly. The change of the world economic structure has opened a new window for China to participate in international financial governance, and China’s goals and demands of interests in participating in international financial governance have become increasingly clear. This chapter systematically illustrates China’s positioning and goals to participate in international financial governance, uses SWOT analysis to summarize the benefits and costs of China’s participation in international financial governance, and proposes countermeasures for its participation in international financial governance reforms.

11.1 Positioning and Goal of China’s Participation in International Financial Governance After the global financial crisis, China follows the principles of being based on its own country, positioned as a major country with gradual progress to actively participate in global economic governance.

11.1.1 The Goal of China’s Participation in International Financial Governance According to the international economic development environment and China’s economic situation, the goal of China’s participation in international financial governance at this stage should be actively promoting the reform and improvement of the old international financial governance mechanism so as to set up a fair, equitable, © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_11

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inclusive and orderly international economic and financial order. The new international financial governance mechanism should be of broad representation, equity and effectiveness. Representation means that a country can participate in international financial governance regardless of its economic strength, and there should be channels and mechanisms to reflect and realize the demands of interests from various countries and resolve their conflicts of interests. Equity includes equity of both the process and the results, which emphasizes that all countries can equally participate in the process of global economic matters to make sure that the final results are accepted by all countries. Effectiveness includes effectiveness of both the decisionmaking process and the policy effects, which attaches much importance to improving the efficiency of international financial governance and strengthening the pertinence in solving global financial problems. China has spontaneously integrated itself with the international system and actively participated in various international financial mechanisms, organizations or agencies in the past few decades since its reform and opening up. The purpose is to be actively integrated into the process of international financial structure and promote domestic economic development. At the same time, it provides a solid foundation for the stability of the international financial order and the sound development of the global economy.

11.1.2 China’s Participation in International Financial Governance Should Be Based on Domestic On October 12, 2015, the Political Bureau of the CPC Central Committee conducted the 27th group study session on the global governance pattern and global governance system. When presiding over the study, Xi Jinping, General Secretary of the Central Committee of the Communist Party of China, emphasized that the fundamental purpose of our participation in global governance is to obey and serve the Chinese Dream of achieving the “Two Centenary Goals” and the great rejuvenation of the Chinese nation. The purpose of participating in international financial governance is even more so. On the one hand, China should actively participate in the construction of international financial governance mechanism, so that its voice and demands can be properly and reasonably reflected in the formulation of global rules to create a good external environment for the economic development. Since the reform and opening up, China’s economy has achieved considerable development, which is largely related to the continuous deepening of China’s participation in economic globalization. The trend of economic globalization cannot be reversed. Under such circumstances, China could only actively participate in the reform of international financial rules, and make rational use of them, so as to establish a more favorable international financial environment for its economic development.

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On the other hand, China should actively participate in international financial governance, further promote domestic reforms and deepen the level of opening up. In order to facilitate China’s participation in international financial governance, domestic policies must be adjusted accordingly. For example, it should continue advancing the strategic deployment of comprehensive reform and opening up unswervingly, achieving the convertibility of the RMB capital account in an orderly way, promoting the RMB to become a convertible and freely usable currency, and actively facilitating the international use of the RMB. The stability of the financial system is of great importance to global economic growth and social stability. In the process of participating in international financial governance, China’s position and opinions should be elaborated, and efforts should be made to ensure that various reform initiatives and related international standards are in line with China’s national interests. While solving systemic root problems in the international financial system, China should actively maintain domestic financial stability and give full play to the role of finance in promoting economic growth and social development.

11.1.3 China Should Stick to the Positioning as a Major Developing Country In the process of participating in international financial governance, China should adhere to its positioning as a major developing country. On the one hand, as a developing country, China should safeguard both its own national interests and the common interests of developing countries. We should not only recognize what China’s development requires of the world, but also what the international community, developing countries in particular, expect from China. Therefore, it is necessary to actively promote the international financial governance system to reflect changes in the global political and economic structure, increase the voice and representation of emerging economies in international financial governance, and protect the voice of least developed countries in international economic governance. On the other hand, as a major developing country, China should reasonably assume international responsibilities and demonstrate its image as a responsible major power. As its economic strength rises, China should gradually assume reasonable international responsibilities, which is also an important manifestation of its participation in global economic governance. It will help China gradually accumulate experience in global economic governance, enhance its “soft power” to participate in global economic governance, ease the United States’ doubts about China’s participation in global economic governance and gain recognition from other countries. In this process, we need to pay attention to the principle of balancing rights and obligations, which is reflected in two aspects. On the one hand, China should determine the degree of participation in international financial governance according to its own strength. For example, in order to make its own contributions to enhancing

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global financial governance, China has actively provided public goods to meet international economic and financial stability and development, proposed the Belt and Road initiative, advocated to establish Asian Infrastructure Investment Bank, and contributed in fund to set up the Silk Road Fund, and signed an agreement to establish the New Development Bank. On the other hand, the international community needs to give China equal amount of rights to match the amount of responsibilities it shouldered in international financial governance.

11.1.4 China Should Gradually Improve International Financial Governance In improving international financial governance, China does not seek to overthrow the existing international financial governance pattern, but hopes to promote the continuous improvement of the existing system as a builder. On the one hand, although there are many shortcomings in the existing global economic governance mechanism, the reform should be incremental and avoid “disruptive breakthroughs”. As the Chinese Premier Li Keqiang emphasizes, China is the beneficiary of the international system because the current patterns of the international division of labor, the international trade, and international investment are generally conducive to China’s economic development (Li 2013). Because China’s global economic governance theory and practice are not yet adequately prepared, rash advancement might not only lead to chaos in the world economic order, but also damage China’s economic interests. Therefore, China should be the defender and repairer of the existing global economic governance regimes, and advance reforms in a “Pareto” manner, which is not only conducive to the inheritance and development of the existing economic governance mechanism, but also reduces the resistance to reform from all parties. On the other hand, China’s demands for reforming the global economic governance mechanism should not seek to challenge the dominant position of the US in global economic governance. China still lags far behind the United States in terms of both “hard” power of economic aggregates and “soft” power of global economic governance concepts and practices. More importantly, the rise of China in global economic governance has been achieved within the US-led system (Fan et al. 2013).1 China’s blind pursuit of leadership will instead lead to the vigorous response and suppression by the United States under the existing system.

1

He Fan, Feng Weijiang, Xu Jin, On the Challenge of Global Governance Mechanism and China’s Countermeasures, World Economics and Politics, 2013 (4), p. 28.

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11.2 SWOT Analysis for China’s Participation in International Financial Governance China has always been an important participant in international financial governance. In order to accurately assess China’s role and position in international financial governance, we conduct a SWOT (Strength, Weakness, Opportunities and Threats) analysis of various factors that affect China’s participation in international financial governance, hoping to synthesize China’s strengths and weaknesses, opportunities and threats, so as to provide reference for China’s participation in international financial governance in the future.

11.2.1 Strength (S) China’s strength in participating in international financial governance mainly comes from the rapid growth of its economy and the continuous improvement of its financial strength over the past years. Primarily, after the reform and opening-up policy was implemented, China’s economy has made remarkable achievements. From 1980 to 2015, the annual growth rate of China’s GDP was close to 10%, far higher than that of the United States and Japan in the same period. The absolute amount of GDP increased by more than 35 times from 1980 to 2015. In 2015, China’s economic volume reached USD10.98 trillion, becoming the world’s second largest economy after the United States. If calculated in terms of purchasing power parity (PPP), China’s economy increased by 63 times from 1980 to 2015, and its share in the world’s total economy (PPP) also rose from 2.3% in 1980 to 17.1%, becoming the world’s largest economic power. Additionally, China’s financial strength is still rising. It is shown as follows: (I)

The scale of financial assets is growing. According to statistics from China Banking Regulatory Commission, as of the end of 2015, the financial assets of China’s banking financial institutions were close to 200 trillion yuan, a sixfold increase than the 31.6 trillion yuan in 2004.

(II)

The scale of the financial market continues expanding. In terms of the stock market, according to statistics from the World Federation of Exchanges (WFE), by the end of May 2015, the market value of China’s A-share stock market had reached USD10.27 trillion, accounting for 14.7% of the market value of the total global stock market in the same period. The bond market has been developing rapidly. In the whole year of 2015, the bond market issued a total of 22.3 trillion yuan of various bonds, an increase of 87.5% over the same period in 2014. In addition, the foreign exchange market, gold market, and futures market transactions developed rapidly too.

(III)

China’s foreign exchange reserves are accumulating rapidly. In 2003, China became a net creditor country. After that, its external net financial assets

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continued to accumulate. By the time of the outbreak of the U.S. financial crisis in 2007, China’s external net financial assets had grown to USD 1.2 trillion. The rise in China’s net creditor status is largely due to the rapid growth of foreign exchange reserves. At the end of 2014, China’s foreign exchange reserves were close to USD4 trillion, and only slightly declined in 2015. The continuous rise of China’s financial strength has provided a solid foundation for China to participate in international financial governance. Based on this, China’s role in international financial organizations has changed quietly. For example, at the G20 Summit in 2009, China and other G20 leaders called on the international community to further expand the available financial resources of the IMF. To this end, in September 2009, China and the IMF signed a bond purchase agreement to subscribe for SDR bonds worth USD 50 billion issued by the IMF. It was the first bood issued in the history of the IMF, and China was also the first member of the IMF that signed a bond subscription agreement.

11.2.2 Weakness (W) China’s financial system reform still lags behind, the financial system and financial market development are not yet sound, and the banking system is still very fragile. At the same time, the financial development environment, the level of government supervision and management of the financial system in China need to be further improved. Firstly, China’s interest rate liberalization has basically been completed, but there are still many tasks to be done. In 1996, the People’s Bank of China started to launch the reform of interest rate liberalization, which successively liberalized the interest rates at China’s monetary market and bond market, and the interest rates of domestic and foreign currency deposits and loans, as well as the interest rates of RMB loans. In October 2015, the People’s Bank of China decided not to set floating ceilings on deposit interest rates for commercial banks and rural cooperative financial institutions any more, which marked the basic deregulation of interest rate control and the completion of China’s market interest rate transformation. Although interest rate liberalization has been basically completed and the reform has made decisive progress, there are still many tasks to follow.2 For example, the transmission mechanism of the central bank for guiding the interest rates has yet to be perfected, and the market benchmark interest rate needs to be further improved.

2

Zhou Xiaochuan, Market-based interest rate has been basically completed, China Economic Net, March 20, 2016. http://www.ce.cn/cysc/newmain/yc/jsxw/201603/20/t20160320_9639644.shtml.

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Secondly, the reform of market-based exchange rate has not been fully completed. On January 1, 1994, China carried out major reforms of the foreign exchange system, abolished the foreign exchange retention system, implemented a banking system of exchange settlement and sales and a single and managed floating exchange rate system based on market supply and demand so as to establish a unified and standardized foreign exchange market. Starting from 2005, China’s foreign exchange market entered a new stage of marketization and liberalization. On July 21, 2005, China began to reform its floating exchange rate system, which not only made the RMB exchange rate formation mechanism more flexible, but also opened the curtain for the rapid development of the foreign exchange market. On August 11, 2015, the People’s Bank of China announced plans to improve the pricing mechanism for the central parity rate of the RMB against the U.S. dollar to further enhance the liberalization and benchmarking of the RMB central parity rate. In December 2015, China’s Foreign Exchange Trading Center launched the China Foreign Exchange Trade System (CFETS), emphasizing that the RMB exchange rate formation mechanism will pay more attention to the currency basket. However, the central bank’s continued intervention in the foreign exchange market has triggered further fluctuations in the RMB exchange rate. The rules set by the central bank while reforming the central parity quotation mechanism are based on market supply and demand, as well as the exchange rates of the currency basket. When pricing the RMB exchange rate, the market not only considers market supply and demand, but also judges the timing and amount of the central bank’s intervention based on the rules set by the central bank. Therefore, the transparency of the rules is very important, and it is also very important whether the central bank follows the rules. In August 2015, according to the situation at that time, the RMB should have depreciated against the U.S. dollar. However, the central bank stepped up intervention in the foreign exchange market, which was obviously neither in line with market supply and demand, nor inconsistent with the exchange rate rules of the currency basket. Forcibly suppressing the demand for U.S. dollars from domestic and foreign financial institutions would only lead to skyrocketing expectations of depreciation. The central bank announced the launch of the CFETS index, but it did not clearly point out the relationship between the currency basket and the central parity formation mechanism. The market’s understanding of the central bank’s exchange rate policy fell into chaos again. It was not until January 2016 when Ma Jun, former chief economist of the central bank, published an article clearly stating that the central parity quotation mechanism would refer more to the currency basket, market sentiment became gradually stabilized. Thirdly, China’s financial environment needs to be further improved. The development of China’s financial system and financial market is not yet sound, and the banking system is still relatively fragile. Meanwhile, financial regulatory authorities should improve the level of supervision and management of the financial system, and financial supervision needs to be continuously strengthened.

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On the one hand, it is necessary to prevent financial supervision from lagging behind the development of financial business, thereby resulting in passive followup and incurring in a regulatory vacuum. On the other hand, it is also necessary to avoid excessive supervision that inhibits the development of financial innovation. Therefore, it is urgent to handle the relations between financial innovation and risk prevention. In addition, financial innovation and comprehensive risk management are not adapted to the development of the situation, and the relations among various bodies of financial supervision needs to be straightened out. Finally, China’s capital account is still controlled to some extent. The RMB is not yet a fully convertible currency and China still implements a certain degree of capital control, which makes its capital market still unable to integrate well with the world. With the rise of global economic and financial risks, the progress to open China’s capital account has slowed down. Although it has an isolation effect on preventing the transmission of international financial risks to the country, it has objectively posed certain limitations for China’s financial market to integrate with the international market and enhance China’s ability to participate in international financial governance.

11.2.3 Opportunity (O) The international community is unsatisfied with the current international financial governance system. With the continuous internationalization of the RMB, the neo-liberalism-based global financial governance concept has begun to shake. It provides opportunities for China to participate in the reform of international financial governance. Firstly, the major stakeholders have reached a consensus to reform the current international financial governance system. The outbreak of the 2008 international financial crisis has further highlighted the defects of contemporary global financial governance mechanism. The international community has been increasingly unsatisfied with the performance of the existing system, which provides an important breakthrough point to reform the global financial governance mechanism. Under the current system, the United States monopolizes the gains of issuing currency globally by virtue of the dollar standard, but it makes all countries around the world share the responsibility of the U.S. dollar jointly. The practice of the U.S. dollar has attracted more and more criticism from the international community, since it is not subject to external discipline and international supervision. With the development of multi-polarization of the global economy, the existing global financial governance mechanism could no longer meet the needs of the world economic development. Secondly, the rapid development of the RMB internationalization has provided a boost to the reform of the international financial system. Since

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the outbreak of the 2008 financial crisis, the internationalization of the RMB has accelerated significantly. On the one hand, it is attributed to the Chinese government’s active promotion of the RMB internationalization. On the other hand, it comes from the international community’s disappointment with the reform of the international monetary system, as well as the shortcomings of the U.S. dollar as a major international currency and the stagnation of the euro due to the European debt crisis. Under such circumstances, the RMB has gained more recognition from the international community. Thirdly, the neo-liberalism-based concept of global financial governance has begun to waver. Since the establishment of the Bretton Woods system, the concept of global financial governance has continued to change, but it has generally inherited the tradition of liberalism and neo-liberalism. However, with the outbreak of the 2008 financial crisis, the international community has started to reflect on neo-liberalism and reconstruct the concept of global financial governance.

11.2.4 Threat (T) The biggest obstacle for China’s participation in global financial governance mainly comes from the United States. As the main founder of the international financial order after World War II and the main beneficiary in the current system, the United States tends to oppose any reform which is good for the international community but detrimental to its own interests. For example, the United States has maintained a dominant influence on the IMF for a long time. Even after the outbreak of the 2008 financial crisis, the U.S. government supported the IMF’s reforms on quota share and governance structure in 2010, but the U.S. Congress had been obstructing it until the end of 2015 when the U.S. Congress passed relevant bills to approve the IMF’s reform resolution. In the process of advancing the enhancement of global financial governance, China has been repeatedly obstructed and opposed by the United States. For instance, when China advocated to set up the Asian Infrastructure Investment Bank (AIIB), the United States had continuously used its influence to prevent the Republic of Korea, Japan, Australia and other allies from joining. After the establishment of the AIIB, the United States has been criticizing it on various grounds, as it worries that the AIIB would become a lever for China to change the international financial order and challenge the financial hegemony of the United States. From the perspective of the United States, the AIIB, together with the New Development Bank, has shown the efforts of emerging countries represented by China to set up separate institutions that are eroding the U.S. dominance in the international financial system. The U.S. will inevitably weaken the influence of the AIIB through various policies.

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11.2.5 SWOT Summary Table 11.1 summarizes the SWOT analysis of China’s participation in international financial governance. Despite some disadvantages, the rapid growth of China’s economy and its rising financial strength have determined that China will play a greater role in global financial governance. The 2008 financial crisis provided China an unprecedented opportunity to participate in global financial governance more actively. Meanwhile, it has also encountered interference and obstruction from the United States, which has become a major threat for China to participate in global financial governance.

11.3 Strategic Choice for China’s Better Participation in International Financial Governance Based on the SWOT analysis, this study emphasizes that China has to adopt an incremental strategy that follows the principle of “gradual and orderly progress” when participating in international financial governance. Table 11.1 SWOT analysis of China’s participation in international financial governance Strength

Weakness

Rapid growth of China’s economy

Liberalization of interest rates has not yet been fully completed

Continuous rise of China’s financial strength

Liberalization of exchange rates has not yet been fully completed The financial environmentneeds to be further improved There are still certain controls over the capital account

Opportunity

Threat

The international community is unsatisfied with the current international financial governance

The U.S. interference and obstruction

The RMB internationalization has achieved rapid development The concept of global financial governance has been changing Source: Made by the author

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11.3.1 At the Domestic Level First, China should continue to foster good domestic and international political, diplomatic, economic, and social relations to maintain a healthy, stable and sustainable Chinese economy. Since the reform and opening up, China’s economy has achieved unprecedented rapid growth. From 1978 to 2015, China’s average annual economic growth rate reached 9.72%. Rapid economic growth is the basis for China’s advantages. Therefore, a strong economic foundation must be established to play an important role in international financial governance. At the same time, China should actively foster good domestic and international relations, continue to deepen domestic reforms and expand opening to the outside world. China needs to further improve the socialist market economic system, transform the economic growth pattern from over-reliance on industry and investment to encouraging the development of the service sector, and lower barriers to labor movement so as to better balance between industry and service sector, capital accumulation and urban employment and productivity growth. Externally, China should create a more peaceful and stable neighboring environment and international environment, adhere to independent foreign policies, and continue the path of peaceful development. It should actively develop relations with neighboring countries in Asia to promote stability, development and prosperity in the region. It should actively carry out dialogue and cooperation, and properly handle various disputes with other Asian countries based on mutual understanding and compromise, fair and reasonable principles. Moreover, it should further stabilize relations and strengthen cooperation with other developing countries. Second, China should keep promoting market-oriented reforms in interest rates and exchange rates. The reform of market-based interest rates has achieved critical progress, and at least two aspects should be further advanced in the future. One is to further improve the reference system for benchmark interest rates that guides market pricing, including short-term interest rates in monetary market policy and medium- and long-term treasury bond yields so as to form a more complete and smooth yield curve. The other is to improve the transmission mechanism of interest rates, open up the relations among the monetary market, credit market, and capital market to further promote the opening of the domestic financial market. In order to further promote exchange rate liberalization of the RMB, we put forward the following three suggestions: (1) Under the current economic situation at home and abroad, the monetary authorities should continue to refer to the basket of exchange rates and withdraw from conventional foreign exchange market intervention. (2) China should strengthen the management of cross-border capital flows, reduce the impact of short-term capital flows on exchange rate, enhance the independence of monetary policies, and provide a cushion for the reform of the exchange rate formation mechanism. (3) China should make detailed crisis plans, maintain open

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communication channels with the market, and guide market expectations. Before new measures are launched for exchange rate reform by the central bank, it is necessary to prepare complete plans and measures and fully consult the opinions of all sectors in the market. Third, China should further develop the domestic financial market and improve the financial system. Developing the financial market and perfecting the financial system are important steps of China’s domestic financial reform. Therefore, China needs to further develop the capital market, cultivate diversified market investors, increase the proportion of direct financing, and promote the asset securitization of state-owned enterprises. In addition, it should try to establish a unified, flexible, efficient, and large-capacity monetary market, promote the bond market to expand the bond issuers and varieties, further strengthen the infrastructure construction of bond rating, guarantee, and settlement, and vigorously develop the public debt market. Also, China needs to further strengthen the construction and promote the modernization of commercial banks, especially state-owned commercial banks, and further improve their management mechanism to increase the ability to resist risks. At the government level, we should continue to continue to strengthen the financial regulatory system, further improve the regulatory system and legal framework of the People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission, maintain the independence of regulatory institutions, establish the authority of regulatory institutions, and improve regulatory level (Huang and Xiong 2009).

11.3.2 At the International Level First, China should try to unite with other forces and take collective actions. In this regard, China’s joint efforts with other BRICS countries to improve global financial governance are a relatively successful experience. After years of development, the BRICS countries have become a new force in promoting international financial cooperation and reshaping the international financial order. The BRICS countries have always been advocating the reform of the IMF to better reflect the significance of emerging economies. At the same time, China has also worked together with other countries to establish new mechanisms and institutions to drive the improvement of global financial governance with concrete actions, such as jointly establishing the BRICS Contingency Reserve Arrangement and setting up the New Development Bank. It is conducive for China to uniting with other countries that share common interests to enhance global financial governance more efficiently and less costly. In the process, China could guide, promote, or act as the “backbone,” and complement each other’s advantages with other parties. At the same time, joining hands with

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other countries would also help reduce the pressure China bears in promoting global financial governance. Second, China should adopt a moderate approach to avoid direct confrontation with the United States. Historical experience indicates that the reform plan must not be radical, otherwise it would be strongly opposed by the status-quo powers, defenders of the current system. For example, in East Asian monetary cooperation, a relatively radical plan - establishment of the Asian Monetary Fund (AMF) was strongly opposed by the United States, while a relatively moderate plan, such as the Chiang Mai Initiative (CMI), went on smoothly. The original goal of the CMI was to expand the ASEAN swap arrangement and extend the swap arrangement to the entire East Asia region. The funding arrangements under currency swaps were also linked to the IMF’s lending conditions, which ensured the smooth advancement of the CMI, and the establishment of the Chiang Mai Initiative Multilateralization (CMIM) and the ASEAN + 3 Macroeconomic Research Office (AMRO). At the ASEAN + 3 financial meeting, the finance ministers in various countries also repeatedly emphasized that the core goal of the CMIM is to provide support for the short-term liquidity difficulties in the region, and it is the supplement, rather than a replacement of the existing international financial arrangements. In the process of advancing international financial governance, China should absorb the experience and lessons of Asian monetary cooperation. China should not only safeguard its interests in participating in global financial governance, but also try to avoid direct conflicts with the United States. Third, China should promote global financial governance through multilateral platforms. China should actively participate in multilateral international cooperation platforms and play a greater role in platforms such as the IMF and the G20 so as to promote global financial governance. The G20 is becoming an important promoter of global financial governance. For example, it has been working hard to promote the governance structure reform of the IMF. In 2005, the 7th G20 Meeting of Finance Ministers and Central Bank Governors approved the G20 Statement on Reforming the Bretton Woods system. The G20 summit has provided new impetus to the reform of the IMF. At the Washington summit, the G20 emphasized that the Bretton Woods system must be comprehensively reformed so that they can fully reflect the changes in the world economic structure. Emerging economies and developing countries should increase their voice and representation in these institutions. While urging countries to approve the 2008 reform plan, the G20 pushed the IMF to reach a plan for the reform of quota share and governance structure in 2010. Although this plan was not approved by the U.S. Congress until 2015, the G20 contributed a lot to the conclusion of it. In 2016, China assumed the rotating presidency of the G20, and continued to promote the improvement of global financial governance. In October 2015, during the Annual Meeting of the IMF and the World Bank in Lima, Peru, China’s Finance

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Minister Lou Jiwei and the Vice President of the People’s Bank of China Yi Gang respectively introduced the preliminary considerations of G20 on issues of financial and fiscal channels in 2016. Among them, promoting the reform of international financial governance and improving the international monetary system was one of the six key issues of next year’s financial and fiscal channels. At the same time, China also announced to resume the G20 International Financial Architecture Working Group after taking over the G20 presidency, specifically holding discussions on improving the international financial architecture. This showed that China attached much importance to and expected to improve global financial governance.

11.4 Policy Suggestions for China’s Better Participation in International Financial Governance China needs to take an active part in the reform of international financial institutions, the management of international capital flows, the building of a global financial safety net and the management of global sovereign debt, so as to enhance China’s rule-making capacity in all areas and realize responsibility and power sharing.

11.4.1 Reform of the International Financial Institutions International financial institutions represented by the IMF are important carriers of the international monetary system and the international financial regulatory system. Their performances could also directly affect the operation and effectiveness of the monetary system and regulatory system. Therefore, it has become the most important topic and breakthrough point in global financial governance to reform the governance mechanisms and operating mechanisms of international financial institutions. Generally speaking, the priority in the reform of the IMF’s governance structure is the asymmetric distribution of quota shares and voting power among member countries. Developed countries dominate the quota shares and voting power in the IMF, whereas developing countries are seriously under-represented in the IMF. For example, the total quota shares of the United States and other developed countries had been more than 60% before the quota reform in 2010 (even after the reform, it is still as high as 57.7%). However, China, which accounts for the highest proportion among developing countries, had only 6.394% of voting power after the increase in 2010, and had been long less than 3% before the quota reform in 2008. Obviously, this could not reflect the economic strength and international contributions of developing countries, especially emerging economies represented by the BRICS countries. More importantly, the asymmetry of decision-making power leads to the serious lack of discourse power of developing countries, in the current international financial order. As for China, the reform of international financial institutions should further

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increase the voice of emerging economies and developing countries in the global financial governance system. As their share in the economic aggregate continues to rise, their status in the global governance process should be better reflected. Besides, as discussed before, the problem of funding shortage has long existed in the IMF. Therefore, further diversification of the funding sources, innovation of financing methods and the increasing of funding base should also be taken into account in the IMF reform.

11.4.2 Management of International Capital Flow After the outbreak of the global financial crisis, the IMF changed its attitude towards international capital flows. This is mainly reflected in its affirmation of the role of capital control and the establishment of a series of management frameworks on capital inflow management, capital outflow management, and international capital flow policy coordination. From the perspective of China, the IMF’s capital flow management framework should be further improved in the following aspects: First, further clarify the conditions to activate capital flow management measures. Considering their understanding of domestic economic situations, governments of all countries should have greater autonomy and flexibility in utilizing relevant instruments. Second, avoid over-emphasizing the sequence of implementing capital flow management instruments so as to reduce disputes about which management instruments to be used and in what order. Third, strengthen the management of policy spillover effects over capital source countries, especially the supervision over important international currency issuing countries and international financial centers. Fourth, further strengthen the international coordination of international capital flow management. In the context of continuously deepening of economic and financial globalization, there is a great international spillover impact for both the international capital flow per se and the corresponding international capital flow management policies. In the future, all countries need to consider such problems as how to strengthen the spillover management of capital flows (including management policies) and how to strengthen the coordination between capital outflow countries and inflow countries, so that countries can maximize the benefits brought by capital flows and minimize its negative impacts.

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11.4.3 Promoting Coordination and Cooperation of the Global Financial Safety Net The rising global financial risks have been calling for further improvement of the global financial governance system to ensure international financial stability. Improving the global financial safety net is an effective means to cope with the significant increase in global economic and financial risks. In addition to further expanding the available financial resources of the global financial safety net, coordination and cooperation between different levels of the safety net should also be strengthened. On the one hand, it is necessary to strengthen the crisis bail-out cooperation between regional financial arrangements and the IMF. The division of labor and respective advantages among different financial safety nets should be taken into account to strengthen cooperation between regional financial arrangements (as well as bilateral currency swaps and a country’s international reserves) and the IMF on crisis bail-out. It depends on specific situations about when a single or joint safety net rescue should be provided. The international community should reach a basic bail-out order based on different risk shocks. If the risk shock is only limited to a country, it should be first responded by the domestic financial safety net of the country (namely, the country’s international reserves), and regional financial arrangements and bilateral currency swaps are the second layer of safety net. If the risk shock is a regional shock, the domestic financial safety net, regional financial arrangements, and bilateral currency swaps should be used first, and the IMF is the second layer of safety net. In the event of a global shock, there should be a collective use of all levels of the financial safety net and a readiness to upgrade the existing global financial safety net as a secondary safeguard. At the same time, in the face of different shocks, regional financial arrangements and the IMF have different priorities for cooperation. For one thing, in the face of national and regional shocks, the cooperation between regional financial arrangements and the IMF should be “all-round.” Specifically, in terms of supervision, regional financial arrangements should focus on monitoring the impact of the shock in the region, and take into account the unique circumstances of the region in terms of the design of bail-out projects. The IMF surveillance should consider the potential impact of such shocks on the world economy. Regional financial arrangements should play a major role in supervision. Bail-out fund arrangements should give priority to regional financial arrangements. Considering that the negotiation and implementation of bail-out plans may last for a long time, regional financial arrangements should react rapidly (for example, first use unconditional loans or loans with relatively flexible conditionality), to stabilize the market in a timely manner, and buy time for subsequent bail-out fund arrangements. In case of insufficient bailout funds in the region, the IMF loans should actively respond and intervene. For another, at the global level, the IMF should play a pivotal role in the bail-out, mainly responsible for the design, implementation and late evaluation of bail-out projects. In addition to actively contributing financial resources, regional financial arrangements

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also actively provide suggestions to the IMF on regulatory matters related to the region to jointly maintain global financial stability. On the other hand, it is necessary to strengthen the daily supervision and cooperation between the IMF and regional financial arrangements. The first is to actively promote bilateral supervision and cooperation between regional financial arrangements and the IMF. Relevant discussions and consultations between the national regulatory team of regional financial arrangements and the national team of the IMF could be actively promoted. The two parties can discuss about the macroeconomic and financial situation of their common members, exchange views, information and documents under permissible conditions. The second is to strengthen cooperation between regional financial arrangements and the IMF in regional and multilateral supervision. If necessary, regional financial arrangements could complement the IMF’s regional consultation mechanisms by signing memorandums and establishing a regular regional consultation mechanism. In addition, regional financial arrangements can also carry out negotiations with the IMF on special issues concerning the region. For example, European institutions have conducted many consultations and discussions with the IMF on issues related to the European debt crisis.

11.4.4 Strengthening the Monitoring and Management of Global Sovereign Debt The outbreaks of the 2008 financial crisis and the subsequent European sovereign debt crisis have highlighted the need to strengthen public debt management. It has become a top priority for global economic governance to improve the current public debt management rules. At the international level, the Guidelines for Public Debt Management jointly formulated by the IMF and the World Bank have provided a reference for countries to conduct public debt management, but these crises illustrate that there is still much space for improvement. The future public debt management reform should focus on the following aspects: First, it is necessary to strengthen the technical management of public debt in accordance with the specific circumstances of the global financial crisis. For example, during the financial crisis, under the pressure of increasing financing demands and rising financing costs, many countries have expanded financing sources and reduced financing costs by changing the maturity structure of bond issuing, developing noncore markets, and financing tools. In addition, in regard to the financing difficulties caused by market turbulence, many countries modified bond issuing mechanisms, flexibly used debt instruments, and strengthened communication with the market to restore market confidence and repair market financing functions. These policies and measures have been used to maintain the operation of the public debt market effectively, and have partially eased the pressure on the public debt market.

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Second, it is necessary to continue to advance and improve the principles of public debt management. In addition to the Guidelines for Public Debt Management formulated by the IMF and the World Bank, other international organizations and institutions have also established similar principles for public debt management. However, the outbreak of the European sovereign debt crisis has indicated that there are still major shortcomings in the existing debt management principles. The future improvement directions should include at least the following aspects: (1) strengthening the construction of risk management framework; (2) improving the ability of public debt management to address macroeconomic shocks; (3) promoting the adoption of an integrated asset-liability management framework, which is conducive to comprehensively analyzing the financial assets and liabilities of government departments; (4) improving the information disclosure in public debt management, including intensifying the monitoring of the public debt in various countries to ensure the transparency of government debts, publicly releasing the formation and changes of national public debt management rules on a timely basis, strengthening internal accountability and external supervision, and strengthening information communication with all parties (domestic investors, foreign investors, rating companies) in the market to reasonably guide the expected development of the market; and (5) enhancing the international spillover effect management of public debt risks. Third, it is necessary to strengthen the coordination of public debt management with other macroeconomic policies. It mainly includes the following three aspects. The first is to further strengthen the information communication between public debt management and other macroeconomic departments. The second is to pay close attention to the interaction between public debt management policies and other macroeconomic policies. The third, most importantly, is to strengthen the coordination between public debt management with other macro policy objectives. Last, in addition to continuing to establish and improve quantitative indicators and strengthen the monitoring of global debts, it is necessary to improve the sovereign debt restructuring framework, and actively promote the utilization of collective action clauses (CACs) and pari passu clause (Pari Passu Clause) in sovereign debt restructuring.

11.5 Conclusion With its rapid economic growth and rising financial strength, China has substantially enhanced its position in international financial governance. The outbreak of the 2008 financial crisis has also opened a new window of opportunity for China to participate in international financial governance. Through SWOT analysis, we have identified the strengths, weaknesses, opportunities for and threats to China’s participation in international financial governance. The rapid growth of China’s economy and the resulting rise in financial strength are accumulating greater and greater advantages for China to participate in international financial governance. This is also an

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important foundation and support for China to participate in international financial governance. Meanwhile, the inadequate financial reform has also brought some constraints to China’s participation in financial governance. For examples, the reform of interest rate and exchange rate markets has not been fully completed, China’s capital accounts are still controlled to some extent, and the financial environment has yet to be improved. At present, China is also facing unprecedented opportunities to participate in global financial governance. More specifically, the international community is increasingly unsatisfied with the status quo of international financial governance, the experience and pattern of China’s development has been increasingly recognized by other countries, and there are widespread expectations for China to play a greater role in international financial governance. These factors all provide a window of opportunity for China to participate in international financial governance. China’s participation in international financial governance should be gradual and orderly. From the domestic perspective, it should keep building good political, diplomatic, economic, and social relations at home and abroad to maintain a healthy, stable and sustainable Chinese economy, and lay a solid domestic foundation for its participation in international financial governance. At the same time, it should continue to promote the reform of market-based interest rate and exchange rate, develop financial markets and improve the financial system, and eliminate the constraints from the domestic financial environment. From the international perspective, China should strengthen cooperation with Asian countries, BRICS countries, and other emerging and developing economies to take joint actions to promote international financial governance. Also, it should pay attention to the impact of the reform plan on relevant stakeholders, and avoid stimulating the United States to create great resistance to reform. It should actively utilize existing multilateral governance platforms, such as the G20, to actively promote the improvement of international financial governance. In each specific reform field, China should adhere to the above principles, pay attention to the equal sharing of responsibilities and rights as well, and gradually improve its rule-making ability in various fields.

References Li, Keqiang. 2013. A Handshake across the Himalayas. CCTV.com. http://news.cntv.cn/2013/05/ 20/ARTI1369035296705203.shtml. Accessed 9 May 2018. Fan, He, Weijiang Feng and Jin Xu. 2013. On the Challenge of Global Governance Mechanism and China’s Countermeasures. World Economics and Politics 4: 19–39. Huang, Meibo and Aizong Xiong. 2009. The Development Space and Opportunity of RMB Internationalization. Journal of Shanghai University of Finance and Economics 2: 67–75.

Part III

Progress and Countermeasures of International Trade and Investment Governance

Preface The world is now at a confusing crossroads, and it is difficult to see how far the globalization will go. As important engines for world economic growth, trade and investment have seen weak growth. The downturn trend in global trade has been severe, and it has been slower than the world economic growth rate for many years. Correspondingly, the ratio of global trade to the total world economy has fallen sharply since the 1990s. The trade downturn is, on the one hand, due to cyclical factors, such as changes in the composition of global demands and the increasing global uncertainty; on the other hand, the structural changes helpful to the rapid expansion of global trade between 1990 and 2000 have started to weaken their impact, leading to the slow progress in trade liberalization. Growth in global investment is also relatively sluggish. The total international foreign direct investment dropped for three consecutive years from 2016 to 2018, due to the combined effects of poor economic growth prospects, low commodity prices, policy uncertainties of major economies and political uncertainties, and rising private debts. After World War II, the global governance of international trade evolved from the General Agreement on Tariffs and Trade (GATT) in 1947 to the World Trade Organization (WTO) in 1994. However, current multilateral trade negotiations are struggling and stagnant. In addition, the field of international investment governance is fragmented by more than 3,200 investment agreements, which is not conducive to cross-border investment cooperation. Therefore, countries have explored establishing a new order for global trade and investment, and have actively participated in the negotiations and drafting of new international trade and investment rules. The mechanism of international trade and investment governance refers to the system and rules that coordinate the economic relations between countries in the world. Generally speaking, it covers two levels: the platforms (or institutions) of international trade and investment governance, and the content of international trade and investment governance. For instance, the Group of Seven (G7), the Group of Twenty (G20), the BRICS, and the Asia-Pacific Economic Cooperation (APEC) are representative platforms. The World Trade Organization (WTO), the United Nations

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Conference on Trade and Development (UNCTAD), the International Monetary Fund (IMF), and the World Bank are representative institutions. The prevailing international trade and investment governance system was mainly established by developed economies after World War II. With the rising of emerging economies and the adjustment of global trade and investment structure, topics such as the direction of the reform of international trade and investment governance mechanisms, as well as China’s role in international trade and investment governance, have attracted more and more attention from all walks of life. As the Chinese General Secretary of CPC Central Committee Xi Jinping stated at the Opening Session of the World Economic Forum Annual Meeting 2017, “The global economic landscape has changed profoundly in the past few decades. However, the global governance system has not embraced those new changes and is therefore inadequate in terms of representation and inclusiveness. The global industrial landscape is changing and new industrial chains, value chains, and supply chains are taking shape. However, trade and investment rules have not kept pace with these developments, resulting in acute problems such as closed mechanisms and fragmented rules. The global financial market needs to be more resilient against risks, but the global financial governance mechanism fails to meet the new requirement and is thus unable to effectively resolve problems such as frequent international financial market volatility and the build-up of asset bubbles.” This part covers five key issues, including the evolution of international trade and investment governance, new trends in international trade and investment governance, structural changes in international trade and investment governance, existing problems and challenges, future directions and responding strategies. The follow-up research is carried out strictly in accordance with the above framework. However, we will distinguish between trade and investment and discuss the following issues associated with trade and investment, respectively, in order: the development of and changes in platforms (or institutions) of governance, the development of and changes in content of governance, problems in governance, and China’s countermeasures. To be specific, the first part elaborates on the history and evolution of international trade and investment governance. It points out that the way in which the United States coordinated the TPP, the TTIP, and the TISA negotiations, in particular the high-level trade and investment liberalization through high-standard negotiation, is a trend of international trade and investment governance worthy of attention. The second part discusses the problems in the current international trade and investment governance mechanisms. With the rapid growth of emerging economies, the world’s economic center shifts from the Atlantic region to the Asia-Pacific region. There are many concerns about the coordination and effectiveness of the current international trade and investment governance mechanisms, including the lack of an international trade governance mechanism resulting from the over-concentrated dominance, the lack of coordination and accountability at global trade governance platforms and institutions, the fragmented development of the international investment system, the legitimacy of the international investment dispute settlement mechanism, the differences in interests between developed and developing countries, and the special and differentiated treatment of developing countries.

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Thirdly, considering the further advancement of international trade and investment governance in the future, we must pay more attention to upholding the reciprocal and win-win concept, respect the development concerns of other countries while realizing our own development, and consciously implement the concept of the reciprocal and win-win symbiosis throughout trade and investment governance reforms in the new era. We emphasize that a rational and effective international trade and investment governance mechanism should truly reflect the changes in the international economic landscape to achieve the organic unity of representation, decisionmaking efficiency, and implementation effectiveness. On this basis, we propose to take active and effective measures to enhance our own strength in participating in the international trade and investment governance mechanism, attach importance to the construction of governance mechanisms such as the BRICS summit and the G20, steadily promote the reform of the international trade and investment governance platform, and reinforce regional governance as an important way to participate in the international trade and investment governance mechanism. We further emphasize the planning of innovative topics in international trade and investment and the cultivation of economic and diplomatic talents, so as to enhance China’s influence on the daily operation of the international trade and investment governance mechanism. Such targeted measures would provide reference for improving the international trade and investment governance mechanism, and further stimulate the growth of global trade and investment. Nowadays, since the international trade and investment governance system is facing severe tests, China can and should “benefit the whole world.” As China’s comprehensive national strength and international status continue to rise, it is a matter of course for China to actively participate in global economic governance and promote a new world economic order. At present, China’s economic growth rate has stabilized at a medium-to-high speed, ranking in the forefront of the world’s major economies, and have contributed more than 20% to global economic growth for many years. The high purchasing power of Chinese consumers has provided a broad export market for countries around the world. The continuously surging foreign investment by Chinese companies has become an important source of local employment and taxation. As a practitioner of the concept of opening-up and an advocate of great power responsibilities, China hopes to provide new ideas, promote common development, and establish a win-win cooperation with its own experience.

Chapter 12

The Development of International Trade and Investment

International trade is a kind of exchange activities for products (or labor) among countries.1 International investment, under this subject, mainly refers to international direct investment, i.e., transnational investment activities of domestic investors with obtaining long-term returns or gaining control of enterprises abroad as their main intentions, and mainly through directly establishing overseas enterprises or merging and acquiring existing enterprises.

12.1 The Development of International Trade International trade, as a process of exchanging products and labor among various economies and a basic channel for reallocating resources, is not only an important way for countries to achieve division of labor and cooperation, but also an important content of economic globalization and integration. International trade plays an essential role, so the national economy of each economy can constitute an organic world economy. It not only reflects the operation of the global economy, but also promotes its sustainable development. This section briefly reviews the development of international division of labor and international trade in a chronological order. (I)

The Changing Process of the International Division of Labor

International division of labor refers to the division of labor among economies. It is a professional division of labor across national borders and is the extension and expansion of social division of labor further to the world. It is generally believed that 1

Literally, international trade is trade among countries. But more strictly speaking, international trade refers to the exchange of products (or labor) across national borders only before the advent of the tariff system, while modern international trade is more of the exchange of products (or labor) across customs border. Although it is called international trade, the entity of exchange is not limited to countries. Special regions, enterprises or individuals can all participate in international trade.

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the development of international division of labor has gone through the following periods: 1.

The Pre-Capitalist Period

During this period, the level of productivity was very low, and the self-sufficient natural economy took a dominant role. The scale and scope of the commodity economy were always very limited. Even if there were divisions of labor among some neighboring countries, it was basically a result of geographic coincidence. 2.

The Budding Period

The Age of Discovery greatly promoted productivity, further separated the handicraft industry from agriculture, and accelerated the development of the commodity economy. The primitive accumulation of capital begun. During this period, some European countries started to colonize, thus forming a division of labor between colonies and suzerain states. However, at this time, the international division of labor was still in its infancy. 3.

The development period

The industrial revolution was an important driving force for the development of the international division of labor. The modern machinery industry made production more specialized. New production sectors continued to emerge, and the division of labor became more scientific. The international division of labor achieved new development during this period. On the one hand, constrained by geographical conditions and resource endowments, one country’s production could no longer meet the increasing amount of raw materials required for mass machinery production, which made developed countries look outside for sources of raw materials; on the other hand, developed countries greatly improved their productivities, and one country’s own market could no longer accommodate the products it produced. The international division of labor at that time was divided between the colonial nations and the overlord, that is, the center was the British Empire, then the world factory, with its Asian, African, and Latin American colonies at the periphery. 4.

The Formation Period

The second industrial revolution finally led to the formation of an international division of labor system. During this period, the international division of labor demonstrated new characteristics. First, the specialization of international production further improved. With the wide use of new machinery, equipment and production methods, many new industrial sectors emerged. In the past industrial countries, the heavy industry gradually took a dominant position; in the past agricultural countries, the mining industry achieved certain development, and a division of labor system covering all fields was formed around the world. Secondly, industrial production was mainly concentrated in developed countries in Europe and the United States, and the production of raw materials was mainly in Asian, African, and Latin American countries. By virtue of capital export and other means, developed countries started

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colonization in many underdeveloped countries, restricting colonies from fostering their national industries. They were not allowed to have economic relations with countries other than the suzerain states. This caused many underdeveloped countries to gradually become deformed, left with a single industry. Their economy became dependent on developed countries to a large extent. 5.

The Changing Period

After World War II, the traditional international division of labor system underwent major changes. Politically independent developing countries gradually rose, and the old system of the international division of labor, linked by economic ties between colonies and suzerain states, was broken; at the same time, the socialist countries were founded and participated in international economic activities, which also affected greatly the content of economic ties of countries. In this context, new characteristics emerged in the international division of labor. First, the division of labor among industrial countries became the mainstream of the international division of labor. With the continuous development of technology and the economy, the division of labor based on various resources gradually gave way to the division of labor based on process technology. The similar economic structure of developed countries promoted the development of the division of labor within the industry and product specialization. Secondly, the division of labor among industrial sectors in developed countries and developing countries gradually developed. With the occurrence of the third industrial revolution and the rising of transnational companies, the production of some industrial products began to shift from developed countries to developing countries, forming the division of labor between high-tech, sophisticated and advanced industries and ordinary industries, and the division of labor between capital- and technology-intensive industries and labor-intensive industries. Thirdly, socialist countries participated more deeply in the international division of labor, ending the situation where capitalist production relations governed the international division of labor. During this period, the content and form of the international division of labor became increasingly diversified, and the division of labor gradually expanded from physical products to services. (II)

New changes in the international division of labor: the development of international production network.

Since the 1980s, an important change in the international division of labor has been the emergence and development of an international production network. International production network refers to transnational companies integrating global resources and building worldwide factories by means of greenfield investment or business outsourcing. In this international division of labor system, a large-scale trade of intermediate products appeared among various production links, among which a large amount of trade was embodied as international trade. The international production network first appeared in the manufacturing industry, and then gradually expanded to other industries. Due to the advancement of production technology, the manufacturing industry developed new changes, which promoted

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the establishment of an international production network, and hence production modularization. A direct result of production modularization was to promote the emergence and development of global value chains. At this time, knowledge and technology became the decisive factor in obtaining value. The value a country could obtain in the global value chain depended to a large extent on whether it could establish its own international production network or on the ability to cross the threshold when entering the international production network. This enabled more transnational companies to centralize their resources on the high-end processes of the value chain (R&D and sales) as they transferred the low-end processes (processing and assembly) of the value chain to enterprises in developing economies. In this way, more developing countries participated in international production. It can be easily seen that the formation of the international production network is essentially the use of global economies of scale by multinational companies to achieve integrated international production through highly specialized division of labor, in order to maximize the integration of global resources. The emergence and development of the international production network and the reconstruction of the value chain in the world have had an important impact on the international division of labor. The current international division of labor is no longer simply a division of labor based on resource endowments. Different from the old times, an important feature of the new division of labor is the intra-product division of labor, i.e. countries do not cooperate between different industries, nor do they cooperate on different products in the same industry. Instead, they cooperate according to the segmentation of the value chain within a single product. Although internationally there are still divisions of labor among industries and within industries, an indisputable fact is that more and more economies are involved in the production of a single product, herein establishing a relatively stable division of labor. It can be predicted that in the coming future, the new model of division of labor may coexist with the old model, but the new model will gradually play a dominant role.

12.1.1 The Development of International Trade After World War II (I)

International trade before the 1990s

After World War II, the international political and economic environment underwent a series of profound changes, bringing an important impact on the development of modern international trade. Since the end of the 1940s, the third industrial revolution gradually rose and greatly improved the level of social productivity. A number of emerging industries emerged around the world, which promoted the upgrade and adjustment of the global industrial structure. Different from the situation before World War II, when a few monopolistic companies controlled the global market, transnational companies had made great progress during this period, leading to the continuous expansion of the corporate trade. Under the guidance of Keynesian theory,

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the governments of developed countries in Europe and the United States increased their intervention in the macro-economy, and the coordination capacity of the global economy improved significantly, among which the General Agreement on Tariffs and Trade (GATT) played a huge role. During this period, economic globalization and integration accelerated, regional economic organizations were established one after another, and their functions were strengthened. When these factors were combined, international trade after World War II revealed new characteristics. First, the scale of international trade expanded rapidly. From 1948 to 1973, the average annual growth rate of global exports of goods reached 9.6%, much higher than that of 0.5% from 1913 to 1948. It was also higher than the growth rate of global industrial output during the same period. After 1973, major capitalist countries entered a period of stagflation, and the growth of international trade slowed down. By the early 1980s, affected by the international economic crisis, there was even zero or negative growth in international trade. However, after the crisis, there was an obvious rebound in the international trade volume. From 1983 to 1989, the average annual growth rate of global exports increased to 9.4%. Secondly, there was a change in the goods structure of international trade. The share of primary products and raw materials in international trade products gradually declined, and the share of manufactured products rose rapidly. Between 1950 and 1990, the share of primary products and raw materials fell from 59 to 29.4%, while the share of manufactured products rose from 41 to 70.6%.2 Thirdly, regional segments of international trade came into being. On the one hand, developed countries were still the mainstay of the international trade entities. On the other hand, in the context of the accelerated development of economic globalization and regional economic integration, a tripartite international trade pattern of North America, the European Union, and East Asia gradually took shape. Fourthly, the forms of international trade became gradually diversified. New forms of international trade were developed, such as leasing trade, compensation trade, processing trade, and license trade. The main feature is the close integration of factor flow, production technology, and international trade. (II)

International trade since the 1990s

Since the 1990s, with the advancement of production technology and the deepening of the international division of labor, the integration among economies increased significantly. The third industrial revolution promoted the development of transportation, information communication, and automation technology, bringing new breakthroughs in the production and circulation of products. In the context of trade liberalization, there was a trend of interconnection and mutual dependence among the economies of various countries. International trade in this period showed the following characteristics. Firstly, it became an important driving force for global economic growth. From 1990 to 2007 before the international financial crisis, the average annual growth rate of global exports reached 8.6%. With the exceptions of 1993, 1998, and 2001, the growth 2

In 1953, the proportion of manufactured products in international trade had exceeded primary products, taking a dominant position.

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rate of international trade was higher than that of the global economy over the same period. Secondly, the trade structure was further upgraded. Advances in science and technology greatly expanded the fields of traditional services trade, and more and more emerging service sectors (finance, telecommunications) entered the global market. Between 1990 and 2007, global service exports increased from 831.35 billion dollars to 3490.24 billion dollars, with an average annual growth rate of 8.8%, higher than the average annual growth rate of global goods exports over the same period. Thirdly, the emerging market economies rapidly expanded the scale of foreign trade. In 1991, the goods exports of emerging market economies and BRICS countries were equivalent to 46.8% and 7.9% of G7 goods exports, respectively; in 2015, they reached 143.9% and 59.6% respectively. In the field of services trade, in 2005, the services exports of emerging market economies and BRICS countries were equivalent to 51.7% and 15.9% of G7 services exports, respectively; in 2015, they reached 75.9% and 28.7% respectively. Fourthly, international direct investment promoted the development of international trade. International direct investment increased the mobility of production factors, causing the global flow of raw materials and intermediate products. According to UNCTAD’s estimation, the internal trade of transnational companies accounted for about one-third of the total international trade while according to OECD’s estimation, nearly 50% of the trade among its member states was the internal trade of transnational companies. Fifthly, e-commerce brought about changes in transaction methods. As soon as e-commerce appeared in the late 1990s, it quickly built an efficient platform for international trade and gradually became one of the most energetic fields in the twenty-first century. (III)

The latest development trend of international trade

The international financial crisis gave a heavy blow to international trade. From 1990 to 2007, the average annual growth rate of global exports reached 8.6%, but in 2009, global exports dropped significantly, with a negative growth of 19.6%, and it was the largest decline since the 1980s. Later, after a short rebound in 2010 and 2011, international trade entered a period of low growth. The annual growth rates from 2012 to 2015 were only 1.3%, 3%, 1.7% and -11.9%, respectively. In addition, different from the situation where the income elasticity of international trade was greater than 1 since the 1950s, the income elasticity of international trade was less than 1 in recent years, indicating that the growth rate of international trade began to be lower than that of the global economy. The occurrence of this situation may be due to the following: First, after the international financial crisis, the global economic downturn continued, leading to insufficient demand and weak growth in international trade. Second, the impact of the international financial crisis enabled some economies to implement trade protection measures to a certain extent to limit the recovery of international trade. Third, with the price hike in China’s production factors, the past cost advantage gradually weakened, but the new advantage has not yet appeared. Therefore, the leading role of China’s foreign trade in the development of international trade has gradually weakened. Four, the slowdown in the evolution of division of labor in the global value chain has made the growth rate of international trade slower than that of the global economy.

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12.2 The Development of Foreign Direct Investment International direct investment is an important way to realize capital internationalization. Through foreign direct investment, one country’s production factors can be exported abroad in the form of capital, directly controlling and guiding overseas production and operation processes, so that the scope of one country’s production and operation can be expanded. The development of international direct investment reflects the new changes in the micro-foundation and operating mechanism of the global economic system, imposing a broad and far-reaching impact on the global economy. This section gives a brief review of the development of international direct investment in chronological order, in view of the important role of international direct investment.3

12.2.1 International Direct Investment Before World War I (I)

International direct investment in the early colonial era

In the early colonial era, major European countries accumulated huge amounts of capital by accumulating resources internally and plundering externally, and initially established the material basis for foreign direct investment. Therefore, international direct investment at this time was shown as the export of foreign capital from European countries. However, at this time, the overall scale of foreign direct investment and its proportion in the capital exported by the suzerain states were still small, and the exported capital was mainly from private sectors. During this period, China, India, Japan, the United States, and Canada were the main capital importers. Regarding the distribution of foreign investment, European countries mostly invested in commerce in Asian countries, by exporting manufactured products to their colonies and importing raw materials and services to their own countries. Their investments in the United States and Canada diversified in many ways, with investment mainly in financial capital in the early stage and resource exploitation and commercial trade in the late stage.

3

Before World War II, there were no strict standards for measuring international direct investment, and it was difficult to accurately estimate its scale. Therefore, in this article, there are situations where international investment is used as substitutes for international direct investment.

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International direct investment in the late colonial era

In the late colonial era, the United States entered the rank of foreign direct investment countries and performed very prominently,4 so that the capital sources of international direct investment presented a diverse characteristic. In more than half a century before World War I, capital from European countries could flow relatively freely into the United States, Australia, and other countries. The scale of British foreign investment in its heyday was equivalent to 10% of its domestic value added. However, during this period, the capital of European countries mainly flowed to the infrastructure construction of host countries, while the proportion flowing to the industry was not very high. As of 1914, the total stock of foreign direct investment in various countries was 14.5 billion dollars, among which the main investment destination of European countries was the United States. The main investment destinations of the United States were Latin American countries and Canada, and Japan’s investment destinations were major coastal cities in the world.

12.2.2 International Direct Investment Between the Two World Wars Before World War I, the United States was the world’s largest debtor. The investment stock from various countries in the United States was 7.9 billion dollars, while the investment stock from the United States in other countries was 3.5 billion dollars. After World War I, the United States carried out a large-scale indirect investment in European countries, while investment from European countries in the United States started to decline. This enabled the United States to gradually change from a capital inflow country to a capital outflow country. The United States also reduced the proportion of the foreign direct investment in total investment from 75% before World War I to 25% by 1919. When it came to the 1920s, major European countries consumed a large amount of capital due to the reconstruction of their own infrastructure, leading to a sharp decline in their foreign investment. After that, the global economic depression once again caused a decline in international investment and changed the investment forms. From the 1920s to the 1930s, the US position in international direct investment rose rapidly, and the scale of Japan’s foreign direct investment also significantly increased compared to that before World War I. The main investment destinations of the United States were European countries and Canada, and Japan’s main investment destinations were its neighboring countries. During this period, the overall scale of international direct investment expanded, but the scale of foreign direct investment from European countries dropped rapidly. In particular, the United Kingdom lost its position as the world’s biggest creditor, and the United States became a new capital exporter. By 1938, major capitalist countries (i.e., the United Kingdom, the United 4

Research estimates indicated that in 1897, the US foreign direct investment accounted for approximately 90% of its total investment. The proportion still reached about 75% until 1914.

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States, Germany, and France) achieved a foreign investment of 42.3 billion dollars. After the outbreak of World War II, the development of international direct investment was at a standstill. During this period, there was only an increment of direct investment from Canada in the United States. By the end of World War II in 1945, the scale of foreign investment by major capitalist countries dropped to 33 billion dollars.

12.2.3 International Direct Investment After World War II Since the late 1940s, with the rise of the third industrial revolution, the US-led developed countries in Europe and the United States once again strengthened their economic strength, and foreign direct investment expanded rapidly. Direct investment based on transnational companies started to replace indirect investment and became the main form of cross-border capital flow. The development of international direct investment after World War II can be divided into three periods according to its characteristics. (I)

International direct investment before the 1970s

The period from the end of World War II to the beginning of the 1970s was the time when international direct investment expedited and gradually became mature. In 1945, the stock of international direct investment was 20 billion dollars, while by 1972, this indicator rose to 146.9 billion dollars. In this year, the proportion of international direct investment in total investment increased to 42.6%, and it became a form of international investment on a par with international indirect investment. During this period, international direct investment also showed new characteristics. First, the core position of the United States in international direct investment was further strengthened. The economic strength of the traditional capital exporters plummeted due to the war. The foreign direct investment capabilities of the United Kingdom and France were greatly weakened, while Germany and Japan simply lost their capabilities of foreign direct investment. In contrast, the United States had sufficient capital and technologies to carry out foreign direct investment. In 1960, the foreign direct investment of the United States accounted for 71.7% of the foreign direct investment of major capitalist countries, and its foreign investment included exports of capital, technology, and management. Second, there was an increase of mutual investment among major capitalist countries. In 1947, the US government announced the Marshall Plan to help European countries rebuild after the war. Between 1948 and 1953 alone, the United States provided 13.6 billion dollars in funding to European countries. By the late 1950s, the economies of European countries began to revive, their direct investment in the United States resumed, and it became normal for mutual investment among developed countries.

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International direct investment from the 1970s to the 1990s

In the mid-1970s, the scale of international direct investment exceeded that of international indirect investment. With this as a sign, international direct investment has entered a new period of massive expansion, during which there were three investment peaks. At this time, an important feature of international direct investment was the rise of foreign direct investment from European countries and Japan. In the early 1970s, the flow of foreign direct investment from the United States accounted for more than half of developed countries, but by the late 1970s, the flow of foreign direct investment from European countries overtook that of the United States. By the end of the 1990s, foreign direct investment from the United States accounted for about 20% of the total international direct investment. During the same period, foreign direct investment from European countries was 3.7 times that of the United States. The first peak of international direct investment occurred from 1979 to 1985. The reason behind this was the outbreak of the second oil crisis. Transnational companies in developed countries turned to invest in major oil exporters, competing for oil resources. During this period, the United States, the United Kingdom, and the Netherlands were among those countries that carried out foreign direct investment. The sum of the foreign direct investment flows of developed countries exceeded 90% of the global foreign direct investment flows. The second peak of international direct investment occurred from 1986 to 1990. In the 1980s, international trade protectionism was on the rise. In order to evade various trade barriers, transnational companies launched a new round of foreign direct investment. During this period, there was the policy trend of international investment liberalization in the world, which created conditions for the vigorous development of the international direct investment. It is worth mentioning that both Japan, as a country for foreign direct investment, and China, as a recipient of direct investment, had remarkable developments during this period. The third peak of international direct investment occurred from 1995 to 2000, owing to the strong promotion of cross-border mergers and acquisitions by enterprises in developed countries. In addition, the rise of foreign direct investment from developing countries also played a certain role in promoting the development of the international direct investment. (III)

International direct investment in the twenty-first century

When it came to the twenty-first century, the scale of international direct investment became greatly volatile. The flow of global foreign direct investment had been on the rise since 2002 and reached the historical high of 2.17 trillion dollars in 2007. However, in 2008, affected by the international financial crisis, the flow of global foreign direct investment dropped sharply by more than 20%. With the current global trade and industrial output returning to pre-crisis levels, the global outbound direct investment flow in 2015 was only 1.47 trillion US dollars, 32% lower than the 2007 peak.

12.2 The Development of Foreign Direct Investment Table 12.1 Top 10 countries (or regions) that absorbed direct investment inflows in 2016

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Ranking

Country (or region)

Inflows (USD1 billion)

1

USA

385

2

UK

179

3

China

139

4

Hongkong, China

92

5

Singapore

50

6

Brazil

50

7

France

46

8

The Netherlands

46

9

Australia

44

10

India

42

Source UNCTAD

In terms of investment flow, a large number of international direct investment flowed into developing countries and countries in transition. Although the United States was still the first choice for foreign direct investment from other countries, the attractiveness of China, Brazil, India, and other countries to foreign investment was also increasing. In 2012, the flow of foreign direct investment received by developing countries and countries in transition exceeded that of developed countries for the first time. The capital flowing to developing countries and countries in transition not only entered labor-intensive industries but also technology-intensive industries. In 2016, half of the top 10 countries (or regions) that absorbed the direct investment inflows were developing economies (Table 12.1). In terms of investment entities, developed countries are still the main investors, but developing countries (especially emerging market countries) are gradually becoming a force that cannot be ignored in foreign direct investment. In 2001, the foreign direct investment flow from developing countries accounted for about 10% of international direct investment flow, but after the outbreak of the financial crisis in 2008, this proportion rose rapidly, and by 2015 it had accounted for a quarter of the world. It can be seen that the importance of developing countries is increasing, whether as a recipient of direct investment or as a country for foreign direct investment. In terms of the investment industry, the service industry has become a hot spot for international direct investment. When it came to the twenty-first century, the capital inflow continues to increase from international direct investment to the service industry (especially the financial industry). The main reasons are as follows. For one thing, for capital exporters, investment in the service industry covers a wide scope. Being more flexible than direct investment in the manufacturing and primary industry, it is easier to obtain considerable profits. For another, for host countries, when the primary and secondary industries have developed to a certain level, there will be higher requirements for the development of the service industry. The introduction of foreign capital is an effective way to improve the development level of the service industry.

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In terms of investment patterns, more and more international direct investment is carried out in the form of cross-border mergers and acquisitions, which has gradually become the dominant way of direct investment. In fact, since the 1990s, the proportion of cross-border mergers and acquisitions has basically remained more than half in international direct investment. Comparing the trend of cross-border mergers and acquisitions and the trend of international direct investment will find that the fluctuations of the two are very similar. (IV)

The latest development trend of international direct investment

The international financial crisis brought about a huge impact on international direct investment. Direct investment inflows absorbed by each economy, after a rebound in 2015, dropped by 13% in 2016, roughly equivalent to the level in 2012. Different from the further drop of international direct investment, the growth rate of the global economy in 2016 reached 3.1%, so international direct investment deviated from global production to a certain extent. In fact, what prevents transnational companies from increasing direct investment lies more at the macro level and policy level. Due to the uncertainty of the global economic situation and the increase in geopolitical risks in some regions, transnational companies have concerns when they carry out direct investment. The continued economic instability in the EU and the increasing downward pressure on the economy of some emerging market countries have also increased the uncertainties for the growth of the international direct investment. In the light of these uncertainties, transnational companies have further adjusted their global layout. Some have also stripped their non-core offshore businesses, which once again makes developed economies absorb more direct investment than developing economies to a certain extent. From the perspective of the foreign direct investment flows of various economies, after declines in recent years, the foreign direct investment flows of developed countries reached 107 million dollars in 2015, with an annual growth rate of 33%. The proportion of foreign direct investment of developed economies also increased to 72.3% in the international direct investment flow. Among which, Europe was the region with the highest flow of foreign direct investment in 2015, with a total investment of 0.58 trillion dollars. Cross-border mergers and acquisitions were an important reason for international direct investment to flow to developed countries. In 2015, the transaction volume of cross-border mergers and acquisitions reached 0.72 trillion dollars, with an annual growth rate of 67%. Despite the decline of foreign direct investment in most developing economies, China’s foreign direct investment remained at a high level, reaching 127.56 billion dollars in 2015 and making it the third-largest country for foreign direct investment only after the United States and Japan. From the perspective of the industry distribution, the transaction volume of crossborder mergers and acquisitions in the manufacturing industry reached 0.39 trillion dollars in 2015, accounting for more than half of the cross-border mergers and

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acquisitions transaction volume, and exceeding the historical high. Affected by the decline in commodity prices, direct investment into agriculture shrank on a large scale, bringing a reduction of planned capital expenditure, and a significant drop in profit reinvestment as well.

Chapter 13

Major Platforms and Institutions for International Trade Governance

The WTO, the successor to the General Agreement on Tariffs and Trade (GATT), is the main platform for current international trade governance. Various regional trade systems are an auxiliary form that has been continuously developed based on them. It has long been the basic mission and core goal of global trade governance and the WTO to promote trade liberalization. It has been its most important content and the ever-lasting basic principle to regulate and eliminate trade protectionism. The current international trading system is built on the basis of the basic provisions of the WTO agreement. It has long been the main goal of global trade governance to promote trade and investment liberalization. However, nowadays, it is difficult to achieve this goal by virtue of multilateral trade negotiations, so the G20 will play an increasingly important role in international trade governance.

13.1 GATT and Trade Governance 13.1.1 The Development of GATT As the predecessor of the WTO, the GATT was temporarily established after World War II with the establishment of the World Bank and the International Monetary Fund, and it was an international multilateral agreement aiming to regulate the mutual rights and obligations of the contracting parties in terms of foreign trade policies and international trade relations. A total of eight rounds of multilateral trade negotiations were conducted within the framework of GATT. These multilateral trade negotiations played a very important role in promoting post-war trade liberalization and boosting the development of international trade. The first six rounds of multilateral trade negotiations completed from the early post-war period to the 1960s were mainly targeted at tariff barriers, the main obstacle that hindered the development of world trade at that time. The negotiations mainly focused on tariff concession to bolster the development of world © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_13

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trade liberalization through slashing tariffs. At the end of the “Kennedy Round” at the sixth round of multilateral trade negotiations, the average tariff level of the GATT contracting parties had dropped from above 45% when the GATT was signed to about 10%. The continuous cut of tariffs enabled world trade to maintain an average annual growth rate of about 8% in the 1950s and 1960s. Therefore, throughout the whole GATT era, the growth of world trade was always higher than that of the global economy over the same period. The oil crisis in the early 1970s and the subsequent economic stagflation in major developed countries triggered a new wave of trade protectionism. Countries around the world mainly adopted the approach of non-tariff barriers to restrict imports, hindering the process of trade liberalization. Therefore, in the seventh round of multilateral trade negotiations under the auspices of GATT, in addition to continuing to discuss tariff reduction issues, reduction until the removal of non-tariff barriers began to become the main negotiation topic, and nine new agreements related to the restriction of non-tariff barriers were successively passed. Moreover, this round of multilateral trade negotiations also reached an “enabling clause” to grant preferential treatment to developing countries (Cheng 2014). The 8th round of multilateral trade negotiations (“Uruguay Round”) from September 1986 to December 1993 was the largest and longest round of multilateral trade negotiations since the signing of the GATT, with the most issues and the most intense disputes. The trade negotiations on goods involved very tough trade issues on agricultural products and textiles. In addition to trade in goods, there were also issues on trade in services, intellectual property rights, and trade-related investment. The most significant achievement from this round of multilateral trade negotiations was the unanimous adoption of the Agreement Establishing the World Trade Organization to replace the GATT.

13.1.2 GATT’s Basic Principles on Trade Governance Looking at the GATT text, its annexes, and a protocol of provisional application, the basic principles can be summarized in the following eight aspects (Han 1993): (I)

The principle of non-discrimination

The principle of non-discrimination is the most important principle in GATT. This principle is embodied through the most-favored-nation treatment clause and the national treatment clause. The most-favored-nation treatment clause is unconditional. It required each contracting party to treat all other contracting parties in an equal manner in terms of import and export, rather than discriminatory treatment. The national treatment clause required each contracting party to enjoy the same treatment as domestic products in terms of domestic taxes or other domestic commercial regulations when the products of any contracting party entered the domestic market without discrimination.

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(II)

221

The principle of tariff protection and concession

It was stipulated in the GATT that a contracting party could only protect its own products through tariffs, and should not adopt other measures to restrict imports. A contracting party also promised to gradually reduce tariffs. However, there were some flexible rules for tariff concession. For example, it was stipulated that if the import of relevant products increased sharply and the similar products of a contracting party were seriously damaged or threatened, the importing country could renegotiate with the relevant contracting party and provide the other party appropriate compensation, and then the original tariff concession could be modified or revoked. At the same time, the GATT also stipulated that in order to protect their domestic industries and agriculture, developing countries could temporarily exempt the application of the above principles in terms of tariff protection if the above-mentioned “fixed” tax rate was unfavorable to their international balance of payments. (III)

The principle of general elimination of quantitative restrictions

It was stipulated in the GATT that in principle, quantitative restrictions for import and export should be eliminated or prohibited. It was stipulated in Clause 11, “No prohibitions or restrictions other than duties, taxes, or other charges, whether made effective through quotas, import or export licenses or other measures shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sales for export of any product destined for the territory of any other contracting party.” (IV)

The principle of fair trade

It was stipulated in the GATT that all parties should not adopt unfair trade methods to compete in international trade. In order to create and maintain a fair and competitive international trade environment, the GATT particularly prohibited dumping and restricted export subsidies in international trade. If dumping or subsidizing goods caused significant damage or threat to the domestic industry of an importing member, the importing country might take anti-dumping or countervailing measures to retaliate. (V)

The principle of exemption and implementation of safeguard measures

Clause 19 of the GATT stipulated that “if, as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions, any product is being imported into the territory of that contracting party in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products, the contracting party shall be free, in respect of such product, and to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in part or to withdraw or modify the concession.” (VI)

The principle of negotiation and mediation

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Consultation and mediation are important principles for the GATT to resolve disputes between contracting parties. The purpose of this principle is to find a dispute settlement method acceptable to all parties concerned. Therefore, the settlement of trade disputes was not to impose legal sanctions on a country’s violation of the GATT, but to maintain the balance of rights and obligations between the contracting parties by resolving disputes. (VII)

The principle of special preferential treatment for developing countries

Starting from the 1960s, developing countries started to join the GATT. With the joint efforts of developing parties, the “Tokyo Round” reached the principle of special preferential treatment for developing countries, especially the least developed countries. It mainly includes the following points: Clause 18 on government assistance to economic development; Part IV provisions on trade and development (including the principle of non-reciprocity, developed parties to try to fulfill obligations, and the establishment of trade and development commissions); enabling clause. It was stipulated in the enabling clause that contracting parties could grant developing countries differentiated and more preferential treatment without having to give such treatment to any other contracting party in accordance with the principle of most-favored-nation treatment. (VIII)

The uniform implementation of trade policies and regulations throughout the country and the principle of transparency

It was stipulated in the GATT that in principle all policies and regulations of contracting parties should be announced in advance, with transparency, so that contracting parties had some time to familiarize with them before implementation. Its purpose was to accept other parties to inspect, supervise and correct their policies and regulations, so as to ensure that laws and regulations from contracting parties truly complied with the provisions of the GATT. GATT existed for 48 years, from its formal establishment in 1948 to its termination in 1995. The number of contracting states grew from 23 to 117. The trade volume of contracting states accounted for more than 90% of the total world trade. Despite its defects, it played an important role in world trade and economic development, and even for the world’s stability and peace. First, a series of basic principles and regulations were formulated for international trade, which stabilized the international trade order. Such basic principles as the most-favored-nation treatment principle, the national treatment principle, transparency principle in the GATT provided common guidelines for international trade to abide by, promoting trade liberalization. They became international trade norms and the basis for contracting parties to resolve trade frictions. Second, it promoted the development of world trade and the economy. GATT conducted eight rounds of negotiations and achieved obvious results in tariff concessions and the elimination of non-tariff barriers. In the second half of the twentieth century, world trade achieved a net increase of 17 times after deducting various factors. Third, it became a venue for contracting states to resolve trade disputes and played an important role in stabilizing the international situation.

13.1 GATT and Trade Governance

223

The imbalance of economic and trade development was likely to cause contradictions and conflicts. GATT provided a negotiation platform for its solution. The two parties could finally compromise with each other after long consultation and mediation and reach a temporary concessional agreement to resolve disputes.

13.2 WTO and Trade Governance The WTO was formally established in 1995 when the GATT was terminated at the same time after running after the war for 48 years. The WTO has retained and inherited the main rules of GATT, as well as various trade treaties negotiated and reached over more than 40 years. The WTO is an international organization independent of the United Nations and jointly operated by all members, known as the United Nations for the economy. In addition to the traditional trade in goods, the jurisdiction scope of the WTO covers intellectual property rights, investment measures, and services trade that have long been outside of the GATT. The WTO has the status of a legal person, and it has higher authority and effectiveness in mediating trade disputes among members (Li and Pang 2006).

13.2.1 The Creation of the WTO The proposal to establish the WTO was first put forward by Italy in early 1990. In July of the same year, the 12 countries of the then European Community formally proposed to establish a “Plurilateral Trade Organization,” which was supported by the United States, Canada, and other countries. In December 1993, the “Plurilateral Trade Organization” was renamed the “World Trade Organization” following the US motion. On April 15th, 1994, at the Marrakesh Ministerial Conference in Morocco, the Agreement Establishing the World Trade Organization (also known as the WTO Agreement) was formally passed by 104 members. The Agreement came into effect on January 1st, 1995, declaring the establishment of the WTO. The proposal to establish the WTO was generally approved and passed smoothly. It was mainly because the GATT had a weak legal foundation for a long time. As a temporary and transitional multilateral agreement, rather than a worldwide formal economic organization, the GATT did not have sufficient legal force and its organizational structure was not sound enough. With the development of the world economy and trade and the continuous increase in the number of the GATT’s contracting parties, there was an objective need for a formal international trade organization with sufficient legal efficacy to coordinate various issues in the development of the world economy and trade.

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13.2.2 The Main Contents of the WTO Agreement The WTO Agreement is composed of 16 articles and 4 annexes. The text of the Agreement does not involve the substantive principles for regulating and managing multilateral trade relations. It only provides the principle provisions of procedural issues such as the structure, decision-making process, membership, acceptance, accession, and entry into force of the WTO. The substantive provisions on coordinating multilateral trade relations, resolving trade disputes and regulating international trade competition rules are all reflected in the four annexes, including Annex 1A Multilateral Agreements on Trade in Goods, Annex 1B General Agreement on Trade in Services, Annex 1C Agreement on Trade-related Aspects of Intellectual Property Rights; Annex 2 Understanding on Rules and Procedures Governing the Settlement of Disputes; Annex 3 Trade Policy Review Mechanism; Annex 4 Plurilateral Trade Agreements. The main contents of the WTO Agreement and its four annexes are summed up as the following aspects (Zhong et al. 1997; Du 1999; Zeng 2003): (I)

The purpose and objectives of the WTO

The “WTO Agreement” states in the preamble that the parties shall recognize that “their relations in the fields of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.” It also urges the member states to recognize that that “there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development.” It further urges the member states to enter into “reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations. (II)

The functions of the WTO

The WTO aims to facilitate the implementation, administration and operation, and further the objectives, of the Agreement and of the Multilateral Trade Agreements. It also provides the framework for the implementation, administration and operation of the Plurilateral Trade Agreements. The WTO is designed as a forum for negotiations among its members concerning their multilateral trade relations, and a framework for the implementation of the results of such negotiations.

13.2 WTO and Trade Governance

(III)

225

The structure of the WTO

The Ministerial Conference, composed of representatives of all the members, is the supreme body and the topmost decision-making body of the WTO. It usually meets at least once every two years and has decision-making powers on all matters under any of the WTO agreements. It also has a General Council composed of representatives of all the members, which meets as appropriate. In the intervals between meetings of the Ministerial Conference, its functions are conducted by the General Council. The General Council also carries out the functions assigned to it by the Agreement. The WTO also has a Council for Trade in Goods, a Council for Trade in Services, and a Council for Trade-related Aspects of Intellectual Property Rights, which operate under the general guidance of the General Council. (IV)

The decision-making mechanism of the WTO

The WTO continues the practice of decision-making by “consensus” followed by the GATT. Only when a decision cannot be arrived at by consensus, the matter at issue will then be decided by voting. The number of votes is different for different issues. For instance, interpretations and decisions of a Multilateral Trade Agreement need to be supported by a three-fourth majority of the members at the Ministerial Conference and the General Council. Amendments, on the other hand, to relevant articles need a two-thirds majority of the members’ support to take effect. Any decision to waive an obligation imposed on a member needs a three-fourths majority of the members’ support. (V)

Original membership, accession, and withdrawal from the WTO

The contracting parties of GATT1947 and the European Community become members of the WTO, once they accept the WTO Agreement and the Multilateral Trade Agreements. They also need to annex the Schedules of Concessions and Commitments to GATT1994 and the Schedules of Specific Commitments to GATS. Any state or separate customs territory processing full autonomy in the conduct of its external commercial relations and of the other matters provided for in the WTO Agreement and the Multilateral Trade Agreements may accede to this Agreement, on terms to be agreed between it and the WTO. Decisions on accession are taken by the Ministerial Conference. The Ministerial Conference approves the agreement on the terms of accession by a two-thirds majority of the members of the WTO. Any member may withdraw from the TWO.

13.2.3 The Basic Principles of WTO Trade Governance The WTO follows the basic principles of the GATT, but its scope of application not only covers the traditional fields of trade in goods, but also new fields such as trade in services, trade-related intellectual property rights and trade-related investment measures, including the principle of non-discrimination, the principle of tariff

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protection and concession, the principle of general elimination of quantitative restrictions, the principle of fair trade, the principle of waiver and safeguard measures, the principle of negotiation and mediation of disputes, the principle of special preferential treatment for developing countries, and the principle of transparency. Among them, in addition to continuing to implement the “non-reciprocal principle” and demonstrating the spirit of the “enabling clause” for developing countries, certain preferential treatments are also given in the following aspects: First, it is allowed for developing countries to fulfill obligations with a relatively long time, or at a long transition period; secondly, it is allowed for developing countries to be relatively flexible in fulfilling obligations; thirdly, developed countries are required to provide technical assistance to developing countries.

13.2.4 Problems of Global Trade Governance Mechanism by the WTO The current global trade governance model was formed after World War II under the dominance of developed countries, such as the United States and European countries. Being a kind of economic governance model, it adjusts international economic relations through economic, trade, financial agreements and other international treaties with a multilateral trading system and international monetary and financial system as the core. In recent years, through the joint efforts of all parties, even though the global trade governance reform has taken new steps and achieved unprecedented progress, GATT/WTO is not perfect as an international system in the field of trade (Gao and Su 2015). (I)

The concentration of dominance leads to the lack of global trade governance mechanism

The current legal systems, which were based on the GATT, the IMF’s “International Monetary Fund Agreement” and the World Bank’s “International Bank for Reconstruction and Development Agreement,” are mostly dominated by developed countries. So are the rules developed on the basis of the above three major legal pillars on the international trade in goods, services, international movement of personnel, international capital flow, and international payment and settlement. They essentially safeguard the interests of developed countries, and the developing countries have long been in a state of passively accepting. This leads to the issue that in the process of collective action, countries with greater influence usually have greater space for domestic policies, receive relatively small external pressure, or pay very little attention to external pressure, and they are more likely to pursue unilateralism and use the national sovereignty, domestic politics, and domestic laws to boycott international economic rules, resulting in the lack of global trade governance mechanisms in addressing some key economic issues.

13.2 WTO and Trade Governance

(II)

227

Lack of coordination and accountability in global trade governance platforms and institutions

First of all, there is the problem of overlapping and policy conflicts arising from the lack of coordination of the governance institutions and the platform. The IMF focuses on the prevention and relief of national financial crises, including providing the nations with medium- and long-term loans, while the World Bank focuses on the construction of soft infrastructure with structural adjustment as the goal. They have certain overlapping and conflicting functions. Secondly, although the IMF and the World Bank promoted the work of the WTO through the liberalization reform practiced by virtue of loan conditions, they also marginalized the WTO. Thirdly, there is a lack of an effective accountability mechanism. This mainly refers to the relationship between the IMF, the World Bank, the WTO, and the United Nations. At the global level, since there is no “world government” similar to a national government, the executive agency lacks unified management. The Charter of the United Nations only stipulates that specialized agencies in economic, social, cultural, health, and other fields should sign agreements with the United Nations. Therefore, the United Nations only enjoys the right to advise and know about the work of its specialized agencies. There is no real accountability power. Each agency can go their own ways (Baldwin and Yang 2013). (III)

Differences in interests between developed countries and developing countries

First of all, in formulating international trade rules, developed countries vigorously promote the implementation of agreements that are beneficial to them, and it is often difficult to implement policies beneficial to developing countries. Secondly, some special and differential provisions related to developing countries are often unenforceable. Thirdly, the contents discussed at the WTO in recent years go far beyond the scope of trade, and the agreements reached in these fields are mostly detrimental to developing countries. (IV)

Special and differential treatments of developing countries

The GATT/WTO implements the principle of non-discriminatory treatment, the principle of tariff protection and concession, the principle of elimination of quantitative restrictions, the prohibition of dumping, and the restriction of export subsidies. Its important function is to ensure that the contracting parties can achieve mutual benefit. But in fact, it is inherently unequal when the same system and rules are applied to countries of different development levels. An open trade system is always more beneficial to developed countries and emerging industrialized countries. This mutual benefit is essentially imbalanced. Moreover, the “special and differentiated treatment” of developing countries is not a legally binding obligation. As far as the whole situation is concerned, there is a very poor delivery of commitment for developed countries to provide preferential treatment to developing countries. A large number of developing countries have not received substantively special preferential treatment in this so-called free trade system (Su 2016).

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13.3 Regional Integration and Trade Governance Regional economic integration refers to a process in which two or more countries or regions, with adjacent levels of geography or economic development, seek common interests, and voluntarily restrict each other’s economic sovereignty based on equality and mutual benefit, or even share or transfer part of the national sovereignty on a mutually equal basis. They establish a commonly coordinated agency, break the boundaries of administrative divisions, formulate unified economic and trade policies, jointly plan according to regional economic principles, jointly organize specialized production and division of labor and eliminate trade barriers among them so that they gradually achieve the coordinated development within the region and the optimal allocation of various resources, promote economic and trade development, and achieve the complementary industry and common economic prosperity.

13.3.1 The Number of Regional Trade Agreements Continues to Grow Rapidly First of all, the WTO-dominated global multilateral trade negotiations are struggling. With the continuous increase of WTO members and the continuously growth of the team of developing countries, there are not only serious conflicts of interest between developed and developing countries, but there are also many contradictions and divergences within developed countries and developing countries. It is extremely difficult to coordinate and reach a consensus, causing the “Doha Round” of global multilateral trade negotiations to get into trouble repeatedly without results. Many countries and regions have gradually lost confidence in multilateral trade negotiations under the WTO framework and turned to establish regional or bilateral FTAs. Secondly, FTA’s own superiority and flexibility are being more and more recognized and accepted. FTA has fewer participants when negotiations are more flexible and voluntary, so it is easy to reach consensuses. FTA can also sign agreements freely according to different parties and based on different schedules, so trade benefits can be achieved in a short time. In addition, the FTA agreement goes beyond the previous scope of only reducing tariffs and lowering quantitative restrictions, and expands to the service sector, investment, and other fields, which can create a better trade and investment environment for the contracting parties. Furthermore, it is the “domino” effect. Although some countries themselves are not willing to join regional trade agreements, they may feel the tremendous pressure of being away from regional trade blocs, so they must consider to join regional trade agreements.

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13.3.2 Economic Integration Will Reveal More New Features At present, regional trade agreements in the world and in major regions have shown many new features in terms of cooperation model, organizational structure, regional focus, and operational fields. Moreover, starting from regional trade rules, along with the development of plurilateral trade rules to regulate a certain field, the rules on goods, investment, and services trade will gradually expand to multilateral economic and trade rules after they are integrated. There will certainly be many new features and innovations at the plurilateral institutional level. First of all, the model of regional economic integration and cooperation has broken the constraints of traditional theories. The homogeneity of organization members has weakened in terms of geographical and economic development level, and the heterogeneity or mixed trend has become more and more obvious. North and south cooperation has become the new development mainstream. The traditional theory of regional economic integration believes that it is easy for countries with homogenous political systems, economic development levels, historical culture, geographical location and other characteristics to achieve regional economic integration, such as the European Union before the eastward expansion and the US-Canada Free Trade Area. However, the development of production networks between developing countries and developed countries under the condition of fragmented production has led to that more and more north and south regional economic integration organizations have been established in recent years. This shows that with the development and changes of the international situation, the ideological factors and features in regional economic cooperation and integration have increasingly weakened. Secondly, the pattern of regional economic integration and cooperation is becoming increasingly complex. Economic integration organizations are multilayered, with overlapping members, showing a networked and transcontinental development trend. In the past, regional economic integration organizations had obvious characteristics of uniting against others, and there was more competition than cooperation and more confrontation than coordination among regional economic groups. The members that take regional economic integration are basically connected geographically or adjacent to each other. One of the main driving forces to form trading groups is to deal with other stronger trading groups or blocs, to ensure multilateral negotiations and bargaining ability in the export market. But in recent years, this closed integrated development path has improved greatly. This clearly shows that countries are not pursuing regional economic integration for one moment and at one place. As long as the conditions and timing are ripe, achieving integration on a larger geographical scale is inevitable. Thirdly, the Asia–Pacific region is the focus of the current and next round of regional integration. Since the end of 2009, regional economic cooperation in the Asia–Pacific region has become the focus of global attention. Firstly, the TPP may become a new competitive regional cooperation mechanism in the Asia–Pacific region. It promoted the establishment of the US-dominated Asia–Pacific regional

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integration process and Free Trade Area of the Asia–Pacific (FTAAP), and accelerated the realization of the goal of trade liberalization and investment facilitation proposed by the member states of the Asia–Pacific Economic Cooperation (APEC). Secondly, the “Regional Comprehensive Economic Partnership” (RCEP) negotiations initiated by the 10 ASEAN countries and six free trade area partners, including China, Japan, Republic of Korea, India, Australia, and New Zealand, have injected strong impetus into East Asian economic integration. Thirdly, new steps have been taken in the construction of the East Asian Free Trade Area. The establishment of the China-Japan-ROK Free Trade Area will have a significant influence on the integration of Northeast Asia and even the Asia–Pacific and global economic and trade pattern. Fourthly, the fields involved in regional economic integration and cooperation are becoming more extensive with constantly deepening connotation and extension, and the standards are getting higher and higher, which will become the key to reshaping the basic rules of international economic cooperation. Changes in global value chains have brought closer links between countries. The integration of production requires consistent national market rules and compatible standards between countries. All these require more complex international trade rules to deal with the cross-border flow of goods and factors, enabling international trade rules to expand from boundary rules to in-boundary rules with more domestic policies involved, such as state-owned enterprise behavior, intellectual property protection, labor, and so on. The global value chain also brings the following challenges: global trade is more driven by FDI, and there is a necessity to integrate trade and investment rules; trade in goods and trade in services are more closely linked, and new trade rules are required to coordinate the emerging new fields as transportation services, business flows, and information services; intermediate products arising from fragmented production flow in multiple countries, so the rules of origin should be in more details.

13.4 G20 and Trade Governance The Group of 20 (G20) was initiated and established by the G7 Finance Ministers Meeting in 1999. It consists of 20 members including Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, and Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union. Before the outbreak of the international financial crisis, the G20 only held meetings of finance ministers and central bank governors to exchange views on international financial and monetary policies, reform of the international financial system, and world economic development. After the international financial crisis, under the initiative of the United States, the G20 was upgraded to a summit of leaders. The Pittsburgh Summit held in September 2009 identified the G20 as the main forum for international economic cooperation, marking important progress in the reform of global economic governance. At present, the G20 mechanism has formed an architecture led by the summit, supported by the

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“dual-track mechanism” of coordinators and financial channels, and supplemented by ministerial meetings and working groups. As an international economic cooperation forum created in response to the global financial crisis, the previous G20 summits closely focused on the two main lines— crisis response and economic growth—and provided a platform to jointly negotiate new international cooperation models under the new situation. The summits also constantly improved the global economic governance structure. It can be said that the G20 summit and its institutionalization have followed the ever-changing new international economic situation, and offered emerging countries and developing countries a platform for equal consultation on international economic cooperation with developed countries. It is of great significance to address the global financial crisis and promote the recovery of global economic growth (Sun 2015; Zhang 2016; Zhou 2016).

13.4.1 The Main Operating Mechanism of the G20 First of all, the organizational structure of the G20. The G20 is an informal dialogue mechanism in the framework of the Bretton Woods institutional system. It lays a broad foundation for discussions and consultations on substantive issues, so as to seek international cooperation and promote stable and sustainable growth of the world economy. From the perspective of the participants, since 2009, each G20 summit has invited no more than 5 non-member states to join. The President of the IMF, the President of the World Bank, and the Chairman of the International Monetary and Financial Committee and the Chairman of the Development Council all have participated in the forum activities as specially invited representatives. From the perspective of institutional structure, it has formed the institutional structure of “leaders’ summit-coordinators’ meeting—ministerial meeting—working group meeting”. In terms of specific work, the G20 mainly operates as informal ministerial meetings and meetings of finance ministers and central bank governors. Finance ministers and central bank governors meet regularly to discuss global economic development issues and coordinate the wishes of all parties. Secondly, G20 decision-making procedures and implementation. The G20 continues to adopt the “consensus” model in its decision-making procedure. The G20 meeting mainly issues some “Communiqués” or “Declarations” and action plans that reflect the consensuses of the member states, and the IMF, the World Bank, and other formal international economic organizations or relevant countries independently implement them. The topics of the G20 meeting are set by the rotating presidency every year. Some examples include combating international terrorism financing, promoting economic recovery, addressing climate change, and economic globalization. The G20 also considers to include inclusive and sustainable economic growth, poverty eradication, and shared prosperity into the discussion and decisionmaking agenda. The decision-making procedure of the G20 is characterized by

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the strong nature of negotiation, informality, and experimentalist governance of multi-level policymaking (Shen 2016).

13.4.2 Major Summits Involving Trade Topics Crisis response and economic growth have always been the main topics of the G20 summit, while ensuring the stability and sustainable growth of trade is one of the keys to the realization of the above two major topics. The following summits have clearly raised the trade issues: On June 26th, 2010, the G20 held its fourth summit in Toronto, Canada. At that time, the European sovereign debt crisis fermented, and the economic growth of emerging economies such as China slowed down, adding uncertainties and unstable factors to the world economic recovery. The leaders at the meeting mainly discussed the world economic situation, the European sovereign debt crisis, the “strong, sustainable and balanced growth framework,” the reform of international financial institutions, and international trade and financial supervision. It also discussed other topics on joint countermeasures, especially the deficit reduction. The Toronto Summit Declaration released at the meeting specifically emphasized that the G20’s highest priority was to safeguard and strengthen recovery, to lay the foundation for strong, sustainable, and balanced growth, and to strengthen resilient financial systems. On November 12th, 2010, the G20 held its fifth summit in Seoul, Republic of Korea. As the United States and European countries had potential contradictions regarding the exit strategy of economic stimulus plans, they affected the process of world economic recovery and led to intensified divergences in the core demands of the participants. The main achievements of the summit included: in terms of currency and exchange rate, the principle of cooperation on the exchange rate between developed countries and emerging market countries was re-verified; in terms of finance, developed countries would erect a fiscally sound plan, and pay attention to the economic risks resulting from concurrent implementing or non-implementing factors; in terms of financial supervision, international standards and principles are approved related to capital liquidity and large global financial institutions with the support from the Basel Committee on Banking Supervision; in terms of trade, a consensus was reached that no new trade and investment barriers would be set up before 2013, and trade protectionism of any form was opposed. On November 3rd, 2011, the G20 held its sixth summit in Cannes, France. It was committed to continuing to strengthen macroeconomic policy coordination and adopted the “Action Plan for Growth and Jobs”, which played an important role in addressing the European debt crisis and promoting the world economic recovery. In terms of trade issues, the summit specifically mentioned: Firstly, at this critical time for the global economy, it was important to underscore the merits of the multilateral trading system as a way to avoid protectionism and not turn inward; secondly, it stood by the Doha Development Agenda (DDA) mandate; thirdly, to achieve a more effective, rules-based trading system, it supported strengthening the WTO, which

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should play a more active role in improving the transparency of trade relations and policies and enhancing the effectiveness of the dispute settlement mechanism. On September 5th, 2013, the G20 held its eighth summit in St. Petersburg, Russia. The summit took growth and employment as the theme, and extended to medium- and long-term growth and development issues. In terms of trade, the summit specifically mentioned: First, free trade and investment, and the achievement of the open, rulebased, transparent, and non-discriminatory WTO-based trading system were crucial for restoring global growth; secondly, it reaffirmed the significance of the successful functioning of the multilateral trading system and its importance in ensuring proper rules enforcement; thirdly, it recognized the risks of economic slowdown and trade damage caused by trade protectionism; fourthly, it valued monitoring of trade and investment restrictive/opening measures by the WTO, the OECD and the UNCTAD; fifthly, it emphasized transparency as a cornerstone of the multilateral trading system; sixthly, it recognized the importance of regional trade agreements and their contribution to trade and investment liberalization; seventhly, it acknowledged the rapid expansion of global value chains and its impacts. On November 15th, 2014, the G20 held its ninth summit in Brisbane, Australia. With the theme of “growth, jobs and resilience,” this summit pledged for the first time the global economic growth as its goal. The important achievement of this summit was the approval of an agreement containing more than 800 measures. In terms of trade, the summit emphasized: First, trade and competition were powerful drivers of growth, increased living standards, and job creation; second, a strong trading system in an open world economy was needed to drive growth and generate jobs. On November 15th, 2015, the G20 held its tenth summit in Antalya, Turkey. The summit was held against the backdrop of uneven global economic recovery, sluggish commodity markets, sharp decline in international trade growth, tightening of the US monetary policy, and increasing risks in emerging markets and developing countries. In terms of trade, the summit emphasized: First, global trade and investment remain important engines of economic growth and development, helping to create jobs, improve welfare and promote inclusive growth; secondly, the WTO is the backbone of the multilateral trading system and should continue to play a central role in promoting economic growth and development.

13.4.3 G20 Hangzhou Summit The Hangzhou Summit was also held under the backdrop of the sluggish global economy, the declining trade and investment growth, the rising protectionism, and the superposition of deep-seated contradictions and uncertainties. Therefore, China listed “innovative growth mode,” “robust international trade and investment”, “efficient global economic governance” and “inclusive and interconnected development” as the key topics of this summit.

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As one of the core achievements of the summit, the G20 Guiding Principles for Global Investment Policymaking established the nine principles of opposing crossborder investment protectionism, creating an open, non-discriminatory, transparent and predictable investment policy environment, strengthening investment protection, ensuring transparency in policy formulation, promoting investment to promote sustainable development, and responsible business conduct of investors. As the first multilateral document on investment policy formulation, the Guiding Principles define the overall framework of global investment rules and provided important guidance for countries to coordinate the formulation of domestic investment policies and negotiate foreign investment agreements. At the same time, it has taken a historic step to bridge differentiated interests on investment policies among countries and strengthen to coordinate multilateral investment policies, which will provide long-term institutional guidance to promote global investment growth. In short, the G20 summit started in 2008, and initially addressed the subprime mortgage crisis, the European debt crisis, strengthened financial supervision, and started to focus on growth of real economy and employment when the crisis was mitigated, and further put the issues of trade, inclusion, domestic reform, and anticorruption, sustainable development of energy, security, and health on the agenda. The G20 has experienced several major changes, like the expansion from short-term crisis response to medium- and long-term growth; the expansion from strengthening financial supervision to promoting the development of the real economy; the dominant force changing from developed countries to developing countries when it has achieved outstanding results. It has gradually become an increasingly important force in global economic governance (Cheng 2014; Jin 2009).

References Baldwin, R., and Panpan Yang. 2013. WTO 2.0: Thinking Ahead on Global Trade Governance. International Economic Review 2: 156–158. Cheng, Dawei. 2014. Comparison and Selection of Multilateralism, Regionalism and Big Regionalism in the Global Trade Governance. Economic Review 4: 95–98. Du, Houwen. 1999. Regulations of WTO and Strategies of China. Beijing: Xinhua Publishing House. Gao, Lingyun, and Qingyi Su. 2015. Strategic Measures for China’s Participation in Constructing a Rational and Effective Global Economic Governance Mechanism. Intertrade 6: 11–15. Han, Depei. 1993. GATT and Its Basic Principles and Rules. Law Review 3: 7–13. Jin, Fang. 2009. Global Co-governance, but not Trade Protection. Wenhuibao, 9 February 2009. Li, Renzhen, and Yongsan Pang. 2006. The Effect of Regional Trading Blocks on GATT/WTO System. Legal Forum 2: 133–138. Shen, Wei. 2016. International Economic Governance System and the G20 Group at the Postfinancial Crisis Era. Peking University Law Journal 4: 1014–1037. Su, Qingyi. 2016. Global Trade Governance: Contradictions of Institutional Supply and Demand. Journal of Northeast Normal University (Philosophy and Social Sciences) 4: 82–84. Sun, Zhenyu. 2015. G20 and Global Trade Investment Governance. China Economic Report 9: 26–27. Zeng, Yi. 2003. WTO Law Course. Beijing: China CITC Press.

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Zhang, Monan. 2016. G20 and the New Framework for International Trade Governance. Seeking Knowledge 10: 29–31. Zhong, Xingguo, Zhong Lin, and Wenhua Shan. 1997. World Trade Organization. Beijing: Peking University Press. Zhou, Mi. 2016. Trade Investment: The Third Pillar to Supplement the G20 Global Economic Governance. Intertrade 9: 51–54.

Chapter 14

Fields for International Trade Governance

After the establishment of the WTO, the international economic and trade environment has changed, international trade openness has continuously improved, and the Doha Round of negotiations is obstructed, so the existing international trade and investment rules have been unable to effectively regulate the trade and investment activities of various countries. Under this circumstance, countries have explored to establish a new order for global economy, trade, and investment, and actively participate in the negotiation and formulation of new international trade and investment rules.

14.1 Trade Rules in the Signed Agreements Owing to different reasons such as the pursuit of economic interests, the needs of political and security policies, and the shortcomings of the multilateral trading system, various bilateral, plurilateral, and regional trade agreements (referred to as Preferential Trade Agreements, PTAs) have developed rapidly. According to the statistics of the WTO, there are more than 300 PTAs in the world, most of which were concluded after the 1990s. Europe and the United States are still the regions with the most PTAs, while the Asia–Pacific region is becoming a new growth point for PTAs. In addition to the surging number, the content of PTAs is expanding as well. As the focus of global economic competition shifts from the manufacturing industry to the service industry, PTAs have also broken through the traditional field of trade in goods. PTAs involving trade in services now account for one-third of the total number. At the same time, the focus of negotiations on international trade and investment rules is shifting from trade to investment. More and more PTAs are beginning to cover investment issues, enabling trade agreements to be an important field to formulate investment rules.

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14.1.1 Changes in the Way of Rule-Making At present, the negotiation framework commonly adopted by various types of PTAs mainly includes: (I) Market access and national treatment: All service sectors are included in the negotiation scope of services trade, including unpredictable emerging service sectors, when the national treatment is implemented before accession; (II) Negative list: All service sectors of all contracting parties are subject to restrictions unless otherwise specified as reservation or exception in the list; (III) Investment chapters related to services trade, mainly financial service sectors and telecommunications service sectors; (IV)Domestic regulations and disciplines: to further strengthen restrictions on transparency, fair competition, service subsidies and so on; (V) “Ratchet Clause,” which locks the status quo of opening up and prohibits the withdrawal of future measures of self-opening once implemented. PTAs and GATS adopt different negotiation methods and pathways. One important difference is the way of commitment. The specific commitments of GATS market access and national treatment are based on the positive list, while PTA’s commitments are mainly based on the negative list. The North American Free Trade Agreement (NAFTA) negotiation adopts the approach of the negative list. The prohibition of rollback mechanism is also an important feature of many PTAs to achieve further liberalization. The mechanism is mainly aimed at preventing the retrogression which happens after some countries independently carry out policy and legal reform. Of course, the PTA’s commitments that go beyond the GATS commitments can also retain the flexibility provided by the Agreement and make reservations for existing inconsistent measures and future measures in order to make optimal consideration for policy objectives.

14.1.2 Changes in the Content of the Rules In terms of content, although PTAs and GATS specify different obligations to be assumed, they both have a common set of basic rules to regulate trade and investment in the service field, such as transparency, national treatment, most-favorednation treatment, payment transfer, monopoly and franchised service providers, and general exceptions. However, in terms of domestic regulations, emergency safeguard measures, and service subsidy rules, PTAs have made more progress than GATS. (I)

Market access

Most PTAs similar to GATS contain market access clause that is almost identical to Article 16 under the GATS, but there are some exceptions. For example, the Republic of Korea-Singapore Free Trade Agreement does not stipulate restrictions on foreign ownership and free transfer of capital in its market access clause. Some PTAs of non-GATS type also refer to the provisions of Article 16 under the GATS, such as the free trade agreements signed by Japan and Switzerland, India and Singapore, and Singapore and Switzerland.

14.1 Trade Rules in the Signed Agreements

(II)

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National treatment

The national treatment clause in many PTAs are similar to Article 17 under the GATS, while NAFTA’s national treatment clause is different. The clause replaces the “similar services or service supplier” expression in GATS with the expression of “similar circumstances.” (III)

Most-favored-nation treatment (MFN)

The MFN clause under PTAs is sometimes missing. About 20% of PTAs do not contain MFN clause, most of which are agreements signed by Asian countries. About 40% of GATS-like agreements do not specify MFN obligations. But all PTAs that follow the NAFTA model and the EU model contain MFN clause. Of course, even if MFN obligations are stipulated, some PTA members also set up many clauses to circumvent, so that the new concessions granted to third parties are not applicable to the original members. (IV)

Emergency safeguard measures

Some PTAs contain emergency safeguard clauses, while others do not. Meanwhile, the content of the emergency safeguard clause varies a lot. Especially due to the different negotiating status of PTA members, the procedural rules regarding emergency safeguard measures are quite different. (V)

Prohibition of requirements on performance, local presence, senior management and board of directors

About 40% of the agreements contain this requirement. Very few agreements prohibit this requirement. For example, Japan-Singapore Free Trade Agreement prohibits the requirement on performance, Colombia-Mexico Free Trade Agreement prohibits the requirement on local presence, and India-Singapore Free Trade Agreement prohibits the requirement on senior management. Few PTAs prohibit the requirement on the board of directors. (VI)

Obligation to maintain the status quo

It is mainly applicable to agreements that use the negotiation method of a negative list. All service sectors are subject to restraints on liberalization obligations unless they retain existing or future non-conforming measures. GATS does not have this requirement. However, about 30% of GATS-like agreements contain this provision. All agreements that follow the NAFTA model stipulate the obligation to maintain the status quo. The obligation to maintain the status quo is also stipulated in Japan’s free trade agreements with the Philippines, Thailand, Malaysia, and Indonesia. (VII)

Obligation to prohibit the reversal

The prohibition of the reversal mechanism goes a step further than the obligation to maintain the status quo. The prohibition of reversal clause is a common structural feature of NAFTA and agreements that follow the NAFTA model, which is included in the cross-border services trade and investment chapters. Agreements without an investment chapter generally do not stipulate the prohibition of reversal obligations. All GATS and GATS-like agreements do not have such provisions.

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14.2 Development of Trade Rules on Services Since the twenty-first century, the rapid development of the service industry has become one of the main characteristics of world economic development. Whether service trade can transcend the restrictions of regions, ethnicities, and languages and proceed smoothly all over the world is an important indicator of whether the goal of trade liberalization can be achieved. Although the United States withdrew from the Trans-Pacific Partnership Agreement (TPP), which later became the Comprehensive Progressive Trans-Pacific Partnership (CPTPP), the rules related to trade in services under the TPP still represent the direction of future services trade rules, and will surely appear in other subsequent trade agreements. Therefore, the following text mainly analyzes institutional designs in the TPP regarding cross-border trade in services, financial services, movement of natural persons, and telecommunications services, and a comparison is made with TISA to clarify the possible development of services trade rules.

14.2.1 Cross-Border Trade in Services Cross-border Trade in Services, also known as Cross-border Supply, refers to that the service supplier of a member in the territory supplies services to consumers in the territory of any other member for remuneration. Its characteristic is that service suppliers and consumers are located in different countries, and in the process of supplying services, the content of the service itself has crossed the border. It can be realized through telecommunications and the internet without the movement of personnel, material and capital. For example, a consulting company in one country supplies law, management, information, and other professional services in its own country to a customer in another member. There may also be the movement of personnel or material or capital, such as a leasing company in one country supplies leasing services, financial and transportation services to users in another country. This type of trade is a basic form of and fully embodies the characteristics and international trade in services. (I)

Main content of the cross-border payment part in the TPP clause

The cross-border payment part under the TPP clause contains 13 clauses and two annexes. The clause defines cross-border services trade or cross-border supply as: the supply of a service from the territory of a party into the territory of another party; the supply of a service in the territory of a party to service consumers of another party; and the supply of a service by the service supplier of a member through the presence of a natural person in the territory of another party. The clause applies to measures taken or maintained by a party due to the impact of cross-border services trade supplied by another party, including the production, sale or delivery of services; the purchase, use or payment of services; access and use, distribution, transportation

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or telecommunications networks by service suppliers, and the provision of bonds or other forms of financial security as services access conditions. The clause also stipulates the principles of national treatment and most-favored-nation treatment and specifies that no contracting party may adopt or retain measures that restrict market access on a regional or national scale. In addition, this part also contains two annexes of professional services and express delivery services. (II)

Comparison with the content of bilateral, multilateral and regional FTA agreements

It can be found that the TPP agreement regulates the cross-border service trade in a more comprehensive and detailed manner, if we compare the terms of the TPP cross-border service trade with the currently signed bilateral and regional free trade agreements, as well as the relevant content included in the GTAS and the TISA under negotiation. First of all, previous bilateral and regional FTA agreements have included crossborder services trade as an important part of services trade, while the general rules and clauses applicable to services trade have not been separately listed as chapters. Secondly, from the perspective of negotiation methods, some of the previous bilateral and regional FTA agreements were based on the positive list, some were based on the negative list, and there were also mixed negotiation methods where two methods coexisted. GATS is a positive list-based negotiation method, TISA adopts a mixed negotiation method, and the TPP completely adopts a negative list method. Thirdly, the general clauses on services trade, such as national treatment, mostfavored-nation treatment, domestic rules, and market access, are all covered in the chapter on cross-border services trade under the TPP, but the principle of the automatic application is different. Taking clauses of national treatment and most-favorednation treatment as examples, GATS emphasizes that the services included in the positive list can enjoy national treatment and most-favored-nation treatment, while TISA and TPP “discriminate” non-member states, which do not automatically benefit from them (Table 14.1). Furthermore, the principle of “competitive neutrality” is emphasized in the TPP agreement, so state-owned enterprises are treated with unprincipled “discrimination.” The GATS clauses do not involve the issue of state-owned enterprises at all. Due to the application of the principle of “competitive neutrality” in TISA, the clause on state-owned enterprise will also be added. In the TPP chapter on cross-border services trade, it is emphasized that various benefits and preferences enjoyed by member states cannot extend to state-owned enterprises of member states, which also reflects the unprincipled “discrimination” against state-owned enterprises. In addition, professional services are also included in the clause as an annex to the existing FTA agreement for the first time. It shows that the TPP attaches great importance to certifying the qualification and educational background of professional and technical personnel necessary for the flow of lawyers, engineers, and architects, and strives to lower the barriers to entry and create conditions for professional and technical personnel to provide cross-border services.

No separate chapter

Mainly positive list

Including unconditional MFN obligations among all WTO members, but WTO members can put forward a waiver, usually no more than 10 years

It is a conditional national treatment rule. It is emphasized that the departments included in the concession schedule shall enjoy national treatment provided that they comply with any conditions and qualifications listed therein

Eliminating government procurement services from the core market access clause It is emphasized that only departments that make market access commitments (unless otherwise specified in their concession schedule) shall not implement quantitative restrictions

The clause on mutual recognition only encourages the government to determine reciprocal competitiveness. In practice, it is rare to reach a mutually recognized agreement

Cross-border services trade

Negotiation method

Most-Favored-Nation treatment (MFN)

National treatment

Market access

Mutual recognition

GATS

This clause is established separately in this chapter. It is a conditional MFN rule, and non-TPP members cannot automatically benefit from TPP liberalization

Negative list

A separate chapter

TPP

Including chapters on qualifications and licenses of professional service suppliers to address the issue of mutual recognition, and rules should be worked out to avoid discriminatory treatment inherent in the certification of licenses and qualifications

Including a government procurement clause. The broad government procurement exclusion clause in GATS should be restricted to limited functions, which helps to include state-owned enterprises (small- and medium-sized enterprises) into the scope of TISA’s rights and obligations

(continued)

In this chapter, a separate mutually recognized clause is established. The education and work experience, license, or certification of service suppliers can be mutually acknowledged through the signing of agreements or arrangements among member states

There is a separate chapter in the TPP text on government procurement, so it is not covered in the market access clause It is emphasized that except for the departments included in the negative list, no mandatory quantitative restrictions should be imposed on service suppliers

It is a conditional national treatment rule, and Non-TPP members cannot automatically non-TISA members cannot automatically benefit benefit from TPP liberalization from them Each contracting party shall grant the services and service suppliers of another contracting party no less preferential treatment than that enjoyed by the services and service suppliers in its own country

It is a conditional MFN rule, and non-TISA members cannot automatically benefit from TISA liberalization. TISA members may decide to extend unconditional MFN gains to underdeveloped countries, but countries of size and status like Brazil, India, and China cannot become “free riders.”

Negative list-based mixed model

There may be a separate chapter

TISA

Table 14.1 Comparison of the text content under the TPP with that under the TISA and the GATS on cross-border services trade

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There is no separate chapter or clause for professional services

Professional services

TPP

Clause on professional service is specified in the form of annex. In particular, commitments are made to the mutual recognition of engineer, architect and lawyer qualifications, qualification recognition, and registration procedures

Although there is no separate clause on state-owned enterprises in this chapter, the restrictions on state-owned enterprises are scattered among the clauses. For example, it is emphasized in the clause of denial of benefits that it is allowed to refuse to supply the benefits of this chapter to the state-owned enterprises of the member parties. It shows “discrimination” against state-owned enterprises

There is a separate clause in this chapter. It is emphasized that all contracting parties should ensure that all generally applicable measures affecting trade are managed in a reasonable, objective, and fair manner so that they do not constitute an obstacle to cross-border trade in services

Source Gary Clyde Hufbaue, J. Bradford Jensen, Sherry Stephenson, Framework for the International Services Agreement; TPP: Chap. 10 Cross-border Trade in Services

There may be a separate chapter or clause for professional services

Since TISA will establish a separate agreement on services trade, and there is a large and increasing number of small- and medium-sized enterprises in the service field, there may be substantive rules on state-owned enterprises in the TISA agreement

The word of state-owned enterprise is not seen in both the main text and the annex

State-owned enterprise

TISA

GTAS contains clauses in domestic regulations, Including the clause of GATS type about but usually lacks the “necessity” testing domestic regulations, and the “necessity” testing should be emphasized in the negotiation of accounting standards. This clause can be listed separately from the chapter on regulatory consistency, or it can be included in that chapter

GATS

Domestic regulations

Table 14.1 (continued)

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14.2.2 Trade in Financial Services (I)

The main content of the financial services trade rules in the TPP clause

In the TPP, there are 22 clauses in the main text of the chapter of trade on financial services, which is followed by five annexes: cross-border trade (mainly including the specific definitions of each contracting party on the content of cross-border trade on financial services), special commitments (including requirements on the removal of restrictions on asset management business, protection of information exchange by financial institutions, restrictions on the sale of insurance business by postal institutions, liberalization of electronic payment card business, and regulatory transparency), negative list ratchet mechanism (mainly provisions for Vietnam’s liberalization of financial services), authorities responsible for financial services and exceptions applicable to Brunei, Chile, Mexico, and Peru, the negative lists of the parties in specific industries are included in Annex III of the agreement. (II) 1.

Comparison with the contents of bilateral, multilateral and regional FTA agreements Regional level

Since cross-border financial services not only have the attribute of services trade, but also belong to the category of international capital flows to a large extent, this part has certain particularity in the free trade agreement. There are provisions on this subject in the chapters on services trade and investment. Since the start of the Canada-U.S. Free Trade Agreement (CUFTA), the United States has organized this part into a separate chapter, following the investment chapter and the cross-border services trade chapter. At present, the NAFTA-styled free trade agreement signed by the United States makes financial services as a separate chapter, which is one of many differences from the free trade agreements of the EU model. In particular, the U.S.-Republic of Korea Free Trade Agreement (UKFTA, signed in 2007 and effective in 2012), which represents one of the highest levels of current free trade agreements, has made commitments similar to the TPP, and its content and structure are basically similar. In addition to the differences in specific commitments, the UKFTA and the TPP are highly consistent on the issue of financial services. This also shows that the level of the TPP’s openness in the field of financial services has not exceeded the acceptable scope implemented in the extant free trade agreement. In addition, Article 20 of the 2012 U.S. Model Bilateral Investment Treaty also gave special provisions on financial services in the investment field, which fully reflected its attention to this field. 2.

Multilateral level

At the multilateral level, the norms involving financial services are mainly the Agreement on Trade-Related Investment Measures (TRIMs) and the General Agreement on Trade in Services (GATS) reached at the Uruguay Round of negotiations. There are

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no special provisions on financial services in TRIMs, and the definition and scope of financial services, domestic supervision, recognition, and dispute settlement mechanism are specified just in the form of annexes in GATS. As GATS itself has a relatively low level of openness and has not introduced the pre-accession national treatment principle and negative list management system, many countries have signed free trade agreements at the bilateral or regional level to further promote the opening of trade in financial services.

14.2.3 Rules for the Movement of Natural Persons The movement of natural persons is the fourth method of services trade under the GATS framework. The Uruguay Round of trade negotiations finally established its status of international law. Since the establishment of the rule for the movement of natural persons, the level of liberalization is still very low. The main reasons are: firstly, to maintain the level of employment in the country; secondly, to maintain talent and technological advantages; thirdly, to maintain social order; fourthly, to maintain national security. With the rapid development of trade in services, requirements for the liberalization level of natural persons’ movement, the major supplier of services, also became higher. Therefore, countries pay more attention to the issue of movement of natural persons during negotiations at multilateral, bilateral, and regional levels. From the currently completed or ongoing bilateral, regional and multilateral negotiations involving the liberalization of trade in services, ASEAN, APEC, and other regional economic organizations have actively explored the movement of natural persons within their respective frameworks and achieved some liberalization results; international organizations such as the International Labor Organization and the International Organization for Migration have made important contributions to the liberalization of natural persons’ movement in terms of international labor standards and international seminars; countries have also actively promoted the liberalization of natural persons’ movement through more flexible bilateral agreements. These efforts provide a more realistic approach to promoting the liberalization of natural persons’ movement. But on the whole, the process of liberalization of natural persons’ movement is still struggling due to the constraints of the institutional defects in movement of natural persons, trade barriers among member states, and domestic policy obstacles in member states. (I)

The main content of the movement of natural persons in the TPP clause

The chapter on movement of natural persons in the TPP clause contains 10 clauses. It mainly regulates and makes commitments on the temporary entry of business persons, and encourages the authorities of the TPP contracting parties to provide information on applications for temporary entry, ensure that application fees are reasonable, make decisions on applications and inform applicants of decisions as quickly as possible. The TPP contracting parties agree to ensure that information on requirements for

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temporary entry are readily available to the public, including by publishing information promptly and online if possible, and providing explanatory materials. The TPP contracting parties agree to ongoing cooperation on temporary entry issues such as visa processing. Almost all the contracting parties have made commitments on entry for each other’s business persons, which are in country-specific annexes. (II)

Comparison with GATS on the clause of the movement of natural persons

From the perspective of the definition of natural persons, the scope of “natural persons” stipulated by GATS includes the movement of natural persons that are subject to commercial presence, as well as the business movement of natural persons that are not subject to business presence and business visitors. And in the TPP text, the movement of “a natural person who is engaged in trade in goods, services, or investment activities, holding the nationality of a contracting party or a natural person who obtained permanent resident status in a contracting state before the signing of this agreement and enjoys the same treatment as residents of that country’s nationality” is all classified into the category of “short-term entry of business persons.” It pays more attention to the movement of business persons, which can also be understood as an opening to the movement of “high-tech and senior-management talents.” From the perspective of the basic conditions for the movement of natural persons, GTAS does not specify whether the occurrence of cross-border services is based on employment, contract, or other legal bases. The TPP annex clearly states that the short-term movement of business persons is mainly based on the movement of personnel before and after the business presence, the movement of professional and technical personnel during the implementation of business contracts, and general business travel and visits, making the legal basis for the provision of transnational services clearer and more targeted. From the perspective of the time limit for the movement of natural persons, the GTAS text only proposes short-term entry, not for the purpose of long-term residence and acquisition of the nationality of a member state, but there is no provision on the specific time limit. In the TPP text, various countries distinguish different types of “short-term business” entry behaviors, and “access” time is specified in detail according to different categories. From the perspective of cooperation among countries, GTAS has not made any commitments. In the TPP clause, in order to reduce member states’ concerns about national security, the contracting parties should strengthen cooperation in visa procedures and border security, such as the mutual provision of electronic visas, use of biometric technology, passenger information systems, and frequent passenger customs clearance procedures and so on. On the whole, TPP’s commitment to the movement of natural persons is clearer and more specific than GTAS, and it has not changed the preferential direction for “high-level” talents on the access threshold .

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Commitments of other regional and bilateral agreements on the movement of natural persons

Compared with the WTO multilateral negotiations in plight, the member states in regional and bilateral trade agreements are equipped with such conditions as close geographic locations, similar economic development levels, and close historical and cultural backgrounds, so it is easier for them to obtain breakthrough progress on the liberalization of the movement of natural persons. For example, in ASEAN’s free trade agreement, the provisions on the movement of natural persons exceed GATS in many aspects. Many countries have signed bilateral agreements to facilitate the movement of natural persons. Some agreements are based on the security considerations of the importers, stipulating that the exporters undertake part of the safeguard obligations; some agreements establish a mechanism to ensure the return of natural persons; and some agreements establish an assessment mechanism on the labor market. These agreements have overcome the shortcomings in GATS rules on the movement of natural persons to a certain extent and made useful explorations for promoting the liberalization of the movement of natural persons.

14.2.4 Progress of Regulation on Telecommunications Service Generally speaking, international trade in telecommunications services includes both cross-border telecommunications services (i.e. telecommunications services activities provided among telecommunication bureaus or stations of any nature in different countries or belonging to different countries) and commercial presence (trading through foreign direct investment). Telecommunications services often involve a country’s security issue, so most countries take it with reservations. Due to the particularity of trade in telecommunications services, market access has become a means of liberalizing international trade in telecommunications services. The GATT “Uruguay Round” included telecommunications and other services on the negotiation agenda for the first time. So far, there are two categories of WTO documents that mentioned trade rules on telecommunications services: one is the Trade in Services Agreement framework and its telecommunications annexes, and the other is the Basic Telecom Agreement, both of which clearly stipulated the conditions for market access. (I)

The basic content of telecommunications services in the TPP agreement

There are 26 clauses and two annexes in the telecommunications chapter of the TPP agreement text, which are applicable to any measures related to access and use of public telecommunications services and any obligatory measures and other measures related to public telecommunications service providers, but not applicable to broadcast or cable distribution of radio or television programming. The basic principle is to

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emphasize that the telecommunications market needs adequate market competition, which can bring more benefits to consumers. The TPP contracting parties promise that their main telecommunications service providers can provide interconnection, leased circuits services, co-location services as soon as possible on reasonable terms, and allow access to poles, ducts, conduits, and other facilities. At the same time, the contracting parties pledged to ensure regulatory procedures are transparent and regulatory measures are non-discriminatory against specific technologies when permits are required for the provision of services. (II)

Comparison with GATS and analysis

In the GATS text, telecommunications services appear as an annex to the trade in services and only contain six clauses. In the TPP text, telecommunications services have a separate chapter, including 26 clauses and two annexes. The specific differences are: First of all, the negotiation method is different. The telecommunications industry is traditionally a natural monopoly industry. Although a competitive landscape has been formed in the field of value-added telecommunications, there is still a general monopoly in the field of basic telecommunications. Therefore, in order to ensure the effective implementation of the contracting parties’ commitments on market access and national treatment, GATS adopts a positive list negotiation model, i.e., each contracting party submitted a schedule of commitment on market opening-up for its telecommunications services. The negative list negotiation method adopted by the TPP requires strict compliance with the provisions of the text as long as the telecommunications service field does not appear on the non-conforming list. Secondly, telecom services cover a wider scope. With the development of information technology, many new technologies have emerged in telecom services, which were not available when the GATS agreement was signed. Only the concepts of telecommunications, public telecommunications transport networks and services, and internal company communications are defined in the GATS telecommunications annex. In the TPP text, some new services appearing in telecom services are defined, such as commercial mobile services, international mobile roaming services, mobile number portability, virtual server hosting. Thirdly, the content of the specification is richer. Among the six clauses of GATS, only the fifth clause, “Access to and Use of Public Telecommunications Transport Networks and Services”, specifies the obligations and access of public service providers. In the TPP clause, in addition to specifying the access and use of major telecommunications networks, it also specifies in details interconnection, international mobile roaming, physical address sharing, submarine optical cable system, allocation and use of scarce telecommunications resources, and application procedures of licenses. Fourthly, regulatory measures are more specific. It is made clear that all contracting parties shall establish regulatory agencies for telecommunications services under the principles of fairness, equality, and transparency to deal with problems arising in the interconnection of telecommunications services, issuing licenses, and resolving disputes.

Chapter 15

International Investment Governance Entity

The national government is the main participant in international investment governance. With the development of globalization and changes in major issues facing international investment governance, the structure of participants in international investment governance has undergone corresponding changes as well. Some emerging governance entities and platforms for investment policy coordination have gradually come into being, becoming important supplements to existing participants in international investment governance.

15.1 National Government and International Investment Governance The national government participates in international investment governance by signing bilateral investment treaties. In order to protect private overseas investment, especially to protect the transnational investment from the expropriation of host countries and other forms of intervention, capital exporters and capital importers started to sign investment-specific treaties to protect and promote international investment and maintain a healthy investment environment from the 1840s. For example, the “Friendship, Commerce and Navigation Treaties” (FCN) concluded by the United States with some countries after World War II contained not only various provisions on property protection, but also the content of protecting private overseas investment. However, due to the lack of procedural provisions on protecting international investment and the excessively broad scope of such treaties, the United States and Thailand signed the last Friendship, Commerce and Navigation Treaties in 1966, and no further treaties have been concluded since then. Since it was difficult for FCN to effectively protect overseas investment, countries such as Germany and Switzerland began to sign specialized bilateral agreements with capital importers to promote and protect investment from the late 1950s. In 1959, the Federal Republic of Germany signed the bilateral agreements to protect © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_15

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investment with Pakistan and the Dominican Republic, which were regarded as the first two bilateral investment treaties in the modern sense. Such bilateral investment agreements mainly regulate investment-related matters, including both substantive provisions on promoting and protecting investment, and procedural provisions on subrogation claims and settlement of investment disputes. The United States has also started to adopt the model of promoting and protecting investment treaty since 1977. In 1982, the United States and Panama signed the first bilateral treaty for investment promotion and protection. In addition to participating in international investment governance by signing bilateral investment treaties, governments of various countries also actively participate in international investment governance through multilateral legislation on international investment. After the United Nations was established, under the impetus of the governments of developing countries, the Resolution on Permanent Sovereignty over Natural Resources was passed in 1952, the Declaration on the Establishment of a New International Economic Order and the Declaration and Program of Action on the Establishment of a New International Economic Order were passed in 1974, thus affirming the permanent sovereignty of host countries over natural resources and the jurisdiction over transnational companies. After the 1970s, with the increasing of international direct investment activities, there have been growing contradictions and disputes on international direct investment between capital exporters and host countries, as well as between investors and host countries. In order to maintain a stable international investment environment, various governments have worked hard to reach international multilateral agreements on foreign direct investment, such as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States in 1965, the Guidelines for Multinational Enterprises in 1976, and the investment-related General Agreement on Trade in Services, the Agreement on Trade-Related Investment Measures, and the Agreement on Trade-related Aspects of Intellectual Property Rights in the WTO institution.

15.2 Non-state Actors and International Investment Governance In the field of global economic governance, the rapid increase in the number and frequent activities of non-state actors is one of the prominent phenomena in recent years. This is also reflected in the field of international investment governance. Nonstate actors mainly refer to entities outside the state that can independently participate in international affairs, generally including intergovernmental international organizations, non-governmental organizations, and transnational companies.

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15.2.1 Intergovernmental International Organization Intergovernmental international organizations are important participants in international investment governance. Representative intergovernmental international organizations participating in international investment governance include the World Trade Organization, the World Bank, the Organization for Economic Cooperation and Development, the United Nations Conference on Trade and Development, and the International Labor Organization. (I)

The World Trade Organization (WTO)

The WTO has been actively participating in international investment governance. Before the Uruguay Round of negotiations reached the WTO agreement, issues on international investment had long not been included in the GATT framework.1 In the WTO agreements reached after eight years of the Uruguay Round of negotiations, the Agreement on Trade-Related Investment Measures, the General Agreement on Trade in Services, the Agreement on Trade-Related Aspects of Intellectual Property Rights, and the Agreement on Subsidies and Countervailing Measures are directly related to international investment.2 These agreements are also an important part of the few multilateral investment rules that are truly binding among numerous international investment documents (Shen 1996; Liu 2000). In the 1990s, the OECD-dominated negotiations on multilateral investment treaties failed. Some developed countries proposed to formulate a new Multilateral Investment Agreement (MIA) under the WTO framework. In November 1999, at the Ministerial Conference held in Seattle, Japan, and the European Community tried their best to initiate negotiations on the MIA issue, but this proposal was not realized due to the opposition from members of developing countries and the NGOs. The WTO Ministerial Conference in Singapore decided to establish the Working Group on the Relationship between Trade and Investment in 1996 and conducted extensive and in-depth discussions on whether to initiate MIA negotiations under the WTO system. In September 2001, the draft ministerial conference declaration issued by WTO members specifically mentioned the MIA issue. After that, issues on investment failed to make progress at the Cancun Ministerial Conference in 2003, the

1

The Havana Charter passed in 1947 contained some provisions on the treatment of foreign investment, but the Charter was not approved to take effect. In 1955, the GATT contracting parties passed a resolution on international investment and economic development, which required countries to conclude bilateral agreements to provide security and protection for foreign investment. At the GATT Ministerial Conference held in December 1982, the United States first proposed to include the investment issue in the GATT system, but it was cancelled due to the opposition from members of the European Community and developing countries. Therefore, before the Uruguay Round, issues on investment were not included in the official topics of GATT multilateral negotiations. 2 Some scholars believe that all provisions in the WTO agreement that have the significance of promoting and protecting international investment are international investment norms. Therefore, all the provisions in the WTO agreement will have a direct or indirect impact on international investment, and they are all significant development in the field of international investment law.

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Hong Kong Ministerial Conference in 2005, and the Geneva Ministerial Conferences in 2009 and 2011. (II)

The World Bank

In the 1960s, in order to reduce investors’ concerns about non-commercial risks of investing in developing countries and encourage foreign investment to flow to developing countries to strengthen international cooperation, and promote economic development, the World Bank drafted the Multilateral Investment Guarantee Agency Agreement, and it was finally passed in 1985. The Multilateral Investment Guarantee Agency (MIGA) was established according to this agreement. This agency is the only international economic organization in the world specialized in political risks. It aims to promote foreign direct investment in developing countries to support economic growth, reduce poverty and improve people’s livelihood. MIGA’s strategic priorities include: invest in the poorest countries; invest in countries affected by conflicts; complex transformation projects; South-South investment. As a branch of the World Bank and also an independent legal person,3 the MIGA seldom takes politics as a reference factor in reviewing the qualification of the investment projects. It can break through the limitations of the political interests of countries and better create conditions for the international flow of capital. Insurance provided by the MIGA mainly covers currency convertibility, expropriation and similar measures, breach of contract, war and civil disturbance.4 Moreover, upon the joint application of investors and the host country, MIGA’s coverage can be extended to other specific non-commercial risks in addition to the above risks with the approval of the board of directors by a special majority vote. MIGA provides security guarantees for the political risks of international investment, especially for those capital exporters (mainly developing countries) that have not established overseas investment guarantee agencies. It also plays a supplementary role in the business of other investment guarantee institutions, and has effectively made up for the shortcomings of overseas investment insurance agencies in various countries and regions (Lu et al. 2007). (III)

The Organization for Economic Cooperation and Development (OECD)

The Organization for Economic Cooperation and Development (OECD) is mainly composed of developed countries, so its members tend to view foreign direct investment from the perspective of developed countries. In June 1976, the OECD passed the Guidelines for Multinational Enterprises, and currently it has about 40 members, most of which are the sources of foreign direct investment and the home countries of many famous transnational companies. From 1995 to 1998, OECD members finally reached the Multilateral Agreement on Investment (Draft) (MAI Draft) after arduous negotiations. However, due to differences among various countries on the substantive issues of many investment rules, 3

Article 1 of the Convention Establishing the Multilateral Investment Guarantee Agency. See Clause 1, Article 11 of the Convention Establishing the Multilateral Investment Guarantee Agency. In addition, Article 1.22 of the MIGA’s Operational Regulations gives a more detailed explanation of the insurance coverage.

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the MAI Draft ultimately ended in failure. The MAI Draft collectively reflected the basic stances and attitudes of developed countries on the main issues of international investment law since the mid-1980s. It also reflected various contradictions and conflicts among Western developed countries in concluding multilateral investment agreements in international investment. Nowadays, with the rapid advancement of economic globalization, it is difficult for countries to participate widely in the international investment legal framework created exclusively by members of the OECD, the “rich club”, a framework that also lacks transparency. (IV)

Other representative intergovernmental international organizations

In addition to the aforementioned intergovernmental international organizations, the United Nations Conference on Trade and Development (UNCTAD) and the International Labor Organization also actively participate in international investment governance. In 1985, UNCTAD proposed the International Code of Conduct on the Transfer of Technology (Draft), aiming to standardize international practices on technology trade. Five conferences and negotiations were held from 1979 to 1985, but the Draft was not passed due to differences among countries. In 1977, the International Labor Organization adopted the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy. The document intended to “provide a guiding route to multinational enterprises, the government, the national employers’ and workers’ organizations in areas such as employment, training, conditions of work and life, and labor relations”. Its purpose is “to encourage the positive contributions which multinational enterprises can make to economic and social progress, and minimize and resolve the difficulties to which their various operations may give rise”.

15.2.2 Non-governmental Organizations Since the 1990s, non-governmental organizations (NGOs) have become increasingly important participants in global economic governance. In international economy, the NGOs have become the fourth force besides countries, multinational corporations, and intergovernmental international organizations, and they are actively showing the ability to interfere in international decision-making and the determination to participate in international governance. The NGOs are also an important participant in international investment governance. Although not binding, the first specialized international document on foreign direct investment in the world, the International Code of Fair Treatment for Foreign Investment, was formulated by the non-governmental organization of the International Chamber of Commerce in 1949. Though the MAI negotiations dominated by the OECD failed mainly due to divergences and contradictions of the developed countries on foreign direct investment, the pressure some NGOs put on was the external reason that caused the termination of the MAI negotiations.

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15.2.3 Multinational Companies In global investment governance, multinational companies are not only an important regulatory object but also an important participant in rule-making. From the 1970s, as some sensational cases were exposed about abuse of rights by multinational corporations, various international codes of conduct were then formulated aiming at regulating multinational corporations, such as the OECD’s Guidelines for Multinational Enterprises, and the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy from the International Labor Organization. However, in the 1980s and 1990s, the focus of attention was back to protecting the rights of multinational companies. In fact, in most contracts signed by multinational corporations with host countries, it is generally agreed that international arbitration should be used when disputes arise from the applicable contract.5 This enables multinational companies to invoke international laws and to become undertakers of specific rights in international laws. In addition, many multinational companies are also involved in international investment governance by participating in formulating industry standards and production codes.

15.3 Emerging Governance Entity for Investment: The G20 With the changes in the game pattern of traditional governance entities, emerging governance mechanisms such as the Group of Twenty (G20) have received more attention. Different from traditional international governance mechanisms, networks among national governments are characterized by being more flexible and able to respond quickly to governance issues and challenges. Some intergovernmental networks are relatively loose and informal mechanisms, usually without a secretariat or other institutions, while other networks are more similar to traditional intergovernmental organizations, such as the Asia–Pacific Economic Cooperation organization and the Basel Committee on Banking Supervision. These non-mandatory dialogue and cooperation mechanisms among countries have become an important supplement to traditional international governance mechanisms (Xue and Yu 2015). In the field of international investment governance, the G20 has performed remarkably in recent years. For example, the G20 has been committed to promoting infrastructure investment and financing in recent years. In the Multi-Year Action Plan on Development concluded at the Seoul Summit in 2010, G20 members elaborated a comprehensive action plan on infrastructure, including the goals to “overcome obstacles to infrastructure investment, develop project pipelines, improve capacity and facilitate increased finance for infrastructure investment.” In the Cannes G20 Declaration in November 2011, infrastructure was seen as a priority task to eliminate bottlenecks that hinder the development of developing countries. In the Declaration of 5

For example, in 1933, Article 22 of the leasing agreement signed between Iran and Anglo-Iranian Oil Company stipulated that disputes between the parties should be submitted for arbitration.

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the St. Petersburg Summit in September 2013, it was clearly stated to “emphasize the importance of long-term financing for investment, including for infrastructure and SMEs to boost economic growth, job creation and development”. The 2014 Brisbane Summit set priority topics in five fields and ten aspects, including investment and infrastructure, and proposed to establish a Global Infrastructure Hub for project information and data support (Global Infrastructure Hub). The hub was formally established in Sydney in October 2015. It has become an important contribution to the G20 in promoting infrastructure investment and cooperation in recent years, and is considered to be “the first time when infrastructure investment has been raised to the height of global governance” (Shen 2016).

References Liu, Sun. 2000. On the Impact of WTO Agreements on International Investment Law. Studies in Law and Business 1: 74–79. Lu, Jinyong, Jingsong Yu, and Chunsheng Qi, eds. 2007. New Discussions on International Investment Treaties and Agreements. Beijing: People’s Publishing House. Shen, Wenhua. 1996. Evaluation and Analysis on International Investment Code in the WTO Agreements. Chinese Journal of Law 2: 135–143. Shen, Minghui. 2016. Forging an Inclusive International Economic Governance System. Northeast Asia Forum 2: 75–86. Xue, Lan, and Hanzhi Yu. 2015. Global Governance Toward a Public Management Paradigm: An Analysis Based on a ‘Issue-Agency-Mechanism’ Framework. China Social Sciences 11: 76–91.

Chapter 16

International Investment Governance Field

With the in-depth development of globalization and the rapid changes in the international economic situation, there have been growing tensions in the political sensitivity of international investment cases. There’s also growing tension in protecting private property rights and allowing the government to take reasonable measures to achieve other social goals. Despite the further development of international investment, problems in this field are also mushrooming, which need to be reformed. The development of international investment agreements is fragmented, and the number of international investment disputes is increasing year by year. The emergence of these new problems makes the field of international investment governance continue to expand.

16.1 The Main Content of International Investment Governance 16.1.1 Promoting International Investment to Enhance Economic Growth Momentum Investment is the core of economic growth and sustainable development. It can enhance the production capacity of the economies, create jobs, and promote income growth. However, the financial crisis has led to a decline in investment, especially in developed countries. Therefore, currently it is still the preferred policy to promote physical investment to achieve economic growth. To promote the cross-border flow of investment, it is necessary to provide a stable environment for international investment. It is also critical to oppose investment protectionism to maintain such an environment. In this regard, the work done by the G20 is a typical example. Since the first leaders’ summit in Washington D.C. in 2008,

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the declaration of each G20 leaders’ summit has always emphasized opposition to investment protectionism. At the same time, since the 2008 Washington Summit, the G20 has called on the WTO, the OECD, and the UNCTAD to supervise the trade and investment measures taken by G20 members according to their respective responsibilities, and publicly reported the implementation of the above commitments by G20 members. As of October 2015, the OECD and the UNCTAD had jointly issued the Report on G20 Investment Measures for 14 times. The most recent report shows that since the supervision was carried out in 2009, almost all the investment policy changes taken by G20 members are to increase the openness to foreign investment. More than 80% of the specific measures for foreign direct investment are designed in nature to make investment more liberalized.

16.1.2 Advancing the Reform of the International Investment System Compared with the international trading system with the WTO as the core and the international financial system with the IMF as the core, the international investment field has not yet reached an overall and comprehensive multilateral investment agreements with binding force so far. Since the 1970s, with the increase of international direct investment activities, there have been growing contradictions and disputes on international direct investment between capital exporters and host countries, as well as between investors and host countries, enabling an increase in international multilateral agreements on foreign direct investment. However, among the numerous international investment documents, the only truly binding multilateral investment agreements are the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, the Convention Establishing the Multilateral Investment Guarantee Agency, and the General Agreement on Trade in Services, the Agreement on Trade-Related Investment Measures, and the Agreement on TradeRelated Aspects of Intellectual Property Rights, which are all investment-related in the WTO system. Therefore, the formulation of a comprehensive and substantive multilateral investment agreement with general binding force is still a goal that so far the international community has pursued but failed to achieve. At the same time, with the development of regional integration, the current international trade and investment rule system shows a “multi-centered” and “fragmented” development trend. The long-term stagnation of the WTO negotiations has given birth to three major global frameworks of rules aiming at promoting international market integration and establishing multilateral cooperation mechanisms, namely the “Trans-Pacific Partnership Agreement” (TPP) and the “Trans-Atlantic Trade and Investment Partnership” (TTIP), and the “Trade in Services Agreement” (TISA). The potential systemic impact of these “mega-regional agreements” negotiations has attracted widespread attention from the international community. Regional economic

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cooperation has changed cooperation and competition relations among countries into relations among regional groups. Although it helps to solve regional problems in global investment governance, it has certain negative effects on global investment governance: Firstly, regional cooperation is discriminatory and will distort global resource allocation to a certain extent and marginalize non-participating third parties; secondly, regional cooperation may weaken members’ motivation to participate in multilateral cooperation; thirdly, regional cooperation may cause further inconsistencies due to the overlapping with existing international investment agreements. In addition, the number of bilateral international investment agreements continues to increase. According to the statistics of UNCTAD’s World Investment Report in 2016, as of the end of 2015, there were 3,304 international investment protection agreements around the world, among which 2,946 were bilateral investment agreements. The huge number of international investment agreements are inconsistent or even contradictory not only in form, but also in content, forming a “spaghetti bowl phenomenon” and leading to fragmented international investment cooperation. Moreover, the newly signed international investment agreements follow different agreement scopes, and most of regional agreements also stipulate that the existing bilateral agreements of the contracting parties continue to be effective, which makes the international investment rule system more complicated. Therefore, currently, the international investment system is at a turning point. As the abovementioned issues and challenges come to surface, stakeholders have begun to extensively discuss the role and impact of the international investment system. On the one hand, international investment agreements are still regarded as a very important policy tool that can create a stable and predictable business environment to protect and attract foreign direct investment. But at the same time, all parties widely agree that it is necessary to reform the network of international investment agreements and the dispute settlement system. But many countries hold a wait-and-see attitude on how to reform. Countries are at different stages of economic development and have different investment scales, so there are still great divergences in the demands for the international investment system.

16.1.3 Reforming the Dispute Settlement Mechanism for International Investment In recent years, foreign investors may unexpectedly file lawsuits on investment dispute settlement between investors and the host countries, enabling the international community to gradually pay attention to the reform of investment dispute settlement mechanism. In the negotiations of mega-regional agreements, such as the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP), the investor-state dispute settlement mechanism is the most prominent

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topic in the public debate. It has become one of the main challenges facing the current international investment governance to solve the problem of this mechanism. Nowadays, there are mainly the following problems in the dispute settlement mechanism for international investment: (I) There is a year-on-year increase in investor-state dispute settlement cases filed against host countries. According to the latest statistics from the United Nations Conference on Trade and Development, there were 767 investor-state dispute settlement (ISDS) arbitrations in 2016, an increase of 62 cases over the previous year. The increasing number of investor-state dispute settlement cases has triggered a crisis in the legitimacy of the current system and has attracted widespread attention from the international community. (II) Systemic shortcomings continue to emerge in the investor-state dispute settlement mechanism. There are mainly six aspects of shortcomings. The first is insufficient legitimacy, the second is insufficient transparency, the third is inconsistent verdicts on the same facts, the fourth is difficulty in correcting wrong judgments, the fifth is the question of the independence and impartiality of arbitrators, and the sixth is that arbitration situation may be “planned.” For example, investors can set up a company in an intermediary country, and the host country will be resorted to investorstate dispute settlement procedures with the help of the international investment agreement concluded between the intermediary country and the host country. (III) The high arbitration fees and arbitration compensations out of investorstate disputes have become a major burden on the public finances of some losing countries. The average expense for lawyers and arbitrators in each arbitration case is as high as 8 million dollars. This high arbitration fee has become a major concern of the state and investors, especially small- and medium-sized enterprises. From a national perspective, even if the government wins the lawsuit, the court may not order the plaintiff investor to pay the defendant’s costs; if the government loses the lawsuit, it will have to pay huge damages. The international community has reached a consensus on the necessity of reforming the existing investor-state dispute settlement mechanism, but there are still divergences on the specific reform routes and plans. Five routes and plans have been formed to reform the investment dispute settlement mechanism: (I) Advocating more use of alternative dispute settlement methods like reconciliation and mediation. Compared with arbitration, alternative dispute settlement methods such as reconciliation and mediation can help save time and money, avoid escalation of disputes, and maintain cooperative relations between disputing parties. Its greatest role is to prevent disputes, but there is no guarantee that disputes will definitely be resolved. It is an auxiliary reform method. (II) Restricting investors from resorting to international arbitration dispute settlement mechanisms. International investment agreements narrow down the subject scope of investor-state dispute settlement in the appeal, or require involved parties to maximally take local remedies before resorting to international arbitration. A more extreme method is to abandon the investor-state dispute settlement mechanism as a way to settle disputes. It will help slow down the spread of investor-state dispute settlement lawsuit and strengthen the domestic judicial system to restrict

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investors from resorting to international arbitration dispute settlement mechanism. This method allows investors to lodge appeals only in the domestic courts of the host country or apply for diplomatic protection in the home country. (III) Establishing an arbitration appeal mechanism. A permanent institution will be set up to substantively review the awards from the arbitral tribunal, when prestigious law workers are appointed from various countries as members of this institution. This approach is conducive to making consistent and relatively balanced arbitration awards. It shall be coordinated with the substantial reform of international investment agreements to establish the appeal mechanism. (IV) Establishing a permanent international investment court. It is composed of permanent judges appointed by various countries to replace the current system of temporary arbitration tribunals, which helps fundamentally resolve people’s concerns about the legitimacy of investor-state dispute settlement mechanisms. It requires the full political willingness of all countries to establish the International Investment Court, and it may trigger sovereignty concerns among countries, which is difficult to achieve in the short term. (V) Revising certain content of the investor-state dispute settlement system in international investment agreements. Countries can, according to their own conditions, revise relevant content of existing international investment agreements, and choose to deal with the most relevant issues and concerns in their opinions. This method does not touch fundamental issues of the investor-state dispute settlement mechanism. In short, although the reform of the international investment dispute settlement mechanism has a clearer reform path, it is still difficult with slow progress. In addition to the abovementioned issues, these are also issues that need to be urgently resolved in current international investment governance to promote investment facilitation, strengthen the supervision over multinational companies, and balance public regulatory powers between investors and the host country.

16.2 International Investment Governance Rules With the rapid development of international direct investment after World War II, the rules of international investment governance have become more and more mature and formed an independent system. This system mainly includes international agreements such as bilateral investment agreements, regional and global multilateral investment treaties, normative resolutions of the United Nations General Assembly, and international practices. The following text analyzes and reviews international investment governance rules mainly from three levels, namely, the bilateral investment agreements, the regional investment agreements, and the global multilateral investment agreements.

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16.2.1 Bilateral Investment Treaty Bilateral Investment Treaty (BIT) is a specialized investment treaty signed between capital exporters and capital importers for the purpose of protecting and promoting international investment and maintaining a healthy investment environment. It is the most important law form to adjust international investment relations, and also the most important tool to standardize investment, protect and promote investment in the world. It is generally believed that BIT, as the most effective legal means to adjust international investment relations in the current international law, has three major functions: protecting investment, facilitating the entry and operation of foreign capital, and promoting overall economic liberalization in developing countries. BIT adopts a broad investment definition, grants national treatment, most-favored-nation treatment, and fair and equitable treatment for investors of the other contracting party, and follows provisions on expropriation or nationalization conditions and compensation standards, foreign exchange transfers, and procedures for investment dispute settlement to provide foreign investors with legal protection for their investments in the host country. As an international investment treaty, BIT can provide investors with a clear, stable and transparent investment legal framework. It also provides investors with the possibility of bypassing the host country and directly seek for international relief in the event of a dispute. Therefore, it is generally considered that BIT’s enhanced protection functions will promote the growth of FDI size. Although most bilateral investment protection treaties do not change the main economic factors of foreign direct investment, they can improve some decisive factors in policy and institution, thereby increasing the possibility of developing countries with BITs receiving more foreign direct investment (Lu et al. 2007). In recent years, the overall number of BITs has continued to increase, but the growth rate has slowed down significantly. Some developing countries are being separated away from the international investment system in Africa, Asia and Latin America, and will not renew agreements after the old ones expire. The main reason is that in recent years, countries have widely understood the potential legal liabilities that BIT may involve, enabling them to become rational to make BITs (Jandhyala et al. 2011). In addition, in the practice of bilateral investment agreements, there are inequalities or imbalances between developed countries and developing countries in terms of negotiation status and capabilities, negotiation goals and effects, powers and benefits. The international community, especially developing countries, has actively explored the innovative pathway to practice BIT (Zeng 2010). In terms of content, there is more content in the definition part of the newly concluded BITs in recent years. For example, the definition of terms in the US BIT model has increased from 5 items in the 1984 model to 35 items in the 2012 model. There are more detailed provisions on fair and equitable treatment, expropriation rules, significantly more provisions on exceptions, further refinement of provisions on

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footnotes and annexes,1 and the investor-host country dispute settlement mechanism. In terms of investors’ protection policies, fair and equitable treatment has been greatly reduced, and it has become increasingly common regulations to allow host countries to apply their laws to delay the transfer of investment gains in order to maintain sound and integral financial systems. In addition, it has become very common rules to emphasize that an investment must comply with the laws of the host country, while more and more BITs have included content about environmental and social development and corporate social responsibility. Some BITs have specifically added new clauses to balance the rights and obligations between the state and enterprises to ensure the consistency of BIT with other public policies.

16.2.2 Regional Investment Treaty Regional investment treaties refer to regional multilateral treaties signed by regional international economic organizations aiming to coordinate investment activities among member states. There are two main forms: One is a specialized investment agreement; the other is the investment clause included in a trade agreement or an economic cooperation agreement (Lu et al. 2007). From the perspective of the impact on international direct investment flow, regional investment agreements have the functions of generating “investment creation” and “investment transfer”. Since 2007, the increased number of BITs has declined year by year, and the number of regional investment agreements has steadily increased with the strengthening of regional cooperation. According to the statistics of the World Investment Report in 2016, as of the end of 2015, the number of other international investment agreements except BITs reached 358. The rapid increase in the number of regional trade agreements that contained investment clauses was mainly due to three reasons: economic benefits, the needs for political and security policies, and the shortcomings of the multilateral trading system (Zeng 2004). At the beginning of development, regional investment agreements were mainly signed between countries in the same region, but since the 1990s, different countries and groups across regions, continents, and oceans have begun to negotiate and conclude preferential trade and investment agreements. Regional investment agreements have also evolved from being concluded only between developed countries at the beginning to being concluded between developed countries and developing countries, and recently between developing countries. Compared with BITs, regional investment agreements generally cover many economic matters, and the scope, methods, and contents involved are quite different. Generally speaking, the main purpose of this type of agreements is to promote trade and investment. The investment rules mainly focus on the investment liberalization, but sometimes also focus on investment protection and promotion. Usually, 1

Taking annexes as an example, the 2004 BIT models of the United States and Canada both had 4 annexes.

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it also includes investment-related issues, such as intellectual property protection and competition. Currently, the representative regional investment agreements that have come into effect are the North American Free Trade Agreement and the China-ASEAN Free Trade Area Investment Agreement. (I)

North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) was formally signed by the United States, Canada and Mexico on August 12th, 1992, and it officially came into effect on January 1st, 1994. NAFTA is a comprehensive agreement that covers goods trade, services trade, investment, intellectual property protection, competition policy, dispute settlement mechanism, and so on. Among them, Chap. 11 specifically stipulates investment rules.2 From the perspective of NAFTA’s investment rules, it stipulates a wide range of investment and investor definitions, high standard investment treatment, strict requirements on investment performance, high-level expropriation and compensation standards, and efficient and unique investment dispute settlement mechanism. It is known as the most extensive clause in regional multilateral international agreement with the highest standard in the aspect of investment protection (Ye 2002). The most distinctive part of NAFTA is the provision of the investor-host country investment dispute settlement mechanism. NAFTA stipulates that private investors can directly participate in the dispute settlement procedure and become the “plaintiff,” thus breaking through the traditional international law followed by the general FTA and WTO dispute settlement mechanisms, i.e. the investment dispute is mainly settled between two countries or international organizations. Private investors cannot initiate dispute settlement procedures. This has become a major development in the dispute settlement mechanism of international investment agreements and provides private investors with more extensive and substantive protection. (II)

China-ASEAN Free Trade Area Investment Agreement3

In 2002, China and ASEAN signed the Framework Agreement on Comprehensive Economic Cooperation between the People’s Republic of China and the Association of Southeast Asian Nations. Afterwards, the two parties implemented the “Early Harvest Program” in 2003, signed the Agreement on Trade in Goods and the Agreement on Dispute Settlement Mechanism in 2004, and signed the Agreement on Trade in Services in 2007. In 2009, China and ASEAN signed the China-ASEAN Free Trade Area Investment Agreement (hereinafter referred to as the China-ASEAN Investment Agreement), marking the completion of the main legal procedures for the construction of the China-ASEAN Free Trade Area. The agreement mainly has the following features: 2

For details, see the NAFTA website, http://www.nafta-sec-alena.org/en/view.aspx?conID=590& mtpiID=142. 3 The full name is “The Investment Agreement of the Framework Agreement on Comprehensive Economic Cooperation between the Government of the People’s Republic of China and the Governments of the Member States of the Association of Southeast Asian Nations.”

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In terms of content, the China-ASEAN Investment Agreement provisions are comprehensive and rich. There are 27 articles in the agreement. In addition to the definition, scope of application, national treatment, most-favored-nation treatment, expropriation, compensation for losses, transfer and profit repatriation, investment dispute settlement, and other aspects in common regional investment agreements, it also contains the denial of benefits, general exceptions, security exceptions, transparency and relations with other agreements. In terms of investment protection level, the overall level of the China-ASEAN Investment Agreement is not high. For example, the agreement imposes multiple restrictions on the application of the most-favored-nation treatment clause. In terms of its relations with other BITs, the China-ASEAN Investment Agreement makes the legal environment for international investment between China and ASEAN countries more complicated. Before the signing of the China-ASEAN Investment Agreement, China had signed BITs with the ten ASEAN countries,4 among them, nine BITs with the other nine countries had taken effect except for the ChinaBrunei BIT. Therefore, the international investment between China and the other nine ASEAN countries is both regulated by the China-ASEAN Investment Agreement and nine bilateral BITs, while the international investment between China and Brunei is completely regulated by the China-ASEAN Investment Agreement. The BITs between China and ASEAN countries inherently have the disadvantage of uneven protection levels. The newly signed China-ASEAN Investment Agreement has created unified international investment protection rules for the first time within the scope of the China-ASEAN Free Trade Area, and begun to pay attention to balancing the relation between the private interests of investors and the sovereignty of the host country. However, its protection level is not high, while it also complicates the legal environment for international investment between China and ASEAN countries. To sum up, although the current China-ASEAN Investment Agreement has shortcomings such as low investment protection levels, the signing of the agreement is of great significance for China and ASEAN countries to open up their markets to each other and promote trade and investment liberalization and facilitation. Countries need to work together to gradually improve the problems in the agreement. When conditions are ready, it can be considered to gradually abolish the previous BITs signed between China and ASEAN countries so that it can make the legal environment for international investment between China and ASEAN countries simple, clear and uniform, thus further facilitating international investment in Southeast Asia.

4

The specific years for the BITs signed between China and the 10 ASEAN countries are as follows: China-Thailand BIT (1985), China-Singapore BIT (1985), China-Malaysia BIT (1988), ChinaPhilippines BIT (1992), China-Vietnam BIT (1992), China-Laos BIT (1993), China-Indonesia BIT (1994), China-Cambodia BIT (1996), China-Brunei BIT (2000), China-Myanmar BIT (2001).

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16.2.3 Global Multilateral Investment Rules Global multilateral investment agreement, also known as multilateral investment norm, multilateral investment rule, and multilateral investment framework,5 is a kind of international investment agreements. The 1948 Charter for International Trade Organization was the earliest international multilateral agreement on foreign direct investment after World War II, but since the organization was not established, the document did not take effect. The International Code of Fair Treatment for Foreign Investment formulated by the International Chamber of Commerce in 1949 was the first specialized international document on foreign direct investment which was passed, but the agreement was not binding. After the 1970s, there was an increase in international multilateral agreements on foreign direct investment. The representative ones included the Convention on the Settlement of Investment Disputes between States and Nationals of Other States formulated by the World Bank in 1965, the Guidelines for Multinational Enterprises released by the OECD in 1976, and the International Code of Conduct on the Transfer of Technology (Draft) proposed by UNCTAD in 1985, the Convention Establishing the Multilateral Investment Guarantee Agency adopted by the World Bank in 1985, the Guidelines on the Treatment of Foreign Direct Investment issued by the World Bank in 1992, the Multilateral Agreement on Investment (Draft) drafted under the organization of the OECD from 1995 to 1998, and the General Agreement on Trade in Services, the Agreement on Trade-related Investment Measures, the Agreement on Trade-related Aspects of Intellectual Property Rights which are investment-related in the WTO system, but only several international investment agreements are truly binding. (I)

Convention Establishing the Multilateral Investment Guarantee Agency

The Convention Establishing the Multilateral Investment Guarantee Agency, also known as the Seoul Convention, was passed at the World Bank Annual Meetings in Seoul on October 11th, 1985 and formally entered into force on April 12th, 1988. The Chinese government signed and approved the Seoul Convention respectively on April 28th and April 30th, 1988, and became one of the original members of the Convention. In accordance with the Convention, the Multilateral Investment Guarantee Agency (MIGA) was established.6 China is the sixth largest shareholder of MIGA. As a developing country, the Chinese government has carried out cooperation with this institution many times in the past period to provide guarantees and other services for foreign investment in related industries in China, which has played a good role in attracting foreign investment in China (Liu 2011). At present, China’s foreign investment is increasing rapidly, and the non-commercial risks covered by MIGA 5

When the WTO conducts multilateral investment negotiations, it is called the Multilateral Framework on Investment (MFI). 6 For more detailed information on the multilateral guarantee agency, see the previous section on International Investment Entity.

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can also play an important role in the overseas investment of Chinese companies, i.e., providing protection against political risks. (II)

Convention on the Settlement of Investment Disputes between States and Nationals of Other States

In the 1950s, since the methods and principles were missing for resolving international investment disputes accepted by both developed countries and developing countries, international direct investment encountered significant obstacles. In order to solve the above problems, under the initiative of the World Bank, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States was concluded in Washington D.C. in March 1965, also known as the Washington Convention, and came into effect on October 14th, 1966. China signed the Convention on February 9th, 1990, and the Convention officially entered into force on February 6th, 1993. The Washington Convention is currently the only international convention that resolves investment disputes between foreign investors and the country where the investment is located. The International Center for Settlement of Investment Disputes (ICSID), established in accordance with the Convention, is headquartered in Washington, D.C. Its purpose is to facilitate mediation and arbitration, and it is especially responsible for resolving investment disputes between the host country and foreign investors. In recent years, in the settlement of investment disputes, ICSID has been criticized for such shortcomings as its conflicting rulings, expanding its jurisdiction in order to expand its power, and biased rulings for investors’ economic benefits regardless of the social benefits of host countries, so there are calls for reform. Some countries have announced to withdraw from the Convention,7 and other countries have made some changes to the International Investment Agreement. Some scholars analyzed the strategies taken by some developing countries that withdrew from this mechanism in order to reduce the legal risks of international claims at the arbitration tribunal. They found that it is a better way for developing countries to seek for re-negotiations to reduce the possible negative impact from international investment arbitration than to seek to withdraw from this mechanism (Lavopa et al. 2013). Cai (2011) believed that the root of the crisis in international investment arbitration lies in its commercialization, and therefore, the “de-commercialization” should be gradually promoted for investment arbitration. Yu (2011) believed that the ICSID should reserve the necessary space for the host country to safeguard national security and public benefits by setting necessary exception clauses in the current investment treaties, improve and perfect the provisions of core clauses in investment treaties, and reasonably balance the relationship between the host country and investors on the protection of rights and benefits. Foster (2010) suggested that investors can be encouraged to take the host country’s administrative or judicial remedies when the investment disputes occur, seeking a balance between investor protection and national sovereignty, and promoting the long-term development of investment treaty arbitration. 7

Venezuela announced its intention to withdraw from the ICSID Convention in January 2012. Previously, Plurinational State of Bolivia and Ecuador already did so.

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International investment rules in the WTO Agreement

After the long-lasting eight years of the Uruguay Round of negotiations, agreements directly related to international investment in the WTO Agreement8 include: the Agreement on Trade-Related Investment Measures, the General Agreement on Trade in Services, the Agreement on Trade-Related Aspects of Intellectual Property Rights, and the Agreement on Subsidies and Countervailing Measures. The international investment norms in the WTO agreement are of great significance. They signaled that international investment issues are no longer solely governed by foreign investment laws, bilateral investment treaties and multilateral investment conventions in various countries, but are also subject to the constraints of the modern multilateral trading system in terms of Substantive Law and Procedural Law (Liu 2000). 1.

Agreement on Trade-Related Investment Measures

The Agreement on Trade-Related Investment Measures (TRIMs) is one of the new topics of the Uruguay Round. The TRIMs agreement has only nine clauses and is a framework agreement only applicable to specific investment measures related to goods. However, it is the first time that investment in a specific scope has been included in the WTO multilateral trading system, and is also the first international treaty in the world that specifically regulates the relation between trade and investment. It promotes the development of international trade law and enriches the content of international investment law as well. The TRIMs agreement first states that certain investment measures have restrictive and distorting effects on international trade. Article 2 of the Agreement clearly stipulates that any member is prohibited from implementing trade-related investment measures that are inconsistent with Articles 3 and 11 of the 1994 General Agreement on Tariffs and Trade. According to the annex of Explanatory List to the Agreement, these investment measures specifically include: trade-related investment measures that are inconsistent with the principle of national treatment specified in paragraph 4 of Article 3 of the 1994 General Agreement on Tariffs and Trade, and trade-related investment measures that are inconsistent with the obligation of general elimination of quantitative restrictions stipulated in paragraph 1 of Article 11 of the 1994 General Agreement on Tariffs and Trade.9 It is worth noting that the TRIMs agreement only covers trade in goods and does not cover trade in services. Moreover, the TRIMs agreement refers to those investment measures that restrict and distort international trade activities, excluding investment measures that have a positive effect on international trade activities. Therefore, they are not all investment measures taken by the host government on foreign investment, which are only part of them. 8

In this text, “WTO Agreement” refers to a package of agreements, including the Agreement Establishing the World Trade Organization and all its subsidiary agreements reached at the Uruguay Round of negotiations. 9 For details, see Article 1 clauses (a) and (b) and Article 2 clauses (a), (b), (c) of annex of the Explanatory List to the TRIMs Agreement.

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The TRIMs agreement also specifies exception clauses, stating that the exceptions stipulated in the 1994 General Agreement on Tariffs and Trade shall all be applicable to the provisions of the Agreement on Trade-Related Investment Measures, and exception provisions are made for members of developing countries to perform obligations of national treatment and general cancellation of quantitative restrictions in terms of investment measures. This is mainly out of the consideration that members of developing countries have special needs in terms of trade, development, and finance. Therefore, members of developing countries are entitled to temporarily deviate from their obligations of national treatment and general elimination of quantitative restrictions in terms of trade-related investment measures. 2.

General Agreement on Trade in Services

The General Agreement on Trade in Services (GATS) incorporated trade in services into the global multilateral trading system for the first time, including all services trade except procurement of government services. The second paragraph of Article 1 of GATS stipulates four modes of supply in services trade.10 The third mode of commercial presence refers to that the service supplier of a member state supplies services through commercial premises in the territory of any other member state. Article 28 gives a more specific definition of commercial presence, i.e. any type of business or professional establishment including through the constitution, acquisition or maintenance of a juridical person or the creation or maintenance of a branch or a representative office, within the territory of a member for supplying a service. According to the definition, “commercial presence” is narrower than “investment” defined on the basis of “assets” in bilateral investment protection agreements and some regional free trade agreements. However, it reveals the close relation between services trade and international investment, i.e., service suppliers often need to establish institutions or business premises in the territory of the host country to supply services. It is generally believed that the provisions in the GATS that have the closest relationship to international investment are the provisions of market access (Article 16) and national treatment (Article 17) in Part III of Specific Commitments. Market access refers to whether foreign services or service suppliers are allowed to enter the domestic market. Article 16 of the GATS does not define the market access. Instead, it adopts a flexible solution of combining a positive list (specific concession schedule) and a negative list (prohibition of restrictive measures), which can better coordinate the benefits of developed countries and developing countries (Lu et al. 2007). The national treatment stipulated by the GATS is a kind of restricted national treatment, which is only applicable to the departments with specific commitment schedules, rather than universally applicable to all services or service suppliers. Moreover, national treatment only involves the treatment after the entry of foreign 10

Since the negotiating parties failed to reach a consensus on the definition of trade in services, GATS had to use enumeration methods to resolve the issues of the concept and scope of application. The four modes of service supply are cross-border supply, consumption abroad, commercial presence, and movement of natural persons.

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services. It is worth mentioning that the treatment of commercial presence as a mode of supply in services trade is essentially the treatment of foreign direct investment. Chinese scholars have different opinions on the significance of the GATS in international investment law. Some scholars believe that the GATS is actually an important international investment treaty (Liu 2000), which contains the most important international investment norm among WTO’s package of agreements (Shen 1996). Some other scholars believe that only some content in the GATS is related to international investment (Zeng 2007). As a mode of supply in services trade, commercial presence is established in the host country, and will inevitably promote the international direct investment of various countries. The influence of the GATS on international investment law shall not be underestimated. 3.

Agreement on Trade-Related Aspects of Intellectual Property Rights

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is a comprehensive and wide-ranging multilateral agreement on protecting intellectual property rights. As a kind of property right, the intellectual property right is an important form of international investment. The international protection of intellectual property right is extremely important for foreign investors, especially high-tech producers. There are totally 73 articles in seven parts in the TRIPS agreement, including the effectiveness, scope and standards of intellectual property rights, enforcement of intellectual property rights, dispute settlement mechanisms and transitional arrangements. The applicable scope of the TRIPS agreement includes copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout designs of integrated circuits, and protection of undisclosed information. The purpose of the TRIPS agreement is to ensure that intellectual property rights are fully and effectively protected. It emphasizes the principles of national treatment and most-favored-nation treatment, and stipulates higher protection standards than other international conventions in force.11 In terms of dispute settlement procedures, the TRIPS agreement stipulates that the provisions of Articles 22 and 23 of the GATT and the provisions of the Understanding on Rules and Procedures Governing the Settlement of Disputes shall be applicable to disputes among member states under this Agreement, and unilateral measures are not allowed, thus strengthening the protection of intellectual property rights. In recent years, owing to differences in the standards of intellectual property protection applicable to various countries, there have neem many international disputes in the field of international investment regarding intellectual property protection, highlighting the importance of intellectual property protection. The importance is self-evident in the conclusion of the TRIPS agreement for international investment, especially for transnational investment related to high technology. 4. 11

Agreement on Subsidies and Countervailing Measures

For example, the protection of copyright extends to computer programs. The term of protection is 50 years, and neighboring rights are recognized.

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The Agreement on Subsidies and Countervailing Measures (SCM Agreement) is also an important agreement related to international investment. In order to attract foreign investment, countries sometimes adopt some incentive measures, such as tax reduction and exemption, so as to guide investment to sectors and fields that can promote their own economic development. Subsidies are also one of the incentive investment measures, which will have an impact on international trade and indirectly affect the benefits of foreign investors. The Agreement on Subsidies and Countervailing Measures reached at the Uruguay Round of negotiations is divided into 11 parts, including 32 articles and 7 annexes. It stipulates the definition and the classification of subsidies, the imposition and collection of countervailing duties, special and differential treatment of developing country members, dispute settlement mechanism and so on. The SCM agreement stipulates that the legitimacy of a certain subsidy depends on its specificity. In other words, the agreement only restricts specific subsidies. Specificity means that the relevant laws and regulations clearly stipulate, or the granting authority clearly states that subsidies are only given to certain specific enterprises or industries. Specific subsidies are divided into three categories: prohibited subsidies, actionable subsidies, and non-actionable subsidies. Article 27 of the Agreement stipulates the special and differential treatment of developing countries, including differences in transitional periods, remedies and procedures. For the first time, the SCM agreement specified the incentive investment measures, which made up for the shortcomings of the TRIMs agreement. The two complemented each other and had an important impact on the in-depth development of international investment liberalization. At the same time, the SCM agreement will have a certain impact on the environment for a country to utilize foreign investment, thus probably reducing a country’s attractiveness to certain types of foreign investment. For example, countries and regions that rely on subsidies to encourage international direct investment may be affected due to subsidy cancelation or restriction, thus reducing the number of preferential foreign investment (Lu et al. 2007). Nowadays, international investment is one of the most important forms of international economic exchanges. International investment activities occur at all levels and in fields of international economic exchanges. Therefore, in addition to the aforementioned four multilateral agreements directly related to international investment, other multilateral agreements and rules in the WTO agreement are also closely linked to international investment, such as government procurement agreements, antidumping, rules of origin, safeguard clauses, pre-shipment inspection rules, license rules, customs valuation rules. Important content of international investment treaties such as investment access, investment promotion and protection, and investment dispute settlement have been included in the relevant agreements of the TRIMs agreement and the GATS in the WTO package of agreements. The WTO Understanding applicable to each agreement provides a fairly complete set of quasi-judicial mechanism. The establishment of the “unanimous veto mechanism” and the cross-retaliation system provide a powerful international legal guarantee to implement all investment-related multilateral agreements and provisions under the WTO agreement.

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From the perspective of bilateral investment treaties, there have been bilateral investment protection agreements that quote the relevant provisions of the TRIMs agreement, which shows the trend of linking the practice of BITs with the WTO system (Zeng 2007). From the perspective of regional investment agreements, some regional trade agreements in recent years have clearly stipulated the application of WTO provisions. From the perspective of foreign investment law in various countries, WTO members need to abolish trade-related investment restriction measures and investment incentive measures that have trade-distorting effects in accordance with relevant WTO agreements, thus improving the investment environment.

References Cai, Congyan. 2011. The Commercialization and De-commercialization of International Investment Arbitration. Modern Law Science 11: 152–162. Foster, G.K. 2010. Striking a Balance Between Investor Protections and National Sovereignty: The Relevance of Local Remedies in Investment Treaty Arbitration. Columbia Journal of Transnational Law 49 (2): 201–267. Jandhyala, S., W.J. Henisz, and E.D. Mansfield. 2011. Three Waves of BITs: The Global Diffusion of Foreign Investment Policy. Journal of Conflict Resolution 55 (6): 1047–1073. Lavopa, F.M., L.E. Barreiros, and M.V. Bruno. 2013. How to Kill a Bit and Not Die Trying: Legal and Political Challenges of Denouncing or Renegotiating Bilateral Investment Treaties. Journal of International Economic Law 16 (4): 869–891. Liu, Sun. 2000. On the Impact of WTO Agreements on International Investment Law. Studies in Law and Business 1: 74–79. Liu, Jingdong. 2011. Taking Legal Action to Protect China’s Assets in Libya and Other Countries. Economic Information Daily, 23 March 2011. Lu, Jinyong, Jingsong Yu, and Chunsheng Qi, eds. 2007. New Discussions on International Investment Treaties and Agreements. Beijing: People’s Publishing House. Shen, Wenhua. 1996. Evaluation and Analysis on International Investment Code in the WTO Agreements. Chinese Journal of Law 2: 135–143. Ye, Xingping. 2002. Innovation and Implications of Dispute Settlement Mechanism in NAFTA. Contemporary Legal Science 7: 83–88. Yu, Jingsong. 2011. On the Balancing of Investor’s Interests and Host Country’s Interests in International Investment Treaty Arbitration. China Legal Science 2: 132–143. Zeng, Lingliang. 2004. The Most Recent Tendencies of Regional Trade Agreements and Their Negative Influence to Doha Development Agenda. Chinese Journal of Law 26 (5): 117–128. Zeng, Huaqun. 2007. On the Relationship Between WTO Regime and International Investment Law. Journal of Xiamen University (Arts & Social Sciences Edition) 6: 105–113. Zeng, Huaqun. 2010. On ‘Imbalance’ and Innovation During BIT’s Practices. Jiangxi Social Sciences 6: 7–15.

Chapter 17

Countermeasures for China’s Better Participation in Global Trade Governance

For developing countries like China, participating in the WTO and many other international multilateral economic systems still has disadvantages, such as the “unfairness” of safeguarding national sovereignty and the “incompatibility” of coordinating with domestic systems. However, it is clear that China does not want to stay outside of the system or go against the current system, nor does it try to overthrow it and make a thorough reform of the current system. It would rather strive to change the current system based on the rationalization and effectiveness of the global trade governance mechanism, achieve a steady and orderly development of the system, and promote the economic development of this country and other countries in the world.

17.1 Rational and Effective Global Trade Governance Mechanism from China’s Perspective 17.1.1 China’s Demands for Global Trade Governance Mechanisms First, a rational and effective global trade governance mechanism should truly reflect the changes in the international economic structure. The world is developing toward multi-polarization. There are accelerating changes in the international balance of power and the world’s economic structure. The overall strength of emerging market countries and developing countries is growing, and the willingness and desire to participate in global trade governance are becoming stronger. Therefore, a rational and effective global trade governance mechanism should fully embody the spirits of coordination, cooperation, fairness, and balance, and ensure equal participation of all countries in the agenda setting, decision-making and other aspects of global trade governance. It should also equally reflect the opinions and concerns of all parties so that the final result follows the interests of all parties and achieves a win–win situation. © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_17

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Second, a rational and effective global trade governance mechanism should organically unite representativeness, decision-making efficiency, and enforcement effectiveness. Among them, there is a certain contradiction between representativeness and decision-making efficiency. It often occurs that the broader the representativeness is, the lower the decision-making efficiency is. For example, the United Nations covers almost all sovereign states and is highly representative, but due to different stances, its decision-making efficiency is relatively low. An organization like the G8, on the other hand, is less representative, and is just a club for a few rich countries and does not fully reflect the changes in the current world pattern and balance of power. Therefore, although its decision-making efficiency is higher, the enforcement effectiveness is not strong. Third, a rational and effective global trade governance mechanism should include both a consultation mechanism of target consensus and a mechanism to work out binding rules. On the one hand, the global trade governance mechanism should reach consensus and willingness contents through the negotiation of policy objectives, such as the “global trade governance spirit” oriented for common development and common prosperity, or the global trade governance goals that emphasize efficiency and fairness, or the “strong, sustainable, and balanced growth framework” of the world economy; on the other hand, some binding rules and quantitative indicators shall be worked out. For instance, the “quantitative rules” within the international macroeconomic framework set by the IMF’s governance structure, and a package of “reference guidelines” for judging the external imbalance of a country’s economy by the G20 (Jin 2009). Four, a rational and effective global trade governance mechanism should take into account both a short-term economic crisis emergency mechanism and a long-term economic governance mechanism. In recent years, discussions on coordinating the global economy have been directly motivated by finding short-term emergency countermeasures for financial crisis and economic recovery, but more attention should be paid to discussing the reform and improvement of the international economic system and strengthening institutional mechanisms of international economic cooperation and coordination from a deeper and longer-term perspective. As President Xi Jinping stated at the G20 St. Petersburg Summit, “All countries should take a long view, strive to shape a world economy where all countries enjoy development and innovation, growth linkage, and interests integration, firmly maintain and promote an open world economy”.

17.1.2 How to Realize an Effective and Rational Global Trade Governance The outbreak of the international financial crisis has exposed the shortcomings in the international financial system and the deficiencies in global trade governance. In order to improve the ability to prevent economic crises, all countries should continue to

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carry forward the spirits of concerted efforts, strengthened cooperation, and solidarity in addressing the crisis, and improve and innovate the global trade governance, including: First of all, to conduct an effective and rational global trade governance, it is necessary to adhere to the principle of common interests in the process of building the global trade governance mechanism. Sovereign states actively participate in global trade governance and abide by the rules of international economic law for their own economic benefits. Different countries have different national conditions, and the interests they pursue are also different. If every country simply emphasizes its own benefits regardless of the benefits of other countries, international economic relations will fall into chaos. Therefore, as a system to be universally accepted and followed by sovereign states, global trade governance and its legal system must be established on the basis of realizing the common interests of all countries. Regardless of the countries’ size and economic development level, their interests should all be respected. On this basis, a governance model and a rule system that realizes the common interests of all countries can be reached through full negotiation and compromise. Secondly, to conduct an effective and rational global trade governance, it is necessary to adhere to the principle of common but differentiated responsibility. On the one hand, it is allowed for each member to take responsibilities of different scopes, sizes, methods, and time limits according to its own capabilities, characteristics and prevailing principles of international law; on the other hand, every member in the international community, big or small, strong or weak, must bear the responsibility of making due contributions to solving global economic problems. The principle of common but differentiated responsibility not only emphasizes the principle that all countries have unshirkable responsibilities for global economic problems, but also aims to make all countries assume responsibilities and solve problems with a fairer and more efficient attitude. It would be against the fair and reasonable principle to just emphasize joint responsibilities without differentiated responsibilities; differentiated responsibilities would lose its foundation and become a tree without roots if there is no joint responsibility. Thirdly, to conduct an effective and rational global trade governance, it is necessary to continuously reform and innovate the global trade governance mechanism. As stated above, the prevailing global trade governance is diversified and overlapping. There are many international agreements and institutions for the same issue. These agreements and institutions are for global trade governance, or in the name of global trade governance. However, these agreements and institutions are largely scattered and disorderly, and there are inherent conflicts and inconsistencies. It requires reform and innovation of the current global trade governance mechanism to resolve, coordinate, and unify such inconsistencies.

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17.2 China’s Participation in Global Trade Governance After the international financial crisis in 2008, the shortcomings and deficiencies in the political and economic structure dominated by traditional developed countries has become increasingly obvious. The rise of emerging economies represented by the BRICS countries and their participation in global political and economic affairs have, on the one hand, challenged and changed the traditional global trade governance structure. It, on the other hand, also makes up for the deficiencies of traditional economic governance mechanisms in solving global economic issues. It is an inevitable trend in the process of globalization that more and more emerging countries participate in and determine global economic affairs. This trend is well presented by the establishment of the G20 leaders’ summit mechanism and the reforms of the International Monetary Fund and the World Bank. Through international organizations and mechanisms such as the G20, the IMF, the World Bank, and the WTO, China has gained more opportunities to participate in international economic affairs and opportunities for win–win cooperation with other countries in various economic fields. It has improved the level of China’s foreign economic cooperation, made full use of China’s comparative advantages, promoted the upgrading of China’s economic development, safeguarded the common interests of China and other countries, and built a long-term stable environment for China’s economic development.

17.2.1 Strategic Thinking on China’s Participation in Global Trade Governance Mechanism In recent years, developed economies such as the United States have accelerated the pace of restructuring global economic and trade rules and governance structure. The United States, the European Union and other developed countries have reached a consensus on the seven common principles of international investment. In 2012, they began to construct a global investment governance system and launched a largescale BIT negotiation. Moreover, in order to break through the WTO framework, the United States dominated global negotiations on the Free Trade Agreement (FTA), mainly including the TPP, the TTIP, and the TISA. About 50 countries and regions joined in the TISA negotiation alone, covering 70% of global services trade. In the face of globalized economic governance and new forms and patterns of international economy and trade, China should continue its efforts to boost the development of the international economic system and related governance mechanisms in a direction beneficial to China’s interests. It should also promote the continuous rise of China’s status in international industrial division of labor, expand the favorable conditions for the flow of Chinese capital on a global scale, promote China’s dominant position in the international trading system, and build external conditions for China’s sustainable development.

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To this end, China must make a difference in participating in the reform and innovation of global trade governance mechanisms. On the basis of adhering to the principle of “equality and inclusiveness, common interests, corresponding powers and responsibilities, and differentiated treatment,” we believe that the first strategic consideration is that China should adhere to the policy of proactive adaptation and active participation. The “Decision” of the Third Plenary Session of the 18th CPC Central Committee clearly stated that in order to adapt to the new situation of economic globalization, it is necessary to boost the mutual promotion of opening to the domestic market and to the outside world, the better integration of bringing in and going global, the orderly and free flow of international and domestic factors, efficient allocation of resources, and deep market integration. It is also necessary to accelerate the cultivation and leadership of new competitive advantages in international economic cooperation, promote reform through opening up, improve the macro-regulatory system, and form a mechanism to participate in international macro-economic policy coordination, so as to improve the global trade governance structure. Looking back on the successful experience of China’s economic development by leaps and bounds, it is also crucial that China has passively accepted a relatively good international environment in addition to its long adherence to the basic national policy of “one central task and two basic points.” Although the changes in the world economic structure and the growth and decline of powers among countries are beneficial to China, there are increasing foreign attention to and calls for China to assume more international responsibilities. Therefore, if China wants an international economic environment that continues to be conducive to its own development, it must rely on its proactive participation in the reform of global trade governance mechanism (Li 2007). Secondly, China should participate in the reform of global trade governance mechanism more comprehensively and extensively. Although China is a latecomer to global trade governance activities, it has developed very fast and its participation has been increasing. The in-depth changes in the world economic structure require China to participate in global trade governance reforms more comprehensively and extensively. It should pay attention not only to the current international economic rules and the treaties and agreements it has joined, but also to the international economic rules that are being conceived, or to be proposed. It should further pay attention to the treaties that China has important manifested or potential interests but has not yet formally acceded to. If possible, China should increase the intensity to initiate and create a global trade governance mechanism. Finally, the reform of international economic governance mechanism is a longlasting process. China should long adhere to its status as the largest developing country and pragmatically promote the reform of the global trade governance mechanism. The 18th CPC National Congress clearly stated that China is the largest developing country in the world, and that China is in the primary stage of socialism and will remain so for a long time to come. China will continue to hold high the banner of peace, development, cooperation, and mutual benefit, promote equality, mutual trust, inclusiveness, mutual learning, and mutually beneficial cooperation in international relations, make joint efforts to uphold international fairness and justice,

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get more actively involved in international affairs, and play its due role of a major responsible country. At the same time, China will unswervingly follow the path of peaceful development and firmly pursue a win–win strategy of opening up. China should also accommodate the legitimate concerns of other countries when pursuing its own interests, and promote common development of all countries when advancing its own development. Developing countries are the new force of global governance, and emerging powers are the vanguard of global governance. Strengthening unity and cooperation with developing countries and firmly safeguarding the legitimate rights and interests of developing countries are an important foundation for China’s participation in global trade governance.

17.2.2 Specific Countermeasures for China’s Participation in Global Trade Governance Mechanism First of all, China should enhance its own strength in participating in global trade governance mechanism, so that China could be in an active and advantageous position in the transformation of global trade governance mechanism. As an emerging market and a developing country, whether China can enhance its rights to speak and participate in international economic affairs and promote the formation of a global trade governance mechanism with equal participation depends to a large extent on its own strength. While accelerating the improvement of China’s economic strength and overall national strength, we must further improve our strategic level, strengthen system construction, accelerate personnel training, actively guide public opinion, comprehensively enhance the ability to respond to complex international situations so as to participate in the reform of global trade governance mechanism. Second, China should attach importance to the construction of governance mechanisms such as the BRICS Summit and the G20, and steadily promote the reform of the global trade governance platform. Emerging economies represented by China, India, Brazil and Russia will become an indispensable force in global trade governance with their rising trade position and economic status. In the context of rapid changes in the world economic and trade patterns, fully respecting the interests of emerging economies and enhancing their right to speak in international organizations are issues that must be paid attention to by any global trade governance institution. The participation in globalization is not only a process of rapid economic development of emerging economies, but also a process of continuously strengthening economic connection between emerging economies and developed countries. In maintaining the global trade order and strengthening global trade governance, emerging economies have shown more of an active enabler role. At present, global trade governance platforms are mainly controlled by developed economies, and it is difficult for China to smoothly promote relevant reforms. To enhance its experience in global trade governance and enhance its voice in regional and international economic

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governance institutions, China needs to explore new economic governance mechanism. At the same time, China should attach importance to promoting the governance mechanism reform of international institutions such as the IMF and the World Bank through the G20 platform, and gradually enhance its right to speak. Third, under the premise of emphasizing multilateral dominance, it is necessary to strengthen regional economic governance and take regional economic governance as an important pathway to participate in global trade governance mechanism. For regional trade agreements, member states should maintain an abidance to the authority of the multilateral trading system. First of all, member states need to make it clear that their goal is to further promote global free trade, rather than set trade barriers for third parties, and should minimize the negative effects of trade transfer on global free trade. Secondly, the high-standard rules set by regional trade agreements should serve the goal of establishing higher-level global trade governance rules, and avoid blindly catering to the needs of developed countries. Thirdly, regional trade agreements should be more transparent and adopt a more open-minded attitude towards new participants. At the same time, regional trade agreements should establish a good interactive relationship with the multilateral trading system to further promote the globalization. The construction of a regional economic mechanism is of great significance for consolidating the economic situation in China’s neighborhood, maintaining the stability of China’s macroeconomy, and strengthening China’s position in the international economic mechanism. For instance, the advancement of the ASEAN “10 + 3” cooperation process, the development of the Shanghai Cooperation Organization, the realization of the multi-lateralization of the Chiang Mai Initiative, the establishment of the Asian foreign exchange reserve pool, and the establishment of the China-ASEAN Free Trade Area have all played an active role in helping China build a stable neighboring economy and supporting China’s gaming with other major powers in multilateral international mechanisms. Four, China should further strengthen cooperation with the World Bank, the International Monetary Fund and other institutions, and actively promote the reform of international financial institutions. In the international division of production, important changes have taken place in the basis of interests of international trade, and the dependence of international trade on the international financial system has increased. Promoting the diversification of the international monetary system and forming the broadest united international front to promote the reform of international financial supervision will enhance China’s ability to participate in the reform of the international financial supervision system. The active promotion of the internationalization and regionalization of RMB should be the main step to take, so as to make RMB the main currency for Chinese enterprises in foreign trade settlement and foreign investment. Gradually letting RMB enter the world and eventually play the role of an international currency will help solve the problem of passive accumulation of foreign exchange reserves and enhance China’s future voice in international finance. It also helps change the passive accumulation of foreign exchange reserves and prevent falling into the trap of value preservation and increment.

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Fifth, China must attach importance to the planning of innovative topics in international trade and investment, and keep an open mind to establish governance mechanisms for new trade topics. China has not only become a major trading country in the world, but will also become a major country for foreign investment in the next ten to twenty years. By actively promoting trade liberalization with neighboring countries and finally achieving Asian or East Asian economic integration, the international trade space will be enhanced incrementally. As a major foreign creditor country, it should actively advocate to establish a global investment environment to protect investors’ rights and benefits. From the current point of view, plurilateral negotiations are the most feasible way to maintain the ability of the multilateral trading system to respond to new topics in a timely manner. For topics or sectors involving market access, such as the Environmental Products Agreement, we should support as many members as possible to participate in, to achieve a final outcome of a key majority in accordance with the applicable principle of most-favored-nation treatment. During the negotiations, China should actively fight for transitional or differentiated treatment for developing countries. For topics that involve rule-making, it is recommended to adopt the model of Government Procurement Agreement (GPA), i.e., an agreement only applicable to the members who signed, and an open attitude should be taken for other members who are not ready. At the same time, the negotiation process should be opened to allow other members to better understand the content of the agreement, so as to be prepared for future expansion. China should actively participate in all negotiations on plurilateral agreement, which can prevent the agreement from being completely manipulated by developed countries such as the United States. Meanwhile, it can demonstrate China’s determination to be active and open to obtain the right to formulate international trade rules. Last, China must promote the deep integration of international and domestic markets with the construction of free trade areas as the carrier. The free trade area is an important carrier for international economic cooperation. In recent years, major economies in the world have promoted the construction of free trade areas as an important strategy. Free trade agreements have become an important means for major powers to carry out geopolitical and economic gaming. The United States and Europe are actively promoting high standard “free trade agreements of next generation,” which not only requires a high degree of openness and more departments to be opened, but also strives to formulate and form new rules in the fields under their focus such as labor, government procurement, intellectual property, investment, human rights, environment, setting a new “benchmark” for future negotiations on various free trade areas around the world. China should actively promote the global layout of free trade area construction, and treat countries and regions such as Asia–Pacific, North America, Latin America, Central and Eastern Europe, Eurasian Economic Union, Africa, and Arab countries differently (Huang 2005; Li and Pang 2006).

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References Huang, Jingbo. 2005. Dilemmas of International Trade Policy and the GATT/WTO Institution. Journal of International Trade 1: 5–10. Jin, Fang. 2009. Global Co-governance, but not Trade Protection. Wenhuibao, 9 February 2009. Li, Wenfeng. 2007. Imbalance in the Current Economy and Trade and Its Governing Approach. Practice on Foreign Economic Relations and Trade 8: 4–6. Li, Renzhen, and Yongsan Pang. 2006. The Effect of Regional Trading Blocks on GATT/WTO System. Legal Forum 2: 133–138.

Chapter 18

Countermeasures for China’s Better Participation in International Investment Governance

Regarding the future direction of international investment governance, parties in the international community have not yet reached a consensus. The following text will summarize the main views of various parties, as well as the possibility for the G20 mechanism to participate in global investment governance, existing obstacles and countermeasures.

18.1 Main Views on Future Direction of International Investment Governance At present, there are two representative views on the future direction of international investment governance. One side believes that the international investment system should be reformed; the other side believes that the international investment system should summarize experiences and study recent legislative innovations. Berger (2016) from the German Development Institute believed that there are many problems in the international investment system. For example, the international investment system still lacks a comprehensive multilateral framework. Apart from a unilateral focus on investment protection in international investment agreements, consistency is also missing in the verdict of arbitral tribunals, and there is no appeal mechanism (Ma et al. 2016). Current empirical studies have not yet clarified the impact of international investment agreements on FDI, which has triggered a crisis about legitimation of the international investment system. In face of this legitimation crisis, some countries have chosen to withdraw from this system, such as withdrawing from the ICSID Convention and terminating the bilateral investment treaty. There are also countries that continue to sign international investment agreements, but they have chosen forms other than bilateral investment treaties, such as regional free trade agreements. He believed that for the future direction of international investment governance, China, the United States and the European Union will constitute a triangular relationship. Currently, China is conducting negotiations © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_18

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on bilateral investment treaties with the United States and the European Union, while the United States and the European Union are conducting negotiations on TTIP. These negotiations will redefine and write global investment rules. China, the United States and the European Union are beginning to converge in some investment rules, such as pre-accession national treatment, detailed substantive clauses, and improving arbitration transparency. But there are also conflicts of interests among them. For example, there are different views on the degree of openness of market access between China and the United States, and different views on the arrangement of investment dispute settlement mechanism between the United States and the European Union. Although China, the European Union, and the United States tend to be consistent on international investment agreements, other members of the G20 have shown different development trends. For instance, Indonesia and South Africa are terminating the BIT, and the new model of bilateral investment treaty promulgated by India expands the regulatory policy space of the host government. Therefore, the current G20 lacks a broad foundation and political willingness for multilateral investment negotiations. Nevertheless, it is still necessary to reform the international investment system. In this regard, the G20 can promote the systematic reform of the substantive clauses in international investment agreements. For instance, it can carry out multilateral negotiations on the meanings of some key clauses in international investment agreements to reach multilateral conventions, including the mostfavored-nation treatment, indirect expropriation and other clauses. In the short term, it is more hopeful to reform the procedural clause, such as establishing a plurilateral or global appeal mechanism, or a global investment court. Such development ultimately depends on whether the United States accepts the EU’s proposal on the international investment dispute settlement mechanism. In addition, the G20 can also conduct dialogue on reforming the objectives, principles and content of international investment agreements to form a consensus at the G20 level, supervise the progress of international investment rule-making, and promote multilateral negotiations on interpreting the international investment clauses in the convention. Professor Pauwelyn (2015) from the Center for Trade and Economic Integration in Geneva believed that what needs to be discussed now is not global investment legislation, but summarizing existing experiences and legal innovation, and conducting dialogue for specific issues on this basis. He believed that the current international investment law is featured with decentralized content, spontaneously internal consistency, being highly controversial but dynamic and stable (Ma et al. 2016). In terms of the agreement content, although there are minor differences in the law-making technology in expropriation, fair and equitable treatment clauses, and non-discriminatory clause, they tend to be overall consistent. Judging from the agreements concluded recently, there is an 82% similarity between the TPP and the US-Colombia Free Trade Agreement. The investment agreements signed by the European Union, China and Republic of Korea are also highly consistent in content. Therefore, in the current chaotic international investment system, what is urgently needed is studying the experience and innovation of existing investment agreements, so as to avoid early discussions on multilateral investment negotiations and receive cold shoulder. What

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the G20 can do at present is conducting dialogue on the key issues in the current international investment system, such as discussing whether to upgrade the investor-host country dispute settlement mechanism or to establish an investment court, whether to adopt a positive list or a negative list for market access, and which content in investment agreements can be resorted to the international investment dispute settlement mechanism.

18.2 Prospect for Negotiations on Global Multilateral Investment Agreement In recent years, investment legislation activities have been active at the bilateral and regional levels. Therefore, there have been many doubts and oppositions regarding the need for a stable and binding multilateral investment agreement in the international investment field. From a legal perspective, a multilateral investment agreement can make up for the overlap, conflict, inconsistency, incoherence, and low binding force of existing international investment rules. From the perspective of economic development, a set of stable, transparent, and predictable investment rules from multilateral investment agreements can greatly promote the free flow of FDI around the world, thereby improving the economic welfare of member states and the world, and preventing welfare losses caused by protectionism and lack of coordinated investment regulations (Lu et al. 2007). Therefore, in the current context of global economic integration, formulating a comprehensive, substantive and universally binding multilateral investment agreement is not only necessary but also central to the current international economic policy agenda (Ge and Zhan 2002). From the perspective of the development of multilateral investment legislation, the OECD-dominated MAI negotiations failed in the 1990s and after that there was no substantial progress in seeking to initiate MIA negotiations by developed countries under the WTO system. However, the international community has not stopped its pace of pursuing a unified, comprehensive and binding multilateral investment agreement. The UNCTAD, the WTO and the OECD are still conducting continuous discussions on multilateral investment legislation.1 Undoubtedly this will accumulate experiences for resuming multilateral investment negotiations at the right time in the future. For the possible restart of multilateral investment agreement negotiations in the future, Chinese and foreign scholars have given their outlooks and designs from different perspectives. One controversial issue is the platform to formulate multilateral investment agreements. The four platforms proposed are the UNCTAD, the 1

For example, after the OECD’s MAI program failed, its subsidiary International Investment and Transnational Enterprise Committee undertook a new research project on international investment. The project is mainly responsible for analyzing and discussing such issues as investment rules and non-discriminatory and social policies, non-discriminatory and environmental protection policies, non-discrimination, investment protection and national sovereignty, investment encouragement and investment promotion among OECD member states. WT/WGTI/3, 22 October 1999, p.15.

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World Bank, the WTO and the OECD. In this regard, it is believed that although the platform to formulate the multilateral investment agreement has an important influence on its final legislative success, it is not a key factor to determine the success of multilateral investment agreement negotiations. Only a transparent, stable and predictable multilateral investment agreement that maximally balances all parties in international investment activities can attract a wide range of countries to participate in and be unanimously recognized. However, this process will inevitably be full of obstacles and difficulties. As Professor Chen An, China’s famous international economic jurist said, “Since World War II, international economic legislation has always been accompanied by the fights between powerful countries and vulnerable groups. The former strives to maintain the established international economic order and international economic legislation in order to maintain and expand the vested economic benefits while the latter strives to update the existing international economic order and international economic legislation in order to gain equal economic rights, and fair economic rights and interests. For more than 60 years, these fights often end in compromises between the two parties, and after compromises new fights emerge because of new contradictions, and the cycle repeats. This historical process can be summarized as the spiral ‘6C trajectory’ or ‘6C law,’ namely Contradiction → Conflict → Consultation → Compromise → Cooperation → Coordination → New Contradiction…However every cycle is not a simple repetition, but an upward spiral, promoting the international economic order and its corresponding international economic law norms to a new level or a new development stage. Correspondingly the economic status and economic rights and interests of vulnerable groups in the international community have also been improved and guaranteed.” (Chen 2010). Moreover, the previous section shows that it is not the right timing to restart multilateral investment agreement negotiations in the short term, and it is even more unrealistic to conclude a binding global investment agreement in the short term. Therefore, international investment governance will maintain the status quo for a period of time in the future, and emerging governance entities such as the G20 will play a certain role in promoting the development of global investment governance.

18.3 China Promotes the G20 Mechanism to Participate in Global Investment Governance In 2016, as the world’s second largest economy and largest developing country, China’s hosting of the G20 summit attracted great attention and expectations from all parties. According to the G20’s institutional arrangements, the rotating presidency in general has great initiative and decision-making power when determining the topics of the G20 summit, and the topics of each summit will have a certain impact not only on the development direction of the world economy, but also on related domestic policies of the G20 members (Jiang 2014). As the rotating presidency of the 2016

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summit, China not only needed to fully implement the results of the Antalya Summit and previous summits, but also needed to propose forward-looking and pioneering policy concepts based on accurately grasping the world economic situation and the development needs of various countries so as to coordinate other members to take collective actions and jointly promote the global economic development. In view of the current situation and problems in global investment governance, the G20 members have explored and worked out the G20 Guiding Principles for Global Investment Policymaking (hereinafter referred to as the Guiding Principles) in July 2016, in order to effectively avoid possible investment protectionism in the post-crisis era, provide investors with a predictable international investment environment, promote investment facilitation, and achieve inclusive growth and sustainable development of the global economy. The Guiding Principles established a set of basic standards to be followed in the formulation of domestic and international investment policies, so as to make the domestic and international investment policies formulated by various countries have coherency and consistency. The Guiding Principles not only provide guidance for the specific investment initiatives of the G20 mechanism, but also provide directional guideline for various countries to formulate international and domestic investment policies and measures, and promote international cooperation in investment-related policies among countries. In terms of content, the Guiding Principles listed a set of principles and standards that give overall guidance for investment policy formulation, including the declarations, guidelines, and codes and other international documents with a nature of voluntary initiative formulated by existing international organizations to regulate the behaviors of international investment and multinational companies. The Guiding Principles also combined new trends and new changes in the international investment system in recent years. In terms of legal status, the Guiding Principles, as a voluntary norm, are positioned as the “soft law” in the international economic field. Countries can choose whether to implement the standards in the Guiding Principles according to their own conditions. The Guiding Principles are not binding, and do not directly set up international rights and obligations, nor do the Guilding Principles bring direct international responsibilities in case of violation of contents. It is worth pointing out that as soon as the Guiding Principles are widely recognized and followed by the international community, their influence will not be inferior to other international “hard laws” in some respects. The adoption of the Guiding Principles is conducive to alleviating the current fragmented dilemma facing the international investment cooperation. It also helps make up for the missing global policy guidance in the field of international investment governance. As far as the G20 is concerned, the conclusion of Guiding Principles under its framework can further promote the G20 mechanism to participate in global investment governance, boost in-depth cooperation among G20 members in addressing global investment governance challenges, and consolidate the G20’s status as a cooperation platform to promote the development of international direct investment. As far as China is concerned, it can help China reshape its participation in international investment governance and international investment landscape, and

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strive for the right to speak in the formulation of international investment soft laws. It can further show China’s policy stance on actively participating in global investment governance and providing global public products. From a domestic perspective, China is in a critical period of economic transformation, and active participation in international investment governance reforms will help to update concepts, promote domestic reforms and institutional innovations, stimulate economic vitality, and build an upgraded Chinese economy. As an advocate of the international document of the Guiding Principles, China needs to pay attention to ensuring that China’s foreign investment policy is consistent with the principles set in the Guiding Principles. The international community is concerned about whether the foreign investment policy of the Chinese government can fully comply with these standards and principles. If the prevailing and future foreign investment policies of the Chinese government cannot fully comply with these principles, some NGOs may attack the Chinese government’s foreign investment policy. From another perspective, the Guiding Principles are also China’s commitment to the international community. China will further improve the investment environment and provide investors with an open, non-discriminatory, transparent and predictable business environment.

18.4 Outlook In the future, the G20 will participate in global investment governance and further promote cooperation on international investment. It is foreseeable that it will face the following three main challenges: The first is whether the G20 is a suitable platform to advance the reform of international investment system. Regarding the reform of global international investment agreement system, some people believe that the best way to make the international investment agreement system promote sustainable and inclusive development is to use a global supporting structure to reform the system collectively (UNCTAD 2015). The limitations of the G20 members will raise doubts about whether it is an ideal platform to advance the reform of the international investment system. Second, the international community has questioned the effectiveness of the G20. Although the G20 is very similar to other international organizations established by treaties in terms of nature, functions, missions, and characteristics, it is only a forum as an informal mechanism. Its commitments and initiatives do not have enforcement mechanism. The implementation of policies is entirely voluntary. Members who do not implement the commitments made at the summit will only face moral pressure. Third, the complexity of G20 members determines that its members’ interests in the international investment system are not completely consistent. Some G20 members are two-way major international investment countries, and some are still mainly capital importers. This means that G20 members have different demands on the international investment system. For example, India updated its model bilateral investment treaty in 2015. From the perspective of protecting the interests of the

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investment host country, it has imposed stricter regulations on investors’ recourse to the international dispute settlement mechanism, requiring investors to first seek domestic courts or administrative agencies for remedies. Indonesia has terminated 18 of its 64 signed BITs. South Africa terminated its BITs with Australia, Denmark, and Germany in 2015. The above-mentioned challenges are what the G20 should resolve urgently if it intends to further participate in global investment governance. In order to cope with the above-mentioned problems and challenges, China needs to strengthen policy coordination with other G20 members. It should start from the following aspects to enhance the role of the G20 as an important platform for international investment cooperation. The first is to give full play to G20’s advantages and international influence as the global governance helmsman. Although the number of G20 members is limited, it includes 19 systemically important countries in the world and the European Union, accounting for approximately 90% of the global GDP, 80% of the global trade, and two-thirds of the global population. Therefore, although the G20 is a small-scale forum, the Guiding Principles for Global Investment Policymaking or Framework and other investment policy measures it promotes will have important international impact. Moreover, the small scale is more conducive to coordinated positions. In the longer term, on the basis of the G20 members’ abidance to the Guiding Principles, the G20 can further conduct feasibility studies on initiating multilateral investment agreement negotiations and elaborate in the leaders’ declaration, so as to provide timely policy reference for the worldwide or major economies. The international cooperation promoted under the G20 framework in the field of global investment governance can lay foundations for the systematic reform of the international investment system. The second is to make full use of the resources of international organizations and multilateral institutions to make up for the lack of effectiveness and limited execution of the G20. It ultimately depends on raising the level of accountability to improve the effectiveness and legitimacy of the G20. However, with the current slow progress in its institutionalization, the G20 should fully mobilize the resources of international organizations and multilateral institutions, and give full play to the supervision role of these organizations and institutions in the implementation of the G20 summit outcomes. For example, UNCTAD and OECD can be called upon to further expand the content of supervision in addition to supervising the investment measures adopted by G20 members, including the commitment to comply with the Guiding Principles or other commitments on international investment matters. The third is to strengthen communication and coordination among G20 members and seek common interest points that promote the development of international direct investment. At present, the international community has different opinions on multilateral investment framework cooperation, showing different interests of countries at different stages of development. As a result, stakeholders have a conflict of vision and a misalignment of strategic priorities when planning a blueprint for global investment governance. In this regard, we should see it from a dynamic perspective. With the increase of foreign investment by some developing countries, their demands on the international investment system will continue to adjust. China is such a typical

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example. At the same time, it is necessary to actively seek for the common interest points of G20 members in the reform of international investment system. The legality crisis in the current international investment dispute settlement mechanism can work as an example. It involves the interests of all members, and is a good entry point for multilateral coordination. In summary, the current international investment landscape is in a critical period of adjustment, change, and development. The deep impact of the 2008 international financial crisis continues to show up. The world economy is generally depressed with sluggish growth, along with increasing voices for populism and anti-globalization. The issue of development becomes more prominent. In this context, countries are launching a fierce gaming over international investment rules around the redistribution of institutional rights and benefits in international investment. The development of international investment rules has entered a period of accelerating change. As an investment host country and a growing major power for overseas investment, China not only safeguards its interests as an international investment host country, but also provides a strong guarantee for legitimate rights and interests of its foreign investment. In order to seek more voice, China should thoroughly study and analyze the pros and cons of the existing general international investment rules. On this basis, China should then carry forward the concepts and principles that reflect China’s stance and demands and gain international recognition through deep participation in international investment governance. The G20 Guiding Principle for Global Investment Policymaking is a very successful attempt.

References Berger, A. 2016. A multilateral investment agreement: A road to nowhere? in G20 Hangzhou Summit 2016. Geneva: ICTSD Chen, An. 2010. Some Jurisprudential Thoughts upon the Decade of China’s Accession to WTO: Brief Comments on WTO’S Law-governing, Law-making, Law-enforcing, Law-abiding and Law-reforming. Modern Law Science 6: 114–124. Ge, Shunqi, and Xiaoning Zhan. 2002. WTO’s Multilateral Investment Framework in the Future and Host Nations’ Economic Development. World Economics and Politics 9: 45–49. Jiang, Shixue. 2014. Cooperation Between China and the EU in G20. Forum of World Economics & Politics 4: 58–71. Lu, Jinyong, Jingsong Yu, and Chunsheng Qi, eds. 2007. New discussions on international investment treaties and agreements. Beijing: People’s Publishing House. Ma, Tao, et al. 2016. Promoting Inclusive Growth Through Global Trade and Investment Cooperation—Minutes of the G20 Think Tank Trade and Investment Conference. International Economic Review 5: 149–159. Pauwelyn, J. 2015. The Rule of Law Without the Rule of Lawyers? Why Investment Arbitrators are from Mars, Trade Adjudicators from Venus. American Journal of International Law 109 (4): 761–805. UNCTAD. 2015. World Investment Report 2015: Reforming International Investment Governance. In United Nations conference on trade and development. New York: United Nations.

Part IV

International Climate Change and Sustainable Development Governance

Preface As a global public product, climate change is also known as the most serious market failure in human history. Its profound impact on economy, society, and human health, wide scope, and long duration can be said to be the biggest challenge facing the whole of humanity. The global threat of climate change has made us deeply aware that the survival and development of mankind is not an endless process of free choice. It is restricted by the limited environmental and energy resources in the world. This restriction will inevitably affect the array of development paths and development models in various countries. This consensus is not only reflected in the five climate change assessment reports of the Intergovernmental Panel on Climate Change (IPCC), but also in the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Climate Agreement reached by the Conference of the Parties in 2015. It is also reflected in the Transforming our World: The 2030 Agenda for Sustainable Development signed by 193 countries around the world in 2015. Climate change has been a major global governance issue in recent years. After more than 20 years of tortuous development, the UN’s climate governance has made progress in institutional design, co-governance by major countries, and emission reduction efficiency (Schor, 2015). It is the most effective method recognized by the international community to completely solve the problem of global warming to reduce carbon emissions, take the road of green, low-carbon, and sustainable development, and decrease the speed of global warming. Behind the surface of low-carbon sustainable development lies the potential for adjustments to the international economic pattern as well as the reallocation of international discourse and decision-making power, among other things. Developed countries such as the EU, the United States, and Japan, holding a favorable position, will inevitably adopt various measures to first form a relatively complete low-carbon economic system within each country, and then use various bilateral, multilateral, and plurilateral cooperation mechanisms and means to promote the achievement of global consensus in the aspects of climate change, energy efficiency

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and related industry standards, and extend the system favorable to it to other countries in the world through assistance, trade, investment, financial, and legal system frameworks. It is foreseeable that this process will bring about major changes in international economic and trade rules, and will also have a profound impact on international cooperation. Climate change will affect many industries, including agriculture, electricity, transportation, forest and land use, and water resource management. Climate change is not only an environmental issue, as it relates to and impacts all parts of government and their related fields. Therefore, the government needs to formulate a comprehensive response plan, and various decision-making methods should also take into account the unique nature of climate challenge. But we have also seen that although climate scientists are increasingly calling for attention to the impact of climate change and its man-made attribute, and calling for immediate and all-round action globally, the international community is increasingly adopting a “standing-idly-by” attitude towards this. This is the famous “Giddens Paradox” existing in international climate cooperation. The “Giddens Paradox” was put forward by Giddens in 2009. In his book, he discussed the governance of climate change from a political perspective for the first time. Giddens believed that there were four reasons to explain this paradox: the first was the obstruction of stakeholders; the second was people’s difficulty in understanding climate science and the concepts of risk and uncertainty; the third was “free-riding” behavior; and the fourth was the economic development needs of countries, especially developing countries (Giddens, 2009). Giddens’ solution was to give full play to the roles of companies, non-governmental organizations and citizens, and mobilize them to actively participate in combatting global climate change. Giddens was pessimistic about the climate governance process at the international level. He believed that in the absence of high participation of the two major emitters of China and the United States, it was difficult for the negotiations to truly achieve effective results. However, the process of climate governance did not proceed exactly as Giddens pessimistically expected. Despite fierce battles among sovereign states on issues such as the allocation of responsibilities and the setting of mechanisms, and even the repeated climate negotiation process for a time, it eventually advanced along the track of cooperation. All countries are striving to look for ways to jointly combat global climate change under the main platform of the United Nations, and the climate confrontation has evolved into “cooperating without doing, fighting without breaking up” (Wang Xuedong, 2014). The final signing and entry into force of the Paris Agreement is a great victory that the international community has achieved in jointly addressing climate change. It is undeniable that there is still a big gap between the emission reduction arrangements and the global targets under the framework of the Paris Agreement. It is also necessary to continue to improve the climate governance framework and achieve effective climate governance so that it neither impedes contemporary development, nor threatens the threshold of the earth and the welfare of future generations. China is the largest emitter of greenhouse gases and one of the countries that are most vulnerable to climate change. In the arena of international climate governance, China is facing pressure from both developed countries and other developing countries. Meanwhile, China has undertaken the historical task of urging

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developed countries to assume historic responsibilities and achieve climate justice on behalf of developing countries. It is currently an urgent issue for China to solve how to accelerate domestic climate governance on the basis of ensuring the stable development of China’s economy, promote the transformation of China’s economy to low-carbon, green and sustainable development, and actively participate in international climate governance cooperation to create a good external environment for China’s sustainable development. This article first defines the basic concepts of international climate governance, and then conducts detailed research on the main body, framework, goals, and mechanisms of international climate governance, and specifically analyzes in detail the roles, nature, correlations and the latest progress of various international mechanisms that have formed since the entry into force of the UNFCCC, and evaluates the international climate governance regime from the two dimensions of equity and effectiveness, with a view to elaborate on the characteristics, progress and future evolving trends of current international climate governance, and provide policy reference for China’s participation in global climate governance. The specific research framework is shown in the figure below.

References Giddens, A. 2009. The Politics of Climate Change, Oxfordshire: Routledge. Schor, J. 2015. Climate, Inequality and the Need for Reframing Climate Policy, Review of Radical Political Economics, 47(4): 525–536. Wang, Xuedong. 2014. Global Negotiations, Domestic Policies: The Climate Change Politics across the World. Beijing: Current Affairs Press.

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Fig. 1 Research Framework on Climate Governance. Source made by the author

Chapter 19

Theories and Paradigms of International Climate Governance

Within the theoretical analysis framework of global governance and in the absence of a super-sovereign super government, it is necessary to establish widely accepted international rules and norms, and even specialized international organizations in order to exert the governance of global public products. As an important public product, the governance of climate change still falls into the scope of global governance. It can be said that this has been a special focus of global governance in recent years (Li 2016). International climate governance mainly focuses on such issues as why and how international climate governance is conducted, who should govern it, what should be governed, and how effective the governance is. The theoretical community is most concerned about the rule-making, legitimacy, equity and effectiveness of the international climate regime.

19.1 Scientific Assessment of Global Climate Change Climate change has become a global issue under the common concern of the international society. The scientific basis for international climate negotiations mainly comes from the multi-volume assessment reports on climate change issued by the Intergovernmental Panel on Climate Change (IPCC), an international organization established in 1988 to assess climate change. So far, IPCC has successively released five assessment reports on climate change. The first, second and third assessment reports on global climate change all pointed out that global warming is an indisputable fact and it is closely linked with human activities, which has triggered the social science community to study and pay attention to climate change issues. The fourth assessment report released by the IPCC in 2007 emphasized the impact of changes in frequency, intensity, and time of extreme weather events, such as high temperature, heat waves, and frequency of heavy precipitation on ecosystems and human society. It also increased the credibility of the conclusion (up to 90% from 60%) that climate change was mainly caused by human activities in the last 50 years. © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_19

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The fifth assessment report in 2014 evaluated the credibility of existing main conclusions about extreme weather events, and analyzed the root causes of disaster risks from the perspective of “extreme weather event + vulnerability + exposure” (Zheng, et al. 2012), which provided an important scientific basis for countries to incorporate risk management into the overall framework of climate change actions (Liu et al. 2012). In recent years, extreme weather and climate events around the world have indeed intensified. The annual Global Risk Report released by the World Economic Forum shows that since 2016, the top three risks among the 29 global risks are all related to climate change, namely extreme climate events, climate change mitigation and inadequate response measures, and natural disasters. The Global Climate Risk Index 2020 released by the German NGO organization of German Watch also showed that from 1999 to 2018, seven of the ten countries most affected by climate were developing countries with low or lower per capita income. Germany, Japan and India suffered long-lasting high temperature. The Annual Report on Actions to Address Climate Change (UNFCCC 2021): Climate Risk Prevention jointly issued by the Chinese Academy of Social Sciences and other organizations found that globally China is also one of the areas most vulnerable to and where the effects of climate change will be most felt. The areas with high levels of ecological risks in the future are mainly distributed in the loess plateau and the Inner Mongolia plateau, South China, the eastern part of the Yangtze and Huaihe rivers, Tianshan alpine basin and the eastern part of Southwest China. The areas with high food risks are mainly distributed throughout the southeast coastal hills, Huaihai plain, the southern part of Southwest China, Nanling mountains, the eastern part of Qinghai province, and the southern part of Xinjiang Uygur Autonomous Region. Climate risks will pose severe challenges to China’s food production security, water resources, ecology, energy, and economic development in the future.

19.2 Particularity of Global Climate Change Issues Compared with other global environmental issues, the issue of climate change is both complex and unique. Climate change caused by changes in natural conditions is only a factor in global warming, and changes in natural conditions are closely linked with human direct or indirect economic activities. Therefore, climate change is not only a purely natural phenomenon, and it also has socio-economic attributes. The first is the large spatial scale and global externality. From a global perspective, the impact from a country’s excessive greenhouse gas emissions is often global, and it is shown in the transnational flow of pollutants, and also in the global ecological environment change caused by the greenhouse effect. Global warming will only occur when the emissions that destroy the atmospheric self-purification mechanism exceed the critical point of emissions. Once the temperature rises, climate will become a public good, forcing countries to consume it. Such goods can be called compulsory public goods. The large spatial scale of the climate change issue has made actions to

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address climate change evolve into the management of global climate public wealth. The decision of any sovereign state must consider the interests of its own economic development and at the same time take global interests into account. From a practical perspective as relates to tackling the problem, countries tend to make other countries take on more responsibilities to increase emission reductions, thereby benefiting from other countries’ emission reduction actions. This kind of “free-riding” behavior often results in a standstill or deadlock for international cooperation on climate. Climate change is also a typical example of market failure. The actions of almost all market participants will generate greenhouse gas emissions, including energy, industry, transportation, and land use. Since the impact cost from such actions cannot be timely reflected by the market, even by the current generation, it is shown as market failure. Corporate greenhouse gas emissions are a typical example of external diseconomy. Such external diseconomy is particularly obvious when emission property rights are not clear. Since emission costs are shared by society, private companies often seek to maximize their own benefits through excessive consumption and utilization of environmental resources. The second is long-term and intergenerational influence. Global warming goes far beyond environmental issues in the general sense. Since 1900, after a long accumulation of nearly two centuries, the global greenhouse gases have slowly developed from quantitative change to qualitative change. Further changes in the future will also be a long-term and constantly evolving process. If the growth rate of global warming cannot be effectively controlled and goes beyond the critical point of forecast by science, it may have an irreversible and significant impact on future generations. Therefore, the climate governance policy is based on the considerations of intragenerational and intergenerational social welfare. It is generally believed that each intergenerational welfare standard should include consumption, education, health and environment. At the intra-generation level, every country and region should enjoy an acceptable environment. If we let global warming continue, developing countries will suffer more severe damages from climate change. In terms of the level of intergeneration, if there is no climate governance now, future generations may not be able to enjoy their due living environment, which is also unfair to them. Therefore, climate change governance has a moral significance. It requires the international community to jointly formulate long-term and effective greenhouse gas emission reduction arrangements and time schedules. Once the economic development level of all countries are not affected, emission reduction efforts and commitments should be continuously improved to decrease the concentration of greenhouse gases in the atmosphere, thus restoring it to a level that does not threaten the future of human beings. But as typical global public goods, the issue of climate change is the most obvious representation of global market failure. In October 2006, commissioned by the British government, a group led by Nicholas Stern, the former chief economist of the World Bank, completed a special report titled “The Economics of Climate Change” (also known as Stern Review) after more than one year work. The review assessed from an economic perspective to process of changing to a low carbon economy and the possibility of utilizing different methods to adapt to circumstances under the backdrop of climate change, as well

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as analyzing the effects of climate change on the United Kingdom and other countries. The Review believed that climate change is a typical example of market failure that includes externalities and public goods. It’s different from other externalities in: firstly, its causes and effects are global; secondly, the impacts of climate change are long-term and continuous, and develop with time: there is a time lag for the climate system to respond to the increase of greenhouse gases; there is also a time lag for the environment, economy and society in response to climate change; thirdly, its economic impact is generally uncertain and unpredictable with risks; fourthly the impact of climate change is more closely connected to the global economy than other environmental issues (Stern 2006). The Stern Review appealed that if measures are taken now, the loss of climate change is equivalent to 5% GDP loss per year. If no action is taken, the loss may reach 20%, and there will be greater risks in the next ten years, similar to the wars and economic depressions of the first half of the twentieth century. The Review suggested to take taxation, carbon pricing, innovation and application of low carbon technologies, and improve energy efficiency and change behaviors to reduce emissions. Therefore, emission trading schemes, international technical cooperation, as well as reduction of deforestation and adaptation constitute an important part of the post-Kyoto international climate regime framework. Although the Stern Review did not cover everything, the direction is correct. Climate change is indeed full of issues that cannot be resolved by the externalities of economics, including uncertainty, long period of time, non-restorability, and its potential huge impact. The government level responded positively to the methods used and conclusions reached in the Stern Review. The EU first proposed a climate goal of 30% emission reduction by 2030 and 60% by 2050, and called for the establishment of a carbon market. The Stern Review has also been enthusiastically supported by many NGOs around the world. The Fourth Assessment Report on Climate Change released by IPCC in 2007 urged the world to accelerate the pace to address climate warming, take practical measures to reduce emissions, and enhance adaptive capacity, which further promoted the global attention to and research booms about climate change mitigation and adaptation. And voices have gradually become the mainstream which advocate the adoption of strong and substantial emission reduction measures.

19.3 Concepts and Goals of International Climate Governance There has not been a clear or unified definition for international climate governance. Comparative politics, political economy, and climate change economics all relate to climate governance from different levels and their respective fields. Based on the definition of global governance by Zhang and Ren (2015), this section defines international climate governance as a sum of self-enforcing international systems, rules or mechanisms, established by the international community under the leadership of

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the United Nations to address global warming, i.e. international climate governance mainly involves the international climate cooperation or other arrangements made by various economies to address global climate change, aiming to control the concentration of greenhouse gases such as carbon dioxide in the atmosphere to the range that does not damage the atmospheric system. This includes establishing mechanisms, formulating norms and standards, signing conventions, and taking necessary action. As a typical issue relating to a global public product, the solution to climate change can only depend on global collective action to jointly manage public resources and prevent the occurrence of “free-riding.” The collective action plan includes: first, at the global level to formulate a general emission plan, emission pathway and action plan on greenhouse gas under the constraints of the global atmospheric environmental capacity, and encourage all sovereign states to actively join and sign multilateral climate conventions or agreements under the guidance of fair, impartial, and efficient principles; secondly, at the national level, countries will formulate national emission reduction targets and action plans based on the framework of multilateral conventions, and carry out bilateral, regional or multilateral cooperation in various forms for a real mitigation of greenhouse gases. The IPCC’s Fifth Assessment Report in 2014 thought the carbon dioxide equivalent concentration corresponding to a temperature increase of 2 °C should not exceed 450 ppm. At present, the international community has generally accepted the 2 °C threshold of temperature increase. The Potsdam Institute for Climate Impact Research conducted a simulation analysis based on these scenarios and concluded that after removing the approximate 2 trillion tons of CO2 that humans emitted into the atmosphere during the industrialization period, the carbon budget at the end of the twenty-first century will be about 1.5 trillion tons, with an annual average of 14.5 billion tons. The Global Carbon Budget 2016 released by the Global Carbon Project (GCP) predicted that if it grows at the current speed, humans may use up the allowance of 1.5 trillion tons within 40 years. To achieve the 2 °C temperature increase target, global emissions need to reach their peak around 2020 and must be cut by about 50% in 2050. The concept of carbon emission right is formed on the basis of atmospheric environmental capacity theory. The allocation of carbon emission right mainly includes the calculation of total carbon emissions, the setting of allocation standards, and the evaluation of allocation results. Among them, the setting of the “fair” allocation standard is crucial to the allocation of carbon emission right and it is also a key and difficult point in international climate negotiation, and in research and discussion in the field of economics (Wang and Guiyang 2012). To this end, the Paris Agreement specifically stated that the goals of addressing climate change include three aspects: (a) to control the global average temperature increase to below 2 °C above pre-industrial level, and to work hard to limit the temperature increase to 1.5 °C above pre-industrial levels; (b) to increase the ability to adapt to the adverse impacts of climate change, and enhance climate resilience in a manner that does not threaten food production, and go for low emission development of greenhouse gases; (c) to make capital flow consistent with a pathway towards low emissions of greenhouse gases and climate-resilient development.

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19.4 Value Norms of International Climate Governance The United Nations Framework Convention on Climate Change (referred to hereafter as “the Convention”) is the first fundamental law for human beings to address climate change. It is composed of a preamble and 26 articles. It clearly states that the international community must follow five basic principles in the process of addressing global climate change (Tian 2015a, b).the first is “the principle of common but differentiated responsibility,” the principle of equity, the principle of respective capabilities (see Convention 3.1). The principle of common but differentiated responsibilities is an important element of the international climate governance mechanism. It aims to specify different emission reduction responsibilities and obligations for developed countries and developing countries so that the international mechanism demonstrates institutional characteristics of equity and rationality. The second is the “special principle,” i.e. the national conditions and needs of special developing countries must be considered and respected to address climate change (see Convention 3.2). Special countries here are specifically defined in the convention as developing countries which are highly vulnerable to climate change, and have disproportionately undertaken emission reduction obligations. The third is the “precautionary principle,” i.e., to set up an early warning and emergency mechanism for possible climate risks to prevent risks (see Convention 3.4). The fourth is the principle of “sustainable development,” which takes both climate change and economic development into account (see Convention 3.3). In response to climate change, inter-generational equity and intragenerational equity must be taken into account while sustainable development of economy and society should be considered. The fifth is the principle of “international cooperation” to promote the coordination of international economic and trade relations to address climate change. “The principle of common but differentiated responsibilities” is the most critical issue in international climate governance. There has been huge disagreement between countries in the fight for national development space and carbon emission rights, and on how the rising emerging powers should share responsibilities and obligations with developed countries like the EU countries, the United States and Japan as key climate governance entities to address climate change in a fair manner in the international arena. The principles of fair distribution that have been discussed frequently in the international society involve the principle of historical responsibility, the principle of equality, the principle of justice, and the principle of utilitarianism (Yang 2012). Developed countries are usually target-oriented, emphasizing the cost-benefit analysis of climate change and avoiding historical responsibilities; developing countries are usually moral-oriented, emphasizing the historical responsibilities of developed countries in global warming, and call on developed countries to carry out climate justice through compensation, technical assistance and other means. Pan et al. (2008, 2009a, b) compared and calculated the proportion of accumulated carbon emissions per capita in different countries, and proposed the concept and method of carbon budget. The Development Research Center of the State Council proposed a “carbon emission account plan” to fairly distribute global carbon emission rights based on the

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“principle of equality per capita.” Tian and John (2012) further broadened the current understanding of global “carbon equity,” and analyzed the situation and role of major emerging emitters of greenhouse gases such as India and China in international environment governance with the help of numerical simulation techniques (Tian and John 2010). It can be seen that the “equity” of the distribution of carbon emission rights will always be the core of future international climate regimes. In addition, the “baseline scenario” of emissions from developing countries is also the focus of climate change research and negotiations, especially the “base year” issue. Zheng, et al. (2012) discovered that the “baseline scenario” definition adopted by some international institutions underestimated the emission pathway of developing countries under the “baseline scenario.” It was recommended to use “no action scenario” under a fixed base year to define the “baseline scenario” to set objective evaluation standards to fairly evaluate the mitigation efforts of developing countries.

19.5 Core Elements of International Climate Governance The UNFCCC also proposed several core elements for international climate governance, namely mitigation and adaptation, technology and finance, transparency, and implementation verification. I. Emission reduction mechanism. The connotation of the principle of “common but differentiated responsibilities” (referred to as “common but differentiated”) determines the design of the emission reduction mechanism. Owing to clear historical responsibilities in the past global greenhouse gas emissions, industrialized countries should assume more emission reduction responsibilities in the global emission reduction arrangements, and at the same time have the obligation to provide financial and technical support to developing countries, and help those countries significantly affected by climate change, especially small island countries to improve their abilities to adapt to climate change. The Kyoto Protocol under the Convention adopted a “topdown” mandatory emission reduction model, which mainly made arrangements for the emission reduction commitments of industrialized countries, and required developed countries to provide financial and technical assistance to developing countries through the clean development mechanism, joint implementation mechanism, and carbon emission trading scheme. Under the “Paris Agreement” emission reduction model, developed countries should take the lead in setting absolute emission reduction targets, while developing countries will gradually move from intensive emission reductions to absolute emission reductions based on their national conditions, and continue to increase mitigation efforts. II. Financial and technical mechanism. Article 11 of the Convention clearly proposed to establish a financial mechanism to promote technology transfer. It is stipulated that developed countries can raise performance funds through various bilateral, regional and multilateral channels. However, there is no specific description of the sources, channels and types of funds and technologies, and as such is a vague promise. The Paris Agreement clearly stated that developed countries are required

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to formulate a workable financial roadmap from the financial aspect to fulfill their commitment to providing USD100 billion annually to developing countries by 2020, and the new financial assistance scale after 2025 should be no less than USD100 billion every year. At the same time, the operation of the Green Climate Fund and other public finance will fully mobilize various resources, including the private sector, multilateral development agencies, and other bilateral or multilateral channels. At the technical level, the Paris Agreement decided to strengthen the technology mechanism to be led by the Technology Executive Committee and the Climate Technology Center & Network, accelerate the research and development and demonstration of climate-beneficial technologies, strengthen the assessment of the demand for new technologies, and strengthen the assessment of transferred technologies, and create a favorable environment for the development and transfer of technology, and remove development obstacles. III. Implementation verification and transparency. This element focuses on regular notification of countries’ emission reduction commitments to ensure transparency of information and data, and regularly reviewing and updating progress. Since the “Monitoring, Reporting, and Verification” (MRV) system was established under the Convention framework, it has been in the process of being revised and improved, and the standards are gradually becoming uniform. The Paris Agreement specifically set up a transparency capacity-building initiative, proposing to strengthen national institution building in terms of transparency, strengthen training and assistance, and gradually increase transparency. It can be said that the Convention provides directions and principle guidance for global climate actions. From the Kyoto Protocol to the Paris Climate Agreement, international climate negotiations and governance mechanisms have always been adjusted or reformed following the principles and framework stipulated by the Convention. International multilateral mechanisms play a decisive role in setting global action targets, defining action and cooperation principles, and identifying key issues in addressing climate change. They are the indispensable core and foundation for international climate governance. Only after the action targets and cooperation mechanism are defined at the national level can it be possible to formulate relevant laws, regulations, and policy measures in the country to continuously promote actions and cooperation to address climate change through various approaches. Government policies and targets will further motivate local governments, private sectors, and social organizations to take active actions, when a series of initiatives and alliances are in place, thereby providing a solid foundation to realize the aims of international climate governance.

19.6 Models of International Climate Governance International climate governance models are mainly divided into the “top-down” and “bottom-up” models. The Kyoto Protocol is a typical representative to promote the construction of international climate regime in a “top-down” way. It is characterized

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by the establishment of a strict legal mechanism to quantify and confirm the emission reduction targets of the Parties, and verify and track its implementation through MRV. It is legally binding and mandatory. However, the biggest disadvantage of the topdown model is that it is difficult for all Parties to reach a consensus and the negotiation cost is high. In the absence of effective mechanisms for supervision, incentive, reward and punishment, there is a high degree of breach of contract for all Parties. After 2009, the “top-down” mandatory emission reduction mechanism encountered major challenges. The “bottom-up” model takes more into consideration the national conditions of each country, and is to promote international cooperation in the field of climate change on the basis of the greatest common divisor of national interests. This model is often established on a voluntary basis. The basis is to emphasize the independent planning and voluntary emission reduction by each country and each region, with the global review to achieve goals of independent contributions. The actions and goals of countries are usually diversified, making it more likely to foster the construction of cooperative and enabling mechanisms, so it is more attractive to the Parties. However, since mandatory requirements are missing for emission reduction targets, there is no globally unified accounting system or rule for greenhouse gas emission, and a mechanism of incentive, and reward and punishment for emission reduction actions is not available, it cannot guarantee the efforts of emission reduction actions and the fulfilment of global emission reduction targets.

19.7 Participants of International Climate Governance Participants of international climate governance mainly refer to relevant actors that play a role in formulating and implementing the rules of global climate governance. The main participants include both national governance bodies, and non-state actors, such as international organizations, non-governmental organizations, even transnational corporations, and civil society. Specifically, the actors participating in international climate governance can be divided into the following categories: I. Relevant UN agencies and organizations. There are more than 30 agencies and projects in the United Nations system that are involved in environmental issues and affairs. A cross-disciplinary and multi-level system is formed when the United Nations General Assembly and the Economic and Social Council are the supreme decision-making bodies, the United Nations Environment Program is the core working organization with the specialized UN agencies and other agencies such as the UN Intergovernmental Panel on Climate Change (IPCC), the UN High-level Political Forum on Sustainable Development, and the Environmental Management Group as the main components. They organize, coordinate, and promote international climate governance (Shang and Wang 2013). The negotiations and consultations organized by the United Nations on climate change issues are supported by the Intergovernmental Panel on Climate Change (IPCC). IPCC was established jointly

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by the United Nations Environment Program and the World Meteorological Organization in 1988. It is a global network with 2500 world-class scientists and experts. It reviews and evaluates scientific research in the field of climate change and aims to provide the world with a clear scientific view on the cognition of current climate change and its potential environmental and socio-economic impacts. II. International organizations and institutions, such as the Global Environment Fund initiated and established by the United Nations. It was co-sponsored by 25 countries as early as 1990. It is managed by relevant United Nations departments and the World Bank to provide financial assistance to address global environmental issues, and its function is similar to that of international environmental financial institutions. In addition, some non-UN intergovernmental organizations and institutions, national groups also actively participate in environmental affairs through bilateral, regional and multilateral ways, such as the European Commission, OECD, G20 and so on. III. Sovereign states. Sovereign states are the main participants of international climate negotiations, the legal body of international climate legislation, and the body to formulate and implement international climate governance rules. They play a leading role in international climate governance. International agreements can only be implemented when sovereign states introduce domestic action plans consistent with international commitments by domestic legislation. Therefore, the emission reduction willingness, emission reduction investment and corresponding policies and actions of sovereign states have an important influence on the effect of international climate governance. IV. Global industry associations and transnational corporations. For example, the International Green Industry Association (GIA) aims to jointly protect the living environment of mankind, advocate the development of green and environmental protection industries, and advocate green operations. In addition, transnational corporations are an important force in addressing climate change due to their large global influence and the huge ability to develop new technologies. They have begun to play an increasingly important role in contemporary international climate governance. Representatives of transnational corporations are usually invited to attend the UN climate conference. V. Non-governmental organizations related to environmental protection. Such organizations aim to protect the global environment or target specific environmental issues, and do not pursue profitability. They can be regarded as organized and systematic civil societal groups with democratic decision-making procedures. They play an important role in promoting and publicizing environmental protection knowledge, promoting public participation, and driving the research and development, production, circulation and consumption of environmentally sound products. In recent years, the influence of non-governmental organizations on international climate governance has gradually increased, and they have begun to be more and more involved in and influence the formulation and implementation of rules. They have played a unique role in monitoring the implementation of environmental laws, communicating with all parties, and promoting coordination and cooperation.

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References Li, Haitang. 2016. Climate Change Law—The Construction of the International Climate Governance System under the New Situation—From the Perspective of “Paris Agreement”. Journal of China University of Political Science and Law 2: 14. Pan, Jiahua. 2008. Carbon Budget Meeting Basic Demands and its International Equity and Sustainable Implications. World Economics and Politics (1): 35-44 Pan, Jiahua, and Yan Zheng. 2009a. Responsibility and Individual Equity for Carbon Emissions Rights. World Economics and Politics 10: 6–18. Pan, Jiahua, and Ying Chen. 2009b. Budgeting Carbon for Equity and Sustainability. China Social Sciences 5: 83–100. Shang, Hongbo, and Hua Wang. 2013. Formulating and Initiating Mechanism for Challenges of Global Environmental Governance. Environment and Sustainable Development 2: 12–17. Stern, N.H. 2006. Stern review on the economics of climate change. London: Her Majesty’s Treasury. Tian, Huifang, and John Whalley. 2010. Trade Sanctions, Financial Transfers and BRIC Participation in Global Climate Change Negotiations. Journal of policy modeling 32(1): 1–162. Tian, Huifang, and John Whalley. 2012. Cross Country Fairness Considerations and Country Implications of Alternative Approaches to a Global Emission Reduction Regime. NBER Working Paper 18443. Tian, Huifang. 2015a. A research on the influence of climate trade policy under the multilateral trade system. Database for cross check of academic papers, October 9. Tian, Huifang. 2015b. Evolving Trend of International Climate Governance Mechanism and China’s Responsibility. Economic Review Journal 12: 99–105. UNFCCC. 2021. The Annual Report on Actions to Address Climate Change. Available Online: https://unfccc.int/sites/default/files/resource/unfccc_annual_report_2019.pdf. Accessed Nov 13 2021. Wang, Wenjun, and Guiyang Zhuang. 2012. The Allocation of Carbon Emission Rights and the Demand for Climate Justice in International Climate Negotiations. Foreign Affairs Review 1:72– 84. Yang, Tongjin. 2012. Cosmopolitans’ Reflections and Criticisms on Rawls’ Theory of International Justice. World Philosophy 6: 97–110. Zhang, Yuyan, and Lin Ren. 2015. Global Governance: A Theoretical Analysis Framework. Quarterly Journal of International Politics 3:1–29. Zheng, Fei, Cheng Sun, and Jianping Li. 2012. Climate Change: New Dimensions in Disaster Risk, Exposure, Vulnerability, and Resilience. Advances in Climate Change Research 8(2): 79–83.

Chapter 20

Institutional Evolution of International Climate Governance

The international climate regime is derived from the international environmental regime. It is a collection of a series of rules and arrangements to solve and manage global climate change issues (Li 2011). The international climate change system includes formal international institutional arrangements and informal international institutional arrangements. The former mainly refers to a series of formal international institutional arrangements such as conventions, agreements, annexes to agreement and supporting mechanisms formed under the leadership of the United Nations, including the UNFCCC, the Kyoto Protocol and its annexes, and the Paris Agreement and its subsidiary agreements. The international climate regime has evolved in a long and arduous process from the signing and entry into force of the UNFCCC to the Kyoto Protocol, and further to the Paris Agreement.

20.1 Evolution of International Climate Regime Under the United Nations Framework Convention on Climate Change International climate cooperation could be traced back to the second half of the nineteenth century, when climate change was still a topic in natural science. In 1873, the world’s first International Meteorological Conference was held in Vienna when the World Meteorological Organization (WMO) was established. The main purpose of this organization was to promote global meteorological cooperation and achieve information sharing on climate issues. At that time, climate cooperation was still at the scientific level and did not rise to the political level. Svante August Arrhenius, a Swedish scientist, was the first person to predict the severity of the climate change problem. In 1896, he discovered through his research that when the concentration of CO2 in the atmosphere increases to a certain level, it will lead to a rise of the global temperature, and the burning of coal is the biggest hidden trouble. This conclusion aroused interests for research in the scientific community. In the second half of the © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_20

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twentieth century, the Hawaii Observatory in the United States first began to observe the concentration of CO2 in the atmosphere. In 1972, the First World Environment Conference was held in Sweden, and global environmental issues including climate change formally came into the purview of the international community. In 1979, the First World Climate Conference was held in Switzerland, and the issue of climate change was formally listed on the worldwide meeting agenda. The international community began to make efforts to address climate change. The first task was to establish a special institution to be responsible for scientifically assessing climate change issues. This was also an important background to establish the United Nations Intergovernmental Panel on Climate Change (IPCC) in 1988. It can be said that climate change has undergone a long evolution. With the degree and influence of intensified warming, it has gradually reached the level of politicization.

20.1.1 The United Nations Framework Convention on Climate Change and the First Commitment Period of the Kyoto Protocol The Ministerial Conference of the Second World Climate Conference was held in 1990 when representatives of 137 sovereign states, as well as WMO and UNEP jointly discussed how to establish an international convention on climate change. In the same year, the United Nations General Assembly launched a process of multilateral international negotiations on climate change focused on the United Nations Framework Convention on Climate Change. In May 1992, the Convention was finally adopted at the United Nations Headquarters and formally entered into force in 1994, with a total of194 parties. It made institutional arrangements for the international community on how to control the concentration of greenhouse gases in the atmosphere in the coming decades, including mitigation, adaptation, finance and technology, and capacity building. It was the first formal, authoritative and comprehensive international cooperation framework to address the global climate change (Tian 2015a, b). For the first time, the Convention recognized the different responsibilities of developed countries and developing countries in global warming. The Conference of the Parties to the Convention was held once a year for consultations focusing on emission reduction arrangements of industrialized countries. The Kyoto Protocol was adopted in Kyoto, Japan in 1997, and it made specific legally binding arrangements for the reduction of greenhouse gas emissions in major industrialized countries before 2012. The international climate regime at this stage had the following characteristics (Tian 2015a, b): (I) The asymmetric emission reduction arrangements between industrialized countries and developing countries. The industrialized countries in Annex 1 undertook legally binding absolute emission reduction commitments and were obliged to provide the latter with financial and technical support. Developing countries did not have to undertake emission reduction commitments. The extent to which developing countries fulfilled their commitments under the Convention depended on

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whether developed countries had effectively fulfilled obligations they committed to providing finance and technology transfer, while the economic and social development of developing countries should also be taken into account. It was the top priority for developing countries to eliminate poverty. (II) A strict “top-down” mandatory emission reduction mechanism. The Protocol set specific emission reduction targets and emission reduction timetables for industrialized countries. It was stipulated in the Protocol that between 2008 and 2012, with 1990 as the base year, the greenhouse gas emissions of major industrialized countries would be reduced by at least 5%, among which the EU as a whole would achieve an absolute emission reduction target of 8%, the United States 7% and Japan 6%. At the same time, in order to ensure the effectiveness of the results, on the basis of the Convention, the Kyoto Protocol formulated a strict monitoring, reporting and verification mechanism (MRV), requiring countries to regularly report their emission reduction progress and information. (III) A bridge for emission reduction among developed countries, and between developed countries and developing countries through the “three flexible market mechanisms.” The Kyoto Protocol created three flexible mechanisms of Joint Implementation (JI), Emissions Trading Scheme, and Clean Development Mechanism (CDM) to help developing countries mitigate and adapt to climate change. The three mechanisms combined the emission reduction obligations of countries in Annex 1 with the sustainable economic development goals of developing countries so that emission reduction costs decreased through market-based mechanisms to achieve emission reduction targets. At the same time, project transfer or purchase of emission permits could meet the financial and technological needs of developing countries. (IV) Prominent conflicts of interests within the groups of industrialized countries. At this stage, three camps were formed around climate negotiations: the European Union, the umbrella group of countries headed by the United States, Japan, Canada and Australia, and the group of developing countries represented by the “Group of 77 + China.” The EU has always been an active promoter of the international climate process. The United States, Canada, Australia and other countries were resistant and conservative towards emission reduction arrangements. After George W. Bush. came to power in 2001, the United States announced its plans to withdraw from the Kyoto Protocol, which severely hit the international community’s confidence and determination to deal with climate change. The Kyoto Protocol was almost in danger of collapse because the conditions for its entry into force could not be met. It was not until the end of 2004 when Russia officially approved the Kyoto Protocol, and the protocol formally came into force in 2005. Since developing countries did not undertake statutory emission reduction obligations, their influence in this period was relatively limited on the process of international climate governance. In general, the most important feature of the Convention and the Kyoto Protocol was that developed countries and developing countries assumed different responsibilities in climate mitigation. Developed countries took the main responsibility in the climate change crisis. As they had a strong ability to solve climate problems, they

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accepted two major emission reduction commitments: mandatory emission reduction targets, and provision of support to developing countries in terms of finance and technology transfer. A consensus was reached among countries that developing countries should not undertake mandatory emission reduction commitments.

20.1.2 Bali Roadmap and Negotiations for the Second Commitment Period of the Kyoto Protocol The Kyoto Protocol was not very well implemented due to the withdrawal of the United States. The “Greenhouse Gas Data 2006” report in the Convention revealed that developed countries reduced their overall emissions by 3.3% between 1990 and 2004, but this was mainly attributable to the negative economic growth of transforming economies in Eastern Europe and Central Europe. However other industrialized countries reported a 11% increase of greenhouse gas emissions, and Western Europe and North America witnessed an increase of CO2 emissions by 100 million tons and 900 million tons respectively between 1990 and 2003. Therefore, the main topic under discussion in this period was how to achieve the emission reduction targets in the commitment period stipulated in the Kyoto Protocol. From the perspective of finance and technology transfer, it was stipulated in Article 11 of the Kyoto Protocol that developed countries should provide new and additional financial resources to pay for all the agreed costs of developing countries in fulfilling their commitments, as well as additional costs. However, developed countries did not clearly fulfill these commitments. In order to include the United States and make arrangements for climate actions after 2012, the Conference of the Parties to the Framework Convention and the Conference of the Parties to the Kyoto Protocol were held in Bali, Indonesia in December 2007. At the meeting, there were significant differences in stances between the United States and EU countries, between industrialized countries and developing countries. After more than 10 days of hard negotiations, the meeting finally adopted the “Bali Roadmap.” The progress of the international climate regime in this period is shown as (Tian 2015a, b): (I) The dual-track was taken to advance the process of international climate negotiations. The most important decision of the Bali Conference was to establish a new ad hoc working group—the Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA), whose main task was to promote all countries to negotiate on the obligations specified in the Convention. The establishment of this working group marked the transition of international climate negotiations from a single-track system focusing on the Kyoto Protocol to a dual-track system of AWGLCA and AWG-KP (Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol) working together. It meant that even if the first commitment period for emission reduction under the Kyoto Protocol (2008–2012) ended, the Kyoto Protocol would continue to fulfill the second commitment period (2013–2020). The main task of the AWG-KP was to negotiate on Annex I Countries’ commitments for emission reduction and to evaluate the level of implementation in

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the first commitment period. The AWG-LCA negotiation agenda mainly included: (1) Developed countries should fulfill their emission reduction obligations during the first commitment period under the Kyoto Protocol; (2) To provide finance for developing countries; (3) To undertake technology transfer to developing countries; (4) To conclude emission reduction targets and roadmaps for the second commitment period through negotiations. (II) The “global long-term goal” was an important part of the Bali Conference. It was stipulated in the Bali Action Plan that one of the tasks of AWG-LCA was to discuss the vision of long-term cooperative actions and formulate global long-term emission reduction targets. The IPCC Fourth Assessment Report provided data on the targets, including: (1) Compared with the level of the industrial age, the global temperature increase should not exceed 2 °C or lower; (2) To control the concentration of atmospheric greenhouse gases below 450 ppm; (3) To define the reduction of global greenhouse gas emissions within a specific scope, for example, by 2050, emissions will be 50% lower or more than the 1990 level. The global target was also related to the following: (1) Annex I Countries’ emission reduction commitments and target set-up; (2) Contributions of developing countries in emission reduction; (3) Developing countries’ demand for finance and technology; (4) Developed countries would provide financial and technical assistance. (III) The Bali Action Plan made certain progress in the four core elements of climate governance, i.e., mitigation, adaptation, technology and finance, and capacity building, and initially established an architecture for international climate governance. Technology and financial mechanisms became the core topics of climate negotiations. The Bali Action Plan identified the main contents of capacity building needed by developing countries as: (1) To strengthen the ability of collecting climate data and information at the national and local levels; (2) To build a better ability to illustrate data; (3) To enhance adaptive capacity, i.e. the ability of the country and the community to address climate issues; (4) The ability to develop, implement and monitor national climate policies; (5) To build coordination capacity of ministries, commissions, departments and countries; (6) To build development and planning capacity of various departments (industry, agriculture, and services) (7) The ability to ensure that climate issues could be incorporated into national development and economic plans; (8) The ability to plan and obtain financial and technical resources and training of related human resources; (9) The ability to improve negotiations. (IV) The competition among the parties was fierce, and the differences and contradictions intensified. Developed countries exerted great pressure to try to increase the obligation level of developing countries and expand the scope. The United States explained that one of the main reasons why it did not join the Kyoto Protocol was that developing countries did not undertake mandatory obligations. At the Bali Conference, the United States and other developed countries tried to abolish the differentiation between developed countries and developing countries when discussing mitigation actions. For example, in the review of the Kyoto Protocol, developed countries required to extend the review scope to increase the obligations of developing countries, and also review the message notification of developing countries.

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The international community originally hoped that a legally binding climate agreement could be reached at the UNFCCC Copenhagen Conference of the Parties in 2009 with a consensus to be reached on long-term emission reduction targets of greenhouse gas. However, due to the outbreak of the financial crisis in 2008, the US-led umbrella countries began to try their best to avoid the target quantification of emission reduction actions. The European Union also fell into a crisis swamp, and it was not as active as before on the issue of climate change. In terms of attitude, developed countries tried to pull developing countries into the team of emission reductions. At the conference, they constantly requested developing countries, especially emerging market countries headed by the “BRICS” countries, to undertake the emission reduction responsibility, which aroused big divergences among the developing countries. The quarrels and prevarications at the Copenhagen Conference posed a gloomy light on the prospect for global climate negotiations at that time, greatly undermining the negotiation atmosphere, and also casting a shadow over the effective advancement of subsequent international negotiations, so that the Cancun Conference in 2010 only reached the Cancun Agreement with no legal effect. Major issues were not resolved such as specific emission reduction targets and the second commitment period of the Kyoto Protocol.

20.1.3 Durban Platform and Post-2020 International Climate Negotiations In order to try to coordinate the differences in stances and interests between developed countries and developing countries, promote the concrete implementation of the Convention, and solve the problems of the second commitment period of the Kyoto Protocol, the UNFCCC parties held a Durban Conference in South Africa in 2011. At the meeting, Canada formally announced its withdrawal from the Kyoto Protocol, which was supported by some developed countries. Japan also made it clear that it would not participate in the second commitment period, making the original dim climate negotiation process even more difficult. The Chinese government made active efforts and great compromises at this conference, enabling that the Durban Outcome was finally adopted. There were two main highlights for the Durban Outcome: (1) the second commitment period of the Kyoto Protocol could be implemented, and the “Green Climate Fund” was officially launched; (2) the “Durban Platform” was established to discuss the arrangements on international climate governance after 2020. The characteristics of international climate governance during this period were as follows (Tian 2015a, b): (I) Reducing greenhouse gas emissions. The target of the second commitment period under the Kyoto Protocol was to reduce all greenhouse gas emissions by at least 18% from the 1990 level during the 2013–2020 commitment period, and to expand the greenhouse gases for emission reduction to seven types. 37 developed country parties including 27 EU member states, Australia, Norway, Switzerland, and Ukraine participated in the second commitment period.

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(II) Transition from the “dual-track system” under the “Bali Roadmap” to the “single-track system.” Each party began to work on a single “Durban Platform” and strive to formulate an outcome document by 2015, which was legally binding and applicable to all Parties to the Convention. The AWG-LCA and AWG-KP under the Bali Roadmap were officially closed with the completion of their missions. Developing countries and developed countries began to negotiate on how to deal with the long-term impact of climate change on a common but new platform. (III) Working for the international climate regime arrangements after 2020. Two main topics were discussed on the Durban Platform: one was how to ensure and enhance the emission reduction actions of the international community before 2020; the other was to continue to negotiate on mitigation arrangements, adaptation arrangements, financial and technical assistance, and capacity building of developing countries under the Convention framework. The goal was to promote the conclusion of the Paris Agreement in 2015, which would be a global agreement to be jointly signed and participated in by developed industrialized countries and developing countries. (IV) Changing the global emission reduction model. The Kyoto Protocol was a mechanism which only involved industrialized countries, when a “top-down” mandatory emission reduction commitments were deployed to promote to achieve emission reduction targets. With the implementation of the second commitment period of the Kyoto Protocol, after 2020, developing countries will also be included in the rank of emission reduction actions. In order to ensure the joint participation of developed countries and developing countries, in 2013, the Warsaw Conference of the Parties began to discuss the target text of the intended nationally determined contributions of each country, and invited the Parties to draft the targets of their intended nationally determined contributions based on their own national conditions and considering historical emissions in order to ensure that a collection of global actions based on the efforts of various countries could help achieve the 2 °C threshold target of global climate emission reduction. It meant that the international climate governance mechanism was changing to a “bottom-up” model, and the system was becoming increasingly flexible. The Warsaw Climate Conference concluded three goals: (1) to further promote the implementation of financial mechanism; (2) to establish a timetable and a roadmap for international climate governance after 2020; (3) to establish a compensation mechanism for losses and damages. (V) Changing the international climate power pattern, while weakening the confrontation model of the “North–South Camp” and intensifying competition among various forces. With their economy gradually getting out of the swamp, the European Union and other countries began to try to return to the leadership for international climate governance, calling for strengthening the emission reduction efforts to address climate change, and setting quantified mandatory emission reduction targets, which had been an important power to promote the Durban Platform negotiation. Due to their vulnerability, small island countries also stood with the European Union and other countries to actively promote the climate negotiation process. Umbrella countries represented by the United States, Japan, Canada and Australia held similar attitudes and stances as the EU. They actively required developing countries, especially emerging market countries, to increase their emission

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reduction actions and participate in global emission reduction actions. There was a clear difference between umbrella countries and EU countries in the construction of emission reduction mechanisms. The former tended to take the “bottom-up” “nationally voluntary emission reduction” model, which was very close to the opinions of most developing countries. Emerging market economies adhered to the “common but differentiated” emission reduction responsibilities under the Convention framework, and called on developed countries to enhance their emission reduction actions before 2020, and at the same time fulfill their commitments to speeding up financial and technical support to developing countries, especially small island countries. However, developed economies such as EU countries and the United States and the Alliance of Small Island States jointly put pressure on emerging market countries due to their rapid increase in annual greenhouse gas emissions. Therefore, during this period, there were extremely obvious competitions for conflicts of interests and powers among various countries on the international climate governance. The contradictions mainly focused on the following points: (1) historical responsibilities and future responsibilities of greenhouse gas emissions; (2) different understandings of “fair” greenhouse gas emission reduction. Developing countries insisted on that fairness should be based on historical responsibility, while developed countries believed that the atmospheric greenhouse gases to be increased in the future will mainly come from developing countries, which should take precautionary measures to control future emissions. (3) The differences in geographical location, ecology and national conditions in various countries led to different impacts of climate change on countries. For example, Asian countries, African countries and Latin American countries located in tropical and subtropical areas are more susceptible to climate change, although there is a low greenhouse gas emission. Small island countries are also very vulnerable to the sea level rise. The economic development level in these areas is often more backward, and there is a higher demand for finance and technology to adapt to climate change.

20.1.4 The Paris Agreement and New Arrangements for International Climate Governance In February 2015, the negotiation text of the Paris Agreement was officially released by the UNFCCC Secretariat. The core content of the text still focused on climate mitigation, adaptation action, financial and technical assistance, capacity building, mechanisms and transparency arrangements. At the end of 2015, with the joint efforts of the international community, after hard consultations and compromises of interests, the Paris Agreement was finally adopted successfully, giving directions for future international climate governance. The main content included the following1 :

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See the full text of the Chinese version of the Paris Agreement.

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– Global goals. The Paris Agreement first called for strengthening climate action efforts before 2020, including: (1) Developed countries should earnestly fulfill their commitments in the second commitment period of the Kyoto Protocol and maximize their mitigation efforts. (2) Developed countries should deliver their commitments regarding finance, technology and capacity building to support developing countries to address climate change, and formulate a practical roadmap. (3) To strengthen high-level participation during 2016–2020, appoint two high-level advocates every two years to promote the implementation of emission reduction actions. (4) To strengthen the construction of a higher level of cooperation network, including the establishment of climate action portals and platforms for non-state actors, and encourage the participation of civil society, mobilize the enthusiasm of the private sector, attract the participation of financial institutions, and strengthen cooperation and action efforts at the municipal levels and at other sub-national levels so as to comprehensively promote global emission reduction actions. (5) To give full play to the role of market mechanisms. The parties should formulate strong climate policies, and the carbon pricing and carbon markets should play its role. For one thing, more ambitious global action goals should be set. For another, it was stipulated in the Agreement that, in addition to the target of controlling the global average temperature increase to 2 °C by 2100, the 1.5 °C target should also be included to minimize the long-term risks and impacts of climate change. For the first time, the 1.5 °C target was on the highest political agenda of global climate action. Although the political significance of this target was greater than its practical significance (Tian 2016a, b), it showed from another aspect the attention of the international community on the climate crisis, and its ambition and determination to tackle climate change. – Intended nationally determined contributions. It was stipulated in the Paris Agreement that all parties should notify the secretariat of their intended nationally determined contribution targets, and this should be done every five years. Developed countries should also report the implementation of financial commitments. The agreement also required all parties to notify of their low-emission development strategies for long-term greenhouse gases in the middle of this century before 2020. – Mitigation. The Paris Agreement established an ad hoc working group to write guidelines on the characteristics of intended nationally determined contributions, and define the content of notification of intended nationally determined contributions, including base year, implementation time limit, emission reduction scope and coverage, emission reduction planning, assumptions and methods involved in the intended nationally determined contribution target, the accounting method of greenhouse gas emissions, and how countries made ambitious contributions to achieve the global long-term emission reduction target, etc. – Adaptation. The Paris Agreement required the Adaptation Committee and experts from the least developed countries to make suggestions on the adaptation efforts of developing countries, and invited relevant United Nations agencies and multi-level financial institutions to submit information reports to state the financial assistance program which would help developing countries adapt to climate change. Three

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plans were specifically proposed. The first was to strengthen regional cooperation in adapting to climate change, including the establishment of regional centers and networks in developing regions; the second was to strengthen cooperation among UN agencies, and between agencies and financial institutions, such as the cooperation among the Adaptation Committee, as well as the Standing Committee on Financing and other financial institutions to ensure the adequacy and effectiveness of the adaptation fund; and the the third was to strengthen the support of the Green Climate Fund to adaptation actions. – Loss and damage. The Paris Agreement clearly requires the continued operation of the loss and damage mechanism established by the Warsaw Conference, and further improved the loss and damage mechanism from other aspects, including: (1) to establish a risk transfer information exchange to manage possible risks; (2) to establish a new working group to strengthen cooperation with existing adaptation committees to specifically deal with homeless and other issues related to the adverse effects of climate change. – Transparency building. In order to gradually improve the transparency of intended nationally determined contributions, the agreement put forward a transparency capacity building initiative, which required: (1) The Global Environment Fund should make transparency capacity building a priority and timely report the progress of financial implementation in its annual report. (2) Each party should also take the financial implementation as an important part of the national information reporting, and report progress at a frequency of once every two years. (3) The ad hoc working group of the Paris Agreement was required to establish templates, procedures, guidelines, and general forms for transparency reporting so that the information notified by the parties was accurate, complete, consist, and comparable to avoid double accounting. (4) It was required that the intended nationally determined contribution target would be only higher but not lower. After it was checked every five years, all parties should further strengthen their actions in addressing climate change. – Entry into force of the Paris Agreement. It was stipulated in the Paris Agreement that after more than 55 parties signed the agreement, the Paris Agreement would take effect as long as the total greenhouse gas emissions of these parties exceeded 55% of the total emissions of all parties. This threshold was far lower than that of the Kyoto Protocol to ensure that global efforts to tackle climate change would not hold back. In general, the signing of the Paris Agreement was a great victory for the international community in the face of climate crisis. It created a brand-new model for international climate governance, weakening the inherent and intricate contradictions and conflicts between the “North and South countries” and among various other interest groups in the past climate cooperation process, making developed countries and developing countries to enter the ranks of the global response to climate change with a relatively equal status, while maintaining the basic principle of “common but differentiated responsibilities” under the Convention, taking into account different economic development needs of developing countries and developed countries. This inclusive

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and dynamic model of international climate governance, which followed its capabilities and would only advance but not hold back, made the global response to climate change both flexible and serious, and it was easier to mobilize the powers and resources of all countries and levels in the world so as to jointly address the global climate crisis and avoid system shock, so climate actions could continue for a long time (Tian 2016a, b). At the same time, due to the low threshold for entry into force, the Paris Agreement came into effect only in less than a year after it was adopted, marking a step forward for the international community to address climate change.

20.2 Climate Goals Under the United Nations Sustainable Development Agenda 20.2.1 Germination and Development on Ideas of Environmental Crisis and Global Sustainable Development Governance In the 1930s, many major environmental pollution cases continuously broke out, such as toxic chemical pollution in the United States and toxic smoke in the United Kingdom. It brought about immense damage to human health and survival. The international community began to gradually pay attention to environmental protection (Tian 2016a, b). Some scientists with a sense of responsibility and pioneering spirit felt that it was necessary to further enhance mankind’s comprehensive understanding of the earth’s environment. A series of research results were published while Silent Spring and Limits of Growth caused the greatest response. The book of Limits of Growth published by the American economist Donella Meadows in 1972 pointed out that the five basic factors of world population growth, food production, industrial development, resource consumption and environmental pollution ran in exponential growth but not linear growth. However, food, resources and environment on which the population and economy depended developed in a linear way. If no actions were taken, it was likely that the growing population would exhaust the limited natural resources on the earth, leading to the destruction of the ecosystem on earth. The only feasible way to change this malignant growth trend was to establish stable ecological and economic conditions, limit growth, and change the direction of the society to move towards a balanced goal. The concept of balanced development conveyed in the book laid the foundation for the birth of the idea of sustainable development. It directly led to the rise of environmental legislation in western countries. The Clean Air Act of 1956 in the United Kingdom and the Comprehensive Environment Response, the Compensation and Liability Act of 1980 in the United States are among the most famous acts (Tian 2016a, b). During this period, the British and American governments played a leading role in environmental protection, such as establishing eco-banks, formulating relevant fiscal and economic measures to strengthen the supervision of polluting companies and support environmental protection industries.

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In the 1970s, the United Nations held the first worldwide conference on the human environment in human history in Stockholm, Sweden. More than 10,000 representatives from 113 countries attended the meeting where it finally published the famous United Nations Declaration of the Human Environment and announced 37 common views and 26 common principles, as well as 109 “action plans” to protect the global environment. This meeting was the starting point for all mankind to directly face environmental challenges for the first time, promoting the establishment of the United Nations Environment Program, and marking the official start of global cooperation in sustainable development actions. In March 1983, the United Nations established the World Commission for Environment and Development (WCED), and published the famous Our Common Future report in 1987. Environmental protection was elevated to the height of human sustainable development from the three aspects of “common problems”, “common challenges” and “common efforts”. In 1992, the United Nations Conference on Environment and Development and the Earth Summit in Rio (“Rio + 20”, or Rio + 20 Conference) was held in Rio de Janeiro, Brazil. 183 national delegations and 70 international organizations attended the meeting. The conference worked out a global plan-Agenda 21 for sustainable development that took into account economic growth, social development and environmental protection. This was a comprehensive plan for sustainable development of mankind that provided a blueprint for various governments, UN organizations, development agencies, non-governmental organizations and independent groups to take measures to safeguard a common future. The agenda divided sustainable development into four dimensions: sustainable economic and social development; sustainable development of resource utilization and environmental protection; roles of the public and social groups in sustainable development; as well as sustainable development of implementation means and capacity building. The agenda formulated more than 2500 action plans in 78 program fields. The key objectives included the gradual reduction and ultimate elimination of poverty, protection of atmosphere, realization of marine and biological diversification, promotion of sustainable agriculture, change of consumption and production means to avoid excessive waste of resources. The conference also adopted the Rio Declaration on Environment and Development to define the principles of national rights and obligations. In order to fully support the implementation of Agenda 21, the United Nations Commission for Sustainable Development (CSD) was established in December 1992 to ensure the effective implementation of follow-up actions of the United Nations Conference on Environment and Development (UNCED). Although Agenda 21 planned the future for the sustainable development of the international community, it did not achieve good results in the actual implementation (Huang et al. 2015). It was embodied as: (1) The policy was severely divided, and society, economy and environment were not regarded as an organic unity during the policy formulation; (2) the resources used in the world was still far beyond the capacity the ecosystem could bear; (3) it focused on short-term governance, ignoring long-term policy design; (4) there was basically no substantial progress for financial and technical assistance from developed countries. In view that human consumption of the earth’s resources exceeded the earth’s own capacity of regeneration and balance, the UN Millennium Summit was held

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in New York in 2000. The meeting adopted the United Nations Millennium Declaration and set a series of quantitative goals, namely the “Millennium Development Goals” (MDGs). There were eight goals in total, including economic, social, environmental and international cooperation, with eradicating extreme poverty, hunger and disease prevention as the main goals. The deadline for the UN Millennium Declaration was 2015. In 2002, the UN Secretary-General launched the “Millennium Project.” In September 2005, the heads of UN member states and governments gathered again and took advantage of this rare opportunity to make many positive decisions in the fields of development, security, human rights and UN reform, which was warmly received by organizations at all levels as well as non-governmental organizations. In the outcome documents adopted by the member states, the world leaders reaffirmed their commitment to achieving the Millennium Development Goals and agreed to hold a high-level summit in September 2015 to formulate plans to achieve the millennium development goals. It can be said that after more than 20 years of development and evolution, global sustainable governance has formed an integrated development framework that includes three pillars of economic development, social progress, and environmental protection, with poverty eradication, nature protection, and change of unsustainable production and consumption patterns as the core elements. Countries have integrated MDGs into their long-term development strategies, and have carried out various forms of international cooperation, increased the publicity and training of sustainable development ideas, and made positive progress in promoting economic development, eradicating hunger and poverty, and improving people’s livelihood. Unfortunately, global development has not really turned to a “sustainable” track. According to the assessment of the famous economist Jeffrey Sachs, there has not been any progress in 20 years for the three important environmental indicators in MDGs: climate change, biodiversity, and desertification control. Some indicators even deteriorated (Tang 2012). Fundamentally, the sustainable development governance architecture in this period itself had major flaws: (I)

(II)

(III)

The Millennium Development Goals focused too much on poverty reduction, especially one-dimensional poverty, making MDGs’ attention to and implementation of environmental dimension greatly lagging behind that of economy and society. The international community also lacked a comprehensive and systematic authoritative assessment of global sustainable development goals. The implementation effort was heavily insufficient in the field of sustainable development. Due to the lack of an effective monitoring mechanism, developed countries did not very well fulfill their political commitments to providing financial support and technical assistance to developing countries. The expense of economic assistance from developed countries dropped from 0.35% in 1992 to 0.27% in 1995. The differences among various agencies of the United Nations on this issue, the “fragmentation” of global governance, the institutional conflicts, and regulatory conflicts all posed challenges to the sustainable development cooperation of the international community.

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20.2.2 Climate Change and a New Round of Reforms in the Worldwide Sustainable Development Governance Due to the natural deficiencies in geographic location and ecological vulnerability, developing countries and underdeveloped regions are inevitably greatly impacted after the climate change problem becomes increasingly prominent, especially under the premise of lack of technology and finance to address climate change. (I) Poor regions and vulnerable regions will suffer severe impacts. Agriculture and life in poor countries or regions are more dependent on natural conditions and extremely prone to the threat of climate change. High temperatures, storms and floods will result in decline of global crop yields per unit area and quality, decline of arable land quality, increase of fertilizer and water costs, and aggravated agricultural disasters; accelerated spread of tropical diseases with climate warming, thus threatening life safety; changes in rainfall will lead to food shortages and lack of drinking water; rising sea levels will cause mass migration. Climate change has also accelerated water circulation to bring changes in water resources and their space distribution, and increase the frequency and intensity of extreme weather events such as torrential rains and strong storm surges, plunging these countries into a vicious circle of environmental poverty (Fig. 20.1). (II) Challenges to traditional production modes and consumption patterns. The traditional resource-exhausted, and unsustainable production and consumption patterns have caused huge challenges to the ecological environment and social and economic development, which should be urgently changed. (III) Challenges to energy efficiency and energy structure. It must ultimately depend on the adjustment of the energy structure to address climate change. There are

Fig. 20.1 Impact pathway of climate change on sustainable development. Source Made by the author

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two plans: (1) to improve energy efficiency and reduce the consumption proportion of fossil energy; (2) to increase the proportion of clean energy, including hydropower, solar energy, wind energy, and nuclear energy, and optimize the energy structure. The former requires the intensive use of traditional fossil energy, utilization of more advanced environmentally-sound technologies, such as clean coal technology, desulfurization technology, and promotion of the transformation of the traditional coal industry, such as taking the road of coal integration. The latter is the general trend of future energy development. In 2012, the international conference on sustainable development was back to Rio de Janeiro, Brazil again when another large-scale, high-level “Rio + 20” was held. Discussions focused on three main goals: (1) to assess the progress of existing commitments and implementation gaps; (2) new commitments for sustainable development; (3) to identify new global challenges. A major background of this conference was the global financial crisis that broke out in 2008. Countries were trying to find new growth points to get rid of the crisis, enabling green economy to come onto the stage of human history. Countries promoted green development through various means, and the “Green New Deal” emerged that represented the structural transformation of industrial economy. “The Future We Want” was adopted at the “RIO + 20” summit, and the main goal was to design the global sustainable development goal after 2015. In order to promote the process, the United Nations High-level Political Forum on Sustainable Development was formally established and officially launched during the General Debate of the 68th Session of the United Nations General Assembly. “Rio + 20” in 2012 opened the prelude to a new round of reform process for global sustainable development governance. The direction and standards of the reform included: to establish an inclusive development framework to incorporate different sovereign states, non-state actors, social groups, and individuals into the sustainable development framework; to establish a stable capital flow to support sustainable development; to improve administrative efficiency; to strengthen capacity building for implementation; to establish effective methods and indicators that would dynamically reflect changes in natural and social systems; to establish strong accountability mechanisms and transparency security measures. The United Nations also took the initiative to carry out a series of surveys on the future direction of sustainable development and system reforms in various countries, adopting the famous “World Cafe” meeting model,2 taking advantage of the powers of the scientific community, the academic community and policy-makers to assess the institutional framework, key challenges and policy selections for sustainable development.

2

The main spirit of the “World Cafe” meeting model is “crossover”, when a group of people with different professional backgrounds, different positions, and from different departments express their own opinions on several topics with colliding views, and then unexpected innovative ideas are inspired.

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20.2.3 Impact of the Sustainable Development Agenda on International Climate Governance In the 2030 Development Agenda, environmental goals, social goals, and economic goals are the three pillars with equal importance in the sustainable development process. Environmental issues highlighted with climate change have a significant role in promoting reforms of global sustainable development governance. The establishment of multiple environmental goals in the United Nations Sustainable Development Goals 2030 has pointed out the direction for global environmental governance in the next 15 years (Fig. 20.2). The 2030 Agenda for Sustainable Development listed the climate change goals (SDG13) separately as one of the 17 sustainable development goals. It aimed to raise USD100 billion annually by 2020 to meet the needs of developing countries and mitigate climate-related disasters, while enhancing the risk-resistance ability and adaptive ability of vulnerable regions such as landlocked countries and island countries, raising public awareness, and incorporating capacity building measures into national policies and strategies. Meanwhile, there are many sub-goals in other specific fields of sustainable development goals that are closely related to climate change. For example, SDG7 (ensures access to affordable, reliable, sustainable and modern energy for all) has established specific targets for increasing energy efficiency and the proportion of renewable energies, strengthening cooperation and research on clean energy technologies, and promoting sustainable energy services, which are also important means to address climate change (Table 20.1). In general, the impact of the sustainable development agenda on international climate governance is shown in the following six aspects: (I) The fundamental position of the UNFCCC is confirmed as the main international intergovernmental forum to address global climate change. It is the most basic framework and fundamental law for the international community to participate

Economy

Replace

Inter-generational equity

Efficiency

Distribution of welfare

Value assessment

Growth Fixed capital

Society Culture

Poverty

Ecological environment issue

Empowerment

Irreversibility

Culture / Heritage

Resilience

Intra-generational equity Wide participation

Ecology

Fig. 20.2 Supportive relationship among the three goals of sustainable development. Source Made by the author

SDG13. Take urgent action to combat climate change and its impacts

SDG9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

(continued)

SDG9.1: Develop quality, reliable, sustainable and resilient infrastructure, including regional and trans-border infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all SDG9.2: Promote inclusive and sustainable industrialization, and by 2030 raise significantly industry’s share of employment and GDP in line with national circumstances, and double its share in LDCs SDG9.4: By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes, all countries taking action in accordance with their respective capabilities SDG9.5: Facilitate sustainable and resilient infrastructure development in developing countries through enhanced financial, technological and technical support to African countries, LDCs, LLDCs and SIDS

SDG8. Promote sustained, SDG8.4: Improve progressively through 2030 global resource efficiency in consumption and production, and endeavor to decouple inclusive and sustainable economic economic growth from environmental degradation in accordance with the 10-year framework of programs on sustainable consumption and growth, full and productive production with developed countries taking the lead employment and decent work for all

SDG7. Ensure access to affordable, SDG7.2: By 2030, increase substantially the share of renewable energy in the global energy mix; double the global rate of improvement in reliable, sustainable and modern energy efficiency by 2030 energy for all SDG7.3: By 2030, enhance international cooperation to facilitate access to clean energy research and technologies, including renewable energy, energy efficiency, and advanced and cleaner fossil fuel technologies, and promote investment in energy infrastructure and clean energy technologies SDG7.4: By 2030, expand infrastructure and upgrade technology for supplying modern and sustainable energy services for all in developing countries, particularly LDCs and SIDS

Sub-goals related to climate change under the sustainable development goals

SDG13.1: Strengthen resilience and adaptive capacity to climate related hazards and natural disasters in all countries SDG13.2: Integrate climate change measures into national policies, strategies, and planning SDG13.3: Improve education, awareness raising and human and institutional capacity on climate change mitigation, adaptation, impact reduction, and early warning SDG13.4: Implement the commitment undertaken by developed country Parties to the UNFCCC to a goal of mobilizing jointly USD100 billion annually by 2020 from all sources to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation and fully operationalize the Green Climate Fund through its capitalization as soon as possible SDG13.5: Promote mechanisms for raising capacities for effective climate change-related planning and management, in LDCs, including focusing on women, youth, local and marginalized communities

Sustainable development goals

Table 20.1 Goals related to climate change in sustainable development goals (SDGs)

20.2 Climate Goals Under the United Nations Sustainable Development Agenda 323

Sub-goals related to climate change under the sustainable development goals

SDG12. Ensure sustainable consumption and production patterns

(continued)

SDG12.5: By 2030, substantially reduce waste generation through prevention, reduction, recycling, and reuse SDG12.8: By 2030, ensure that people everywhere have the relevant information and awareness for sustainable development and lifestyles in harmony with nature SDG12.9: Support developing countries to strengthen their scientific and technological capacities to move towards more sustainable patterns of consumption and production SDG 12.10: Rationalize inefficient fossil fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking fully into account the specific needs and conditions of developing countries and minimizing the possible adverse impacts on their development in a manner that protects the poor and the affected communities

SDG11. Make cities and human SDG11.3: By 2030 enhance inclusive and sustainable urbanization and capacities for participatory, integrated and sustainable human settlements inclusive, safe, resilient settlement planning and management in all countries and sustainable SDG11.6: By 2030, reduce the adverse per capita environmental impact of cities, including by paying special attention to air quality, municipal and other waste management SDG11.7: By 2030, provide universal access to safe, inclusive and accessible, green and public spaces, particularly for women and children, older persons and persons with disabilities SDG11.8: Support positive economic, social and environmental links between urban, peri-urban and rural areas by strengthening national and regional development planning SDG11.9: By 2020, increase by x% the number of cities and human settlements adopting and implementing integrated policies and plans towards inclusion, resource efficiency, mitigation and adaptation to climate change, resilience to disasters, develop and implement in line with the forthcoming Hyogo Framework holistic disaster risk management at all levels SDG11.10: Support least developed countries, including through financial and technical assistance, for sustainable and resilient buildings utilizing local materials

Sustainable development goals

Table 20.1 (continued)

324 20 Institutional Evolution of International Climate Governance

SDG17. Strength the means of implementation and revitalize the global partnership for sustainable development

Source Excerpts of the 2030 Agenda for Sustainable Development from the official website of the UNDP: http://www.cn.undp.org/content/china/zh/home/post-2015/sdg-overview/

Sub-goals related to climate change under the sustainable development goals

Financing SDG17.1: Strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection SDG17.2: Developed countries to implement fully their official development assistance commitments, including the commitment by many developed countries to achieve the target of 0.7% of ODA/GNI to developing countries and 0.15–0.20% of ODA/GNI to least developed countries SDG17.3: Mobilize additional financial resources for developing countries from multiple sources Technology SDG17.6: Enhance North–South, South-South and triangular regional and international cooperation on and access to science, technology and innovation and enhance knowledge sharing on mutually agreed terms, including through improved coordination among existing mechanisms, in particular at the United Nations level, and through a global technology facilitation mechanism SDG17.7: Promote the development, transfer, dissemination and diffusion of environmentally sound technologies to developing countries on favourable terms, including on concessional and preferential terms, as mutually agreed SDG17.8: Fully operationalize the technology bank and science, technology and innovation capacity-building mechanism for least developed countries by 2017 and enhance the use of enabling technology, in particular information and communications technology Capacity-Building SDG17.9: Enhance international support for implementing effective and targeted capacity-building in developing countries to support national plans to implement all the sustainable development goals, including through North–South, South-South and triangular cooperation Multi-stakeholder partnerships SDG17.16: Enhance the global partnership for sustainable development, complemented by multi-stakeholder partnerships that mobilize and share knowledge, expertise, technology and financial resources, to support the achievement of the sustainable development goals in all countries, in particular developing countries SDG17.17: Encourage and promote effective public, public–private and civil society partnerships, building on the experience and resourcing strategies of partnerships Data, monitoring and accountability SDG17.18: By 2020, enhance capacity-building support to developing countries, including for least developed countries and small island developing states, to increase significantly the availability of high-quality, timely and reliable data disaggregated by income, gender, age, race, ethnicity, migratory status, disability, geographic location and other characteristics relevant in national contexts SDG17.19: By 2030, build on existing initiatives to develop measurements of progress on sustainable development that complement gross domestic product, and support statistical capacity-building in developing countries

Sustainable development goals

Table 20.1 (continued)

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in international cooperation in addressing global climate change. It adheres to the dominant role of the Convention and shows that the multilateral process of global response to climate change is retained. (II) It provides comprehensive and effective policy support to address global climate change. 2030 is the target year for both the Sustainable Development Goals and the Paris Agreement. In the future, the two goals will be connected, mutually supportive, and be implemented together. This will also force countries to deeply integrate their own development goals with the targets in response to climate change and other sustainable development goals when designing future economic development strategies. This will bring changes in national policies and development concepts. In order to better evaluate the process of sustainable development, the United Nations designed a series of quantitative indicator systems, requiring member states to regularly report the progress of indicators, and evaluate them. This will also play a supervising and promoting role for the global implementation of the Paris Climate Agreement. (III) The global partnership for revitalizing sustainable development advocated in the Sustainable Development Goals will provide strong financial, technical and capacity-building support for global climate action. Innovative public– private partnership is the key to the success of the post-2015 development agenda. The Sustainable Development Goals emphasized the importance of global cooperation and partnership from the perspectives of finance, technology, capacity building, trade, and data monitoring, and proposed a package of measures and specific goals. For example, it was clearly required that developed countries should fully fulfill their commitments to provide developing countries with official development assistance accounting for 0.7% of developed countries’ GNI, and to provide least developed countries with assistance accounting for 0.15–0.2%. Developed countries were required to undertake the commitments under the United Nations Framework Convention on Climate Change to jointly mobilize USD100 billion annually from all sources by 2020, for improving the transparency on implementation, and fully operationalize the Green Climate Fund through its capitalization as soon as possible. In terms of technical cooperation, special emphasis was placed on establishing a “global technology facilitation mechanism” at the UN level to enhance the cooperation scope of technology and innovation field at different levels, such as North– South, South-South and triangular regional and international cooperation, as well as share knowledge and expertise, technical and financial resources among multistakeholders. Another aspect of the partnership is to build a partnership between the private sector and the civil society with the target of mobilizing, transferring and releasing changing powers of trillions of US dollars in private resources to achieve sustainable development goals. (IV) The Sustainable Development Goals highlight the importance of climate adaptation. The primary and specific goal of SDG13 to address climate change is to strengthen the ability of countries to resist and adapt to climate-related disasters and natural disasters. Adaptation and disaster are closely linked. Because developing countries lack sufficient finance, technology, and the capacity to adapt to climate change, once extreme climate disasters occur, it will hugely impact the GDPs of

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these countries. Therefore, in order to adapt to climate change, it is important to strengthen water resource management, forest maintenance, and agricultural safety management in ecologically fragile areas, and speed up research and development cooperation on adaptive technologies. (V) It provides guiding principles for international climate governance. Three goals should be achieved for the global carbon emission reduction policy. The first is to determine a reasonable carbon price to set an initial price for the formation of the future carbon market; the second is to encourage technological research and development, including improving energy efficiency, increasing the utilization of renewable resources, carbon storage technology and reducing deforestation; and the third is to effectively reduce market failures. In other words, sustainable development, energy security, and restraining climate change will be the direction of the policy framework. The principles of the sustainable development agenda are also applicable to global actions to address climate change, such as adhering to the principles of sustainable development, correctly handling the relationship between contemporary people and future generations, correctly handling the relationship among economic development, resource protection and environmental utilization. (VI) The 2030 Agenda for Development will significantly enhance global awareness on environmental protection and sustainable development. An important article of the UN’s 2030 Agenda for Sustainable Development is to expand environmental protection-related publicity and education, which requires to inspire environmental protection awareness of governments, companies, social groups and the public, form a strong atmosphere for global sustainable development, and give full play to the role of the media and the public to monitor environmental protection achievements. On the whole, the rollout of the 2030 Agenda for Development provides a strong driving force for global low carbon transformation and sustainable development. Despite many challenges, this process also provides new opportunities and new impetus to the climate and environmental governance in various countries. In particular, it will bring late-developing advantages and technology spillover effects to developing countries, enabling their future development pathways to avoid traditional road of “treatment after pollution, but directly achieve leap-forward development. Green development has also become the focus of countries seeking new economic growth and enhancing national competitiveness after the 2008 financial crisis, and has brought about a series of positive revolutions and changes associated with this.

20.2.4 Policy Selection of Climate Governance Under the Framework of Global Sustainable Development (I)

Fully implementing the global sustainable development agenda and the Paris Agreement

It is the core task of the international sustainable development process to implement the 2030 Agenda for Sustainable Development and formulate the country-specific

328

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action plans. The G20 Action Plan on the 2030 Agenda for Sustainable Development adopted at the G20 Hangzhou Summit in 2016 clearly stated to take a series of measures, including dialogue, policy coordination, and strengthening of higher-level international cooperation to promote implementation of sustainable development agenda at the national level. The G20 also called for enhancing the financial system’s ability to raise private finance for green investment. The G20 Working Group on Development is responsible for evaluating and supervising the G20’s progress in implementing the Sustainable Development Goals. The implementation of SDGs should also strengthen the top-level design of reform actions in various countries to ensure the coordination of global development goals and sustainable development goals of all countries. Taking China as an example, China’s 13th Five-Year Plan organically integrated the sustainable development agenda with China’s mid- and long-term development plan. China’s National Plan on Implementation of the 2030 Agenda for Sustainable Development promulgated by China in September 2016 elaborated on China’s overall pathway to promote 2030 agenda for development from seven aspects of strategic alignment, institutional guarantee, social mobilization, resource investment, risk prevention and control, international cooperation, and supervision and evaluation. Specific plans were given to implement 17 sustainable development goals and 169 specific targets. The Chinese plan was not only committed to China’s sustainable development, but also clearly stated that China will also work hard to help other developing countries to forge ahead in the global implementation process, providing a good case and example to align with global and national development strategies. Secondly, international governance should be strengthened. Major countries such as China, the United States, and EU countries provided political support for the implementation of the United Nations sustainable development agenda by taking the lead in formulating national action plans. Partner countries were supported to implement the 2030 Agenda and climate agreements, increase trust and capacity building, strengthen the experience exchange, promotion and cooperation in green finance and green development in the international field, and were encouraged to align with financial policies at the global level to meet the financial needs on green development and achieve effective governance of the global environment. In addition, research should be strengthened on global cooperation in response to sustainable development and climate change adjustment, especially in the context of the rising power of the global extreme right faction, the deteriorating political environment, and the growing trend of anti-globalization. (II)

Increasing global climate mitigation efforts and climate adaptation capacity-building

The relationship between climate mitigation and climate adaptation is shown in Fig. 20.3. Among them, mitigation measures include cut of greenhouse gas emission sources and increase of greenhouse gas absorption sinks/reservoirs. In terms of greenhouse gas emission reduction, there are three main goals: the first is to reduce the absolute amount of emission reduction; the second is to lower the growth rate of CO2 emissions; the third is to cut down the intensity of carbon emissions, i.e. to

20.2 Climate Goals Under the United Nations Sustainable Development Agenda

329

Fig. 20.3 Relationship among climate change, climate mitigation and climate adaptation. Source Made by the author

reduce the relative amount. Corresponding policies at the international level include the three mechanisms from the Kyoto Protocol: joint implementation, emissions trading scheme, and clean development mechanism, while domestic policies at the economic level include: carbon tax, licensing trade, and subsidies for renewable energy and clean technology; policies at the administrative level include planning directives, technical and product standards, certification and labeling and so on, and other voluntary policies, including signing voluntary emission reduction agreements, establishing environmental awareness and changing behaviors. The adaptive policy is to make adjustments in the ecological, social, or economic system to make beneficial to actual or expected climate stimulus and its impact, and to increase the potential or capacity of the system, region or community to adapt to the impact of climate change. In terms of policies, it should include the expansion of carbon sink absorption, such as forests, soils, afforestation, and the use of carbon capture and storage technology (CCS) to increase sustainable infrastructure construction, promote water-saving technologies and expand afforestation, increase ecological protection and recovery efforts, and strengthen the construction of early warning information system and disaster emergency management mechanism. (III)

Developing a low carbon economy

Europe was the earliest place to practice the “low carbon economy.” The United Kingdom first proposed it, and then it was positively responded by other countries, thus starting the upsurge of transitioning to a low carbon society in Europe, and becoming an international pioneer in the development of a low carbon economy and an international leader in the process of climate governance. The low carbonization of the economy is a new development model, and it is featured with low energy consumption, low emissions, and low pollution. The model was proposed from the irreversibility of global climate change and the non-renewability of energy resources.

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The re-survival and development of mankind are not an endless process of free selection. It is restricted by the global limited environmental resources and limited energy resources, which affects the selection of development pathways and development models in various countries. The essence of a low carbon economy is to achieve an efficient use of energy resources and reduce carbon emissions in the utilization process; at the same time, to find new alternative clean energies, and finally get rid of dependence on the traditional fossil energy, so that the economy will be on a path of efficient, clean and green development. The core competitiveness of low carbon economy is still technological progress, including the upgrading of traditional energy efficiency technologies, the development and innovation of environmentally sound technologies, and the promotion and application of clean energy technologies. Therefore, the low carbon economy will bring transformation of and challenges to the global industrial structure, and it will also bring innovation to and fundamental changes in global lifestyles, development concepts and systems.

20.3 Climate Change Issues Under the Multilateral Trade Framework 20.3.1 Global Trade Distribution and Trade Carbon Emission Distribution The globalization of the economy has led to dramatic changes in the scale and structure of international trade. Trade liberalization has broken down trade barriers and greatly promoted growth and prosperity. Among them, the biggest changes can be seen in emerging market countries when the degree of trade openness jumped from 30% to nearly 80% in 2000, and the degree of openness even far exceeds the average levels of developed countries and the world. International trade plays an important role in promoting the integration of emerging market countries with the world economy (Fig. 20.4). The international trade gradually develops and shifts from the agricultural sector to the industrial and service sectors. From the perspective of sector structure, the rapid growth of trade in emerging markets is due to the rapid growth of their industrial manufacturing. So in the world trade pattern emerging markets have destined to be the main exporters of primary products and high energy-consumption, highlypolluting industrial products, while imports from developed economies are mostly products with relatively high technical content. However, the comparative advantages of emerging markets are constantly being enhanced. Export of primary products and resource-based products in the early 1970s has slowly changed to the export of diversified industrial products (Tables 20.2 and 20.3). From the perspective of export flow, the European Union, the United States and Japan are the main destinations for China’s exports. In particular, exports to the United States have seen an ever rise in the proportion of China’s GDP. Exports from 2006

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331

Fig. 20.4 Changes in the degree of global trade openness (1960–2008). a. The proportion of the total imports and exports of goods and services calculated at the constant price of US dollars in 2000 to the total GDP of the world and each group. Source Statistics on trade from the International Monetary Fund (IMF)

Table 20.2 Changes in the composition of exports by economies (1960–2007) Group

Exports 1960–72

1973–85

1986–2007

Advanced economies Primary nonfuels*

24.92

19.48

14.11

Primary fuels

3.79

6.37

4.65

Manufacturing

71.37

74.22

81.24

60.8

37.76

16.51

Primary fuels

16.78

23.65

8.94

Manufacturing

23.33

38.59

74.55

Emerging market economies Primary nonfuels*

Other developing economies Primary nonfuels*

81.53

35.64

31.08

Primary fuels

14.96

56.80

40.46

Manufacturing

7.33

9.43

31.02

Source Statistics on trade from the International Monetary Fund (IMF) Note * Primary nonfuels mainly include agricultural raw materials, food, minerals, ores, and metals

to 2008 were more than twice that of the 1990s. Trade among developed countries has been relatively stable, and intra-regional trade has increased (Table 20.4). From the perspective of global carbon emissions, between 1880 and 2000, countries such as the United States and EU countries contributed most to the world’s cumulative carbon emissions, and the two together contributed nearly 50%. China’s cumulative emissions accounted for only 11%. However, in terms of annual emissions, the growth rates of carbon emissions in countries such as China and India were much higher than that of developed economies (Fig. 20.5).

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Table 20.3 Changes in the composition of imports by economies (1960–2007) Imports 1960–72

1973–85

1986–2007

Advanced economies Primary nonfuels*

35.74

22.21

17.75

Primary fuels

11.59

22.69

13.46

Manufacturing

52.66

55.11

68.79

26.60

19.71

16.31

Emerging market economies Primary nonfuels* Primary fuels

7.38

17.00

13.40

Manufacturing

66.02

63.29

70.29

Other developing economies Primary nonfuels*

20.98

19.61

23.58

Primary fuels

7.85

13.31

12.90

Manufacturing

71.17

67.12

63.55

Source Statistics on trade from the International Monetary Fund (IMF) Note * Primary nonfuels mainly include agricultural raw materials, food, minerals, ores, and metals

Under the background of globalization, global trade has accelerated and its structure has also undergone major changes. The flow rate of global goods has increased significantly. Products manufactured in one country can quickly reach other countries and be used by consumers in other countries, thus separating the place of production and the place of consumption of a product (Xi et al. 2011). The contribution of trade to global carbon emissions has exceeded 20% (Fig. 20.6).

20.3.2 Climate Trade Measures Under the WTO Framework In the international trade system, there is no special legal agreement on environmental issues. However, as trade issues and environmental issues have gradually shown a high degree of relevance, the WTO Agreement has gradually included many provisions related to environmental protection to regulate the quality of trade products and trade disputes arising from environmental issues. The famous Marrakesh Agreement on Trade and Environment adopted in 1994 established a special trade and environment committee to solve trade-relevant environmental problems. It was clearly stipulated in the provisions of the WTO Agreement that in the process of reviewing trade products, if member states found that the products posed a threat to people’s health and life safety or did not meet the required standards, they could control the import of trade products in accordance with relevant laws and regulations or through technical standards and other trade means, which provided a legitimate umbrella for green trade barriers (Tian et al. 2011).

Euro area

Japan

1.6

4.0

6.0

Japan

Other advanced economies

5.8

2.5

1.2

…

7.7

2.9

2.3

…

4.4

0.8

2.9

6.3

NIEs and ASEAN-4

Latin America

Aigentina

Brazil

Mexico

12.3

1.4

0.6

5.1

9.3

2.8

6.0

21.0

2.8

2.1

10.9

10.3

5.9

6.9

20.7

2.0

1.8

9.3

7.9

6.9

6.4

1.7

2.8

1.6

2.3

3.0

0.6

1.5

5.9

1.1

…

1.0

0.7

1.6

1.5

1.5

4.6

1.7

3.2

6.9

1.0

…

1.0

0.7

2.4

3.0

1.9

6.2

3.7

4.4

7.5

1.3

…

1.1

1.2

2.5

3.3

2.6

5.9

5.2

4.9

7.7

1.7

…

1.3

0.8

0.7

0.3

0.7

6.6

1.7

3.2

1.0

…

0.2

0.6

0.2

0.5

0.2

0.5

5.3

3.1

3.8

1.1

…

0.4

0.8

0.2

0.4

0.2

0.4

5.8

3.6

3.9

0.9

…

0.4

0.5

0.2

0.4

0.2

0.5

5.3

3.0

3.3

0.9

…

0.4

0.5

Source Statistics on trade from the International Monetary Fund (IMF), “World Economic Outlook” from the International Monetary Fund (IMF) a. Export is expressed as the proportion to the GDP of the exporting country or group of countries. The data covers 86 countries of origin of trade and 105 trade destinations. ... = Not applicable

0.6

8.3

China

3.6

Emerging Asia

6.8

3.2

2.2

…

Emerging market economies and other developing economies

…

Euro area

1981–85 1991–95 2001–05 2006–08 1981–85 1991–95 2001–05 2006–08 1981–85 1991–95 2001–05 2006–08

United States

Advanced economies

Exporter

United States

Destination

Table 20.4 Export flows of each economy and the proportion of exports in GDP of each economy

20.3 Climate Change Issues Under the Multilateral Trade Framework 333

334

20 Institutional Evolution of International Climate Governance Annual CO2 emissions in various countries since 1990 (in 100 million tons)

Fig. 20.5 Global carbon cumulative emissions (contribution rate of cumulative CO2 emissions). Source WRI

Fig. 20.6 Regional distribution of net carbon flows embodied in global trade. Notes The black area indicates the most serious carbon embodied in trade in this region

Numerous non-tariff barriers linked to carbon (such as carbon packaging, carbon labeling, green clauses, technical clauses, etc.) have also become the preferred means of developed countries. Such trade measures often appear in the ways including price control, such as anti-dumping and anti-subsidy investigations on China’ solar products, as well as technical standards. Technical barriers to trade on climate include low-carbon technical regulations and standards, such as the implementation of low carbon certification, which requires companies to improve technology and reduce emissions from the corporate level. Technical standards often have greater flexibility, which work for all levels of manufacturing, such as product manufacturing, transportation, and sales. Being invisible and arbitrary, it can exert restriction on the import of trade products in the name of justice upon request of the country, so it is welcomed by developed countries, especially for reviewing the import of trade products with high energy consumption (Tables 20.5 and 20.6).

20.3 Climate Change Issues Under the Multilateral Trade Framework

335

Table 20.5 Low carbon certification and technical measures to trade in European and American countries Country

Description

Process boundary

Product category

Assessment standard

The United Kingdom

Carbon Reduction Labeling

From raw material to delivery/total life cycle

Food, clothing, daily PAS 2050 chemicals, building materials, etc.

France

Groupe Casino Indice Carbon

From raw material to delivery

Daily chemicals, home textiles, food and other retail products

ISO 14047 PAS 2050

Germany

Carbon Footprint Label

Total life cycle

Communication products, home textiles, clothing, daily chemicals, food, packaging materials, etc.

ISO 14047 PAS 2050

Switzerland

Climatop

Total life cycle

Organic cotton textiles, detergents, cream, etc.

ISO 14047

Sweden

Environment Product Declaration (EPD)

From raw material to product transport

Food, textiles, furniture, wood and paper products, plastic rubber/glass and chemicals

ISO 14047

USA

Carbon Free Label

Total life cycle

Textiles, building materials, drinks, etc.

ISO 14047

Climate Conscious Carbon Label

Total life cycle

Textiles, food, etc.

PAS 2050 ISO 14047

In addition to carbon labels, there is also a kind of technical standards, i.e. energyconsuming standards, such as the EU’s Directive establishing a framework for the setting of eco-design requirements for energy-using products (EuP) and establishing a framework for the setting of eco-design requirements for energy-related products (ErP); US’s Energy Star (Energy Star) project and Electronic Product Environmental Assessment Tool (EPEAT) to reduce energy consumption and emission reduction; Japan’s implementation of the “Top Runner Program” and eco-point system in the manufacturing process. The above regulations and systems all belong to this type of trade measures. Generally speaking, in the context of globalization, the relationship between trade and climate change is getting closer. Environmental factors have become an important consideration in formulating current trade rules. To cope with the challenge of climate change, it is necessary to coordinate the relationship between the climate system and the trade system: on the one hand, it is necessary to adequately deal

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Table 20.6 Carbon label standards voluntarily established by companies Company

Target

Calculation method

TESCO

To mark all 70,000 kinds of goods on the shelves with carbon labels

To cooperate with the To cooperate with the carbon fund, and first to carbon fund, and first to take the air transport data use the plane logo

Identification method

CASNO

To mark 3,000 kinds of Jointly developed by own food with carbon French Environment and labels Energy Management Agency and British Standards Institution

To use different colors to represent different emission level

Migros Group

To define products with LCA method compiled the best carbon by Climatop and emission performance Ecological Center

To be labelled with “CO2 Champions”

Coop Group

To decrease impacts on To judge by air freight climate change via reducing product airfreight

Products shipped by air to be labelled with airplane mark

Home Depot

To disclose a series of green indicators on products, including car emission level

Temporarily unclear

Comprehensive environment mark, including carbon emission data

Patagonia

To provide consumers with environmental information

Independently developed Products marked with LCA method information, and detailed information provided via network

with the conflicts between the two systems, and on the other hand, it is necessary to promote the coordination of the two systems. In the trade system, it is necessary to accelerate the construction and standardization of relevant rules on climate change; in climate governance, the carbon flow in international trade should also be an important governance object to promote the low carbon transformation of foreign trade sectors, and at the same time it is necessary to accelerate the construction of trade-related carbon standards, such as carbon labels, carbon tariffs, etc.

20.4 The G20 and International Climate Governance Climate change has not been the main topic of the G20 summit. The G20 summit communiqués before 2012 more expressed support for the outcomes of the UN Climate Conference. For the first time, the G20 summit 2012 was held in Los Cabos, Mexico, a developing country. The summit established the G20 Research Group on Climate Financing for the first time to study how to effectively mobilize finance to achieve the goals, regulations and principles under the UNFCCC, and expressed support for the operation of Green Climate Fund. The agenda of the G20 Australia

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Summit in 2014 did not plan to include climate change. As the APEC Summit took climate change and environmental protection issues as the central topic for the first time, China and the United States jointly issued the Joint U.S.-China Statement on Climate Change. Both parties clearly put forward their respective emission reduction targets in the Statement: the United States will strive to achieve an absolute emission reduction target of 26–28% by 2025 with 2005 as the base year, while China will strive to reach the emission peak as soon as possible and increase the proportion of non-fossil energy. The ambition and determination of China and the United States to address climate greatly boosted the global confidence, thus enabling the issue of climate change to be an important topic for discussion at the G20 summit. At the summit, China and the United States specifically mentioned financial assistance to developing countries. China has set up South-South Climate Cooperation Fund, while the United States pledged to increase USD 3 billion to GCF. Under the leadership of China and the United States, other developed countries also expressed their willingness to provide financial assistance. For example, Japan expressed to provide USD 1.5 billion to Green Climate Fund. It was the biggest progress achieved by the G20 in the field of climate change and laid foundation for the Paris Climate Agreement at the end of 2015. In order to ensure the smooth implementation of the Paris Climate Agreement, before the G20 Hangzhou Summit in 2016, China and the United States took the lead in ratifying the Paris Agreement, injecting a strong impetus into the formal entry into force of the Agreement. The leaders of the G20 countries pledged at the summit to gradually phase out inefficient fossil fuel subsidies that encourage wasteful consumption in the medium term, and increase the share of renewable energy in the global energy structure. The Action Plan for the 2030 Agenda for Sustainable Development adopted by the G20 summit took it as the priority of the G20 to take urgent actions to address climate change (SDG13), and encouraged the provision and mobilization of more resources to address climate change. The Paris Climate Agreement and the 2030 Agenda for Sustainable Development corresponded to each other, enabling low carbon green transformation to be an important goal for global development. The G20 Hangzhou Summit also added green finance to the G20 agenda for the first time, and established the G20 Research Group on Green Finance to reach some important consensuses on the development of green finance, including the voluntary principles of promoting green finance, the development of green credit, green bond, green stock index and related products, financial tools such as green development fund, green insurance and carbon finance, and expanding learning networks for capacity building, promoting international cooperation in green finance, and promoting cross-border green bond investment and knowledge sharing in the field of environmental and financial risks. This summit will provide clear strategic policy signals and framework for the development of global green finance.

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References Huang, Haibo, et al. 2015. “Post-2015 Global Development Agenda” and China’s Response. The Journal of International Studies 1: 91–112. Li, Sheng. 2011. An Analysis of the System of International Climate Governance. Journal of Liaoning University (Philosophy and Social Sciences Edition), 39(5): 61–67. Tang, Wei. 2012. How Far Can Global Sustainable Governance Go? Wenhui Daily, 26 July 2012. Tian, Huifang. 2015a. A Research on the Influence of Climate Trade Policy Under the Multilateral Trade System. Database for Cross Check of Academic Papers, 9 October 2015. Tian, Huifang. 2015b. Evolving Trend of International Climate Governance Mechanism and China’s Responsibility. Economic Review Journal 12: 99–105. Tian, Huifang. 2016a. Five Highlights of the Paris Climate Conference. World Affairs 2: 60–61. Tian, Huifang. 2016b. Government Behavior in the Development of Green Finance—An Empirical Analysis of European Countries and American Countries. Journal of International Economic Cooperation 11: 27–32. Tian, Huifang, et al. 2011. China and India’s Participation in Global Climate Negotiations. International Environmental Agreements: Politics, Law and Economics 11(3): 261–273. Xi, Yanle, Xiaojun Sun, and Shufei Wang. 2011. Research Review on the Relationship of Climate Change and International Trade. Economic Perspectives 10: 131–136.

Chapter 21

Implementation Mechanism of International Climate Governance

21.1 Emission Reduction Mechanism There are generally three types of emission reduction mechanisms: establishment of carbon market trading, three flexible mechanisms were proposed in the Kyoto Protocol from the United Nations Framework Conference on Climate Change issues: including international emission trading scheme (ETS), and clean development mechanism (CDM). These mechanisms are all set to improve the economic efficiency of greenhouse gas emission reduction, with the latter two aiming to encourage investors to invest finance in countries with projects of lower emission reduction costs.

21.1.1 Emission Trading Scheme (ETS) Greenhouse gas emission trading scheme defines emission rights (environmental capacity resources), and price signals are used to reflect the scarcity of greenhouse gas emission rights through establishing emission trading markets and formulating related tracking, supervision and punishment mechanisms. Therefore, emissions trading scheme has the characteristics of clear objectives and clear cost control, especially for greenhouse gases represented by CO2 , which has higher efficiency. The carbon emission trading scheme mainly includes three parts: control of total amount, initial allocation of emission rights, and reallocation of emission rights through the trading market (Fig. 21.1). Currently, there are three types of platforms for greenhouse gas emission trading: regional or cross-regional trading markets, trading markets at the national level and trading markets at the regional level, as well as individual-oriented retail markets. There are more than 20 emission trading platforms around the world. The United States is the earliest advocate and promoter of emission trading scheme. However, after the United States announced its withdrawal from the Kyoto Protocol in 2003, its © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_21

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Fig. 21.1 Policy system of carbon emission trading scheme

international greenhouse gas emission trading scheme became stagnant. The European Union Emission Trading Scheme (EUETS) is also one of the trading markets earliest established in the world, and it is currently the largest regional trading scheme. In February 2017, in order to fulfill the obligations under the Paris Climate Agreement, the European Parliament approved numerous plans to limit greenhouse gas emissions through the European emission trading market, including adding the socalled “linear reduction factor” to annually reduce emission allowance of 2.2% from 2021 (according to current regulations, an annual reduction of 1.74%), and by 2024, the annual reduction ratio of the “emission credit” allowance will be increased to 2.4%. Emission trading scheme consists of mandatory trading scheme and voluntary trading scheme. Among the “flexible three mechanisms” established under the Kyoto Protocol, emission trading scheme was a mandatory trading scheme, and its trading was the allowance-based allocation and corresponding financial derivatives similar to options and futures while Joint Implementation (JI) and Clean Development Mechanism belonged to the voluntary trading scheme, and their trading targets were projectbased. The situation and types of the global major greenhouse gas emission trading markets are shown in the Table 21.1. The global emissions trading market consists of the following three features (Lei and Jing 2011). The first is rapid development. As of 2019, a total of 20 carbon emission trading schemes around the world were put into operation, six countries and regions were building carbon emission trading schemes, and 12 countries and regions were planning to implement carbon emission trading schemes. The global carbon market covers about 8% of the total greenhouse gas emissions, and the total GDP of covered regions accounts for about 37% of the global GDP. It covers multiple industries such as

21.1 Emission Reduction Mechanism

341

Table 21.1 Emission trading markets of global major greenhouse gases Trading markets

Launching year

Trading objects

Chicago Climate Exchange (CCX)

2003

Corporate members which Voluntary, voluntarily joined allowance-based

Types

Greenhouse Gas Abatement Scheme in New South Wales (GGAS)

2003

Electric power resellers in Mandatory, New South Wales state allowance-based and other participants

European Union Emission Trading Scheme (EU ETS)

2005

Emission entities in the EU countries

Mandatory, allowance-based

Regional Greenhouse Gas Initiative of the United States (RGGI)

2005

Electric power companies in the 10 northeastern states of the United States

Mandatory, allowance-based

Western Climate Initiative (WCI)

2007

Companies in five western Mandatory, states of the United States, allowance-based four provinces of Canada, and companies in some states of Mexico

Joint Implementation (JI) 2008

Annex 1 Among countries Mandatory, project-based

Clean Development Mechanism (CDM)

Annex 1 Country under the Kyoto Protocol and non-annex 1 Among countries

2008

Mandatory, project-based

Assigned amount units 2008 of international emission trading (AAUs)

Annex 1 Among countries Mandatory, allowance-based

Climate Action Reserve (CAR)

Within California of the United States

2009

Mandatory, project-based

Source State and Trends of the Carbon Market (the World Bank)

power, industry, civil aviation, construction, and transportation. The main transaction products are carbon allowance and voluntary certified emission reduction. The second is serious fragmentation. The market is decentralized, but most of the transactions happen in the EU, and a unified international transaction market has not yet been formed. The third is sharp price fluctuation. The carbon pricing mechanism is not yet complete. Due to the existence of comparative advantages among countries, price differences may occur to the same emission reduction unit, resulting in a profitseeking phenomenon in the financial market, which is highly susceptible to market supply and demand. As of April 1, 2020, global carbon prices ranged between USD1 and USD119 per ton, but nearly half of the carbon emission prices covered by the carbon pricing mechanism were below USD10 per ton, and only less than 5% of the carbon price level was consistent with the goal of achieving the Paris Agreement (it

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would reach USD40-80 per ton CO2 equivalent by 2020 and USD50-100 per ton CO2 equivalent by 2030). Since 2013, seven pilot projects for carbon trading have been successively established in China. In 2019, the cumulative transaction volume was approximately 69.6 million tons of CO2 equivalent with the cumulative transaction turnover of approximately RMB1.562 billion. The effect of emission reduction began to emerge. In 2017 China announced to launch national carbon market and accelerated the project construction. The Construction Plan for National Carbon Emission Trading Market (for Power Generation Industry) clearly stated that China’s carbon market will take the power generation industry as the breakthrough and a three-step strategy will be implemented, i.e. infrastructure construction period, simulation run period and deepening and improving period. It was the preparatory stage in 2016 and before. The period from 2017 to 2020 is the stage for operation improvement. Around 1,700 companies were included in the first batch of power generation /heating industries in the first stage with emissions of more than 3 billion tons, and their CO2 emissions accounted for 46% of China’s total CO2 emissions. The key emission companies that meet conditions in the pilot areas of the second stage will be gradually included in the national carbon market to be centrally managed. After 2020, it will enter a stage of deepening stability. According to the plan, a stably operating, healthy and active trading market will be gradually formed at this stage by increasing transactional products and developing diversified transactional models.

21.1.2 Clean Development Mechanism (CDM) CDM mechanism is defined as project financing for developing countries by investors from developed countries, which can effectively reduce the emission reduction costs of industrialized countries. The CDM mechanism has three goals: (1) it must complete the UNFCCC goals; (2) it encourages the sustainable development of developing countries; (3), it reduces the emission reduction cost in developed countries. The first batch of CDM projects was formally approved by the CDM Executive Committee in November 2004, and the first batch of CERs were issued to project participants in September 2005. Figure 21.2 shows the total number of projects that have completed the registration process since the CDM started operation. As of September 16, 2016, a total of 7733 CDM projects worldwide were successfully registered. China and India were the largest holders of the CDM share at that time, and the sum of the two accounted for about 50% of all projects. Attachment: CDM projects issued by CER that China obtained as of January 31, 2017 CDM can be seen as a subsidy, a market and a political mechanism. It is a subsidy because it provides finance to developing countries to support them to reduce pollution. The evaluation of subsidies is based on the output efficiency obtained by the

21.1 Emission Reduction Mechanism

343

Fig. 21.2 Latest status of CDM projects issued to China (as of January 31, 2017)

subsidized party, and the ideal result is to obtain the maximum output at the lowest cost. CDM is a market because its subsidies are passed by through CER. This tradeable credit can also be used by developed countries as a tool to fulfill obligations. CDM is also a political mechanism because it allows developing countries to participate in the Kyoto Protocol mechanism. Strictly speaking, the CDM mechanism itself does not establish a carbon emission trading market, but only carbon offset trading. The reason to select CDM is mainly based on the consideration that it has the largest geographical scale and the largest number of transactions. However, developing countries are not restricted by total carbon emissions, so there are such problems as carbon leakage and low economic efficiency.

21.1.3 Carbon Tax (I)

Domestic carbon tax

Carbon tax refers to that a country’s government levies a greenhouse gas emission tax on the domestic users of these fossil fuels when the carbon content in fossil fuels such as coal, petroleum, and natural gas is used as the tax base. It is a domestic indirect tax in the tax category. At present, only some developed countries in the world impose carbon tax on related industries. In Europe, Sweden, Denmark, and Italy started to impose carbon tax at an early time with strong taxation effort and relatively mature systems; British Columbia and Quebec provinces in Canada levy

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the carbon tax within their administration. In general, the call for carbon tax is higher than practice (Tian 2015a, b). In theory, the levying of carbon tax is conducive to internalizing the cost of emission. Carbon tax is a tax item levied by the government on emissions of each unit of CO2 equivalent from taxable sources. In the research on taxation impact, “double dividend” is a very important concept. In theory, carbon tax should also have a “double dividend” effect, i.e. carbon tax can not only achieve environmental protection, but also improve welfare level by reducing distortions in the existing tax system. There are three main ways to achieve double dividends (Andrea Baranzini 1999): the first is revenue neutrality, i.e., when the carbon tax is levied, other taxes should be reduced through fiscal reform, so that the entire tax revenue remains relatively unchanged. The characteristic of revenue neutrality is that the tax collected from one sector is fully used to subsidize another sector (Morris et al. 1997). The second is to set up earmarked funds for environmental protection in advance, such as environmental fund, scientific research fund, project fund to encourage companies to carry out technological innovation, subsidize projects with huge initial investment and market failure, and implement incentives for energy conservation and emission reduction. The third is to take exemption or reduction and compensation measures: the carbon tax revenue is used to compensate the industries, groups, and regions most affected by the carbon tax, or to implement tax reduction or exemption preferences. (II)

International carbon tax

There are two main types of international carbon taxes. One type is trade-related “carbon tariff.” The particularity of climate change has caused carbon leakage to become a cross-border externality problem. It is the theoretical basis for developed countries to impose “carbon tariff” or other “Border Carbon Adjustment” measures on developing countries. This concept is a trade measure first proposed by the European Union, the United States and other OECD countries, which aims to protect their local companies from losses in international competitiveness and to avoid carbon leakage. This trade measure is presented in two main ways: the first is to impose import duty or carbon tariff on products of countries without substantial greenhouse gas emission reduction obligations; the second is to require importers of these products to purchase corresponding carbon emission credits from the international carbon market or regional carbon markets. In accordance with the design of relevant mechanisms, the funds raised by implementing this policy will be used to promote research and development of environmentally sound technologies, transfer of technology to developing countries, and strengthen capacity building to adapt to climate change. The EU does not have strict legislation on carbon tariff. In 2009, a directive was adopted: the Directive on Improving and Extending the EU Greenhouse Gas Emission Allowance Trading Scheme. The directive recommended to include importers of carbon leakage industries into the EU’s carbon emission trading system at an appropriate time (Table 21.2). Although it has not been implemented, the American law clearly stipulates that it does not need to consider the economic development level of the country on which the tax is levied. The Clean Energy and Security Act of the United States mentions the

21.1 Emission Reduction Mechanism Table 21.2 Industry standards EU may impose to implement border adjustment

345 Manufacturing cost

Trade openness

Industry standard 1

Increase by more than 5%

>10%

Industry standard 2

Improve by more than 30%

–

Industry standard 3

–

>30%

Industry standard 4

In accordance with the industry emission reduction potential, market characteristic and profit rate, etc

Source EU directive on improving and extending EU greenhouse gas emission allowance trading scheme

levying time and the tax rate: from 2020, carbon tariff will be imposed on emissionsintensive products imported from countries that do not implement carbon emission reduction limits, at a price of USD10 to 70 per ton (Tables 21.3 and 21.4). Another type of international carbon tariff is an industrial “carbon tax” across borders. The most typical example is the carbon emission tax on airlines that the EU wanted to launch in 2012, i.e. all international flights entering Europe should pay a carbon emissions tax. But this proposal was opposed by various international airlines, and furthermore no consensus was reached on this within Europe, and the plan was ultimately suspended. Although both carbon tax and carbon trading as emission reduction policies can help reduce greenhouse gas emissions, they both have differences in emission reduction effects, implementation costs, implementation resistance, operational risks, fairness, and negative economic impacts. The emission reduction effect of carbon trading is of more certainty. The carbon tax urges taxpayers to reduce greenhouse gas emissions by charging each greenhouse gas emission, but the total emission reduction cannot be controlled. On the premise that the price mechanism is effective, the carbon trading policy can effectively control the total emissions of greenhouse gases and the initial allowances of each emission reduction entity, thereby ensuring the realization of emission reduction targets and making emission reduction effects more predictable. However, the implementation cost of carbon tax is relatively low, because the establishment of a carbon trading market requires plenty of time, manpower, and financial investment, and it also needs to allocate carbon emission rights appropriately, regularly check the emissions of emitters, monitor and control the market, and follow relevant mechanisms to reward and punish carbon emission entities, and monitoring costs are relatively high .

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Table 21.3 “Carbon Border Adjustment Tax” clauses in the US climate legislation proposal Proposal

Product scope

National scope

Effective date

S.1766

Primary product

No comparable action has been taken, not a low-emission or low-level development country

January 1, 2020 Based on the ratio of the number of free allowance to the economic adjustment

S.2191

Primary product

No comparable action has been taken, not a low-emission or low-level development country

January 1, 2019 Based on the ratio of the number of free allowance to the economic adjustment

S.3036 Climate Security Act

Primary product and consumer product

No comparable action has been taken, not a low-emission or low-level development country

January 1, 2014 Based on the ratio of the number of free allowance to the economic adjustment

H.R.6186

Primary product

No comparable action has been taken, not a low-emission or low-level development country

January 1, 2020 Based on the economic development level of the exporting country

H.R.6316

Primary product and consumer product

No comparable action has been taken in the WTO, not a low-emission or low-level development country

January 1, 2015 Based on the ratio of the number of free allowance to the economic adjustment

H.R.2452 Clean Products for Energy and carbon leakage Security Act industry and some consumer products

Countries that are January 1, 2020 not up to specific standards in the Act, and not low-emission or low-development countries

Allowance adjustment requirement

Based on the number of free allowance accepted

21.1 Emission Reduction Mechanism

347

Table 21.4 List of products subject to carbon tariff under the Lieberman-Warner Act in 2008 1. Main products

(1) Iron, steel, steel mill products (pipes), aluminum, cement, glass (flat glass, containers, special glass and fiberglass), pulp, paper, chemicals or industrial ceramics (2) Any other manufactured products in the following two situations

1) The purpose of mass sales is to continue production or include it in the final product 2) Direct greenhouse gas emissions or indirect greenhouse gas emissions are produced during the production process, and the corresponding carbon emissions are equivalent to the carbon emissions produced by related companies in the industrial sector during the production process

2. Production materials for consumption purposes

(1) Not main products (2) In the production process, a large amount of direct or indirect greenhouse gas emissions are generated, including the greenhouse gas emitted in the process of integrating production raw materials into the main products based on consumption purposes (3) After the International Climate Change Commission’s consultation with the regulatory agency, it is thought to be specific products or commodity that that international reserve indicators apply in accordance with the provisions of Clause 1306 of the 2008 Lieberman-Warner Act, which are feasible and necessary

3. The product has caused a large amount of direct or indirect greenhouse gas emissions during the production process (continued)

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Table 21.4 (continued) 4. Products are closely related to the products that have production cost increase in the United States due to the provisions of the Lieberman-Warner Act

21.2 Technical Mechanism Since the signing of the UNFCCC, low carbon technology transfer has always been the focus of international climate governance, and a difficult issue as well. There has always been a huge gap in the attitudes of developed countries and developing countries towards technology transfer: developed countries insist that technology transfer should follow the market model, while developing countries hope to get free or low-cost technical assistance. In order to overcome the obstacles in the process of technology development and transfer, the conferences of the Parties (COP) have listed technology transfer as an important issue, and a series of resolutions and frameworks have been formed.

21.2.1 Technological Changes and Pollution Control Technological innovation is particularly important for climate change actions. Technological progress helps improve energy efficiency, thereby reducing the consumption of traditional fossil energy. Technological progress, especially the widespread use of technologies such as carbon capture and carbon storage, will reduce emission reduction costs and it is a key factor in achieving global emission reduction targets (Wang et al. 2008). Technological changes can also promote output growth, reduce economic costs at a given output level, and reduce “waste” emissions in the production process. But the technology itself has diversity and uncertainty. First, it is not clear for technological changes to impact the optimal time pathway of emission reduction actions; and second, private R&D investment and technological learning are the main driving factors for technological changes, but this process is full of uncertainty and is extremely vulnerable to disturbances of various factors, such as policy changes, technological changes, uncertainty and path dependence of the technology itself, and the uncertainty of gains (Fig. 21.3). The negative externalities of the climate change impact often make economic entities lack the motivation to reduce emissions, and make technological innovation as well. Higher R&D costs often discourage companies. To promote the research and development and innovation of low carbon technologies, the government needs to play a leading role in this process, create a favorable policy environment, establish

21.2 Technical Mechanism

Policy selection

349

Market failure 1: climate

Technical change

Climate goals

change negative externability

Climate policy: carbon

Demand driving: use

Increase

tax, emission limit

of new technologies

output

Reduce emission Technical policy:

Technical promotion:

patent, subsidy

development of new Market failure 2: technical

Reduce cost

technologies

innovation positive spillover effect

Fig. 21.3 Selection framework for technology promotion policies. Source Made by the author

incentive mechanisms, and promote the development and dissemination of environmentally beneficial technologies. Therefore, the combination of climate policy and technological change promotion policy can promote technological change from both “demand-driven” and “technology-driven” aspects, so that emission reduction targets can be achieved at a lower cost.

21.2.2 Connotation of Low Carbon Technology and Key Fields of Transfer There are only vague descriptions about technologies and technology transfer related to climate change in the current international laws and regulations on climate change, being implicitly present under the Convention framework. It was stipulated in Article 4.1(c) of the Convention that all departments must strengthen the research and development, application and promotion of emission control technology. It was stipulated in Article 4.5 of the Convention that developed countries were obliged to transfer low carbon technologies on preferential terms or free of charge to developing countries to help them adapt to and address climate change. It was further stated in Article 4.7 of the Convention that it was a prerequisite for developing countries to participate in mitigation actions consistent with national conditions whether they could obtain available technology or finance. Generally speaking, there are two main types of climate-beneficial technologies: (1) climate technologies related to mitigation, such as wind and solar technologies; (2) climate technologies related to adaptation, such as water-saving irrigation technology, agronomic water-saving technology, building energy-saving technology (Ye 2015). Strictly speaking, climate technology should be an organic system, covering the following aspects: (1) hardware systems, such as physical facilities, procedures,

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Table 21.5 A 17 key low carbon technologies identified by IEA Supply side

Demand side

• CCS fossil fuel generation • Nuclear power plant • Utilization of wind-onshore and wind-offshore energies • Biomass gasification combined cycle (BIGCC) & co-combustion • Solar—PV • Solar—CSP • Coal—IGCC (integrated gasification combined cycle) system • Coal—USCSC • 2nd generation biofuels

• Energy efficiency in buildings and electric appliances • Heat pumps • Indoor and hot water solar energy (Efficient ICSs) • Energy efficiency in transportation • Plug-ins and electric vehicles • H2 fuel cell vehicles • CCS: industrial, H2 and fuel conversion • Energy efficient motor systems

Source IEA energy technology outlook 2008

utensils, etc.; (2) software systems, including experience, technical principles, intellectual property rights, etc.; (3) training system, aiming to promote the learning, publicity and promotion of technology; (4) financial guarantee, aiming to provide financial support for the research and development and promotion of technology; (5) supportive environment, to reduce obstacles to the development of climate-beneficial technology; (6) evaluation system, aiming to evaluate the performance, possible benefits and impact of the technology. These aspects should work together like a unified entity, and their coordinated development can give full play to the maximum function of technology. IEA classifies low carbon technologies into nine categories, including solar energy, advanced transport, building and industrial energy conservation, bioenergy, wind energy, high-efficiency and low-emission coal technologies, smart grid, carbon capture and storage, and other energy resources. An in-depth assessment was conducted on various low carbon technologies to list 17 technologies that would have a decisive role in greenhouse gas emission reduction in the future. See the Table 21.5 for details. Energy Technology Perspectives 2015 clearly pointed out that the energy sector should work hard towards the direction of gradually increasing the use of technologies such as wind and solar energy. The application of energy efficiency technology contributes most to emission reduction in sectors such as industry, transportation, and construction. Another technical reserve for emission reduction in the industrial sector is carbon capture and storage technology (CCS), but CCS needs more government support. In general, technology is a key factor in achieving emission reduction, and it is necessary to increase the development, application and transfer of energy efficiency technologies, carbon capture and storage technologies, and clean energy technologies (Table 21.6).

21.2 Technical Mechanism

351

Table 21.6 Cumulative CO2 emission reduction by industry and technology in the 2 °C scenario by 2050 Electric power

Industry

Transporta Ɵon

Renewables

CCS

Fuel conversion

Source IEA energy technology perspectives 2015

21.2.3 Low Carbon Technology Transfer Mechanism Under the Convention Framework The core components of the international cooperation mechanism for technology development and transfer are: institutional arrangements under the Convention; financial mechanism; supervision, verification and performance evaluation mechanism; policy measures; intellectual property rights, corporate social responsibility and capacity building. (I)

COP7: Action Framework for Technology Transfer

An important part of the “Marrakesh Agreement” adopted by COP7 in a package in 2001 was to build an action framework for technology transfer. The framework encouraged cooperation among governments, multilateral development agencies, NGOs, scientific research institutes and private companies, and established two technology-related subsidiary bodies under the United Nations Framework Convention on Climate Change: Subsidiary Body for Scientific and Technological Advice (SBSTA) and Subsidiary Body on Implementation (SBI). The former aimed to provide the parties with technical information and consulting services, while the latter evaluated the implementation of the Convention (Chen 2015). In order to solve the financing problems in technological innovation and technology transfer, broaden financing channels, and increase the number of technology transfer projects, it was encouraged in the technology transfer framework to strengthen exchanges with the United Nations Secretariat, the Global Environment Fund (GEF) and UNEP, and financing plans on the development and transfer of innovative technologies. It also co-sponsored the Private Financing Advisory Network (PFAN) with the Climate Technology Initiative (CTI) to promote the successful experience of clean energy financing and provide opportunities for cooperation in clean energy investment and technology transfer among countries. The International Energy Agency (IEA) estimated the additional technology investment needed by 2030 according to the different stages of technology development. In order to achieve

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Table 21.7 Additional financial demands based on technology development stage Technological development phase

Additional financial demand by 2030 (In USD1 billion) Developing countries

Global

Technological research and development

10–100

Technical demonstration

27–36

Technical deployment

6–41

25–163

Technical diffusion and commercialized application

176–464

380–1000

Source IEA 2008

the global emission reduction target, the additional investment required by the world annually would reach USD300-1000 billion by 2030, as shown in Table 21.7. (II)

COP13: Bali Action Plan

Technology is one of the four core elements of the “Bali Action Plan.” The “Bali Action Plan” gave five directions to work on: (1) Remove barriers to technology development and transfer so that developing countries could obtain low carbon technologies on preferential terms; (2) Accelerate the research and development of available low carbon technologies, diffusion, and transfer channels; (3) Speed up technological development and innovation in various ways, and strengthen technical cooperation; (4) Strengthen technical cooperation in specific fields. Different departments should design technical cooperation mechanisms consistent with their own departments. (5) Increase financial support for low carbon technology transfer. (III)

COP15: Cancun Technical Mechanism

The Cancun Agreement, adopted at the Cancun World Climate Conference in 2010, encouraged the Parties to carry out domestic actions and participate in bilateral and multilateral cooperation on technological development and transfer in accordance with Articles 4.1(c) and 5 of the Convention, consistent with national capabilities, national conditions and priority fields. There were mainly seven priority fields for cooperation in the Cancun Agreement: (1) improve technology-related capacity building; (2) technology promotion and information sharing; (3) increase technology investment and mobilize the enthusiasm of the private sector; (4) deploy technology hardware system and software system at the same time; (5) improve the level of information management; (6) improve the innovation system and set up the technological innovation center; (7) develop the country-specific action plan and implement it as soon as possible. Another major decision of the Cancun Conference was to establish the Technology Executive Committee (TEC) and the Climate Technology Center and Network (CTCN). The Technology Executive Committee was composed of 20 experts selected through the Conference of the Parties. Its main tasks included: providing comprehensive technology demand information and technology transfer policy analysis; recommending policies and priority programs relevant to technology development

21.2 Technical Mechanism

353

and transfer while taking into account the parties of the least developed countries; promoting cooperation among the government, private sector, non-profit organizations and academic institutions in technology development and transfer; proposing action suggestions to overcome obstacles to technology development and transfer; promoting technology roadmaps or development and application of action plans at the global, regional and national levels. The Climate Technology Center and Network (CTCN) is a technology network platform jointly established by the United Nations Environment Program, the United Nations Industrial Development Organization, and 11 scientific and technological institutions. Some of these 11 institutions are from developed economies, such as the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, the Energy Research Center of the Netherlands, the National Renewable Energy Laboratory of the United States, and the United Nations Environment Program’s Riso Center in Denmark. Some are from emerging market countries and developing economies, such as the Asian Institute of Technology in Thailand, and the Council for Scientific and Industrial Research in South Africa Association, the Energy and Resources Institute in India. CTCN was officially launched in February 2013 to accelerate the transfer of technologies related to climate change, reduce greenhouse gas emissions and improve adaptation to changes in weather patterns, drought, soil erosion and other climate change impacts. (IV)

Technical mechanism under the COP21 Paris Agreement

The Paris Agreement continued and carried forward the low carbon technology mechanism under the Convention framework. There were provisions specifically for technology development and transfer in its articles. The specific content included: (1) The Technology Executive Committee and the Climate Technology Center and Network should increase technology research and development and demonstration and further strengthen their own capabilities and technologies; (2) the affiliated scientific and technical consulting institution was required to establish a technical framework conducive to carrying out evaluations of technical needs and strengthen project alignment with banks and other financial departments through drafting the projects acceptable to banks; provide financial support to carry out technology evaluation; facilitate the evaluation of technologies with transfer conditions and timing; identify and eliminate obstacles to technology transfer and create a supportive environment for technology transfer. In addition, the Paris Agreement established the Paris Committee on Capacity Building, whose main function was to help developing countries identify their problems and gaps on capacity building, and prepare annual technical reports to ensure the continuity of capacity building work. In addition, it also conducted capacity building cooperation and experience sharing at global, regional, sub-regional, and bilateral levels, strengthened capacity building based on network information technology, developed portal websites, reinforced experience sharing for typical cases on global capacity building, and strengthened public participation and public training and publicity.

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21.2.4 Financial Gaps and Obstacles to International Technology Transfer Even though the Convention framework tried to improve the transfer mechanism of the international low carbon technology, the technology transfer from developed countries to developing countries has not made substantial progress. Since 1991, the Global Environment Fund has provided USD12.5 billion in grants to 3690 projects in 165 developing countries and leveraged USD58 billion in co-financing. However, the number of projects and the total amount of finance cannot meet the needs of developing countries for low carbon technology and finance (Table 21.8). As for the reasons, there are mainly the following obstacles to the international low carbon technology transfer under the Convention framework: Table 21.8 Financial sources and scale of international technology transfer Life cycle of technology

Financial source

Estimated annual investment

For technological development and demonstration

Public finance

10

Private finance

9.8

For technical diffusion and commercialization

Private investment

148

Finance outside of the Convention and the Agreement

Export Credit Agency (ECAs) 1–2 Finance from bilateral or multilateral sources

5–10

Finance from 1 non-governmental organizations, foundations and resource carbon sink markets Finance under the Convention and in the Agreement For technical deployment and diffusion

In total Source UNFCCC (2008a)

Funding mechanism under the 0.22–0.32 Convention (GEF Trust Fund; SCF; LDCF) Public investment and private investment leveraged by the funding mechanism under the Convention

1.152

Flexible mechanisms under the Kyoto Protocol (CMI, JI)

4.5–8.5

Private investment leveraged by the flexible mechanism under the convention

45–85

140–230

21.2 Technical Mechanism

(I)

(II)

(III)

(IV)

(V)

355

Intellectual property barriers. Developed countries have strict protection of intellectual property rights. The intellectual property rights of low carbon technologies are mostly controlled by companies in developed countries, which increases the difficulty for low carbon technologies to enter the markets of developing countries; The financial mechanism lacks a strong coordination agency. There are clear objectives in the Convention for the use of finance related to technology transfer, especially the lack of funding for new technology development and low carbon technological transformation, and the lack of transparency in funding sources. Information asymmetry. Due to the lack of knowledge and experience, developing countries do not understand the access to low carbon technologies, the scale of finance required, or even the technology itself. Inadequate policies: both developed countries as technology exporting countries and developing countries as technology importing countries should pay attention to the formulation and implementation of relevant incentive policies. There are major divergences in technology development and transfer among the parties. The EU believed that technology transfer from developed countries to developing countries should be based on the mitigation and adaptation action plans of developing countries, and developing countries are required to formulate policies and take measures at home. The United States emphasized to achieve technology transfer through market mechanisms, believed that the main thing the government should do was to formulate policies and regulations and create an appropriate policy environment, and insisted to promote trade and investment of clean energy technology through the World Bank’s Clean Technology Fund. Japan emphasized the necessity to work out a mutually shared technology roadmap.

21.3 Financial Mechanism There is currently no authoritative or comprehensive assessment of the total amount of finance required to address climate change. The IPCC’s Fifth Assessment Report estimated that from 2010 to 2029, there will be an annual increase of USD147 billion for investment in non-fossil energy, and there will be an annual increase of USD336 billion for investment in improving energy efficiency. The UNFCCC Secretariat estimated that by 2030, the global adaptation cost will be USD28-67 billion, and the World Bank proposed an estimate of USD70-100 billion. It is an issue that the international community is beginning to pay attention to how to make full use of limited finance to substantially promote green and low carbon development. Under the Convention framework, climate financing is an incremental capital independent of official assistance. It is provided by industrialized countries specified in Annex I. it is intended to help developing countries enhance their adaptive capacity to climate change and improve capacity building. Whether it is the United Nations Framework

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Convention on Climate Change, the Kyoto Protocol or the Paris Agreement, there are clear descriptions and stipulations about financial mechanism. The commitment of developed countries is to annually increase long-term finance of USD100 billion by 2020. Funding has always been the most intensely discussed topic with the most obvious divergences in the process of international climate governance (Wu et al. 2013).

21.3.1 Progress on Climate Finance Issues at Previous Conferences of the Parties It was stipulated in Clause 4 of Article 3 under the Convention that developed countries should provide developing countries with “new and additional” financial support to cover all their costs incurred in fulfilling obligations of international information notification. These actions included: implementing mitigation and adaptation actions, integrating climate change into economic policies and national action plans, conducting climate research, education and training, etc. The Global Environment Fund (GEF) was the earliest financial mechanism. GEF’s finance was mostly allocated to the field of mitigation actions, and there was less support for adaptation actions. The Bali Conference in 2007 officially established the Adaptation Action Fund, independent of the Global Environment Fund. The financial operation of the Adaptation Fund is to allocate 2% of the total income obtained from the CDM to institutions in developing countries. The Copenhagen Conference in 2009 proposed to establish the Green Climate Fund (GCF). The GCF was formally established at COP16 in 2010, aiming to mobilize financial resources through public finance, support mitigation and adaptation actions in developing countries, improve their technological research and development capabilities and capacity building, and improve information notification in developing countries. The Paris Agreement adopted in 2015 made further arrangements for the development of the future financial mechanism: developed countries should increase transparency in fulfilling their financial commitments, and deliver their financial commitment to annually providing developing countries with no less than USD100 billion by 2025. In order to ensure that sufficient finance could be obtained, the agreement encouraged to mobilize various financial resources, including the private finance, the use of various bilateral and multilateral funds, and the expansion of financial support from other sources. As entities of the financial mechanism, GCF and GEF should continue to increase their efforts to support emission reduction actions and capacity building in developing countries.

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21.3.2 Fund Mechanism Under the United Nations Framework Convention on Climate Change Under the Convention framework, a fund system has gradually formed including GEF, the Adaptation Fund (AF), GCF, the Special Climate Change Fund (SCCF), and the Least Developed Countries Fund (LDCF). The Global Environment Fund (GEF) was established in 1991. It was originally just a pilot project of USD1 billion under the World Bank. After being reorganized in 1994, it became an operationally independent organization whose members covering 183 countries and regions. It also works as the fund mechanism for four other international conventions related to environmental pollution, including the convention on desertification, and it is responsible for managing the Special Climate Change Fund (SCCF) and the Least Developed Countries Fund (LDCF). The Global Environment Fund also temporarily assumes the work of the Adaptation Fund Secretariat (Table 21.9). As an operating entity of the fund mechanism under the UNFCCC, the Secretariat of the Green Climate Fund (GCF) is located in Republic of Korea. It is a financial institution dedicated to addressing climate change. The World Bank is the entrusted administrator of GCF. The fund of GCF is mainly contributed by developed countries. The initial amount was donated by 12 developed countries to jointly contribute USD100 billion annually before 2020, among which the fast start finance was USD30 billion. Currently GCF is the largest global public climate fund. As of October 31, 2017, GCF received funding commitments equivalent to USD10.3 billion from the governments of 38 countries, and approved a total of 43 projects to assist developing countries.

21.3.3 Financing Innovation Outside of the United Nations Framework Convention on Climate Change (I)

Climate Investment Funds (CIFs)

The Climate Investment Fund was established in 2008 and was jointly funded by 14 developed countries and developing countries. Projects were jointly financed and managed by the International Bank for Reconstruction and Development, the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), and the Inter-American Development Bank (IDB), and the African Development Bank (AFDB). The financial mechanism outside of the fund convention shows clearer investor’s intentions. There are mainly two investment funds under the CIF: Clean Technology Fund (CTF) and Strategic Climate Fund (SCF). The main purpose of CTF is to promote the demonstration, promotion and transfer of low carbon technologies, especially to realize the innovation and large-scale application

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Table 21.9 Global environment fund (GEF) trust fund and fund custody state Contributor

Operating state

Global Environment 152.25 Fund (GEF) Trust Fund

Total donation

39 countries including China, and the United States did not join

Since its launch, GEF provided a total of USD12.5 billion in grants to 3690 projects in 165 developing countries in the world, leveraging USD58 billion in co-financing

Special Climate Change Fund (SCCF) Trust Fund

3.46

15 countries made commitments

Supplement the insufficient GEF and support the adaptation and technology transfer of developing countries. As of November 2016, SCCF provided USD350 million in funding for 76 adaptation projects, leveraging USD2.64 billion in co-financing

Least Developed Countries Fund (LDCF) Trust Fund

9.91

25 countries made Specifically for 51 least donation commitments developed countries, it is responsible for financing for the formulation and implementation of National Adaptation Programs of Action (NAPAs). As of November 2016, LDCF provided USD970 million in grants for 222 projects, leveraging USD3.93 billion in co-financing

Nagoya Protocol Implementation Fund

Donated USD14.85 million

Japan, Switzerland, France and the United Kingdom made donation commitments

Accelerate the ratification and implementation of the Nagoya Protocol on Access to Genetic Resources and the Fair and Equitable Sharing of Benefits from Their Utilization to mobilize the enthusiasm of the private sector (continued)

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359

Table 21.9 (continued) Adaptation Trust Fund

Total donation

Contributor

Operating state

With a donation of UDS642 million, can get 2% income out of the emission reduction trading

16 member states and 16 candidate states

Support specific adaptation projects and adaptation plans in developing countries

Source website for carbon emission trading: http://www.tanpaifang.com/ and GEF’s official website: http://www.gefchina.org.cn/

of clean technologies. SCF mainly supports other projects. CIF can be regarded as an important financial supplement to the Official Development Assistance (ODA), and it is also one of its goals to promote the realization of the Millennium Goals. In CIF’s first round of funding, it got a commitment of USD7.52 billion, among which the United Kingdom and the United States accounted for more than 55% of all donations. CIF is also committed to leveraging private sector finance and other finance to extend the impact of funding projects. (II)

Climate funds from international financial organizations and multilateral development banks

Multilateral development banks are the main participants in the climate financing framework, providing about half of the international public climate funds, and playing an important role in achieving climate financing targets for developing countries by 2020. In 2016, the World Bank formulated an ambitious Climate Change Action Plan, intending to allocate about 28% of finance to support the climate field, and to leverage USD25 billion in commercial loans to invest in clean energy. The World Bank also innovated climate financing methods. For example, the Prototype Carbon Fund (PCF) is mainly funded by the private sector, which is a PPP organization. Currently, there are more than 15 carbon fund projects under custody of the World Bank. Other innovations include IFC’s Sustainable Financial Market Fund and a dedicated carbon financial institution, as well as the China Utility-based Energy Efficiency Finance Program (CHUEE) (Table 21.10). In 2016, the climate investment from the Asian Development Bank also exceeded USD4.4 billion, among which USD3.7 billion came from ADB’s internal finance and about USD700 million came from external financing. ADB’s goal was to double its annual climate investment to USD6 billion by 2020. It was equivalent to 30% of ADB’s total investment, being close to the World Bank’s ratio. From 2007 to 2013, the European Investment Bank issued EUR3.8 billion in loans, among which Asia and Latin America respectively received EUR1 billion and EUR2.8 billion (both were caps). In December 2015, the European Investment Bank signed the Climate Change Framework Loan II (CCFLII) with the Ministry of Finance of China, lending EUR500 million to China for multiple fields such as the utilization of renewable energy,

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Table 21.10 The world bank group’s climate action plan for 2016–2020 Priority action arrangements

Key fields

Main goals and measures

Priority field 1: Help countries in a stage of deep transition to achieve policy and institutional transformation

1. Help countries turn climate commitments and priority development goals into actions 2. Improve pricing mechanism

By 2020, help target countries improve their investment environment, strengthen capacity building, achieve the integration of development agenda and climate agenda, and eradicate poverty Assist countries in implementing carbon pollution pricing, encourage decision makers of governments and private companies to make correct climate choices, and establish incentive mechanisms

Priority field 2: Leverage private investment to achieve global climate goals

Catalyze private finance Maximize the utility of preferential financing

By 2020, first leverage USD13 billion in incremental capital from the private sector each year Mobilize USD25 billion in commercial loans for clean energy in the next five years

Priority field 3: Expand climate actions, accelerate the speed of transformation, explore new solutions, and improve the synergy of climate investment

Renewable energy and energy efficiency Sustainable transportation system Sustainable urban resilience Smart use of land, water and food safety Green competitiveness Leave no one behind

In the next five years, allocate at least 28% of the investment in climate change projects each year, ensuring that more than 75% of the projects can generate significant effects; The World Bank, including other financial development institutions, should allocate at least USD16 billion annually for climate change projects, including the provision of renewable energy and improvement of energy efficiency In the next five years, triple the funding to strengthen the resilience of the transportation system against climate change. By 2020, invest at least USD1 billion to promote energy conservation and enhance urban resilience Help countries increase renewable energy, reduce high carbon energy, and establish a green transportation system, (continued)

21.3 Financial Mechanism

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Table 21.10 (continued) Priority action arrangements

Key fields

Main goals and measures

Priority field 4: Build partnerships, adjust internal processes, optimize organizational structure

Build partnerships Global initiative on key issues Build a knowledge base and innovate solutions Adjustment and motivation of internal processes Improve organizational ability and collaboration

Meet customers’ needs with creative, shared, and operable innovative solutions In the project evaluation, increase the evaluation of the project’s climate risks and social costs caused by emissions

Source The World Bank’s website

industrial greenhouse gas emission reduction, energy enhancement and renewable energy efficiency. The first loan contract of EUR500 million was signed in 2007. According to the Joint Report on Multilateral Development Banks’ Climate Finance 2019 jointly released by the world’s seven largest multilateral development banks in August 2020, climate financing of MDBs in 2019 reached USD61.6 billion, 76% of which were invested in the field of mitigating climate change, and 24% was used to improve the capacity to adapt to climate change. USD41.5 billion flowed into low- and middle-income economies. AIIB climate financing in 2019 was approximately USD1.7 billion (accounting for 39% of the bank’s total operations), among which USD806 million (46%) was used to mitigate climate change, USD387 million (22%) was used to adapt to climate change, and USD549 million (32%) was for projects in between. From 2016 to 2018, every USD1 invested by MDBs in climate financing could leverage USD0.87 in public investment and USD0.62 in private investment. In 2019, approximately USD102.7 billion in public finance and private finance participated in climate action, bringing the total climate financing in that year to USD164.3 billion. Multilateral development banks jointly committed at the United Nations Climate Action Summit in September 2019: to provide at least USD65 billion in climate funding by 2025, among which USD50 billion is for lowand middle-income countries; to increase funding for adaptation to USD18 billion; to co-finance USD110 billion, including direct private mobilization of USD40 billion (Table 21.11). (III)

National Climate Fund

For example, “China South-South Climate Cooperation Fund” aims to provide training and other assistance to developing countries, especially small island countries and least developed countries, to address climate change, and to enhance their capacity building to respond to and adapt to climate change. Some developing countries also established national funds, such as the Indonesian Climate Change Trust Fund, which was established in 2009 to support mitigation actions, and the Amazon Fund of Brazil.

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Table 21.11 Climate financing state of multilateral development banks from 2015 to 2019 Scale of climate financing (USD100 million)

2015

2016 2017 2018 2019

251

274

Proportion of climate financing in MDBs’ total amount of 19.2% 20% businesses

352

431

616

25%

30%

31%

Note The report before 2018 was jointly released by the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the Inter-American Development Bank Group (IDBG), the Islamic Development Bank (IsDB) and the World Bank Group (WB), and the report in 2019 added climate finance state of the Asian Infrastructure Investment Bank (AIIB) for the first time Source 2015–2019 Joint Report on Multilateral Development Banks’ Climate Finance

(IV)

Participation of private finance

The involvement of private investment in the field of climate change management can help solve problems such as financing bottlenecks. International VE/PE has been looking for investment opportunities in clean energy and other fields since 2008, especially in Asia. Wind energy is the most mature clean energy technology, and it attracts 1/3 more investment than nuclear power or hydropower. Solar energy is also the fastest growing sector. In the UN’s report of Guide to Climate Change Investment in May 2009, the United Nations believed that by 2030, the investment in low carbon economy will be as high as USD10 trillion, and pension funds should treat climate change as a kind of “fiduciary responsibilities” as The P8 Group. In the past decade, financial regulators around the world have also realized the growing risks posed by climate change to the financial system. The UN-supported Principles for Responsible Investment (PRI) required its members to conduct and disclose climate-related financial analysis in accordance with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) of the Financial Stability Board. The strategy and governance indicators under the PRI’s climate and risk indicator will require signatories to report starting from 2020. By 2020, there will be 2097 investors to report with total assets of USD97 trillion, which is 3.5 times more than the 591 investors to report in 2019. It is foreseeable that climate-related investments will increase in the next few years.

References Chen, Xiaoyan. 2015. Research on International Transfer Mechanism of Low Carbon Technology. Economic Research Guide 2: 203–206. Lei, Lijun, and Zhefeng Jing. 2011. Development of International Carbon Market and its Enlightenment for Chinese Carbon Market Construction. China Population, Resources and Environment 4: 30–36. Tian, Huifang. 2015a. A Research on the Influence of Climate Trade Policy under the Multilateral Trade System. Database for Cross Check of Academic Papers.

References

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Tian, Huifang. 2015b. Evolving Trend of International Climate Governance Mechanism and China’s Responsibility. Economic Review Journal 12: 99–105. Wang, Ke, Can Wang, and Jining Chen. 2008. The Simulation of Technological Change and the Application in Climate Policy Models. China Population, Resources and Environment 5: 31–37. Wu, Changhua, Handuo Cai, Shan Ren, Jialin Luo, Yao Wang, and Qian Liu. 2013. Definition and Status Quo of Climate Financing. Strategics for China’s Response to Climate Change Financing 3. Ye, Huihua. 2015. Under the Background of Climate Change on the Intellectual Property System Adjustment of Technology Transfer. Hebei Law Science 1: 162–170.

Chapter 22

Evaluation on the Effect of International Climate Governance

22.1 Evaluation of the Effectiveness of International Climate Governance The current international climate governance model is mainly featured in the transition from the mandatory “top-down” emission reduction model of the Kyoto Protocol to the “bottom-up” intended nationally determined contribution. Although this relatively flexible and loose emission reduction arrangement includes most countries in the world in the action system, it is still inevitable that there will be “free-riding” behaviors for special public products with typical externalities like climate change. Economists have made a lot of attempts both theoretically and empirically on how to avoid such behaviors as much as possible so that the climate governance system can be more stable and effective (Tian 2015). Typical documents include: In his 1994 study, Barrett used the concept of “self-enforcement mechanism of the contract” in transaction economics to construct a self-enforced emission reduction mechanism, i.e. a voluntary emission reduction mechanism for all parties, suggesting whether this model of completely self-determined reduction willingness could solve the “free rider” problem (Cai 2010). The “self-enforcement” mechanism mainly emphasizes the own initiatives of all participants (Zhou and Huang 2011). It is based on the mutual trust of all parties to restrain behaviors through social reputation, and assumed that all parties have sufficient tolerance, international cooperation in emission reduction can be realized in this way. Members who violate commitments will not be punished by legal sanctions under the WTO, but rather by informal means such as conventions, business rules, and moral principles. Botteon and Carraro (1997) then studied whether the cooperative mechanism was stable when only some members voluntarily joined the emission reduction mechanism. His simulation result was: as long as the number of member states was three or more, the self-enforcement mechanism would become unstable. Regarding this voluntary emission reduction mechanism, is there any other mechanism that can attract more members to voluntarily join the ranks of emission reduction and reach a global voluntary emission reduction agreement? Chen and Uzawa © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_22

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(2004) tried to seek for solutions from the perspective of incentive mechanism and punishment mechanism, and studied whether punitive tariff measures or incentive financial transfer payment measures could support to reach an agreement. The model analysis of both Uzawa (2004) and Chen proved that the financial transfer payment measures worked very well, and the financial mechanism should be included in the emission reduction agreement as an important incentive mechanism. Based on the basic ideas of the above research, this section first constructs an “Armington trade-climate model for N countries and N commodities,” which integrates international trade mechanisms with international climate mechanisms to simulate and analyze the effectiveness of trade measures (such as tariff, carbon border adjustment, financial transfer payment, technical assistance) in promoting international carbon emission reduction cooperation (Tian 2015).

22.1.1 Construction of an Armington Trade Climate Model with Multiple Countries and Multiple Commodities Here we introduce a new trade and climate change analysis framework (taking the method of the Computable General Equilibrium Model Analysis Method (CGE)) to construct the model required for the research of this subject (Tian 2015). The basic idea of the model is that a country’s behavior of emission reduction will change the country’s welfare in two ways: one is to directly reduce the country’s production and consumption, thereby reducing the country’s welfare; the other is that emission reduction will slow down the increase in global temperature, thereby generating positive externalities and triggering the rise of the country’s welfare. The result of the interaction of these two mechanisms will determine whether the country is willing to participate in climate cooperation. The model incorporates the global externalities of the greenhouse effect into a country’s welfare function, which predicts how the willingness of countries to participate in climate cooperation will be affected in case that there is no trade and there is international trade under a closed framework. (I)

Basic assumptions of the model

1. 2. 3.

N countries, N commodities, and the same country to consume the same goods. Production leads to an increase in carbon emissions; Consumption has a positive impact on welfare, while global warming directly results in the loss of welfare in various countries, bringing adverse impact on utility. Consumption in a country depends on the country’s commodity production capacity. Declining consumption means lower production and reduced emissions, which will help alleviate global warming.

(II)

Temperature change and utility function at the national level: The utility and welfare function of a country is not only a function of consumption. At the same time, changes in global temperature will directly affect the welfare of a

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367

country in a positive or negative manner. Therefore, the functional relationship is expressed as:  U i = U (RCi , T ) = RCi ∗

H − T H

β (22.1)

According to the common practice, we also assume that the utility function is the Cobb–Douglas function: Among them, RCi is an incremental concept, which represents the difference in consumption demand under the normal growth scenario and consumption demand under the zero-growth scenario (hereinafter collectively referred to as consumption). T represents the change in global average temperature in t years; Ui represents the change in welfare under the normal growth scenario compared with that under the zero-growth scenario (hereinafter collectively referred to as utility or welfare). In the following text, R represents the total output. It can be seen from the model that, a positive change of Ui and RCi i.e. growth in a country’s consumption, will bring welfare increase of the country; and a reverse changes of Ui and T , i.e. global warming will directly lead to damage to the country’s welfare. Among them, H represents the limit value of the global temperature rise that the earth can withstand (in the research of Stern (2006) for the global temperature, the limit value that can rise is set to 2 °C by 2036, and the limit value that can rise is 5 °C by 2056). We assume that once the earth’s temperature rises above the limit, it will have a devastating blow on the global ecosystem, human activities will have to stop, and global welfare will become zero at this time. In the model, we choose H = 10 (i.e., the global temperature rise cannot exceed 10 °C at most) as the BAU scenario, and perform sensitivity analysis on H = 2 and H = 5. The meaning of the model is that once the global temperature change T is closer to H , i.e. the earth temperature rise is close to the temperature threshold (it is 10°), the excessive temperature will stop all production and life, and the welfare will become zero. The closer T is to H , the closer the welfare level of each country is to zero. If the global temperature remains constant, i.e. T = 0, the welfare level is only related to domestic consumption and production. The smaller T is, the higher the welfare level is. The parameter α reflects the impact of consumption changes on a country’s welfare, and the parameter β reflects the impact of temperature changes on the welfare. The parameter values of α and β will be calibrated with relevant data later. The value of global temperature change T depends on the total amount of global carbon emissions in t years. We assume that the global temperature change is a function of the total production of countries around the world, i.e. the more production is, the more emissions in production are, and hence the greater the possibility of causing global temperature rise will be.

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T = g

  i

 ei RSi

=a

 

b ei RSi

+c

(22.2)

i

Specifically, ei represents the intensity of a country’s carbon emissions. The greater the intensity of carbon emissions is, the more CO2 emitted from production will be. Intensity is expressed in carbon emissions per unit GDP. T organically links formulas (22.1) and (22.2), and there are two channels to reflect global temperature changes: channel 1, a country’s emission reduction behavior will directly affect its own production and consumption, leading to a decline in its own welfare; channel 2, emission reduction brings a decrease in production, thus leading to a decrease in CO2 emissions. The reduction of CO2 emissions helps to alleviate the degree of global warming, causing the decline of T . The decline of T generates positive externalities, which stimulates the increase in the country’s production and consumption, thereby increasing its welfare. The combined effect of the two mechanisms determines whether the country will participate in international cooperation. If the net income is positive, the country tends to voluntarily commit to reducing emissions with other members; if the net income is negative, the author tends to withdraw from the emission reduction agreement when there is no incentive or punishment mechanism. (III)

A decomposition of a country’s consumption: consumption mainly includes domestic consumption and imported consumption, and the level of consumption is determined by a country’s endowment. σ  σ −1 σ −1  σ −1 1 1 Max RCi = RCi (Di , Mi ) = (λi1 ) σ Di σ + (λi2 ) σ Mi σ

s.t. piw Di + pim Mi ≤ Ii = piw RSi

(22.3) (22.4)

Among them, Di and Mi respectively represent a country’s demand for local consumer goods and its demand for imported goods. I represents the total income of a country, expressed in GDP. RS stands for the total supply of a country. If a country’s income is allocated between the purchase of local consumer goods and the purchase of imported goods, the demand for local consumer goods and the demand for imported goods are respectively: Mi = Di = (IV)

λi2 I i w

(i = 1 . . . N ) λ1 ( pi )(1−σ ) + λi2 ( pim )(1−σ )

(22.5)

λi1 I

(i = 1 . . . N ) ( piw )σ λi1 ( piw )(1−σ ) + λi2 ( pim )(1−σ )

(22.6)

( pim )σ

A second decomposition of a country’s imported products: The quantity of imports is a CES function of the quantity of products imported by the

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369

country from other countries, and the quantity of imports is determined by a country’s endowment.

i i Max Mi =H (R1i , R2i , . . . , Ri−1 , Ri+1 , . . . , R iN ) ⎞ σ σm−1 ⎛ m  σm −1 1 i σm i σm ⎠ ⎝ (κ j ) (R j ) =

(22.7)

j=i



s.t.

p dj i R ij ≤ Iim = pim Mi

(22.8)

j=i

Performing the utility maximization calculation on the CES function, the following equation can be obtained: ⎡ pim



=⎣

⎤ 1−σ1

m

κ ij ( p dj i )1−σm ⎦

(22.9)

j=i

R ij = (V)

κ ij pim Mi κ ij ( pim )σm Mi =  ( p dj i )σm j=i κ ij ( p dj i )1−σm ( p dj i )σm

(22.10)

Trade equilibrium conditions: 

j

Ri + Di = RSi (i = 1 . . . N )

(22.11)

j=i

(VI)

Emission reduction cost function:

MCi = ϕ

(E i − E i ) E i

RSi

(22.12)

E represents emission reduction quantity, MCi represents the marginal cost of emission reduction, and ϕ represents technical variables. The higher the emission reduction requirement is, the higher the emission reduction cost is. The cost of emission reduction is also affected by emission reduction technology. (VII)

Model expansion

The model includes carbon tariffs, financial transfer payment, technical factors, external trade imbalances and emission reduction costs as exogenous variables into

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the model structure. Carbon tariffs can be accounted in the GDP as a country’s income, and financial transfer payment is mainly provided by the United States, EU countries, and Japan. (VIII)

Assumptions of business as usual scenarios (BAU)

The model uses the consumption and trade data of the OECD and the BRICS countries, and defines a benchmark future growth mode. With 2006 as the base year, it was assumed that all countries should reduce emissions by 50% in the next 50 years. With references to Stern’s Review’s assumption of the global temperature increase limit of 3° and 5° respectively by 2030 and by 2050, and the damage cost of climate change in Stern and Mendelsohon, the global CO2 stock was concluded for the two periods of 2006–2036 or 2006–2056, and the model parameters were corrected.

22.1.2 Data Source and Parameter Calibration The basic data in this article mainly come from the WTO. This section also divides the global countries into eight major economies of the United States, the European Union, Japan, Brazil, Russia, India, China, and others. In the simulation analysis, Brazil, Russia, India, and China are taken as a BRICS group for analysis. The model uses the trade and emissions data in 2006 as the base period, and mainly applies general equilibrium analysis methods for simulation calculations. Data and parameter selection are shown in the table. When there is no change in temperature, the utility function is: Ui∗ = RCi

(22.13)

Taking the change loss into account, we can get: Ui∗ /Ui

 =

H − T H

β (22.14)

The data collection is shown in the Table 22.1, 2006 is taken as the base year. The temperature change adopts assumption of a 2 °C rise in 2036 and a limit value of about 5 °C in 2056 in Stern Review (2006). The data are listed in Tables 22.1 and 22.2.

22.1.3 Analysis of Simulation Results (I)

Analysis of the effectiveness of trade measures

PPP growth rate (Based on the World Bank’s 2007 data)

52.31 16.82 65.42 26.16

Total accumulated output in 2056 considering discount rate (discount R Si2056 ), trillion$

Total accumulated emissions in 2036 (E i2036 ), bmt

Total accumulated emissions in 2056 (E i2056 ), bmt

Total accumulated emissions in 2056 considering discount rate bmt (Discount E i2056 )

130.83 183.16

trillion$

Total accumulated output in 2056 measured in PPP (PPP R Si2056 ), trillion$

Total accumulated output in 2056

(R Si2056 ),

33.63

0.04 1.40

Assumed annual GDP growth rate

Total accumulated output in 2036 (R Si2036 ), trillion$

0.53 0.500

bmt)

1.067

Brazil

Carbon emission intensity in 2006

Emissions in 2006

(E i2006 ,

Output in 2006 (R Si2006 , trill$)

242.09

770.16

160.34

93.94

478.18

298.86

62.22

1.60

0.06

2.577

2.54

0.987

Russia

177.89

566.18

117.99

88.42

703.50

281.40

58.64

2.50

0.06

2.012

1.83

0.912

India

Table 22.1 Basic data table (data in 2036 and 2056 are calculated on basic data in 2006)

968.63

2939.42

542.65

435.93

2778.03

1322.87

244.22

2.10

0.07

2.222

5.88

2.645

China

145.16

296.39

91.15

280.78

573.28

573.28

176.30

1.00

0.02

0.517

6.81

13.164

USA

41.30

108.44

32.94

140.48

313.52

368.85

112.05

0.85

0.015

0.294

3.13

10.636

EU

17.35

46.31

13.26

63.57

161.16

169.64

48.58

0.95

0.015

0.273

1.19

4.368

Japan

352.07

633.92

175.63

359.62

874.15

647.25

179.39

1.35

0.015

0.979

14.37

14.682

Others

1970.65

5426.23

1150.77

1515.04

6064.98

3792.98

915.03

-

-

-

36.29

48.46

In total

22.1 Evaluation of the Effectiveness of International Climate … 371

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22 Evaluation on the Effect of International Climate Governance

Table 22.2 Parameter calibration H 10

20

30

β BAU Damage cost assumed (%)

β

10

0.152

20

0.322

50

1.000

10

0.366

20

0.776

25

1.000

10

0.578

16.7

1.000

Parameters a, b units are in climate function:T 2036 = 3T 2056 = 5 a = 0.294 b = 0.329

From a global perspective as regards the economic impact of carbon tariff measures, carbon tariff measures have little effect on solving carbon leakage and reducing freeriding behavior. On the contrary, there may be adverse impact on global welfare. The levying of carbon tariffs does not increase the social welfare of developed countries, on the contrary, the welfare level of almost all major countries has declined. This also proves the economic irrationality of carbon tariff measures from another aspect. Under the current trade structure, the full spread of carbon tariff measures lacks a realistic basis. In the short term, the levying of carbon tariff can reduce the exports of the taxed countries, but in the long term, the levying of carbon tariff affects the equity of international trade and may trigger a new round of competition for international political and economic interests. (II)

Effectiveness analysis of low carbon technology transfer

Judging from the simulation results, technological progress has greatly stimulated the enthusiasm of developing countries to reduce emissions. It will greatly reduce the cost of emission reduction in developing countries to establish an international technology transfer mechanism, being more conducive to reducing free-riding behavior than carbon tariffs. (III)

Effectiveness analysis of the financial transfer mechanism

Judging from the simulation results, a certain scale of adaptive financial incentive is more helpful to reduce free-riding behaviors and increase the enthusiasm of developing countries. Financial assistance incentive can more easily stimulate the emission reduction behavior of developing countries than trade sanctions. (IV)

Parameter sensitivity analysis shows that

Trade elasticity↑==> carbon tariff↓, capital scale Climate damage cost↑==> carbon tariff↓, capital scale↑ Energy efficiency technology↑==> carbon tariff↓, capital scale↓

22.1 Evaluation of the Effectiveness of International Climate …

373

Threshold of earth temperature↓==> carbon tariff↓, capital scale↑ Use PPP GDP==> carbon tariff↑, capital scale↑ Discounting==> carbon tariff↓, capital scale↓ Reduce carbon intensity instead of absolute emission reduction==>carbon tariff↓, capital scale↓ This means that there are many other factors that will affect the willingness of various countries to actively participate in international climate governance cooperation: trade elasticity, damage cost of climate change, marginal cost of emission reduction in various countries, whether to consider PPP factors, whether to consider the GDP discount rate. The difference in model parameters and assumptions, such as reduction in absolute quantity or carbon intensity reduction, will greatly affect the results. Technological progress is the key to reversing the adverse impact of emission reduction, and energy efficiency cooperation will become a key breakthrough for China’s future cooperation on international climate. The losses and damages of climate change are increasing year by year, and it will also change the willingness of many countries to cooperate.

22.2 Equity Assessment of International Climate Governance The focus of international climate governance is how to divide the global carbon emission rights fairly. The issue of climate equity in the global emission reduction plan is mainly shown as distributions of the global remaining carbon capacity space among regions. Based on different principles of climate equity, this section evaluates global carbon emission reduction plans under different principles. Summing up the existing global emission reduction programs, there are four emission reduction responsibility sharing programs (i.e., four principles of equity): responsibility, equity, capacity and demand, and cost effectiveness. In the simulation analysis, they are represented as the equal-per capita capacity with history considerations, equal-per capita capacity without history considerations, equal per capita burden of reductions, and equal per capita benefit of reductions. The model continues the Armington trade climate model for multiple countries and multiple commodities in the previous section. Since a different scheme is used for emission reduction responsibility sharing, the emission reduction space of countries has changed. The simulation results show that from the perspective of emission space, compared with other equity principles, emerging economies and developing countries including China can obtain relatively more carbon emission space under the “per capita cumulative emission equity.” However, since the emission base of China and the United States is much bigger than the limited emission space allocated, no matter which allocation scheme for carbon emission rights is taken, in the long run, there is no significant difference between the good and the bad for the super emitting countries, they will inevitably bear bigger and

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22 Evaluation on the Effect of International Climate Governance

more convergent absolute emission reduction responsibility, and this also means that regarding the “common but differentiated” principle that developing countries have always insisted on, “common responsibility” will be strengthened in the future, but “differentiated responsibility” will be weakened. In the short term, China can strive for more emission space through “equal-per capita cumulative emission,” but in the long run, it should change its concept, jump out of the shared allocation deadlock, be the first to take the responsibility, and impose domestic reforms, and seek for other ways to safeguard the right for development, achieving a substantial progress for global emission reduction (Table 22.3).

22.3 Evaluation of “Intended Nationally Determined Contributions” Targets The Emissions Gap Report of the United Nations Environment Program has been published for 10 consecutive years, aiming to find the best way to close the gap. After the adoption of the Paris Agreement, the assessment result of the Emissions Gap Report 2016 showed that there was a significant gap between the efforts of intended nationally determined contributions (INDC) of each country and the emissions required by 2025 and by 2030. Calculated based on the expected greenhouse gas emission levels in various countries in 2030, even if the Paris Agreement is fully implemented, there is still a possibility of global temperature increase of 2.9–3.4 °C by 2100. To achieve the 2-degree temperature control target, countries should reduce 12–14 billion tons of CO2 equivalent based on the submitted INDC by 2030; and the Emissions Gap Report 2019 required each country to further reduce 15 billion tons of CO2 equivalent based on the submitted INDCs; to achieve the 1.5 °C temperature control target, 32 billion tons of CO2 equivalent must be reduced (Table 22.4).

22.4 The Future Development Trend of International Climate Governance The Paris Agreement has officially entered into force since November 2016. Under this new climate governance arrangement, as far as the intended nationally determined contributions submitted by countries are concerned, it is far from enough to achieve the goal of controlling the global temperature increase within 2 °C by the end of this century as stipulated in the Agreement. In the future, the following issues should be at least considered on how to accelerate the effective advancement of the Paris Agreement and continuously strengthen the actions of countries: first, how to achieve a win–win situation in both economic growth and climate governance within the country; and second, how to achieve common development of international community, and cooperate to create a win–win situation. Pertaining to these

47.80

18.24

298.77

1382.60

Japan

Row

World

10.32

Brazil

EU

85.04

Russia

114.87

109.32

India

US

698.08

China

1382.60

711.48

15.78

52.34

66.36

36.09

18.68

252.91

228.97

1382.60

775.23

10.38

4.34

20.86

39.33

5.62

282.93

243.93

1382.60

7.36

489.55

112.96

74.97

286.66

364.1

25.12

21.88

Equal per capita benefits of reductions

1382.60

4.31

738.82

215.1

106.54

236.25

69.97

7.51

4.1

Equal per capita burdens of reductions

82.58

82.58

82.58

82.58

82.58

82.58

82.58

82.58

82.58

82.58

58.52

84.93

80.92

89.94

39.08

96.17

59.70

94.29

Equal-per capita capacity without history consideration (%)

82.58

54.80

90.09

98.42

96.84

33.61

98.85

54.91

93.91

Equal-per capita capacity with history considerations (%)

Uniform equal proportional (%)

Equal-per capita capacity with history considerations

Uniform equal proportional cuts (82.58%)

Equal-per capita capacity without history considerations

% Emission reduction by country out to 2050

Emission allocation by country out to 2050 under alternative approaches (bmt carbon equivalent)

Table 22.3 Corresponding carbon emission reduction space of countries under different equity principles

82.58

99.47

64.59

91.83

94.58

79.27

73.67

98.18

98.42

Equal per capita benefit of reductions (%)

82.58

99.69

46.56

84.44

92.29

82.91

94.94

99.46

99.70

Equal per capita burden of reductions (%)

22.4 The Future Development Trend of International Climate Governance 375

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22 Evaluation on the Effect of International Climate Governance

Table 22.4 Intended nationally determined contributions of major countries Emission reduction goal

Financial commitment

US

To reduce greenhouse gas emissions by 26%~28% from the 2005 level by 2025

To donate USD3 billion to the Green Climate Fund

EU

To reduce greenhouse gas emissions by 20% from the 1990 level by 2020; by 40% by 2030; by 80%~95% by 2050 To increase the proportion of renewables to 20% by 2020; no less than 27% by 2030; no less than 55% by 2050

UK will donate USD1.2 billion to the Green Climate Fund France will donate USD1 billion to the Green Climate Fund and will increase foreign assistance of EUR4 billion each year since 2020

Japan

To reduce emissions by 26% from the 2013 level by 2030

To donate USD1.5 billion to the Green Climate Fund

China

To lower carbon emission intensity by 60%~65% from the 2005 level by 2030 To increase the proportion of non-fossil fuels to around 20%

To invest RMB20 billion to establish the “China South-South Climate Cooperation Fund” Launched the national carbon emissions trading system in 2017

Brazil

To reduce greenhouse gas emissions by 37% from the 2005 level by 2025 and by 43% by 2030; renewables to account for 45% by 2030

India

To reduce carbon emission intensity by 33–35% from the 2005 level by 2030 To increase the proportion of non-fossil fuels to around 40% by 2030 To increase 2.5–3 billion tons of carbon sinks by 2030

Source Sort according to the INDC data of various countries

two major issues, the following changes may occur in the future international climate governance: Firstly, climate governance has become inseparable from the development agenda, growth agenda, trade and investment agenda, and financial agenda. The implementation of the Paris Agreement must be closely integrated with strategic plans for economic growth, finance, trade and investment, and sustainable development at the national and international levels. For example, the Intended Nationally Determined Contribution Targets (INDC) of each country will be embedded in the country-specific action plan for 2030 Agenda for Sustainable Development and the investment strategy to increase the country’s future emission reduction ambitions and successfully pass peer review. Countries must integrate the 17 sustainable goals and 169 specific targets in the 2030 Agenda in accordance with their national conditions, incorporate them into their national mid- and long-term development strategies, and establish a synergetic and complementary relationship between international agendas and domestic strategies. In order to achieve the goal of intended nationally determined contributions, countries should adjust their trade structure, and strengthen and adjust their growth strategies, and increase climate

22.4 The Future Development Trend of International Climate Governance

377

investment, taking advantage of the important opportunities of low carbon development. At the same time, they should strengthen and adjust financing strategies, build a green financial system to meet the financial needs for low carbon development. Secondly, sustainable infrastructure investment will become the key to achieve sustainable development goals and economic growth, as well as the key to achieve climate goals under the Framework Convention. Both the 2030 Development Agenda of the United Nations and the Paris Climate Conference have incorporated the construction of green, clean, and high-quality infrastructure into the Sustainable Development Goals (SDGs) as important global measures to address climate change. Investment in sustainable infrastructure can avoid locking up high-carbon investments and leave room for policy makers to set ambitious emission reduction targets in the future. Investment in sustainable infrastructure can also balance the impact of global trade decline on countries, create jobs for countries, and become resilient against climate impacts. According to the latest forecasts of the Global Infrastructure Hub (GIH), the investment gap in the global infrastructure investment market will be as high as USD10-20 trillion by 2030. In addition, as part of sustainable infrastructure financing, the disclosure of climate-related systemic financial risks will promote the strategic redeployment of global capital, thereby creating a climate-resilient global financial system. This system requires all sectors of the financial system, including banks, investors of financial market institutions, private equity management companies, insurance companies, public financial institutions and regulatory agencies, to establish climaterelated financial transparency. Companies are required to comply with social, environmental and governance standards and improve their social and environmental responsibilities. Thirdly, green finance will become a solution to solve the climate financing gap. In the past decade, some countries and financial institutions have taken measures to promote the green transformation of financial institutions and financial markets. Voluntary standards such as the “Equator Principles” have increased the environmental risk management of many financial institutions. The World Bank has established an informal “sustainable banking network” led by developing countries and consisting of banking regulators to promote sustainable lending practices. More than 20 stock exchanges around the world have formulated “Environment, Social Responsibility and Corporate Governance (ESG)” information disclosure guidelines for listed companies and established many green indexes. More and more institutions, including the Bank of England and the Industrial and Commercial Bank of China, have begun to assess the financial impact of climate and environmental policy changes, and have also started the practices of new environmental stress test. Germany, the United States and the United Kingdom have developed green financing interest subsidies and guarantee procedures, as well as government-supported green investment banks. The British government has also established the Green Development Bank to invest heavily in green projects and attract a lot of private finance. Multilateral development banks are also an important mechanism that can play a broad role. In the progress of low carbon development, multilateral development

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22 Evaluation on the Effect of International Climate Governance

banks can share the experiences and lessons accumulated in their businesses and implement the low carbon concept in their daily work. They can fully leverage private/institutional investment. Fourthly, the status of non-sovereign state actors represented by transnational city networks becomes prominent in the governance system. Since the establishment of the UNFCCC, the media and the public have paid more attention to the government’s negotiations on greenhouse gas emission reduction. However, the international community is increasingly aware of the importance of local governments and non-governmental organizations in combatting climate change. In particular, if cities can take joint actions, it will play an important role in mitigating global climate change. Urban economic growth, such as urban investment, consumption, and trade activities, has become the main driving factor for energy consumption and greenhouse gas emissions. At the same time, cities are also the main force in solving climate problems. The mayor of a city can use flexible policies and absolute decisions to take rapid action against climate change. The transnational city network is just a typical model of cities participating in climate governance. The main features of this model are: on the basis of voluntary participation and equal consultation, a governance network and communication platform among cities are established to jointly promote best practices and share innovative low-carbon technologies and methods, thereby realizing urban greenhouse gas emission reduction and giving full play to the initiative and political influence of cities in climate governance. Li (2015) believed that this model had the characteristics of multi-center decision-making and highly networked social finance. The central government, local governments, NGOs, and various social groups or private sectors can all be participants in the network. Homogeneity of cities makes it easier to communicate effectively on specific issues and establish a common code of conduct. Even in the absence of external compulsory constraints, effective incentives can be formed inside the city, helping cities keep their promises, and supervise and learn from each other. The large-scale urban network alliance established earlier is the “International Council for Local Environmental Initiatives (ICLEI-Local Governments for Sustainability),” which was established in 1990 to strengthen the environmental autonomy of local governments. ICLEI is the world’s largest local and city government organization, uniting 12 mega cities, 100 super cities and urban areas, 450 large cities, 450 small- and medium-sized cities and towns from 86 countries committed to promoting sustainable development, covering a population of over 660 million in the world. It is currently the largest city and local government platform. The alliance’s work focuses on three areas: establishing a network of experts on urban sustainable development to learn, create and collaborate together; helping local governments to promote sustainable development with good results through various projects and activities; and through various innovations tools, purposefully establishing fruitful partnerships, and providing solutions for local governments’ practices. Another influential transnational city network is the C40 Cities Climate Leadership Group. It was established in 2005 to focus on the Clinton Climate Initiative (CCI) under the American Clinton Foundation to promote low-carbon development in large

22.4 The Future Development Trend of International Climate Governance

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cities, and to strengthen international experience sharing and concept dissemination. It connects more than 90 of the largest and most representative cities in the world, consisting of more than 6.5 million people and a quarter of the global economy. The city group establishes carbon emission trading to address climate change, and urges cities to take actions to reduce greenhouse gas emissions and urban risks, while creating a healthier and happier life for urban residents and more employment opportunities. Many cities in China including Beijing, Shanghai, Guangzhou, and Hong Kong have joined the group. In recent years, the city group has become an important participant in the setup of the international climate governance agenda, an important promoter of climate governance norms, the implementer of climate cooperation projects, and the best sharing platform for global low carbon and sustainable development practices (Wang et al. 2016). There are two ways for these transnational city networks to participate in international climate governance: one is to establish an internal organizational framework. Members should make action commitments and accept the supervision of the alliance. The alliance will also provide members with a platform for exchanges and learning, and members are allowed to share information to promote the dissemination and promotion of climate technology. It is an “innovative activist” in climate governance. The other option is to participate in external governance, such as exerting influence on the government and multilateral processes through lobbying, proposals, reports in order to obtain more policy support and project funding. It gathers people, materials, and information through the Internet. The clustering effect promotes the diffusion of regulations and technologies related to low-carbon development at the city level.

References Botteon, Michele, and Carlo Carraro. 1997. Environmental Coalitions with Heterogeneous Countries: Burdensharing and Carbon Leakage. Fondazione Eni Enrico Mattei Working Paper 24. 98 Cai, Yuezhou, and John Whalley. 2010. Positive Effects of International Trade on Global Carbon Reduction Agreements: Theoretical Framework and Numerical General Equilibrium Simulation on Reduction Incentives. Journal of Finance and Economics 11: 4–15. Li, Xinlei. 2015. Action Logic for Transnational Municipal Networks in Global Climate Governance: A Perspective of ‘Self-governance’ based on International Public Product Supply. International Review 5:104–118. Stern, N.H. 2006. Stern review on the economics of climate change. London: Her Majesty’s Treasury. Tian Huifang. 2015. A research on the influence of climate trade policy under the multilateral trade system, Database for Cross Check of Academic Papers, October 9, 2015. Uzawa, H. 2004. Economic Theory and Global Warming. Cambridge: Cambridge University Press. Wang, Yuming, and Peiwen Wang. 2016. Research on the Approaches of Transnational Municipal Climate Networks in the Global Climate Governance, Social Sciences. Journal of Harbin Institute Technology 18(3): 114–120. Zhou, Zhimin, and Yujie Huang, 2011. Causes, Risks and Countermeasures of Incomplete Contracts. Enterprise Reform and Management, 1: 32–35.

Chapter 23

Countermeasures for China’s Better Participation in International Climate Governance

23.1 Objectively Understanding China’s Position in Global Climate Governance The challenge from climate change will be one of the biggest challenges the mankind is facing in this century. No country or region can stand alone. China is also one of the most vulnerable countries in terms of climate change. It has become a global trend to reduce greenhouse gas emissions, innovate development pathway, enhance low carbon competitiveness, and follow the path of low carbon and sustainable development. It requires collective actions at the global level to mitigate and adapt to climate change and transform energy structure. It also requires a major greenhouse gas emitter like China to actively undertake emission reduction obligations and fulfill emission reduction commitments. From the perspective of economic development, China’s current economic scale ranks second in the world, but there is still a considerable gap between its economic structure, technological level, and the maturity degree of market economy system with that of developed countries. China has recently developed from a least-developed stage to a middle-income stage. The typical characteristics of this stage are: China has the characteristics of some developed countries, such as the large economy, the high proportion of trade in the global share, and the annual greenhouse gas emission ranking first in the world, while it has not got rid of features of developing countries, such as unbalanced economic development, dual structure, low per capita development level, insufficient independent innovation capabilities and other soft power, and low levels in global value chains. Therefore, China is in a critical period of transformation, and values, economic systems, and production and consumption patterns will undergo major changes in the future. It is foreseeable that in this process developed countries will inevitably become increasingly alert to China’s rapid development and require China to assume equal or greater responsibilities on major global issues. However, China’s participation in global governance is still relatively limited, and its governance capabilities, governance levels, and international cooperation experience are far from the level that advanced economies should have. Under the circumstance © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_23

381

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23 Countermeasures for China’s Better Participation …

of the complex global governance and the uncertainties in global climate governance, China needs to take the correct position, strategically grasp the general trend, and handle the situation tactically. It should also be noticed that China has some special advantages when participating in global governance, such as the unique experience of its own development and cultural diversity. In the past 10 years, China has rapidly grown from a passive participant to an active contributor in terms of trade governance, financial governance, and even climate governance, fully proving that China has the willingness and means to adapt to international opponents and partners with different cultural backgrounds and at different stages of development. First, China should place climate change at the height of the national strategy while integrating it into all aspects of China’s transformation development to form an overall framework for China to address climate change. In September 2020, China pledged at the United Nations General Assembly that carbon dioxide emissions will peak in 2030 and is committed to achieving carbon neutrality by 2060. This commitment will bring about tremendous changes in China’s production modes, lifestyles, industrial structure and business forms, and even values. China should not only make short-term plans, but also take a long-term perspective concerning climate change, place it high within the strategic panoply, while at the same time closely integrating it with the development of other fields, so as to maximize its strategic demands such as change in growth mode, adjustment of industrial structures, improving development quality, and overcoming the middle-income trap. Second, China should adhere to the positioning of a developing country and promoting the process of international climate governance under the framework of the United Nations. The international climate multilateral process under the UNFCCC is the main channel to address global climate change and promote international cooperation. At the same time, the Convention and other binding agreements, including the Kyoto Protocol, the Paris Climate Agreement, together constitute the legal basis for international climate governance. China is still in the rank of developing countries in terms of historical responsibility, per capita emissions, and capacity building. It conforms to China’s reality to adhere to the positioning of a developing country, and can also win precious space for China to develop. The “bottom-up” intended nationally determined contribution emission reduction model established by the Paris Agreement is a governance model recognized by most countries in the world while taking into account both effectiveness and feasibility. To achieve the global goal by 2050, all countries still need to continuously increase their ambitions of emission reduction. This requires to continue to promote climate governance under the Convention framework. Third, China should properly handle several sets of relationships while participating in international climate governance. The first is the relationship between internal and external. China’s resource endowment, geographic distribution, and demographic situation determine that

23.1 Objectively Understanding China’s Position …

383

China is one of the countries most exposed to the adverse effects of climate change, and one of the countries with great climate risk as well. In 2019, coal still accounted for more than 60% of China’s primary energy consumption, thermal power accounted for around 72% of China’s entire power supply structure, and renewable energy power generation only accounted for nearly 28% of all power generation. The longlasting steady energy structure will inevitably bring the greatest pressure on China to achieve its carbon neutral goal. The direction of China’s efforts is to vigorously develop renewable energy, improve energy efficiency, and reduce energy intensity, but this will surely be a long-term process. At the domestic level, China should organically integrate its response to climate change with China’s 14th Five-Year Plan, integrate resources from various sectors such as economy and finance, formulate long-term plans, establish effective mechanisms, and at the same time strengthen publicity and supervision mechanisms, and guide universities and key research institutions to reinforce relevant discipline settings and resource allocation, and do well in training and using talents. Externally, it is necessary to actively integrate diplomatic resources, increase cooperation with the EU, Japan, Republic of Korea and other countries that have also made carbon neutrality commitments, and gain more voice and influence. China should strengthen the South-South cooperation and establish a good international image so as to create a stable external environment for China’s domestic development. This process also needs to be well connected with China’s other foreign development strategies, such as the “Belt and Road” initiative, so that China’s foreign strategies form a mutually strengthening whole. The second is the relationship between gains and losses. The establishment of any international cooperation mechanism is based on the mutual recognition and transfer of interests among member states within the mechanism. China’s positioning of the concept of global governance is to “co-consult, co-build, and share together” and establish a “fair, equal and reasonable” new international economic order. In essence, it is to achieve mutual benefit, win–win and peaceful cooperation among all stakeholders. In terms of diplomacy, it cannot take but not give, let alone neither take nor give. China’s core interests must be resolutely safeguarded and the major interests must be actively maintained while principles are followed for the sake of general interests with no constraints to gains and losses. China is facing great difficulties and pressures under current methods of climate governance, but the response to climate change is consistent with China’s long-term interests and China’s sustainable development goals. It should be treated and handled with a dynamic and long-term development perspective. The concept of development should be actively utilized to safeguard the overall interests of developing countries. It is necessary to compromise at appropriate time in order to better win the support of developing countries. In the competition with developed economies, it is necessary to adapt to the rules of the game of big powers as much as possible, and exchange interests to stabilize cooperation if necessary. The third is the long-term and short-term relationship. When climate goals are formulated, independent decisions should be made based on China’s development and strategic goals, development stages, capabilities, and national conditions, as

384

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well as China’s understanding of historical responsibilities and current and future responsibilities in the global governance system. Before the Paris Conference, China proposed a mid-term goal in the “Expectable Intended Nationally Determined Contribution Targets” submitted to the IPCC Secretariat, i.e. by 2030, to reduce the intensity of carbon dioxide emissions by 60–65% from the 2005 level, while reaching the peak of carbon emissions. The climate goal of the 13th Five-Year Plan was to fulfil the international commitment to reducing carbon dioxide emission intensity by 40–45% by 2020 from the 2005 level. There is no clear low-carbon development plan on how China will achieve its carbon neutral goal by 2050 or by 2060. It is necessary to plan ahead on how to achieve a benign connection among short-term, mid-term and longterm strategies so that China’s action to reduce emissions can continue to increase and be recognized by the international community, while adapting to the needs of China’s economic development and achieving China’s two centennial goals.

23.2 Promoting China’s Low-Carbon Transformation with Focuses and by Stages From the perspective of economic development stage, China as a whole is still in the middle and late stages of industrialization, and it will take a long time to fully complete the process of industrialization. It is inevitable to see a growing trend of carbon dioxide emissions in the short term. From the perspective of urbanization process, China’s urbanization rate is still insufficient. The average level in 2019 was about 60%, lower than the average level of 70% in advanced economies, and there are significant differences in urbanization rates among regions, with some regions in the western part of China being less than 50%. The advancement of urbanization means that large-scale construction of housing and infrastructure will continue, which will also bring a great test to cities’ carrying capacity. It may be the direction of future urban development to move towards an intensive, low-carbon, intelligent, and high-end city. The “14th Five-Year Plan” requires to make detailed arrangements on how to mitigate and adapt to climate change, including industry emission reduction arrangements, carbon market construction, green finance, low-carbon pilot programs, and multilateral and bilateral cooperation mechanisms. This arrangement will be a process of multi-objective decision-making, requiring to find the optimal development pathway under many goals of economic development, energy production and consumption, environmental protection and human development. This process should be carried out in a continuous and dynamic way in steps and by stages according to the economic development situation. The first issue is to align China’s carbon neutral goals with China’s growth, investment, and development strategies, establish synergy between the international agenda and domestic strategies, as well as enhancing coordination among domestic strategies.

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It is necessary to combine low carbon development goals with the implementation of sustainable development, accelerate the construction of a resourcesaving and environment-friendly society, combine low-carbon development planning with industrial layout adjustment, and combine low-carbon development with the improvement of people’s livelihood and human development. In addition, it is necessary to promote sustainable infrastructure investment, and handle the social and environmental impact of the project while comprehensively considering life cycle costs, safety, resilience against natural disasters, job opportunities, capacity building, and transfer of knowledge and professional skills, which are consistent with economic and development strategies. It is necessary to promote the research and development and application of green and low-carbon technologies to the greatest extent, and combine low carbon development with digital economy and other emerging business forms to improve the environmental spillover benefits of investment. It is necessary to improve the climate risk disclosure of the financial system, strengthen corporate environmental responsibility governance, and accelerate the pace of green finance. The second is to establish an emission reduction system that combines government leadership, market mechanism and administrative promotion. As a public product with negative externalities, government intervention is required to address climate change, which cannot be resolved through market mechanisms alone. The market mechanism here is mainly the carbon market. Although the national carbon market has been launched and carbon trading pilot programs have been carried out for many years, it is still in its infancy, featuring with decentralized market entities, small-scaled project market VER, incomplete carbon pricing mechanism, and a big gap in terms of the level and ability of software and hardware in the market with the international level. China needs to gradually improve its carbon market in stages. China has defined the period after 2020 as the second development cycle of its carbon market development. At this stage, whether the scope of transactions, or products and models of transactions will be greatly improved and enhanced. In this regard, it is necessary to strengthen the experience sharing with the EU, Japan and Republic of Korea in carbon pricing and carbon market development, so that China’s carbon market construction can gradually be aligned with international standards. The government needs to enhance publicity on climate issues, promote the participation of the whole society, and build a diversified climate governance system. The third issue is the need to improve the financing system for low carbon development and build a diversified financing platform. (I) Establishing and improving the green financial system. Since 2016, China has continued to promote the development of green finance along the two pathways of “top-down” top-level promotion and “bottom-up” exploration. Such policies as green bonds, green credit, environmental information disclosure, and third-party assessment and certification have been gradually implemented. In June 2017, eight cities in the five provinces (regions) of Zhejiang, Jiangxi, Guangdong, Guizhou, and Xinjiang were approved to establish pilot zones for green finance reform and innovation. As of the end of 2019, China’s green loan balance reached RMB10.22

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trillion, and the issuance size of international green bond reached USD257.7 billion, an increase of 51.06% over the same period in 2018. However, compared with China’s future green investment demand, the gap is still very large, which needs to further exert the guiding role of public finance to fully tap the potential of domestic and foreign private investment. (II) Making best of the financial market to promote green and low carbon development. It is necessary to establish a “green channel” for low carbon companies to go for public issuing and listing, especially to encourage and support companies that develop and use low carbon technologies to enter the Growth Enterprise Market. Industrial funds should be established to reduce carbon emissions and venture capital funds for energy-saving and emission-reduction companies to defend against investment risks in the production and development of low carbon companies. The equity investment fund for low-carbon green industry initiated by the Liaoning Environmental Protection Industry Association in November 2020 is a useful attempt. The scale of the fund is overall set at RMB3 billion, and the first phase is RMB500 million. Through government guidance, social capital participation, and amplification of financial institutions, the fund will be invested in key projects in environmental protection fields, manufacturing of advanced environmental protection equipment, smart environmental protection, carbon sink trading and other fields. (III) Actively striving for chances to issue green bonds internationally, and issue green corporate bonds and municipal green bonds domestically to support low carbon development. Banks can issue green financial bonds and financial environmental protection bonds to solve the demand for a large amount of finance needed by some low carbon projects and ecological projects that have good social benefits. The funds raised can be provided to companies through preferential loans to support their research and development of green products, undertake ecological agricultural production, realize ecological industrial processing, and carry out green marketing activities or through large, high-quality companies with conditions to issue bonds are encouraged to cooperate with financial leasing companies, and jointly apply to the National Development and Reform Commission or the China Banking and Insurance Regulatory Commission for the issuance of corporate bonds or financial bonds for energy-saving and emission reduction equipment leasing as lessees and lessors. The fourth issue is to vigorously support the research and development of climate-beneficial technologies, encourage independent innovation, and remove obstacles to technological innovation, research and development, and dissemination. First of all, the nation should be committed to creating a supportive environment for the development, transfer, and dissemination of low carbon technologies. Subsequently, the country should increase the social and environmental impact analysis of infrastructure investment projects, and low carbon technologies should be used as much as possible in the project process to build high-quality and highly-efficient infrastructure. Furthermore, the government can facilitate and assist private sector’s technology transfer by strengthening environmental regulations, legislative systems,

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and protecting intellectual property rights, and use public financial means to reduce transaction costs, reduce the risks of exploring markets and adopting new technologies, and create favorable conditions for companies to develop and transfer environmentally beneficial technologies. It is also necessary to increase efforts to tackle key core technologies, such as CCUS, energy storage technology, and hydrogen energy technology. The fifth is to full play to the role of cities and make them the main driving force for energy conservation and emission reduction in China. China’s strategies and policies at the national level generally have to be disseminated to the provincial and even municipal levels before they can be effectively implemented. At the same time, most economic activities such as investment and consumption occur in cities. Cities should be important body in China to implement national climate and energy strategies and policies. The target responsibility system for energy conservation and emission reduction is currently China’s important management tool in the field of energy conservation and emission reduction. Judging from the current situation, the ability of Chinese cities to mitigate and adapt to climate change is still weak. For example, stakeholders have weak awareness and knowledge of how to carry out low carbon development, and they are lack of experience and ability to formulate and implement urban low-carbon development with corresponding finance and human resources being inadequate as well. In addition, China is currently in the process of industrialization and urbanization. If advanced low carbon technologies are not adopted as soon as possible in large-scale urban infrastructure construction and industrial development, China’s future development model may be locked on a high-carbon pathway. Therefore, in the current urbanization process, China urgently needs to adopt low-carbon design and technology, establish a low-carbon management system to prevent “pathway dependence” in accordance with the low carbon concept. In terms of capacity building, China still lacks mature analysis tools in important aspects of urban low carbon planning, such as greenhouse gas accounting, low carbon scenario research, target setting and decomposition, and confirmation of key fields for emission reduction. The low carbon transformation of future cities requires the following specific tasks: (1) To incorporate the concept of low carbon development into the overall urban development planning; (2) To improve the statistical system, establish a statistical, monitoring, verification and implementation system to control carbon emissions, and combine information sharing and feedback mechanisms to evaluate the implementation of low carbon development projects. (3) To use fiscal and taxation policies to encourage consumers to purchase products with low carbon labels, and adjust the energy consumption and carbon emission behavior of companies and individuals, and use public finance for green government procurement, establish a dedicated low carbon development fund, and promote local financing platforms to support low carbon projects. (4) To attract private finance to join sustainable urban construction. This requires the government to change its role, with smart city construction as a key chance to create a suitable investment and regulatory environment, provide subsidies and preferential policies, and change purchasing decisions. (5) To strengthen

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the development of low carbon human resources, including technical personnel and management personnel, and promote its cooperation with international and domestic scientific research institutions to improve the city’s low-carbon technology capabilities. (6) To strengthen international exchanges and cooperation, encourage cities that meet the requirements to consider joining a transnational city network, and create more opportunities for international technology transfer and financial support so as to gain advanced knowledge, concepts, and management experience.

23.3 Constructively Maintaining the Current International Climate Governance System On the one hand, China should proactively assume international responsibilities in line with its own development stage, capabilities and national conditions, and contribute China’s strength to realize global goals; on the other hand, China should also uphold justice and equity. It should form strategic alliances with developing countries to defend the interests of the developing countries, and innovate the SouthSouth cooperation, and at the same time, it should carry out pragmatic cooperation with developed countries on the basis of win–win cooperation and promote the North–South cooperation, so as to build a “fair, reasonable, effective, and win–win” international climate governance system. Specific measures include: (I)

Objectively treating the global leadership position of the U.S.

After Donald Trump was elected president of the United States, he made major adjustments to the United States’ climate change policy, turning it to an unfavorable direction. But regardless of whether the United States stays in the Paris Agreement or not, from a legal perspective, after the Paris Agreement has officially entered into force, it will not affect the overall effectiveness of the agreement in the short term. On the other hand, despite the inaction at the government level, the American states, cities, international organizations, NGOs, and citizens have played more and more prominent roles in the American climate action. Regarding the impact of uncertainty brought by the United States, first of all China has to recognize the American international leadership and status, especially its absolute advantages in climate-beneficial technologies, energy-efficiency technologies, and new energy. China should search for new common interests in climate change and energy field for the two countries, and under the new situation, manages and controls divergences, enhances understanding, and maximally guarantee the consensus and tacit understanding on the team interests of the two parties. (II)

Closely promoting China-EU cooperation in the field of climate and energy

Both China and the EU are active participants and contributors to the current international climate governance process. In recent years, since the release of the Joint

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Statement on Climate Change between China and the European Union, ChinaEU climate cooperation has formed a relatively complete cooperation framework, including climate dialogue and cooperation mechanisms at all levels, cooperation and exchanges at the local level, and pragmatic project cooperation. China has also signed bilateral climate cooperation mechanisms with the United Kingdom, France, Germany and so on, and conducted extensive cooperation in the fields of Internet technology, new energy, and technological innovation. Recently both China and the EU have made commitments to achieving carbon neutrality and made plans for future green development. In the future, China can consolidate cooperation with EU countries and strengthen China-EU coordination on major climate issues. (III)

Forming the most extensive community of shared interests with developing economies

Developing countries have concerted demands with China in terms of low-carbon sustainable development. China can use the China South-South Cooperation Fund and the Climate Change South-South Cooperation Fund as a key chance to expand the investment size and scope in the least developed countries, while promoting high-quality and green development of the Belt and Road initiative, and effectively improving the climate resilience and development capabilities of developing countries along the route to promote new South-South cooperation. (IV)

Expanding climate cooperation among BRICS countries, and at the same time making the BRICS cooperation mechanism become a bridge between South-South cooperation and North–South cooperation

Affected by the pandemic and the Sino-Indian border conflict, China-India relations cooled down to a certain extent in 2020, which may have a certain impact on future BRICS cooperation. However, climate change and ecological vulnerability are common challenges all BRICS countries are facing. It is highly complementary within the BRICS countries in addressing climate change. This can be an important chance to deepen climate cooperation among the BRICS countries. First, knowledge sharing and project cooperation should be effectively promoted in science and technology and resource management in the BRICS countries. For example, in the field of clean energy, the BRICS countries have their own strengths and there is a wide range of cooperation room. It is necessary for countries to build government platforms, scientific research platforms, and enterprise platforms to jointly promote the sharing and dissemination of clean technologies. Secondly, sustainable infrastructure investment is also a priority field for cooperation where BRICS countries are most likely to form cohesion, and it is necessary to create a policy environment to support capital flows in the fields of infrastructure and sustainable development. Thirdly, the BRICS New Development Bank should actively play its role to give more support on projects related to climate change and sustainable development, such as supporting the promotion of green and low carbon technologies and clean energy cooperation. Fourthly, cooperation in the fields of agriculture and forestry should be strengthened in the BRICS countries to promote the dissemination and promotion of efficient and

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green agricultural production technologies, and enhance the ability of agriculture and forestry to address climate change. (V)

Exerting the role of such platforms as the United Nations and the G20, carrying out political mobilization to implement the Paris Agreement, and effectively promote the process of climate governance

The climate goal is also one of the main goals of the United Nations Sustainable Development Goals, which echoes the Paris Agreement. The implementation of the United Nations Sustainable Development Goals (SDGs) can be used as an opportunity to form a trend of interaction between the SDGs’ climate goals and the goals of the Paris Agreement, and strengthen all-round cooperation with the United Nations Development Program, the United Nations Environment Program, the United Nations Conference on Trade and Development and other departments. The power of the United Nations platform is utilized to promote progress in the fields of technology and finance. In addition, with the help of the United Nations platform, dialogue and exchanges will be strengthened with the international community. On the one hand, it is necessary to learn from the practical experience of other early-developing countries and regions in the fields of goal formulation for sustainable development, resource efficiency, ecological innovation, and green finance; on the other hand, the progress and experience should be actively shared about China’s ecological civilization construction and response to climate change. Thirdly, political support can be provided for the United Nations Sustainable Development Agenda and the Paris Agreement by first formulating national action plans, thereby strengthening communication with various economies and non-state actors and building a more comprehensive climate action network.

23.4 Further Deepening Pragmatic Cooperation on International Climate Issues In order to further deepen pragmatic cooperation among different stakeholders in the world, China, together with other countries should take the following measures: First, strengthen the construction of the core technology list and promoting the transfer and cooperation of low carbon technologies. In view of the inherent differences between developed economies and developing economies on technology transfer issues, developing countries, including China, should appropriately adjust their actions on technology issues and strengthen the construction of the core technology list to determine which technologies are necessary, what must be obtained, which technologies are payable and can be purchased through market mechanisms. Intellectual property rights should not be an obstacle to developing countries’ access to technology at an affordable price. Some alternatives can be advocated in international climate negotiations. For example, for existing

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patented technologies, developed countries are urged to provide incentives, companies are encouraged to allow developing countries to obtain the rights to use at preferential prices, and for technologies that are independent of public finance, technology patents can be authorized for use in developed countries, but exemption from patent rights should be allowed for developing countries. The most important thing is that developing countries themselves must increase technological research and development capabilities, strengthen cooperation with other developing countries, and strengthen the construction of information networks and expert networks. Second, continue consolidating the results of climate financing in the UN climate negotiations, while encouraging innovation in financing channels, especially supporting the development of green finance. Specific measures include: (1) To urge the establishment of a monitoring and supervision mechanism on climate finance, follow the basic principles of the climate change convention, clarify the definition of climate fund, unify statistic method, and ensure that source, amount, flow and management of finance are transparent and institutionalized and there is sufficient and effective finance in developed countries. (2) To urge multilateral development banks and green climate funds to play the leverage role of international finance and guide finance towards the fields of low carbon infrastructure investment and financing construction. AIIB and BRICS banks can also expand their business scope and international influence by investing in green infrastructure. (3) To encourage “sovereign wealth fund” to invest in low carbon fields. As a special public investment fund with specific goals, sovereign wealth fund can be used as a financing source for multilateral development banks such as the Asian Infrastructure Investment Bank, guiding them to invest in low carbon fields and expand the scale of climate financing. (4) To encourage countries to build a green financial system and establish an information exchange platform for green finance, share best practices, promote the dissemination and promotion of technology, and give full play to the role of multilateral development banks to make them core participants in and builders of green finance development. Third, take the China-US and China-European bilateral cooperations as the key to promote pragmatic cooperation in the field of climate change. The energy cooperation between China and the United States once achieved fruitful results, involving renewable energy, smart grid, clean coal, shale gas and other highly operable fields (Tian 2013). But Donald Trump’s coming to power has brought uncertainties to Sino-US energy and climate cooperation. However, tangible benefits can still drive cooperation. For example, China is currently promoting the replacement of bulk coal, while the United States is changing into an exporter of natural gas. Such supply and demand alignment can form a good cooperative atmosphere, which can promote Sino-US cooperation and a return to real markets and benefits. China and the EU have also established a close partnership in the field of climate change. However, there are also many challenges in Sino-EU cooperation, such as “anti-dumping and anti-subsidy” investigations, technical barriers, the issue of safe corridor of countries along the “Belt and Road,” and pressure from major

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countries such as the United States and Russia. Both China and the EU should strengthen cooperation in the climate and new energy fields through formulating and implementing specific cooperation projects, strengthen political mutual trust, further improve cooperation mechanisms to achieve mutual benefit and win–win results. Fourth, actively participate in the establishment of the rules for international trade and investment system and accelerating the low carbon transformation of the domestic foreign trade industry. As far as China is concerned, it should first continue to promote the WTO-based multilateral trade mechanism at the international level, and at the same time actively participate in the formulation of international rules through multilateral, bilateral and plurilateral free trade agreements. In this process, cooperation among major countries is very important. China should continue to promote trade cooperation with the EU, Japan, ROK, ASEAN, Russia, while preventing the fragmentation of various free trade agreements from becoming an obstacle to future international trade (Tian 2015a, b). In addition, China should accelerate the domestic industrial structure transformation and low carbon transformation. First, it should cultivate industries with low carbon influence and low carbon sensitivity, such as instruments and meters, machinery manufacturing for office purpose, wood processing and manufacturing, communication equipment, computer and other electronic equipment manufacturing, agriculture, forestry, animal husbandry and fishery, etc. They are relatively ideal low carbon industries, as well as the advanced manufacturing industry with high technology and high added value, which are also strategic emerging industries strongly supported by China, with the dual effect of riving industrial upgrading and achieving low carbonization. The textile, food, and tobacco processing industries can achieve win–win results and reap the benefits of low carbon through quality improvement and green manufacturing. The metal manufacturing, smelting and processing industries, petroleum processing, chemical, and printing industries are basically energy-intensive industries. It is necessary to reduce their proportion at the appropriate stage of economic development, and increase efforts of energy conservation and emission reduction, improve the efficiency of resource conservation and utilization. The transportation industry must vigorously develop new energy vehicles to form new growth momentum. The government should increase support for low carbon industries and new energy industries, grant preferential policies in terms of finance, credit, and taxation, and at the same time enhance external publicity in terms of policy transparency to prevent losses to our industry in international cases due to non-market economic status or poor policy communication (Tian 2015a, b). Lastly, formulate a systematic international publicity strategy and strengthening its own governance capacity building. China should actively address climate change, promote the systematic internationalization of ecological civilization, elevating it to the center of “go global” strategy within its comprehensive strategic layout, as well as exporting experience and values with an emphasis on development, and enhancing its international image and soft

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power. To this end, it is necessary to systematically plan, accelerate strategic deployment, expand the scope and channels of publicity, make an overall arrangement for publicizing ecological civilization internationally and tell China’s story, set up special agencies, increase the investment of special finance for publicity, and take publicity as an important job for future diplomatic work. China should also make good use of the powers of Chinese academic community, business circles, industrial associations and social organizations to mobilize them to actively participate in global economic governance activities. In addition, diplomatic resources related to global economic governance are a kind of very precious resources when many established dialogue mechanisms can be used by us, such as B20, T20, L20, Y20, W20 in the G20, and dialogue mechanism under the BRICS cooperation mechanism, including the BRICS Business Council, BRICS Think Tank Summit and other auxiliary mechanisms at various levels.

References Tian, Huifang. 2013. US-China Cooperation and Competition in Energy and Climate Change: Deepening and Breaking through. International Economic Review 11: 68–78. Tian, Huifang. 2015a. A Research on the Influence of Climate Trade Policy under the Multilateral Trade System. Database for Cross Check of Academic Papers. Tian, Huifang. 2015b. Evolving Trend of International Climate Governance Mechanism and China’s Responsibility. Economic Review Journal 12: 99–105.

Part V

International Macroeconomic Policy Coordination and Countermeasures

Preface A major difference between World Economics and International Economics lies in the research object: the former focuses on global issues, and the latter centers on intercountry issues. How to bring different countries together to make concerted efforts in response to global economic issues remains one of the most typical global economic governance issues. In this sense, World Economics, or global economic governance, aims to achieve the optimization of the global economy, which determines the difficulty of world economic studies. The first step to realize the collective action of global governance is to reach consensus and unanimous consent among different countries, signifying that all countries share the common goal of global governance. However, considering the fact that all countries wish to maximize their own benefits, it is logical that the benefits of some countries may be compromised while others may benefit when achieving the optimization of the global economy; that is to say, the costs and benefits of the optimization of the global economy may be distributed asymmetrically among countries. As such, it is an inevitable topic and tricky bit in global governance to coordinate such unsymmetrical costs and benefits. International economic policy coordination, an integral part of global economic governance, is also trapped in the same dilemma. Similar to World Economics and global governance, theoretically speaking, international economic policy coordination aims for the optimal or smooth growth in the world economy from the perspective of a virtual world government. Therefore, the optimal growth path and strategies shall be firstly figured out; then, countryspecific policies shall be developed and implemented based on their own situations, resembling those euro-wide monetary policies formulated by the European Central Bank and effectuated by the central banks of EU members. Technically, international economic policy coordination is more complicated than the effectuation of euro-wide monetary policies, which is attributed to different economic reaction functions and different policy goals and sequences in different countries, as well as their different attitudes and actions towards policy coordination, thus increasing the difficulty in exploring the paths and strategies of policy coordination. More importantly, some

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countries may pay higher prices but get fewer benefits, while other countries enjoy more at lower prices. Hence, it is believed that the countries with more benefits and lower costs shall compensate those with fewer benefits and higher costs. Theoretically, a global cooperation surplus can guarantee that total benefits are always greater than total costs in a cooperation. However, due to the absence of a world government, who is responsible for the calculation of such benefits and costs? How are the transfer payments of such unsymmetrical benefits effectuated? Furthermore, according to the fundamental hypothesis of the theory of international relations, inter-country relations represent power competition between countries in essence, and the enterprises from different countries also strive for greater market shares in the world market. Under the zero-sum game, all countries endeavor to gain more edges than their competitors in international economic relations. As long as relative gains secured by the counterparties from the cooperation are declining, international economic policy coordination may possibly not occur though it yields a cooperation surplus. Hence, not only is international economic policy coordination itself beset with difficulties, but the transfer of asymmetrical benefits is even more difficult to realize. Faced with such a realistic predicament, international economic policy coordination is confined to a very limited sense, with a certain scope and within a certain consensus. Specifically, firstly, due to the absence of a world government in reality, international economic policy coordination often needs unanimous consent of all concerned parties. This means that real international economic policy coordination may only appear in crises, as only in crises is weathering through thick and thin together necessary. To put it another way, all parties no longer need to weigh the pros and cons and fuss over the distribution of absolute or relative cooperation surplus. The necessity of cooperation is so clear that non-cooperation will result in unbearable heavy losses. Secondly, the absence of a world government dictates that international economic policy coordination must be based on the consideration of costs and benefits of all parties, rather than subjectively pursuing the optimal growth of the world economy. As a matter of fact, such coordination is a discretionary choice by governments based on their own situations, and is possibly free of a fixed pattern but is found with obvious subjective arbitrariness. Thirdly, considering the differences in the scale, sensitivity, and vulnerability of the economies of different countries in real life, the initial coordination of international economic policy is often caused by the spillover effect resulting from the changes in a superpower’s policies. The most ideal policy coordination means that, major countries with policy spillover effects consciously reduce the negative externalities of their own policies when formulating policies, while other major powers affected by such spillover effect also purposefully confine possible spillover effect of their policy responses within their own countries through various measures or seek the understanding and tolerance of other countries through communication and negotiation so as to avoid conflicts (such as a trade war or a currency war), or the countries affected by such reverse spillover effect will not adopt countermeasures or confine the negative externality of such countermeasures within their own countries. Fourthly, international economic policy coordination is possibly manifested by policy exchanges in a more common sense. Information

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exchange helps to enhance mutual understanding of concerned parties and avoid conflicts, bringing the best out of a cooperative game. Without information exchange, the game will often be non-cooperative. Noticeably, international organizations are playing a greater role in the process of policy exchange. The third-party policy effect can be simulated in a fair way to show conflict losses and demonstrate the necessity of coordination and cooperation. In general, international economic policy coordination was firstly studied by Meade (1951) and Cooper (1968), et al., who pointed out the necessity of international economic policy coordination. It was after the signing of the Plaza Accord in 1985 that international economic policy coordination began to truly attract widespread attention from academia, though it could be traced back to Price Specie-Flow Mechanism under the gold standard system. After the global financial crisis broke out in 2008, the crisis was largely attributed to global trade and financial imbalances. This problem was not substantially alleviated in the post-crisis global economic recovery; instead, new economic and financial risks were springing up. The general view of academia on international economic policy coordination is, when economic interdependencies between different countries are growing, macroeconomic policies of a single country will exert an influence on the welfare function of other countries, so these macroeconomic policies shall be revised or jointly adjusted to overcome their negative externality, maximizing the participating countries’ economic benefits while guaranteeing their acceptance.

Chapter 24

Historical Evolution of International Macroeconomic Policy Coordination

International economic policy coordination can be described via a simple logical deduction: the interconnections of economies of different countries can possibly cause policy spillover, resulting in a deviation from the goals of these policies. Therefore, it needs to establish policy coordination. A consensus shall be reached to achieve policy coordination, but the influence of the spillover on the economies of different countries and the differences in their policy goals and economic structures will have an impact on consensus building, thus adding up to the difficulty of policy coordination. As a matter of fact, the form of coordination also varies a lot, and even the coordination measures themselves may exacerbate conflicts. Therefore, international economic policy coordination is not a question of whether or not, but a question of how to coordinate.

24.1 Evolution of the World’s Economic Pattern and Order As expressed by Triffin (1997) in Gold and the Dollar Crisis: The Future of Convertibility, the problems of modern international currency and balance of payments are largely attributed to the dissonance and divergence resulting from different policies adopted by legally independent but actually interdependent sovereign states and their different goals and priorities. This interpretation also applies to the problems in international economic policy coordination.

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24.1.1 General Logic of International Economic Policy Coordination: Linkage, Spillover, Coordination and Conflict It is widely recognized that the world economy is interconnected, so the spillover effect of economic policies is inevitable. As long as policy spillover is acknowledged, it is necessary to assess the consequences of such spillover effect. Such effect may hinder or facilitate the policy goals of the affected country, or hinder the policy goals in the short run but facilitate the policy goals in the long run, or vice versa. There is also a possibility that such effect may hinder the policy goals of the affected country but contribute to the overall improvement of the global economy, and the list goes on and on. In a nutshell, spillover effect possibly brings about some policy conflicts, which is the so-called negative externality. Undoubtedly, how to assess the consequences of spillover effect serves as the basis of making decisions on international macroeconomic policy coordination, which relies on the concerted efforts of concerned countries for a common goal. It is generally believed that countries that coordinated well during a crisis may fail to do so in a relatively peaceful era, as the pressure to coordinate weakens. A recent example is the European Union (EU), which developed the Lisbon Strategy in 2000. It should be noted that the implementation of the Lisbon Strategy hinge on the coordinated and consistent structural reform policies of the EU members, so it’s necessary for the member states to have common interests and goals in this respect. However, the coordination of structural reforms is naturally more complicated than the coordination of demand-side reforms for several reasons: structural reforms have less spillover effect and will exacerbate the competition between governments; as most structural reform policies require trade-offs between efficiency and equity, employment and unemployment as well as short-term and long-term effects, they remain choices made on the basis of country-specific situations and can hardly rise to the international level as a consensus reached among different countries; the experience and lessons from one country may not directly apply to the other country.

24.1.2 Consolidated International Economic Relations and Policy Spillover Effect As we know, free trade based on comparative advantage, resource endowments and economies of scale enhances the welfare level, increases productivity, defuses conflicts and promotes international economic policy coordination. Therefore, according to the logic of economics, it is quite a natural thing that international trade will enjoy rapid development in breadth and depth. From the empirical data, in spite of fluctuations, the overall trend of international trade is indeed the case.

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Yet, the problem is that international economic policy coordination does not come naturally. Globalization is largely built on international trade. However, as there’re more participants in globalization, the problem of free-riding becomes increasingly prominent. As such, global economic policy coordination does not advance so fast as regional economic cooperation in terms of depth. Compared with regional economic policy coordination, the scope of global economic policy coordination is larger, but the depth is shallower. This may be the linkage and distinction between global policy coordination, regional policy coordination and regional integration. For instance, the coordination of the G20 coordination is a sharp contrast with the Eurozone integration.

24.1.3 Trade and Regional Economy Integration: Comparisons Between Eurozone and East Asia From the perspective of trade, intra-regional trade between China, Japan and South Korea enjoyed a steady growth within 30 years from 1980 to 2009, driving a steady rise in the proportions of imports and exports in ASEAN 5 + 3 Region. However, such a trend significantly slowed down and even stagnated after the 2008 global financial crisis. Noticeably, Europe greatly outperforms East Asia not only in the average levels of its large and small members, but also in the overall average level of entire regional trade integration, suggesting that intra-regional trade development in Europe has reached a very mature and stable state. Compared with general trade in goods and services, the development of regional value chain systems directly brings countries closer to each other through intermediate goods trade. International trade of general goods and services is grounded in traditional comparative advantage theory and reveals the relations of inter-industry trade, while intermediate goods trade based on regional value chain systems represents an intra-industry trade. Obviously, the economies of different countries are more closely connected through intra-industry trade than through inter-industry trade.

24.1.4 International Economic Pattern Evolution and International Economic Order Historically, enhanced policy coordination or the anticipated results described by the Peace-through-Trade Theory were rarely seen. Instead, trade wars and currency wars emerged one by one and led to the two world wars. It should be noticed that, as Keohane and Nye (2011) puts it, increased interdependence also aggravates potential conflicts due to the absence of efficient international economic policy

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coordination and the lack of general recognition for international economic policy cooperation. The changes in international economic pattern before the First World War further ratcheted up such conflict in an opportunistic way. However, after two world wars, the establishment of international currency systems, represented by the Bretton Woods system, signified the inception of international economic order and international economic policy cooperation. Especially after the collapse of the Bretton Woods system, the tendency of international economic policy coordination was not undermined but even enhanced. Although international economic policy coordination also brought about new conflicts, they were finally solved in a sensible way under the background of wide recognition for international economic policy coordination.

24.2 Evolution of the International Macroeconomic Policy Coordination Theory International macroeconomic policy coordination, a topic of great theoretical and practical significance, has drawn the attention of lots of scholars. In the past decades, many internationally renowned economists have successively devoted themselves to the research on this topic. Therefore, the literature on international macroeconomic policy coordination is relatively rich, and the issues discussed are relatively comprehensive, mainly comprising four parts.

24.2.1 Principles of International Economic Policy Coordination: Necessity and Feasibility International macroeconomic policy coordination is often proposed from the perspective of a world government: the optimal goal of macroeconomic policy coordination is the optimization of the global economy, or the maximization of total economic welfare of all countries, rather than the maximization of the benefits of a single country. That is to say, the negative externalities caused by the spillover effect of a country’s macroeconomic policy shall be reduced, or such policy shall not hinder the realization of other countries’ macroeconomic goals, or at least not to beggar-thy-neighbor. Undoubtedly, international macroeconomic policy coordination is a result of the policy’s spillover effect. The necessity of policy coordination demonstrates that, firstly, nearly all economies are open to the world in the era of globalization, and the international economy is highly interdependent; secondly, the heterogeneity of macroeconomic economic policy effect decides that these policies spread at different rates at the international level, which can be explained by the different scope and degree of interdependence between different economic entities, as well as their

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different degrees of response to the same policy; thirdly, there are differences in the macroeconomic management goals among different countries. In a word, the spillover effects of different countries’ macroeconomic policies may be conflicting and unsatisfactory, so coordination is indispensable.

24.2.2 Prerequisite for International Macroeconomic Policy Coordination International macroeconomic policy coordination means that all concerned countries shall temporarily restrain their own needs and cooperate with each other to achieve the optimization of the world economy or the inter-temporal optimization from their respective perspectives. The formation of such consensus is one of the prerequisite for international macroeconomic policy coordination. To cooperate in police-making for intended effects, two issues must be resolved: what kind of policies shall the concerned countries introduce to coordinate? Cognitive premise is a conceptual issue, while modeling is a technical issue. Undoubtedly, the formation of the concept of policy coordination heavily depends on coordination results. International economic policy coordination rarely occurs if it often yields very low benefits (the benefits are assessed from different aspects, but generally related to each country’s own benefits but not global benefits). As for the benefits of international policy coordination, no final conclusion has been drawn in the previous studies for three possible reasons: the failure to consider uncertainty in the models; ineffective coordination due to the different preferences of policy makers; and possible time inconsistency in the coordination models. According to a classical study by Ghosh (1986), the benefits of international macroeconomic policy coordination are a decreasing function of model uncertainty. Obstfeld and Rogoff (2002) concluded that the benefits from policy coordination are very small. Canzoneri et al. (2005) developed a so-called second-generation model of multisectors involving two countries, but found that policy coordination has become increasingly important.

24.2.3 Principle and Transmission Mechanism of International Economic Policy Coordination The models of international macroeconomic policy coordination can be roughly divided into two generations. The first generation is represented by the MundellFleming-Dornbusch (MFD) Model, in which there is always one spatial equilibrium condition on the output and another spatial equilibrium condition on the price, and

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the spatial equilibrium conditions on capital flows and exchange rates are concurrently considered, with limited gains from policy coordination. The second generation is represented by the Post-Keynesian Model, which has a micro-foundation, involving monopolistic competition, nominal and real stickiness, and assumes that all concerned parties have utility functions. Other examples include models of information asymmetry, commitment asymmetry and the pursuit-evasion game. The benefits of international macroeconomic policy coordination brought by the second-generation models exceed those of the first-generation models. In recent years, international division of labor for global production, especially those related to products, has become increasingly elaborate, leading to higher degree of international cooperation during economic cycles, and has provided a new driving force and a mechanism for international macroeconomic policy coordination. During the economic recession from 2008 to 2009, global trade declined sharply partially due to the growing influence of GVC on international macroeconomic policy coordination.

24.2.4 Difficulty in International Macroeconomic Policy Coordination: Welfare Effect and Its Asymmetry According to Ostry and Ghosh (2013), although both theories and empirics strongly support the coordination of macroeconomic policies, successful international economic coordination is rarely seen unless the world economy is on the verge of collapse. Under normal circumstances, policymakers always put national vision on the top of the agenda. Their study also revealed that the difficulties in international coordination are mainly attributed to the unsymmetrical scale of economies, different judgments on economic trends and transnational conduction effects, and policymakers’ miscalculations on the significance and priorities of various policy goals. They suggested that a neutral assessor should be appointed to coordinate different views held by the policymakers of different countries, so as to propose credible and neutral assessments acceptable to all parties. Only in this way can all concerned countries properly assess their welfare benefits from the policy coordination. They also advised that when the coordination is impeded, negative spillover from current and capital accounts would warn the concerned countries to maintain and encourage policy coordination. Therefore, Ostry and Ghosh recommended the IMF to assume the role of providing such assessment and warnings. In brief, the research methods related to international macroeconomic policy coordination also include traditional macroscopic model, open macroscopic model, game theory, IPE, and quantitative analysis in the welfare economics, but they all center on the analysis of welfare benefits. Previous studies either supported free trade or policy coordination. The conclusions of international coordination studies are sometimes conflicting, but coordination is preferred in most of these studies.

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24.3 Evolution of the International Macroeconomic Policy Coordination Practice and Relevant Comments There is no doubt that international macroeconomic policy coordination requires practice before theory. To have a better understanding of international macroeconomic policy coordination, progress and factual evolutions of these practices must be reviewed first. On this basis, it is of great significance to analyze and comment on the historical environment and policy effects.

24.3.1 International Economic Policy Coordination Before the Bretton Woods System Strictly speaking, international macroeconomic policy coordination only occurs after the macroeconomic policy is clearly proposed and adopted by the governments of various countries, but in a broad sense, as long as there is international trade, international finance, international exchange or international economic interaction, international economic policy coordination is put on the agenda. Under the free market conditions, a country may turn a blind eye to the spillover effect of the policies or take intervention measures, and such policy coordination selection matters a lot to the implementation of international currency system. (I)

International Economic Coordination of Europe, the United States and Other Developed Countries Before the First World War

Before the First World War broke out, Britain occupied a dominant position in the world economy, and naturally assumed the role of international economic policy coordinator. On the one hand, British imports and exports nearly accounted for half of European exports or one third of European imports, making it the largest capital exporting country, so London naturally became the largest capital market in the world. On the other hand, the prevailing gold standard system in the capitalist countries was essentially dominated by pound sterling, which replaced gold to perform the functions of international currency, namely as a unit of measure, payment and storage for international trade, and London therefore became an international finance center. Moreover, the principle of free trade was followed in Britain and most of the regions governed by the British Empire, whose population accounted for one fourth of the world’s total population, speeding up the prevalence of free trade in the world economy. As a result, Britain benefited the most from the free trade system. Of course, it also undertook lots of international obligations and paid proper prices for it. (II)

International Economic Coordination After the First World War

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Under the gold exchange standard system, the currency in circulation cannot be exchanged with gold. Gold can no longer give play to its role of spontaneously regulating currency circulation, thus undermining the stability of the currency system since currency circulation has lost its regulation mechanism and stabilizing foundation. If the amount of paper money in circulation for a country exceeds the demand for currency, currency devaluation will be induced. If a country issues large amounts of paper money to make up for fiscal deficit, inflation will possibly occur, leading to a rise in commodity prices and affecting economic development. For a country with a gold exchange standard system, since a fixed parity ratio is maintained between its currency and a superpower’s currency, its foreign trade and financial policies will be definitely affected and controlled by the monetary policies of relevant countries. Thus, the country with a gold exchange standard system should have good credit and an efficient restrictive mechanism when issuing the currency. However, in order to shift the burdens of domestic crisis and social conflicts, the governments often adopted a beggar-thy-neighbor policy, so tariff, dumping and currency wars broke out one by one, causing a very low stability of global economic order. In the global crisis starting from 1929, the currencies of different countries devalued successively to expand exports and increase employment, which invisibly destroyed the newly-established international currency system. (III)

International Economic Coordination During the Global Crisis of 1929– 1933

After the outbreak of the global crisis, the international society attempted to coordinate. At the World Economic Conference (WEC) held in 1933, the participants tried to seek international cooperation on the following issues: First, the issue of currency stabilization; second, the issue of tariffs; third, the issue of building international public projects; fourth, the issue of war debts. The global economic and political structure before the Second World War was mainly dominated by developed capitalist countries and their colonies. At tht time, international economic coordination was mainly targeted at the seizure of colonies and semi-colonies in Asia, Africa and Latin America, and political conflicts overtook cooperation. In response to the economic crisis in the capitalist world, the concerned countries have released some economic policies to coordinate the international economy, however, the measures were too specific and temporary, with extremely limited effects, and mostly failed in the end.

24.3.2 The Era of the Bretton Woods System The great crisis of the 1930s and two world wars have taught all countries the importance of international economic policy coordination and made the international society reach a consensus on international economic management: create and maintain a relatively free economic system, and rebuild the international economic order from three aspects, namely, finance, investment and trade.

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(I)

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Rebuilding the International Currency System

Under the Bretton Woods system, on the one hand, the U.S. dollar, as a supplement of the gold, made up for the lack of international liquidity, put an end to the chaos of international monetary and financial relations, and created a stable environment for international trade and international investment. On the other hand, the U.S. dollar stabilized the exchange rates of the countries to some extent, avoided exchange rate risks induced by international capital flows, facilitated inflows and outflows of capital, created a favorable environment for international indirect financing, and promoted the development of the finance industry and international finance market. It also provided good conditions for the production internationalization of multinational corporations and played a positive role in the recovery and development of the world economy. (II)

Trade Negotiations Under the General Agreement on Tariffs and Trade (GATT)

After the Second World War, until the mid-1960s, international macroeconomic policy coordination was less distracted by exchange rate instability and more efforts were focused on trade and investment disputes. The General Agreement on Tariffs and Trade (GATT) realized a mutually beneficial agreement, drastically cut tariffs and other trade barriers, eliminated discriminatory treatment in international trade, created a sustained and prosperous multilateral trading system, organized consultations and dispute settlement among countries on issues arising from commercial policy, assisted individual countries to resolve their trade problems, helped strengthen regional trade cooperation, and implemented programs to train international trade professionals. Such great tariff reduction was unprecedented in the development history of international trade, playing a significant role in promoting the development of international trade and creating favorable conditions for trade liberalization. (III)

Risks and Coordination of the Bretton Woods System

After nearly 20 years of continuous economic development, European countries, Japan and other developed countries accumulated large amounts of international payment surplus. Meanwhile, trapped by the Korean War and the Vietnam War, the United States experienced a sharp increase in overseas military expenses and suffered huge fiscal deficits, successive balance of payment deficits, and constant outflows of gold reserves. The situation went on until the mid-1960s, and the inherent contradictions and defects in the dollar-centered Bretton Woods system were gradually exposed. That is to say, other member states had to rely on the United States to maintain a deficit and continue to export U.S. dollars so as to increase their international liquidity, which would inevitably endanger the credit of the U.S. dollar and thus shake the U.S. dollar’s status as the most critical international reserve asset. Conversely, if the United States wished to maintain the balance of international payments, other member states would be plagued with slow international reserve growth, which will lead to the serious problem of inadequate international liquidity and affect the growth of international trade and economy. This is the famous “Triffin Dilemma”.

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24.3.3 After the Collapse of the Bretton Woods System: 1970s and 1980s Due to the collapse of the Bretton Woods system, international financial system was caught in an unprecedented chaos and turbulence. Trade wars, exchange rate wars, investment wars and interest rate wars among countries rose one after another and became increasingly fierce. Under the floating rate system of the Jamaica Accord, exchange rate, interest rate, stock market and commodity prices became unstable; international balance of payments were often out of balance; trade protectionism prevailed; international finance field was in chaos and turmoil; and the world economy was faced with frequent upheaval and crises. Under this background, to jointly respond to global economic and monetary crisis, international macroeconomic policy coordination aroused the attention of the affected countries again. (I)

Coordination of Macroeconomic Policies in the G7

The most notable is the summit of the Finance Ministers and Central Bank Governors of seven Western countries. In the initial years, international issues were mainly discussed, but policy coordination did not yield satisfactory results. In 1978, the countries reached an agreement at the Bonn Conference: Germany, France and Japan agreed to adopt expansionary fiscal and monetary policies to stimulate domestic demand so as to help the United States reduce its trade deficits; in return, the United States agreed to develop a plan to curb inflation and energy consumption. As a critical milestone, the Bonn Conference demonstrated that the world’s leading economic powers were able to coordinate, formulate, and promote cooperative national economic policies, and that the United States still played a major role in multilateral governance efforts. From 1980 to 1982, the developed countries were threatened by another severe economic recession, and brought the United States, Japan and Germany back to their original positions, that is, the United States demanded Japan and Germany to expand their economies, while the United States would reduce huge fiscal deficits and lower interest rates in return. In 1985, the New York Plaza Conference attended by finance ministers and central bank governor of the five countries reached an agreement on joint intervention in the exchange rate. This coordination relieved the strong U.S. dollar and huge trade deficit resulting from the Reagan Administration’s monetary tightening policies. As a result, the U.S. dollar exchange rate gradually declined, finally achieving “a soft landing.” Again, the conflicts were successfully relieved through international macroeconomic policy coordination. (II)

Coordination of Trade Disputes

Along with the declining economic strength of the United States and the slowing development of the developed countries like European countries and Japan, an imbalance occurred again among them. Even with the continuous efforts of coordination under the GATT, trade disputes still intensified, represented by the well-known US-Japan, US-Europe, and Japan-Europe trade wars.

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The United States held that it was trapped in a passive position in the competition with Japan because Japan’s economic institution was an obstacle to free competition. It condemned that the domestic market of Japan was closed and exclusive. The United States threatened to sanction Japan with Super 301. Although Japan made a concession later, the trade imbalance between the United States and Japan was still not thoroughly resolved. The most prominent dispute between the United States and the EEC arose out of agricultural products. The United States used the GATT tariff cut negotiations to force the EEC to reduce tariffs, but the EEC implemented various non-tariff barriers. The EEC released a differential subsidy policy for agricultural products, which impacted the traditional market for American agricultural exports, compelling the United States to adopt an agricultural export subsidy policy. In 1976, the first trade war between Japan and the EEC broke out. Japan was forced to implement “auto control” of the quantity of steel products. In 1980, the second trade war between Japan and the EEC broke out. Since then, trade disputes between them rose one after another, including several trade wars. (III)

Coordination of the Latin American Debt Crisis

In 1982, the prevailing debt crisis in Latin Americ severely undermined the international financial order and the stable development of the world economy, making it a global issue that aroused much attention of the international society. In 1985, Baker’s Plan was formulated to promote private sectors to participate in voluntary bank loan restructuring to prolong the fiscal adjustment period. As a result, large amounts of debt burden shrank investments, leading to increasing capital flight and weak growth, as well as a rising debt ratio. It was not until the 1990s that the participants in debt restricting realized that the insolvent countries needed debt relief, i.e., reducing the nominal value of debt. It wasn’t until 2003 that Latin America got rid of the debt crisis. (IV)

Effects of the G7 Coordination

The macroeconomic policies of the relevant countries are the fundamental guarantee for a stable exchange rate, especially the coordination of monetary policies and the convergence of economic operation indicators. In September 1992, the financial storm raging over Western Europe caused the greatest shock to the European monetary system since its establishment, which was a result of the uncoordinated macroeconomic policies of Western European countries. In order to get rid of the recession and stimulate economic growth, countries like Britain, France and Italy eased their monetary policies and reduced interest rates successively, while Germany was heavily burdened by restoring the economy of the East Germany after unification. To prevent further inflation, Germany tightened monetary policies and increased interest rate, leading to a continuous rise in the exchange rate of the Mark. Along with the deepening economic interdependence among the EU, the United States, Japan and other developed countries, policy coordination gradually evolved from the initial “risk management” to “risk prevention” coordination. The attention

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was shifted from periodic topics like information exchange and exchange rate stabilization to macroeconomic policy coordination of relevant countries, and even to the discussions of common development goals and policy instruments.

24.3.4 Contemporary International Economic Policy Coordination: Since the 1990s Since the 1990s, regional free trade became a new trend. The role of developing countries in the international economy and trade has increased day by day, the coordination role of global international organizations and the G7 has declined, and the methods and scope of international economic coordination have been expanding. International economic coordination has evolved from local to global, and the coordination of a few international economic organizations was gradually replaced by multi-level and multi-modal coordination. (I)

International Economic Coordination of the Southeast Asian Financial Crisis

After the Southeast Asian Monetary Crisis, as the IMF’s relief scheme was too harsh, the Southeast Asian countries missed the gold opportunity of getting over the financial crisis, the rescue effect was unsatisfactory, and the national economy got battered. Given that these countries were much constrained by developed countries including Europe and the United States in the international policy coordination, a sub-regional cooperation framework, namely “10 + 3”, was established by the ten ASEAN member countries, together with China, Japan and South Korea in East Asia after the end of the 1997 Asian Financial Crisis, which included regular summit meetings, regular consultations of finance ministers and policy dialogues. The ASEAN countries also began to set up their own free trade zone, and planned to build an economic community resembling the EU by 2020. (II)

International Economic Coordination of the 2008 Financial Crisis

The G20 cooperation started after the Asian Financial Crisis. To expand macroeconomic policy coordination scope, the G7 evolved into the G20, and the latter played an indispensable role in uniting countries to respond to the financial crisis and cooridnating global economic policies, at least preventing international currency wars and trade wars.1 1

In fact, around the 2018 global financial crisis, the developed countries also attempted to initiate policy coordination under G7 framework. On 12 December 2007, 11 March 2008, 18 September 2008, 8 October 2008 and 13 October 2008, in response to the deteriorating financial crisis impacts,the U.S. Federal Reserve, European Central Bank, Bank of England and Bank of Japan successively waged large-scale international joint aid actions, mainly including: (1) Central banks of all major countries injected liquidity into their own monetary markets through open market operations and other channels; (2) The U.S. Federal Reserve established provisional currency swaps

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Of course, it should also be noted that the G20 is still a loosely structured forumbased cooperation mechanism, rather than an international organization in the real sense. As such, its policies are not compulsory but optional for the member states. The G20’s decision-making mechanism is also based on unanimous consent. In general, it is very difficult to reach a consensus due to the large number of member states, and a resolution can only be the result of mutual compromise. Therefore, the agreed content rarely touches the underlying substantive issues. This characteristic is becoming especially evident in the post-crisis era. Specific agreements for solving practical issues and making real progress were rarely seen, and continuous efforts should be made through the ministerial meetings. (III)

Policy Coordination Framework for the G20 Structural Reforms

It is generally believed that the structural reforms of various countries are not within the scope of international economic policy coordination due to poor spillover. However, the European debt crisis demonstrated that structural problems also established the need of international economic policy cooperation and coordination. As a result, structural reforms found a larger place in the G20 agenda, and a consensus has finally been reached. Another coordination of the G20 in terms of the structural reforms is the assessment of the progress of structural reforms in different countries. Previously (2014– 2015), the main method was that countries reported their structural reform commitments and implementation status, and international organizations would assess how these reforms affected economic growth. Such progress assessment was quantified and standardized during China’s presidency. By assessing this progress, a certain binding coordination is formed for the structural reforms of various countries.

References Canzoneri, M.B., R.E. Cumby, and B. Diba. 2005. The need for international policy coordination: What’s old, what’s new, what’s yet to come? Journal of International Economics 66 (2): 363–384. Ghosh, A.R. 1986. International policy coordination in an uncertain world. Economics Letters 21(3): 271–276. Keohane, R.O., and Nye, J.S. 2011. Power and Interdependence (4th Edition). New York: Longman, 2011. Obstfeld, M., and K. Rogoff. 2002. Global implications of Self-oriented National Monetary Rules. The Quarterly journal of economics 117(2): 503–535. with central banks of major countries, and adjusted the period and scale of the swaps if necessary. Since 13 October 2008,to cooperate with the rescue operations of central banks of other countries, the U.S. Federal Reserve announced that it wouldtemporarily upregulate the dollar swap quotas with European Central Bank, Bank of England, Swiss National Bank and Bank of Japan to an unlimited level; (3) On 8 October 2008, the U.S. Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Swedish Central Bank and Swiss National Bank etc. jointly announced a reduction of interest rate by 50 basis points. However, it turned out that without the participation of emerging markets, international economic policy coordination would not work.

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Ostry, M.J.D., and M.A.R. Ghosh. 2013. Obstacles to International Policy Coordination, and How to Overcome Them. International Monetary Fund. Triffin, R. 1997. Gold and the Dollar Crisis: The Future of Convertibility. Shanghai: The Commercial Press.

Chapter 25

Spillover Effect in International Macroeconomic Policy Coordination

Macroeconomic policy coordination is a realistic demand arising from the growing financial interdependence of different economies against the backdrop of deepening globalization. In the M-F model, a key node in the open IS-LM curve comes from the trade channel. The scale of trade is used to measure external demand, and then the income elasticity of import demand is derived. With the development of global value chain (GVC) studies, it is problematic to use the variable of a country’s export scale to measure changes in external demand, as a country’s export scale equates to changes in external demand under the condition that all exports are produced within the country and exported to other countries as final products. However, the development of global value chains has eliminated such possibility. Therefore, the M-F model needs to be expanded based on the global value chain for a better analysis of the spillover effect of a country’s macroeconomic policies by integrating the framework of the global value chain.

25.1 Literature Review on the GVC and Value-Added Trade Hummels et al. (2001) firstly calculated one country’s added value gained from the international production chain, and defined the indicators to measure the vertical division of labor. Later, based on the world input–output table, Timmer et al. (2012) established an analysis of global value chain income. Under this framework, global GDP could be decomposed into the global value chain income of various countries, providing a consistent framework for a comprehensive and systematic understanding of the added value. Meanwhile, the demand-induced connotations make it very appropriate for added value-based research on effective exchange rate. According to the summary of Johnson (2014), seeing from one country’s general trade with other countries, one unit of exports does not generate one unit of added value, and the proportion of its exports to GDP will overestimate the impact of © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_25

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reduced exports on GDP resulting from declining foreign demand. Judging from bilateral trade with other countries, bilateral trade scale cannot be used for accurately measuring the added value gained by the home country from other countries, thus leading to possibly overestimated or underestimated impact of other countries’ demand on the home country. The Mundell-Fleming Model is an important framework for analyzing the spillover effect of international macroeconomic policies, but in terms of the model per se, as general trade scale is adopted for estimating foreign demand of one country, under the background of trade in value added, such estimation is not so accurate, and the trade in value added shall be introduced for recalculation.

25.2 Global Value Chain and Spillover Effect of International Macroeconomic Policies: The Expansion of the Mundell-Fleming Model How does the global value chain affect the spillover effect of macroeconomic policies? It can be investigated from both general trade and bilateral trade. Seeing from one country’s general trade with other countries, as long as there’re inputs from other countries, one unit of exports generally does not correspond to one unit of added value, suggesting that the proportion of exports from general trade to GDP will overestimate the impact of reduced exports on GDP resulting from declining foreign demand, and such overestimation almost exists in all countries but to different degrees. Bilateral trade is more complicated. Foreign demand measured based on exports may be overestimated or underestimated, as suggested by Johnson (2014). Assuming that there’re three countries A, B and C, A exports intermediate products to B for assembling, and B exports finished products to C after the assembling. Here, the export of products by A to B is actually driven by the demand of C, meaning that the exports from A to B measured based on traditional trade overestimates B’s demand for A, while the exports from A to C measured based on traditional trade underestimates C’s demand for A. Given that foreign demand may be overestimated or underestimated in the traditional trade flows, in this part, the Mundell-Fleming Model (M-F model) will be expanded by integrating the global value chain, thus analyzing the global value-based spillover effect of macroeconomic policies.

25.2.1 Scenario Analysis Foreign country’s demand for the home country is reflected in the exports from the home country to the foreign country, while the home country’s demand for the

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foreign country is revealed by the exports from the foreign country to the home country. Besides, the exports of the home country (foreign country) are determined by GDP and import demand elasticity of income of foreign country (home country). Such connotation is inherent in the IS curve (equilibrium in the goods market). A common IS curve for home country can be expressed as: Y = a0 + a1 Y − a2 i + a3 E − a4 Y + a5 Y∗ + G where a5 Y∗ decipts the relationship between exports and foreign demand. By analyzing the spillover effect of macroeconomic policies through global value chain-based trade, two different impacts may be identified, which are largely due to the differences between the GVC-based trade flows and traditional trade flows. If the GVC-based trade flows are understood as “true foreign demand” of one country, the foreign demand from the analysis of traditional trade flows will be overestimated or underestimated. In the M-F model, since the IS curve and the LM curve are used for describing product market and monetary market respectively, the above changes in foreign demand will have a direct influence on the IS curve. Naturally, it is also believed that global value chain trade will affect the mechanism of exchange rate’s action on trade, and exchange rate variables will affect the LM curve. But up to now, this influence is still not conclusive, so the changes in the IS curve alone are considered here. Meanwhile, since we mainly focus on the influence of value-added trade on spillover effects, capital opening-up degree will not be especially taken into account here. Instead, it is assumed that the capital flows freely, so the BP curve is actually a horizontal line. In specific discussions, scenario analysis is introduced, and the discussions on the M-F model could be classified into the following aspects: Baseline Scenario (Scenario 1, abbreviated as S1), Overestimation Scenario (Scenario 2, abbreviated as S2) and Underestimation Scenario (Scenario 3, abbreviated as S3). The Baseline Scenario describes the traditional M-F model; the Overestimation Scenario describes the M-F model when foreign demand is overestimated; and the Underestimation Scenario describes the M-F model when foreign demand is underestimated. (I)

Baseline Scenario (Scenario 1, abbreviated as S1)

The traditional M-F model is considered in the Baseline Scenario (S1). In S1, the home country’s IS curve and the foreign country’s IS* curve can be respectively written as: Y = a0 + a1 Y − a2 i + a3 E − a4 Y + a5 Y∗ + G Y∗ = a0∗ + a1∗ Y∗ − a2∗ i∗ + a3∗

1 − a4∗ Y∗ + a5∗ Y + G∗ E

where “*” represents the foreign country; a0 represents autonomy; a1 stands for the elasticity of consumption demand to income levels; a2 refers to the elasticity of

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investment demand to interest rates. Here, it is assumed that the capital flows freely, so the home country and the foreign country have the same interest rate, namely, i = i∗ ; a3 represents the elasticity of net exports to exchange rates; a4 stands for the elasticity of imports to the home country’s income level; a5 represents the elasticity of exports to the income level of the foreign countries. As the home country’s imports (exports) equal to the foreign country’s exports (imports), a4 = a5∗ , and a5 = a4∗ . Thus, the IS curve and the IS* curve can be further written as the relationship between interest rates and income: i= i∗ =

a0 + a3 E + a5 Y∗ + G a1 − a4 − a2 + Y a2 a2 a0∗ + a3∗ E1 + a5∗ Y + G∗ a∗ − a4∗ − a2∗ ∗ + 1 Y ∗ a2 a2∗

Therefore, the IS curve portrays the relationship between a country’s domestic income and interest rates. To be specific, the slope of the home country’s IS curve is determined by the elasticity of the home country’s consumption demand to income level, the elasticity of import to the home country’s income level, and the elasticity of the home country’s investment demand to interest rates; the slope of the foreign country’s IS curve is decided by the elasticity of the foreign country’s demand to income levels, the elasticity of imports to the foreign country’s income levels, and the elasticity of the foreign country’s investment demand to interest rates. Therefore, as we can see from the above equations, although a5 depicts the elasticity of the home country’s exports to foreign income, it is not directly reflected in the slope of the home country’s IS curve. However, it will affect the slope of foreign country’s IS curve. The variable a4∗ measures the elasticity of the foreign country’s imports to foreign income, which is equivalent to the elasticity of the home country’s export to foreign income. As a result, the slope of the IS* curve in S2 or S3 is different from that in S1, which will directly affect the home country’s income, and the results of macroeconomic policy coordination. (II)

Overestimation Scenario (Scenario 2, abbreviated as S2)

Some of the products exported from the home country to the foreign country will be exported to a third country or returned to the home country, leading to overestimated foreign demand measured by the scale of domestic exports to the foreign country, since part of the exports is not caused by foreign demand. This means that the import income elasticity of foreign country’s income Y∗ (or the home country’s income elasticity of exports) is overestimated; that is, the variable a5 = a4∗ in S2 is smaller than that in S1. Hence, the changes in the home country’s exports induced by foreign demand in S2 are smaller than those in S1, and the impact of changes in domestic income by changes in external demand is also smaller than that in S1, which means that the IS* curve in S2 is flatter than S1.

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(III)

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Underestimation Scenario (Scenario 3, abbreviated as S3)

The home country does not directly export finished products to a foreign country, but exports intermediate products to a third country, and then exports from the third country to the foreign country. In this case, the export trade between the home country and the third country is partially induced by the foreign country’s demand, but is not reflected in the export trade from the home country to the foreign country, so the foreign demand measured with the home country’s export scale to the foreign country is underestimated. Under such circumstance, the import income elasticity of foreign country’s income Y∗ (or the home country’s income elasticity of exports) is underestimated, and the variable a5 = a4∗ in S3 is greater than that in S1. Therefore, the changes in the home country’s exports induced by foreign demand in S3 are greater than those in S1, and the influence of changes in foreign demand on the home country’s income in S3 is also greater than that in S1, suggesting that the IS* curve in S3 is steeper than that in S1. Next, the differences and similarities in the M-F model in Overestimation Scenario (S2) and Underestimation Scenario (S3) under different exchange rate systems (fixed exchange rate system and floating exchange rate system) and in Baseline Scenario (S1) are compared respectively.

25.2.2 Fixed Exchange Rate System Fixed exchange rate system means that the home currency is pegged to a foreign currency to form a fixed exchange rate. If the home country’s exchange rate is subject to the appreciation pressure due to any change in the balance of payments, the home country’s central bank will buy foreign exchange in the foreign exchange market to avoid such appreciation. In the absence of write-off, the home currency’s liquidity will be released to move the LM curve to the right. If the home country’s exchange rate is subject to depreciation pressure, the home country’s central bank will sell foreign exchange in the foreign exchange market to avoid such depreciation, thus recovering the liquidity of the home currency and moving the LM curve to the left. Since it is assumed that the capital flows freely, the BP curve is a horizontal line, which will move up and down with the interest rate. In international coordination, different countries have different economic statuses and different policy preferences. In the same period, their monetary policies may be tightened or eased, which becomes quite obvious under current international situation. Due to unbalanced global recovery, among major developed economies, the U.S. Federal Reserve has given up quantitative easing and resorted to increased interest rate and monetary tightening. The Eurozone and Japan are still easing their monetary policies and adopting negative interest rate. Consequently, the effects of expansionary and tightened monetary policies and overestimated and underestimated foreign demand caused by the trade in the value added shall be analyzed.

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Expansionary Foreign Monetary Policies

In the traditional M-F model in S1, expansionary foreign monetary policies will drive the LM* curve to move to the right, leading to reduced foreign interest rate and increased foreign income. Reduced foreign interest rate will cause capital inflows from the foreign country to the home country, so the home currency is subject to appreciation pressure. Thus, in order to avoid the appreciation of exchange rate, the home country’s central bank will buy foreign exchange assets in the foreign exchange market, moving the LM curve to the right without write-off and reducing the home interest rate to the same level of foreign interest rate. At the same time, increased foreign income signifies a rise in the home country’s exports, so the home country’s IS curve moves to the right, and the home country’s income goes up, causing IS* curve to move to the right. In the end, both countries experience increased income. Therefore, under the fixed exchange rate system, expansionary foreign monetary policies will bring about a “synergy effect,” promoting the rise in the income of both the home country and the foreign country. In the Overestimation Scenario (S2), expansionary foreign monetary policies will drive the LM* curve to move to the right, which is consistent with that in S1 in terms of movement degree. However, as the IS* curve is flatter, foreign income resulting from the intersection of the IS* curve and the LM* curve is higher than that in S1. Nevertheless, due to small foreign income elasticity of imports in S2, an offset occurs. The home country’s exports induced by increased foreign income in S2 are not greater than those in S1, so the international balance of payments in S2 is consistent with that in S1. As a result, expansionary foreign monetary policies in S2 will also bring about a “synergy effect,” and the spillover effect of this policy in S2 remains the same with that in S1. In the Underestimation Scenario (S3), expansionary foreign monetary policies will drive the LM* curve to move rightwards, which is consistent with that in S1 in terms of movement degree. However, as the IS* curve is steeper, foreign income resulting from the intersection of the IS* curve and the LM* curve is lower than that in S1. Nevertheless, due to small foreign income elasticity of imports in S3, an offset occurs. As the exports in S3 are not less than those in S1, balance of payments in S3 is consistent with that in S1. Therefore, just like S2, expansionary foreign monetary policies in S3 will also bring about a “synergy effect,” and the spillover effect of this policy in S3 remains the same with that in S1. (II)

Expansionary Foreign Fiscal Policies

In the traditional M-F model in S1, expansionary foreign fiscal policies will drive the IS* curve to move to the right, leading to increased foreign interest rate and increased foreign income. Increased foreign interest rate will cause capital outflows from the home country to the foreign country, so the home currency is subject to depreciation pressure. Thus, in order to stabilize the home currency’s exchange rate, the home country’s central bank will sell foreign exchange assets to avoid such depreciation, moving the home country’s LM curve to the left and reducing the home country’s income. At the same time, increased foreign income signifies a rise in foreign demand

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and in the home country’s exports to the foreign country, so the home country’s IS curve moves to the right, and the home country’s income goes up. If the increase in the home country’s income induced by increased foreign demand does not suffice to make up for the reduction in the home country’s income caused by increased interest rate, expansionary foreign fiscal policies will lead to a decrease in the home country’s income, which in turn reduces the imports of foreign products through foreign demand channels, driving IS* curve to move rightwards, undermining the effect of expansionary foreign fiscal policies, and bringing down the foreign country’s income. This is the so-called effect of “beggar-thy-neighbor.” In the Overestimation Scenario (S2), expansionary foreign fiscal policies will drive the IS* curve to move to the right, and the resulting increased foreign income and increased interest rate are the same as those in S1. However, since the foreign country’s income elasticity of imports in S2 is less than that in S1, the home country’s imports caused by increased income in S2 will also be not as high as those in S1, and the effect of expansionary foreign fiscal policies on the rise of the home country’s income in S2 is less than that in S1. Meanwhile, the effect of increased interest rate resulting from expansionary foreign fiscal policies on the reduction of the home country’s income in S2 is the same with that in S1. As such, the home country’s income in S2 tends to deteriorate more than that in S1. Hence, there is a higher possibility of the effect of “beggar-thy-neighbor” in S2 than in S1. In the Underestimation Scenario (S3), expansionary foreign monetary policies also bring about increased foreign income and increased interest rate, which are almost the same as those in S1. However, since foreign income elasticity of imports in S3 is greater than that in S1, the imports from the home country resulting from increased income in S3 will also be higher than those in S1, and the home country’s export scale to the foreign country in S3 is higher than that in S1, thus enhancing the home country’s income. Meanwhile, the effect of increased interest rate resulting from expansionary foreign fiscal policies on the reduction of the home country’s income in S3 is the same as that in S1. As such, the home country’s income in S3 tends to deteriorate less possibly than that in S1. Hence, there is a lower possibility of the effect of “beggar-thy-neighbor” in S3 than in S1. (III)

Expansionary Domestic Monetary Policies

Expansionary domestic monetary policies will drive the LM curve to move rightwards and bring down the home country’s interest rate, forcing the capital to flow from the home country to the foreign country and posing a threat of depreciation to the home currency. In order to stabilize the interest rate, the home country’s central bank will sell foreign exchange reserves, driving the LM curve to move leftwards to the initial position. As such, under the fixed exchange rate system, expansionary domestic monetary policies will not work, which is true to S1, S2 and S3. (IV)

Expansionary Domestic Fiscal Policies

In the Baseline Scenario (S1), expansionary domestic fiscal policies will drive the IS curve to move to the right, leading to the increase in the home country’s interest rate and income. The home country’s increased interest rate will cause the capital

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to flow from the foreign country to the home country, so the home currency is subject to appreciation pressure. Thus, the home country’s central bank will buy foreign exchange assets in the foreign exchange market to stabilize exchange rate and increase the home country’s money supply, moving the LM curve to the right. At the same time, the home country’s increased income signifies a rise in the imports from foreign country, so the home country’s IS* curve moves to the right, and the foreign country’s income goes up. Thus, increased foreign demand will also stimulate the rise in the home country’s exports, causing the home country’s IS curve to further move to the right. Therefore, expansionary domestic fiscal policies will increase the income of both the home country and the foreign country, and the increase in the home country’s income will be greater than that in the closed economy. As a result, expansionary domestic fiscal policies will contribute to the effectuation of “synergy effect.” In the Overestimation Scenario (S2), expansionary domestic fiscal policies will also drive the IS curve to move to the right, and bring about the increase in the home country’s interest rate and income. The interest rate influence channel in S2 remains the same as S1. The influence on income varies in these two scenarios. Besides, although this policy also drives the IS* curve to move rightwards and further increase foreign income, due to smaller foreign income elasticity of imports in S2 than that in S1, the home country’s export rise caused by increased foreign income in S2 s also less than that in S1. Hence, the home country’s IS curve moves rightwards to a smaller degree in S2, and the increase in the home country’s income in S2 is smaller than that in S1. As a result, expansionary domestic fiscal policies in S2 also contribute to the effectuation of the “synergy effect”, but its policy effect is not as significant as that in S1. In the Underestimation Scenario (S3), expansionary domestic fiscal policies bring about the increase in the home country’s interest rate and income. The influence on interest rate in S3 is similar to that in S1, but the influence on income varies. As the foreign income elasticity of imports in S3 is greater than that in S1, the rise in the home country’s exports resulting from increased foreign income induced by expansionary domestic fiscal policies in S3 is greater than that in S1. Hence, the home country’s IS curve in S3 moves rightwards to a greater degree, and the increase in the home country’s income in S3 is greater than that in S1. Hence, “synergy effect” in S3 is more significant. (V)

Tight Foreign Monetary Policies

In the traditional M-F model in S1, tight foreign monetary policies will drive the LM* curve to move leftwards, and bring about increased foreign interest rate and reduced foreign income. Increased foreign interest rate will cause the capital to flow from home country to foreign country, and the home currency is thus subject to depreciation pressure. In order to avoid exchange rate depreciation, the home country’s central bank will sell foreign exchange assets in the foreign exchange market, driving the LM curve to move leftwards without write-off and upgrading the home country’s interest rate to the same level as foreign country’s interest rate. Meanwhile, reduced foreign income also suggests a decline in the home country’s exports. Thus, the home

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country’s IS curve moves rightwards, and the home country’s income also reduces, driving the IS* curve to move leftwards. Finally, both countries witness the decrease in income. Therefore, under the fixed exchange rate system, tight foreign monetary policies have a “synergy effect,” and will have a negative influence on the home country’s economy, bringing down the home country’s income. In the Overestimation Scenario (S2), monetary tightening in the foreign country will drive the LM* curve to move leftwards, whose movement degree is the same as that in S1. However, as the IS* curve is flatter, the foreign income gained from the intersection of the IS* curve and the LM* curve in S2 is lower than that in S1. Nevertheless, due to smaller foreign income elasticity of imports, an offset occurs. The reduction in the home country’s exports caused by reduced foreign income in S2is not more than that in S1. As such, balance of payments in S2 is the same with that in S1. Hence, the monetary tightening in the foreign country in S2 cause a “synergy effect,” exerting a negative influence on the home country’s economy, but the reduction in the home country’s income in S2 is the same with that in S1. The expansionary monetary policy in the foreign country will move the LM * curve rightwards, and the scale of this movement is the same as that in S1. However, because the IS * curve is steeper, which made the foreign income obtained by the intersection of the IS * curve and the LM * curve lower than that in S1. However, due to the high elasticity of foreign import income in S3, the two offset each other, and the export of S3 is not less than S1. In this way, the balance of payments is consistent with S1. Therefore, like S2, the monetary policy of foreign expansion under S3 will also bring about a “synergy effect,” and the spillover effect of this policy is not different from S1. In the Underestimation Scenario (S3), monetary tightening in the foreign country will drive the LM* curve to move leftwards, whose movement degree is the same as that in S1, bringing down a decline in foreign income. However, since the IS* curve is steeper, the foreign income gained from the intersection of the IS* curve and the LM* curve in S3 is higher than that in S1. Nevertheless, due to larger foreign income elasticity of imports in S3, the reduction in the home country’s exports caused by reduced foreign income in S3 is not less than that in S1, so the balance of payments in S3 is the same as that in S1. As a result, just like S2, the monetary tightening in the foreign country in S3 also bring about a “synergy effect,” and the spillover effect of such policies remains the same as that in S1. (VI)

Tight Foreign Fiscal Policies

In the traditional M-F model in S1, tight foreign fiscal policies drive the IS* curve to move leftwards, thus bringing down foreign interest rate and foreign income concurrently. Reduced foreign interest rate signifies that the capital will flow from foreign country to home country, and the home currency is subject to appreciation pressure. In order to stabilize the home currency’s exchange rate, the home country’s central bank will purchase foreign exchange assets and release the liquidity of home currency, driving the home country’s LM curve to move rightwards and upregulating the home country’s income. Reduced foreign income suggests a decline in foreign demand, and a reduction in the home country’s exports to the foreign country, thus

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driving the home country’s IS curve to move leftwards and bringing down the home country’s income. If these two effects counteract to bring down the home country’s income, the fiscal tightening in the foreign country will exacerbate foreign country’s contractionary effect and further bring down foreign income. In this case, the fiscal tightening in the foreign country will cause greater contractionary effects to both the home country and the foreign country, leading to the effect of “beggar-thy-neighbor.” In the Overestimation Scenario (S2), the fiscal tightening in the foreign country will drive the IS* curve to move leftwards, and the resulting reduction in foreign income and foreign interest rate in S2 is no different from that in S1. However, due to smaller foreign income elasticity of imports in S2 than that in S1, the reduction in the home country’s imports caused by reduced income in S2 is smaller than that in S1, and the reduction in the home country’s income resulting from the fiscal tightening in the foreign country in S2 is smaller than that in S1. Meanwhile, the effect of reduced interest rate caused by the fiscal tightening in the foreign country on the rise of the home country’s income in S2 is also the same as S1. Therefore, the home country’s income tends to deteriorate less possibly in S2 than in S1. Hence, there is a lower possibility of the effect of “beggar-thy-neighbor” in S2 than in S1. In the Underestimation Scenario (S3), reduced foreign income and reduced foreign interest rate caused by the fiscal tightening in the foreign country in S3 are not different from those in S1. However, due to larger foreign income elasticity of imports in S3 than that in S1, the reduction in the home country’s imports caused by reduced income in S3 will be smaller than that in S1, and the reduction in the home country’s export scale to the foreign country in S3 is greater than that in S1, thus reducing the home country’s income. At the same time, the effect of reduced interest rate caused by the fiscal tightening in the foreign country on the rise of home country’s income in S3 is the same with that in S1. Therefore, the home country’s income tends to deteriorate more possibly in S3 than in S1. Hence, there is a higher possibility of the effect of “beggar-thy-neighbor” in S3 than in S1. (VII)

Tight Domestic Monetary Policies

The home country’s tight monetary policies will drive the LM curve to move leftwards and upregulate the home country’s interest rate, which causes the capital to flow from foreign country to home country, and posing a threat of appreciation to the home currency. In order to stabilize exchange rate, the home country’s central bank will buy foreign exchange and release the liquidity of home currency, driving the LM curve to move rightwards to the initial position. As such, under the fixed exchange rate system, the home country’s tight monetary policies do not work, which is true to S1, S2 and S3. (VIII)

Tight Domestic Fiscal Policies

In the Baseline Scenario (S1), the home country’s tight fiscal policies will drive the IS curve to move leftwards, bringing down the home country’s interest rate and income. The reduction in the home country’s interest rate will cause the capital to flow from home country to foreign country and pose a threat of depreciation to the home currency. Thus, the home country’s central bank will sell foreign exchange

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in the foreign exchange market to stabilize exchange rate, bringing down the home country’s money supply and driving the LM curve to move leftwards. The reduction in the home country’s income will bring about the decrease in the imports from foreign country, causing the IS* curve to move leftwards and downregulating foreign income. In this case, the decrease in foreign demand further suppresses the home country’s exports, and the home country’s IS curve further moves leftwards. As a result, the home country’s tight fiscal policies will bring down the income of the home country and the foreign country at the same time, and the suppression of the home country’s income is greater than that in the closed economy. Hence, the home country’s tight fiscal policies will bring about a “synergy effect.” In the Overestimation Scenario (S2), the home country’s tight fiscal policies will also drive the IS curve to move leftwards, bringing down the home country’s interest rate and income. The influencing factors of interest rate in S2 remain the same with those in S1, but the influence on income varies. Although such policies also drive the IS* curve to move leftwards and bring down foreign income, due to smaller foreign income elasticity of imports in S2 than that in S1, the reduction in the home country’s exports caused by reduced foreign income in S2 is also less than that in S1. Hence, the home country’s IS curve moves leftwards to a smaller degree, and the decrease in the home country’s income in S2 is also less than that in S1. Therefore, the home country’s tight fiscal policies in S2 still bring about “synergy effect”, but the contractionary effect in S2 is less than that in S1. In the Underestimation Scenario (S3), the home country’s tight fiscal policies bring down the home country’s interest rate and income, and the influence on interest rate is similar to that in S1, but the influence on income is different. Due to larger foreign income elasticity of imports in S3 than that in S1, the reduction in the home country’s exports caused by decreased foreign income resulting from the home country’s tight fiscal policies in S3 will be greater than that in S1. In this way, the home country’s IS curve further moves leftwards to a greater degree, and the home country’s income reduction in S3 is higher than that in S1. Therefore, “synergy effect” in S3 leads to greater contractionary effect.

25.2.3 Floating Exchange Rate System Under the floating exchange rate system, capital flows will cause fluctuations in the exchange rate. At this time, both the central banks of the home country and the foreign country will not intervene in foreign exchange market. Hence, the movement of the LM curve will not be affected. However, since the exchange rate is a relative price, its fluctuations will have an influence on the international balance (trade) of payments, thus affecting the movement of the IS curve. It shall be noted that the influence of exchange rate on the trade level is assumed to be unchanged in the three scenarios.

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Expansionary Foreign Monetary Policies

In the traditional M-F model in S1, expansionary foreign monetary policies will drive the LM* curve to move rightwards, leading to a reduction in foreign interest rate and the flows of capital from foreign country to home country. Therefore, foreign currency is depreciated. Such depreciation leads to the increase in foreign exports, driving IS* curve to move rightwards and leading to a rise in foreign income; the appreciation of home currency causes a decrease in the home country’s exports, driving the IS curve to move leftwards and bringing down the home country’s income. Increased foreign income will lead to the increase in the home country’s imports, which makes up for the reduction in the home country’s income resulting from expansionary foreign monetary policies to some extent, but the income of the home country still declines. The decrease in the home country’s income will also bring about a certain degree of decrease in foreign income, thus undermining the promotion effect of expansionary foreign monetary policies on foreign income. In this way, expansionary foreign monetary policies under the floating exchange rate system actually produces an effect of “beggar-thy-neighbor.” In the Overestimation Scenario (S2), expansionary foreign monetary policies will drive the LM* curve to move rightwards. The foreign currency depreciates, while the home currency appreciates. The influence of the adjustment of the relative prices on the income of home country and foreign country in S2 is consistent with that in S1. However, the increase in the home country’s imports caused by increased foreign income in S2 is smaller than that in S1, restricting the rise of the home country’s income. In equilibrium, the reduction in the home country’s income in S2 is bigger than that in S1. However, when the reduction in the imports from foreign country caused by the home country’s decreased income in S2 is less than that in S1, the resulting decrease in foreign income in S2 is also smaller than that in S1.In this case, the home country’s income in S2 is less than that in S1, and the foreign country’s income in S2 is greater than that in S1. Therefore, expansionary foreign monetary policies will bring more trouble to neighboring countries, and the adverse impact on itself will decline, leading to a more significant effect of “beggar-thy-neighbor.” In the Underestimation Scenario (S3), expansionary foreign monetary policies will drive the LM* curve to move rightwards. The foreign currency depreciates, while the home currency appreciates. The influence of the adjustment of the relative prices on the income of home country and foreign country in S3 is consistent with that in S1. However, when the increase in the imports from the home country caused by increased foreign income in S3 is greater than that in S1, the resulting rise in the home country’s income in S3 is greater than that in S1, causing less adverse impact on foreign income. The income of both the home country and the foreign country in S3 is higher than that in S1, undermining the effect of “beggar-thy-neighbor” induced by expansionary foreign monetary policies. (II)

Expansionary Foreign Fiscal Policies

In the Baseline Scenario (S1), expansionary foreign fiscal policies will drive the IS* curve to move rightwards, thus leading to an increase in foreign interest rate

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and foreign income. Increased foreign interest rate will result in the appreciation of foreign currency and the depreciation of home currency, leading to the decline in the foreign country’s exports and the increase in the home country’s exports, and driving the IS* curve and the IS curve to move leftwards and rightwards, respectively. The home country’s income increases through two channels: the depreciation of home currency promotes exports; the rise in foreign income promotes the home country’s exports. After the home country’s income goes up, the IS* curve will further move rightwards, counteracting part of the reduction in foreign income induced by the appreciated foreign currency. As a result, expansionary foreign fiscal policies will increase the income of both the foreign country and the home country simultaneously, and achieve a “synergy effect.” In the Overestimation Scenario (S2), expansionary foreign fiscal policies will also drive the IS* curve to move rightwards. The ways how depreciated foreign currency and appreciated home currency affect the exports in S2 are the same as those in S1. However, due to smaller foreign income elasticity of imports in S2 than that in S1, the increase in the home country’s exports driven by foreign income in S2 is less than that in S1, so the rise in the home country’s income in S2 is not as much as that in S1. The “synergy effect” realized by expansionary foreign fiscal policies in S2 is less than that in S1. In the Underestimation Scenario (S3), expansionary foreign fiscal policies will also drive the IS* curve to move rightwards. The ways how depreciated foreign currency and appreciated home currency affect the exports in S3 are the same with those in S1. However, due to greater foreign income elasticity of imports in S3 than that in S1, the increase in the home country’s exports driven by foreign income in S3 is greater than that in S1, so the rise in the home country’s income in S3 is more than that in S1. The “synergy effect” realized by expansionary foreign fiscal policies in S3 is greater than that in S1. (III)

Expansionary Domestic Monetary Policies

In the Baseline Scenario (S1), expansionary domestic monetary policies will drive the LM curve to move rightwards and bring down the home country’s interest rate. As such, the capital flows from home country to foreign country, leading to the depreciation of home currency and the appreciation of foreign currency. The depreciation of home currency leads to the increase in the home country’s exports, driving the IS curve to move rightwards; the appreciation of foreign currency leads to the decrease in the foreign country’s exports, driving the IS* curve to move leftwards. As such, the home country’s income increases, while the foreign country’s income decreases. The reduction in the foreign country’s income causes a reduction in the products imported by the home country, thus deteriorating the exports of the home country, and driving the IS curve to move leftwards. The rise in the home country’s income driven by expansionary domestic monetary policies is not as much as that in the closed economy, simultaneously deteriorating the foreign country’s income and producing the effect of “beggar-thy-neighbor.” In the Overestimation Scenario (S2), expansionary domestic monetary policies also drive the LM curve to move rightwards, leading to the depreciation of the home

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currency and the appreciation of the foreign currency, as well as the increase in the home country’s income and the decrease in the foreign country’s income. However, due to smaller foreign income elasticity of imports in S2 than that in S1, the reduction in the home country’s exports caused by the foreign country’s reduced income in S2 is not as large as that in S1, and the income losses inflicted on the home country are not as much as those in S1. Nevertheless, the rise in foreign country’s exports induced by the home country’s increased income in S2 is not as much as that in S1, and the reduction in the foreign country’s income in S2 is greater than that in S1. As a result, expansionary domestic monetary policies will bring more trouble to neighboring countries, and the adverse impact on itself will decline, leading to a more significant effect of “beggar-thy-neighbor” in S2 than in S1. In the Underestimation Scenario (S3), expansionary domestic monetary policies also drive the LM curve to move rightwards, leading to the depreciation of home currency and the appreciation of foreign currency, as well as the increase in the home country’s income and the decrease in the foreign country’s income. However, due to larger foreign income elasticity of imports in S3 than that in S1, the reduction in the home country’s exports caused by the foreign country’s reduced income in S3 is larger than that in S1, and the income losses inflicted on the home country are greater than those in S1. Meanwhile, the rise in foreign country’s exports induced by the home country’s increased income in S3 is greater than that in S1, and the reduction in the foreign country’s income in S3 is not as much as that in S1. As a result, expansionary domestic monetary policies will bring more trouble to itself, and the adverse impact on neighboring countries will decline, leading to a less significant effect of “beggar-thy-neighbor” in S3 than in S1. (IV)

Expansionary Domestic Fiscal Policies

In the Baseline Scenario (S1), expansionary domestic fiscal policies will drive the IS curve to move rightwards, leading to a rise in the home country’s interest rate and causing the capital to flow to the home country. Hence, the home currency will appreciate, while the foreign currency will depreciate. The appreciation of home currency causes the IS curve to move leftwards, and the home country’s income decreases; the depreciation of foreign currency drives the IS* curve to move rightwards, and the foreign country’s income goes up. The rise in the foreign country’s income will upregulate the home country’s imports, and then make up for the loss in the home country’s income caused by the appreciation of home currency. In equilibrium, expansionary domestic fiscal policies will lead to a higher income of both the home country and the foreign country than the initial level, thus producing the “synergy effect.” In the Overestimation Scenario (S2), expansionary domestic fiscal policies also lead to the appreciation of the home currency and the depreciation of the foreign currency, further causing the reduction in the home country’s income and the rise in the foreign country’s income. However, due to smaller foreign income elasticity of imports in S2 than that in S1, the increase in the home country’s exports caused by the foreign country’s increased income in S2 is smaller than that in S1, and the home country’s ultimate income in S2 is not as much as that in S1. Hence, the “synergy

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effect” of expansionary domestic fiscal policies in S2 is not as significant as that in S1. In the Underestimation Scenario (S3), expansionary domestic fiscal policies also lead to the appreciation of the home currency and the depreciation of the foreign currency, and further cause a reduction in the home country’s income and a rise in the foreign country’s income. However, due to larger foreign income elasticity of imports in S3 than that in S1, the rise in the home country’s exports induced by increased foreign income in S3 is greater than that in S1, and the home country’s ultimate income in S3 is higher than that in S1. Therefore, the synergy effect of expansionary domestic fiscal policies in S3 is more significant than that in S1. (V)

Tight Foreign Monetary Policies

In the traditional M-D model in S1, the monetary tightening in the foreign country will drive the LM* curve to move leftwards, increase foreign country’s interest rate, and cause the capital to flow from home country to foreign country, leading to the appreciation of the foreign currency. Appreciated foreign currency brings about a reduction in the foreign country’s exports, further driving the IS* curve to move leftwards and causing a reduction in the foreign country’s income; depreciated home currency brings about a rise in the home country’s exports, driving the IS curve to move rightwards and causing a rise in the home country’s income. However, the reduction in foreign country’s income will drive the decrease in the imports from the home country, which undermines the rise in the home country’s income due to the depreciation of home currency to some extent. If these two effects counteract to bring down the home country’s income, the foreign country’s income will be further reduced. At this time, the tightness of foreign monetary policies will be greater than that in the closed economy. Therefore, expansionary foreign monetary policies under the floating exchange rate system actually produce an effect of “beggar-thyneighbor.” In the Overestimation Scenario (S2), the monetary tightening in the foreign country will drive the LM* curve to move leftwards, and cause the appreciation of the foreign currency and the depreciation of the home currency. The influence of the adjustment of such relative price on the changes in the income of foreign country and home country in S2 is consistent with that in S1. However, due to the smaller reduction in the home country’s imports caused by the foreign country’s reduced income in S2 than that in S1, the reduction in the home country’s income is restricted. In equilibrium, there is a lower possibility in the reduction in the home country’s income in S2 than that in S1, and the reduction in the foreign country’s income in S2 is also less than that in S1. Thus, the tightness of foreign monetary policies in S2will be less than that in S1. As a result, the effect of “beggar-thy-neighbor” in S2 is less significant than that in S1. In the Underestimation Scenario (S3), the monetary tightening in the foreign country will drive the LM* curve to move leftwards, and cause the appreciation of foreign currency and the depreciation of home currency. The influence of the adjustment of such relative price on the changes in the income of foreign country and home country in S3 is consistent with that in S1. However, due to the greater

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reduction in the home country’s imports caused by the foreign country’s reduced income in S3 than that in S1, the home country’s income is further reduced. In equilibrium, there is a higher possibility in the reduction in the home country’s income in S3 than that in S1, and the reduction in the foreign country’s income in S3 is also higher than that in S1. Thus, the tightness of foreign monetary policies in S3 will be greater than that in S1. As a result, the effect of “beggar-thy-neighbor” in S3 is more significant than that in S1. (VI)

Tight Foreign Fiscal Policies

In the Baseline Scenario (S1), the fiscal tightening in the foreign country will drive the IS* curve to move leftwards, and bring down the foreign country’s interest rate and income. The reduction in the foreign country’s interest rate will lead to the depreciation of foreign currency and the appreciation of home currency, and result in the rise in the foreign country’s exports and the reduction in the home country’s exports, further driving the IS* curve and IS curve to move rightwards and leftwards, respectively. The home country’s income decreases through two channels: the appreciation of home currency suppresses the exports; the reduction in the foreign country’s income brings down the home country’s exports. The reduction in the home country’s income further drives the IS* curve to move leftwards, thus counteracting part of the rise in the foreign country’s income induced by depreciated foreign currency. As a result, the fiscal tightening in the foreign country will reduce the income of foreign country and home country simultaneously, producing a “synergy effect”. In the Overestimation Scenario (S2), the fiscal tightening in the foreign country will also drive the IS* curve to move leftwards. The ways how appreciated foreign currency and depreciated home currency affect the exports in S2 are the same with those in S1. However, due to smaller foreign income elasticity of imports in S2 than that in S1, the reduction in the home country’s exports induced by reduced foreign income in S2 is less than that in S1, so the reduction in the home country’s income in S2 is less significant than that in S1, and the adverse impact on foreign income in S2 is not as significant as that in S1. The “synergy effect” brought by the fiscal tightening in the foreign country in S2 is less than that in S1. In the Underestimation Scenario (S3), the fiscal tightening in the foreign country will also drive the IS* curve to move leftwards. The ways how appreciated foreign currency and depreciated home currency affect the exports in S3 are the same with those in S1. However, due to larger foreign income elasticity of imports in S3 than that in S1, the reduction in the home country’s exports caused by reduced foreign income in S3 is greater than that in S1. Therefore, the reduction in the home country’s income in S3 outnumbers that in S1. The “synergy effect” brought by the fiscal tightening in the foreign country in S3 is greater than that in S1. (VII)

Tight Domestic Monetary Policies

In the Baseline Scenario (S1), the home country’s tight monetary policies will drive the LM curve to move leftwards, and lead to the rise in the home country’s interest rate. Thus, the capital flows from foreign country to home country, leading to the appreciation of home currency and the depreciation of foreign currency. Appreciated

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home currency brings about the deterioration of the home country’s exports, driving the IS curve to move leftwards; depreciated foreign currency contributes to increased exports of foreign country, driving IS* to move rightwards. As such, the home country’s income decreases, while the foreign country’s income goes up. However, the reduction in the home country’s income leads to the reduction in the products imported from foreign country, as well as the decrease in foreign country’s income. If such influence counteracts with the rise in income induced by previous depreciated foreign currency, foreign country’s income will also decrease. At this time, the home country’s tight monetary policies will produce an effect of “beggar-thy-neighbor.” In the Overestimation Scenario (S2), the home country’s tight monetary policies will also drive the LM curve to move leftwards, and result in the appreciation of home currency and the depreciation of foreign currency, thus causing a reduction in the home country’s income and a rise in the foreign country’s income. However, the reduction in the products imported from foreign country induced by the home country’s reduced income in S2 is not as much as that in S1, and the reduction in the foreign country’s income is also smaller, which counteracts with possible decrease in the income increase effect caused by depreciated foreign currency. There is a lower possibility in the reduction of foreign country’s income in S2 than that in S1, so the effect of “beggar-thy-neighbor” in S2 is less significant than that in S1. In the Underestimation Scenario (S3), the home country’s tight monetary policies will also drive the LM curve to move leftwards, and result in the appreciation of home currency and the depreciation of foreign currency, thus causing a reduction in the home country’s income and a rise in the foreign country’s income. However, the reduction in the products imported from foreign country induced by the home country’s reduced income in S3 is greater than that in S1, and the reduction in the foreign country’s income is also greater, which counteracts with possible increase in the income increase effect caused by depreciated foreign currency. There is a higher possibility in the reduction of foreign country’s income in S3 than that in S1, so the effect of “beggar-thy-neighbor” in S3 is more significant than that in S1. (VIII)

Tight Domestic Fiscal Policies

In the Baseline Scenario (S1), the home country’s tight fiscal policies will drive the IS curve to move leftwards, and result in the reduction of the home country’s income. Also, they will bring down the home country’s interest rate and cause the capital to flow to foreign country. Thus, the home currency will depreciate, while the foreign currency will appreciate. Depreciated home currency drives the IS curve to move rightwards and results in the increase in the home country’s income; appreciated foreign currency drives the IS* curve to move leftwards and results in the decrease in the foreign country’s income. Reduced foreign income will cause the reduction of the home country’s imports, and undermine the rise in the home country’s income induced by depreciated home currency. In equilibrium, the home country’s tight fiscal policies will cause the income of home country and foreign country to be lower than the initial level, thus producing the “synergy effect”. In the Overestimation Scenario (S2), the home country’s tight fiscal policies also result in the depreciation of home currency and the appreciation of foreign currency,

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thus leading to the rise in the home country’s income and the reduction of the foreign country’s income. However, due to smaller foreign income elasticity of imports in S2 than that in S1, the reduction of the home country’s exports induced by reduced foreign income in S2 is less than that in S1, so the home country’s ultimate income in S2 is higher than that in S1. Therefore, the “synergy effect” of the home country’s tight fiscal policies in S2 is not as significant as that in S1. In the Underestimation Scenario (S3), the home country’s tight fiscal policies also result in the depreciation of the home currency and the appreciation of the foreign currency, thus leading to the rise in the home country’s income and the reduction of the foreign country’s income. However, due to larger foreign income elasticity of imports in S3 than that in S1, the reduction of the home country’s exports induced by reduced foreign income in S3 is greater than that in S1, so the home country’s ultimate income in S3 is lower than that in S1. Thus, the “synergy effect” of the home country’s tight fiscal policies in S3 is more significant than that in S1.

25.3 Analysis of Spillover Effect of Macroeconomic Policies Based on the Global Value Chain In the previous part, the influence of extended global value chain network on the spillover effect of macroeconomic policies is theoretically discussed, and the changes in the spillover effect of monetary and fiscal policies in the case of overestimated and underestimated demand are concluded. In this part, the value-added foreign demand is calculated and compared with the foreign demand measured in general export trade, especially those with China, Japan, the United States and Germany, thus remeasuring the spillover effect of these national macroeconomic policies.

25.3.1 Methods of Calculating Added Value In order to calculate the weight of the value-added real effective exchange rate, the added value of all countries across the world shall be measured. The framework proposed by Timmer et al. (2014) is adopted for measuring the added value. As stated in the previous literature review, the calculation method of Timmer et al. essentially decomposes the GDP of all countries into their value-added income based on the global value chain, which is very complete and comprehensive. Theoretically, this model helps fully decompose the final consumption of this country based on the international fragmentation of production, thus tracking all direct and indirect links of production. In real operation, this model is based on the world input–output table, and uses the Leontief Inverse Matrix to get all direct and indirect production activities to match the final demand. Added value refers to the product value in each link of the international fragmentation of production.

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According to the definitions and forms of the world input–output table, the following equation can be obtained: X = AX + Y

(25.1)

where: X = {X 1 , X 2 , . . . X n } , X n refers to the total output of a country; Yi = {Yi1 , Yi2 , . . . Yik } , Y represents the final demand, and Y ik stands for Country k’s final demand for the products of Country i. ⎡

A11 ⎢ A21 A=⎢ ⎣ ... An1

A12 A22 ... An2

... ... ... ...

⎤ A1n A2n ⎥ ⎥ ... ⎦ Ann

(25.2)

where A refers to the direct consumption coefficient matrix; Aij represents the intermediate product of Country i consumed by Country j. Therefore, Eq. (25.2) can be written as: ⎡ ⎤ ⎡ ⎤⎡ ⎤ Y X1 A11 . . . A1n X 1 ⎢ 11 ⎣ . . . ⎦ = ⎣ . . . . . . . . . ⎦⎣ . . . ⎦⎢ . . . ⎣ ... Xn An1 . . . Ann Xm Yn1 ⎡

+ ... ... +

... ... ... ...

⎤ Y1n ... ⎥ ⎥ ... ⎦ Ynn

(25.3)

Therefore: ⎡

⎤ ⎡ ⎤ ⎡ ⎤−1 ⎡ ⎤ X1 X 11 . . . X 1n 1 − A11 . . . −A1n Y11 . . . Y1n ⎣...⎦ = ⎣ ... ... ... ⎦ = ⎣ ... ... ... ⎦ ⎣ ... ... ... ⎦ Xn X n1 . . . X nn −An1 . . . 1 − Ann Yn1 . . . Ynn (25.4) ⎡ ⎤⎡ ⎤ B11 . . . B1n Y11 . . . Y1n = ⎣ . . . . . . . . . ⎦⎣ . . . . . . . . . ⎦ Bn1 . . . Bnn Yn1 . . . Ynn V is defined as the proportion of added value in the total output of each unit. According to Eq. (25.4), the added value used for measuring the weight of effective exchange rate can be obtained from the following equation: GV C = V (1 − A)−1 Y = V BY where B is the Leontief Inverse Matrix. V can be written as:

(25.5)

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⎡

V1 ⎢ 0 V =⎢ ⎣... 0

0 V2 ... 0

... ... ... ...

⎤ 0 0 ⎥ ⎥ ...⎦ Vk

⎤ rk1 0 . . . 0 ⎢ 0 r2 . . . 0 ⎥ 1 2 n k ⎥ where: Vk = ⎢ ⎣ . . . . . . . . . . . . ⎦, rk , rk , …, rk refers to the proportion of the added 0 0 . . . rkn value of various industries of Country k in the total output. According to Eq. (25.2), it can be known that the proportion of added value shall meet the following restraint: ⎡

 A ji Vi = u I − j

(25.6)

where u refers to the column vector with a value of 1.

25.3.2 Stylized Facts in General Trade and Their Influence on the Spillover Effect of Macroeconomic Policies This part analyzes the foreign demand scale and traditional export scale of total GVC for major countries (China, the United States, Japan and Germany). According to our research, in terms of general trade, the foreign demands of all countries measured at the traditional export scale are overestimated to different degrees in 2011. Among them, the United States has the lowest overestimation rate, which is about 3% overestimated. The highest overestimation rate is Germany, which is about 45% overestimated. China is overestimated by 23% and Japan is overestimated by 14%. In the Overestimation Scenario, under the fixed exchange rate system (represented by China), expansionary foreign monetary policies produce the same “synergy effect” with that in the Baseline Scenario, but expansionary foreign fiscal policies will cause higher effect of “beggar-thy-neighbor,” which is mainly due to the fact that the role of foreign demand has actually been overestimated. Therefore, the demand effect brought by expansionary foreign fiscal policies is less significant than that in the Baseline Scenario. Meanwhile, expansionary fiscal policies will also cause the rise in the foreign country’s interest rate and the outflows of China’s capital. By selling foreign exchange reserve, the central bank stabilizes the currency, which is a tightening monetary policy for the home country. This means that for China, on the premise of stabilizing the exchange rate, worldwide fiscal expansions have a greater negative impact on China considering the impact of the global value chain.

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Meanwhile, expansionary domestic monetary policies still do not work, while the “synergy effect” of the expansionary domestic fiscal policies is even lower. Therefore, for China, expansionary domestic fiscal policies have a lower positive influence than that in the Baseline Scenario when considering the impact of the global value chain. On the other hand, monetary tightening in the foreign country has the same “synergy effect” as that in the Baseline Scenario. Fiscal tightening in the foreign country leads to less effect of “beggar-thy-neighbor,” which is attributed to the fact that reduced foreign demand has less influence on China than that in the Baseline Scenario when the role of foreign demand is overestimated. Hence, when considering the influence of the global value chain, worldwide fiscal tightening has less influence on China. In the case of maintaining fixed exchange rate system, domestic monetary tightening policies do not work, and domestic fiscal tightening policies produce a larger negative influence on foreign countries than that in the Baseline Scenario. In the Overestimation Scenario, under the floating exchange rate system (represented by the United States, Germany and Japan), expansionary foreign monetary policies will bring about a higher effect of “beggar-thy-neighbor,” which is due to the negative influence of depreciated foreign currency on the home country’s exports. Meanwhile, since foreign demand is overestimated, the exports brought by expanded foreign demand are less than those in the Baseline Scenario, suggesting that countries with floating exchange rates are subject to greater negative influence of expansionary foreign fiscal policies when taking into account the global value chain. At the same time, expansionary foreign fiscal policies have less influence on the home country’s exports than in the Baseline Scenario, so its “synergy effect” is also less than that in the Baseline Scenario. In general, on the premise of considering the influence of the global value chain, expansionary foreign monetary and fiscal policies have more negative influence and less positive influence on the home country. Similarly, expansionary domestic monetary and fiscal policies are more prone to cause losses to other countries and bring trouble to itself. In the Overestimation Scenario, tightening policies in the foreign country have less negative effect than in the Baseline Scenario.

25.3.3 Stylized Facts in Bilateral Trade and Their Influence on the Spillover Effect of Macroeconomic Policies First of all, China and its major trade partners are compared based on the GVC and traditional indicators. A basic trend is that China’s exports to the countries in the East Asian value chain are overestimated, while its exports to the United States and Europe are underestimated, suggesting that the demand of East Asian countries is not so important to China, and more important is the demand of the United States and Europe. The following is a specific analysis of the influence of this fact on the spillover effect of macroeconomic policies. In terms of the relations between China and the United States, it is generally believed that the RMB against the U.S. dollar is relatively stable, so the fixed exchange

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rate system can be adopted, which corresponds to the underestimation scenario. In this case, loose monetary policies released by the U.S Federal Reserve have a positive spillover effect on China, producing a “synergy effect”. Meanwhile, expansionary fiscal policies also signify a lower effect of “beggar-thy-neighbor,” and have a smaller influence on China. As the dollar is floating to the currencies of other countries, the floating exchange rate system may be adopted between China and other countries. Corresponding to European countries is the Underestimated Scenario, so the loose monetary policies in the Eurozone corresponds to a lower effect of “beggar-thyneighbor,” and expansionary monetary policies have relatively little influence on China, while expansionary fiscal policies in the Eurozone produce a higher “synergy effect,” and play a more positive role in China’s economy. In contrast, corresponding to East Asian countries is the Overestimation Scenario, where the main focus is on Japan’s policies. Japan’s loose monetary policies bring about a higher effect of “beggar-thy-neighbor.” Expansionary monetary policies have a greater negative influence on China, with a lower “synergy effect,” and plays a small role in China’s economy. Thus, it can be seen that after the adjustment of added value, the spillover effect of the macroeconomic policies of the United States and Europe on China has improved, while the spillover effect of the macroeconomic policies of Japan on China has deteriorated. Next, Japan and its major trade partners are compared based on the GVC and traditional indicators. In contrast, Japan’s exports to East Asia including China and South Korea have been overestimated, its exports to the United States have also been slightly overestimated, and its exports to major European countries (including Germany, France and Italy) are underestimated. That is to say, the demands of China and the United States are overestimated in the traditional trade, but the demand of Europe is underestimated. The influence of such fact on the spillover effect of macroeconomic policies will be analyzed below. Taking the United States’ macroeconomic policies as an example to analyze the overestimation scenario. China will be in a similar situation. The expansionary monetary policies of the United States will bring about a higher effect of “beggarthy-neighbor,” causing greater negative impact on Japan. The expansionary fiscal policies will lead to a lower “synergy effect,” and have fewer positive effects on the Japanese economy. European demand for Japan is underestimated, signifying that those expansionary monetary policies in the Eurozone will bring about a lower effect of “beggar-thy-neighbor,” and will have less negative impact on Japan; the expansionary fiscal policies will bring a higher “synergy effect” and have a greater positive effect on the Japanese economy. It can be seen that after the adjustment of added value, the spillover effect of macroeconomic policies of the United States and China on Japan has improved, while the spillover effect of macroeconomic policies of the Eurozone on Japan has deteriorated. Next, the United States and its major trade partners are compared based on the GVC and traditional indicators. The export scales of the United States’ two traditional trade partners, namely, Canada and Mexico in the NAFTA, are significantly overestimated, and their foreign demands are not so critical to the United States as

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measured with the traditional export scale. The United States’ exports to the Asia– Pacific region and Europe are underestimated, reflecting the underestimation of the foreign demands of China, Japan and European countries. This means that when analyzing the spillover effect of macroeconomic policies of major regions on the United States, the underestimation scenario shall be considered. Against the backdrop of a floating exchange rate system, the underestimation means that expansionary foreign monetary policies will bring about a lower “beggarthy-neighbor” effect, while expansionary foreign fiscal policies will cause a higher “synergy effect.” Thus, it can be seen that after the adjustment of added value, the spillover effects of macroeconomic policies of China, Japan and Eurozone countries on the United States have relatively improved. Finally, Germany and its major trade partners are compared based on the GVC and traditional indicators. The Germany’s exports to the United States and Japan are underestimated, its exports to China are overestimated, and its exports to major Eurozone countries are significantly overestimated. The spillover effects of the macroeconomic policies of the United States and Japan should be viewed from the perspective of underestimation. Taking the United States as an example for analysis, the situation in Japan will be similar. For the United States, its expansionary monetary policies will bring about a lower “beggarthy-neighbor” effect and its expansionary fiscal policies will result in a higher “synergy effect.” China’s spillover effect shall be considered from the perspective of overestimation. China’s expansionary monetary policies will bring about a higher “beggar-thy-neighbor” effect, and its expansionary fiscal policies will cause a lower “synergy effect.” Germany’s exchange rate to major European countries is fixed, so the overestimation scenario shall be considered under the fixed exchange rate system. Considering that the monetary policies in Eurozone are common, only fiscal policies are analyzed. Expansionary fiscal policies of other European countries will bring about a higher “beggar-thy-neighbor” effect. On the whole, after the adjustment of added value, the spillover effects of macroeconomic policies of the United States and Japan on Germany have relatively improved, while the spillover effects of macroeconomic policies of China and other European countries have deteriorated. Since the macroeconomic policy coordination always involves the interaction of policies between two countries, whether the spillover effect of each other’s policies increases or decreases after the adjustment of added value needs to be analyzed. If the negative spillover effect is also improved, the coordination between two countries will be smoother; if one country’s negative spillover effect improves but the other country’s negative spillover effect deteriorates, it is difficult to implement such coordination. According to our research, the spillover effects between China and the United States, the United States and Japan, and the United States and Europe witness two-way improvement, while the spillover effects between China and Japan, China and Europe, and Japan and Europe improve for one party but deteriorate for the other. Therefore, more attention shall be paid to the coordination between these countries. Seeing from economic coordination between China and the United States, the most important bilateral coordination, the introduction of global value chain provides a new

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perspective. In terms of the U.S. Federal Reserve’s previous quantitative easing policies and current interest rate raising policies, the spillover effects of the RMB against the U.S. dollar under the fixed and floating exchange rates are considered. Under the fixed exchange rate system, the spillover effects from the traditional perspective and from the value chain perspective are consistent. That is to say, expansionary monetary policies have a positive influence on China, while monetary tightening exerts a negative influence on China. However, under the floating exchange rate system, the spillover effects from the traditional perspective and from the value chain perspective vary a bit. Expansionary monetary policies have a lower negative influence on China from the value chain perspective, while monetary tightening also produces a lower positive influence from the value chain perspective. This means that during the U.S. Federal Reserve’s quantitative easing period, the negative influence of the floating exchange rate is not as significant as that from the traditional perspective. If other costs in the fixed exchange rate are considered, the floating exchange rate can be a policy choice. During the U.S Federal Reserve’s interest rate raising period, more attention shall be paid to the communication, warning and coordination of relevant policies, since the spillover effect under the fixed exchange rate system is negative and the positive influence of the floating exchange rate system is smaller than that from the traditional perspective.

References Hummels, D., J. Ishiib, and K. Yi. 2001. The Nature and Growth of Vertical Specialization in world Trade. Journal of International Economics 54 (1): 75–96. Johnson, R. 2014. Five Facts about Value-Added Exports and Implications for Macroeconomics and Trade Research. Journal of Economic Perspectives 28 (2): 119–142. Timmer, M.P., A. Erumban, B. Los, R. Stehrer, and G. de Vries. 2012. New Measures of European Competitiveness: A Global Value Chain Perspective. WIOD Working Paper, 9. Timmer, et al. 2014. Slicing Up Global Value Chains. Journal of Economic Perspectives 28 (2): 99–118.

Chapter 26

Three Key Topics for the G20 Macroeconomic Policy Coordination: Integration, Imbalance and Spillover

We pointed out earlier that macroeconomic policy coordination is based on global economy integration while unsymmetrical influence and the spillover effects existing in the integration, particularly unsymmetrical spillovers of macroeconomic policies in the condition of an imbalanced global economy. It finally leads to the conflicts of macroeconomic policies and the need for coordination.

26.1 Global Rebalancing Analysis Based on the Global Value Chain Undoubtedly, global economic rebalancing can reduce policy conflicts between different countries fundamentally, resolving the problem of macroeconomic policy coordination thoroughly as a result. Linkages between economies of each country and their interaction shall also be taken into account naturally. Based on the perspective of the global value chain, a solution can be exactly provided to rebalance the global economy.

26.1.1 Overview of Global Rebalancing Before the 2008 global financial crisis, the focus of research was on whether global imbalances were sustainable. The G20 hadn’t truly acted as a global economic policy coordination platform at that time, and there was no substantial measure taken to realize global rebalancing. At the beginning of the financial crisis, global imbalances were regarded as a primary cause of the global financial crisis, so the focus of research turned to the relationship between global imbalances and crises. Since crisis response and avoidance of another financial crisis turned into the core of G20 international policy coordination at that time, global rebalancing occupied an important place. © China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_26

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However, since 2014, the distribution of imbalances has become relatively scattered in general, the policy discussion on rebalancing in the G20 has gradually weakened, and the current growth framework gradually centers on the discussion of mediumand long-term growth. Summing up, however, it’s easy to find that the discussion on rebalancing is always conducted when the rise of global imbalances is sizable, and it cannot be ruled out that the scale of global imbalances will rise again. Therefore, further promotion of global rebalancing studies needs to be carried out. In fact, an assumption implies in abovementioned discussion on rebalancing, namely imbalances truly exist. As to international discussion on post-crisis rebalancing, major rebalancing pressure comes from the deficit countries like the United States on the surplus countries like China, Japan and Germany, which is mainly because the United States believes that excess liquidity under the background of global imbalances plays a critical role in the United States subprime mortgage crisis, and the main imbalances have their origin in torsion conducted by the surplus countries. Obviously, although discussion on rebalancing is based on the global environment, bilateral or multilateral imbalances are a major concern during implementation. Generally speaking, economic imbalances in main countries from the global value chain perspective are not as huge as that of from a traditional perspective.

26.1.2 The Scale of Imbalances in Major Countries Based on the Global Value Chain This section compares the difference in the global imbalance scale from the perspective of traditional trade and that of value added based on the OECD-WTO TiVA database. It mainly studies the imbalance adjustment of China, Japan and Germany (as a surplus country) and the United States (as a deficit country), and analyzes the aggregate and the bilateral trades. There are normally two approaches in specific analysis—net exports and total exports. As for the first approach, net exports directly correspond to the current account balance based on the balance of international payments. Net exports are a critical item of the current account balance. Therefore, comparison and analysis of similarities and differences in net exports of traditional trade and the ones based on value added can be carried out. If the latter is lower than the former, then the balancing pressure is reduced. If the latter is higher than the former, then the balancing pressure rises. The second approach focuses on total exports (corresponding to surplus countries) or total imports (corresponding to deficit countries), which is mainly because a general understanding of causes of imbalances is surplus countries export much more than they import while deficit countries import much more than they export. Therefore, comparison and analysis of similarities and differences in total exports or imports of traditional trade and the ones based on value added can be carried out. If the latter is lower than the former, then the balancing

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pressure is reduced. If the latter is higher than the former, then the balancing pressure rises. (I)

Aggregate Trade

For analysis of aggregate trade, it should be made clear that there is no difference in net exports of traditional trade and the ones based on value added for general trade. The added value calculated by deducting exports from imports has been removed. Therefore, whether the added value is adjusted or not will not affect net exports. It means that the scale of imbalance measured by the current account balance will not change with the adjustment of value added. As a result, when aggregate trade analysis is conducted, value added only suits for the adjustment of total value (total exports or imports) rather than that of net value (net exports or imports), which is a major limitation of this approach in its application to rebalancing. Consequently, the adjustment of value added of total exports or imports is going to be studied next. China as well as Japan and Germany, the next two countries to be discussed, are all surplus countries, so total exports of these countries will be the main focus. A country’s exports normally contain imported contents more or less, unless it only exports products that are made entirely at home. Therefore, the value added of exports to China is generally less than the total exports, and thus the total export based on the adjustment of value added will be less than that of traditional exports. However, different countries have different adjustment ranges due to their differences in the value-added rate. The larger the adjustment range, the less rebalancing pressure there is from the perspective of the global value chain. China: China’s total exports based on value-added adjustment have significantly declined. It can be concluded from the sample data collected in recent years; China’s total exports based on value-added adjustment is around 65% of traditional ones. It means that China has a lower value-added rate in its exports, and value added of the home-made products contributes less to export products. After the financial crisis, China’s exports had a negative growth in 2009 and a positive one since then, exceeding its 2008 level. Its exports based on GVC also had a negative growth in 2009, but declined not as much as traditional ones. The value-added rate of China’s exports is on the rise with the value-added rate of 61% in 2005 and 66% in 2011. In general, the rebalancing pressure of China’s exports calculated by value-added export was reduced. Japan: Japan’s total exports based on value-added adjustment have declined with a degree smaller than China’s export adjustment. Japan’s total exports based on value-added adjustment is around 87% of traditional ones. It indicates that Japan’s value-added rate in its exports is higher than that of China, and domestic value added contributes more to export products. Just like China, after the financial crisis, Japan also had a negative growth in 2009, and its total exports in 2011 exceeded its export level in 2008. The changes of its exports based on GVC were basically consistent with that of normal ones. Unlike China, the value-added rate of Japan’s exports was declining with the value-added rate up to 92% in 1995 and 83% in 2011, which was probably caused by an international division of labor brought by GVC in East

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Asia. Generally speaking, the rebalancing pressure of Japan’s exports calculated by value-added export was reduced, but not as much as China’s. Germany: Germany’s total exports based on value-added adjustment have declined with an adjustment range between that of China and Japan. Germany’s total exports based on value-added adjustment is around 75% of traditional ones. Germany’s value-added rate in its exports is about 10% higher than that of China and 10% lower than that of Japan, and its domestic value added contributes relatively more to export products. After the financial crisis, the absolute size of Germany’s exports declined. But by 2011, the size of exports in both the traditional and GVC perspectives had not yet returned to the 2008 level. From the changing characteristics of time series, the value-added rate of Germany’s exports was declining like Japan with the valueadded rate of 82% in 1995 and merely 71% in 2011, which is probably caused by the EU integration process. In general, the rebalancing pressure of Germany’s exports calculated by value-added export was reduced, which was lower than China but higher than Japan. The United States: The United States is a primary deficit country, so its total imports will be the focus. The U.S. total imports based on value-added adjustment has declined. Its total imports are around 85% of traditional ones. It means that 15% of the value-added contribution in U.S. imports comes from itself. U.S. imports declined after the financial crisis, and the imports in 2011 surpassed the ones in 2008. In general, the rebalancing pressure of U.S. imports was reduced from the GVC perspective, but it is not as good as surplus countries like China and Germany, and a bit better than Japan. It shows that, from the perspective of aggregate trade and the total exports/imports, the rebalancing pressures in descending order are: Japan, the United States, Germany, and China. The export analysis of aggregate trade based on GVC indicates that the rebalancing pressure on China has been significantly reduced. (II)

Bilateral Trade

Sino-US trade imbalance is an important part of global rebalancing. When discussing the issue of rebalancing, both China and the United States pay attention to both the export scale and China’s trade surplus with the United States (from the perspective of net exports). Therefore, it’s necessary to analyze from both of the two perspectives. From the perspective of export scale, China’s exports to the United States have been revised down from the perspective of value added. Its exports after valueadded adjustment are averagely 65% of the ones from the traditional perspective. The adjustment scale is consistent with that of China’s exports to all countries. It means that China’s exports to the U.S. have been decreased by almost a third after value-added adjustment. From the perspective of net imports, the imports after valueadded adjustment are averagely 64% of the ones in traditional perspective, which means China’s net exports to the U.S. have been decreased by a third as well. As a result, both the scale of export and net exports measured by value-added adjustments mean a decline in the scale of Sino-US imbalance and a reduction in the Sino-US rebalancing pressure.

26.1 Global Rebalancing Analysis Based on the Global Value Chain

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The China-U.S. bilateral trade imbalance is improved from the GVC perspective, whereas both the Japan-U.S. and the Germany-U.S. bilateral trade imbalances are worsened. Firstly, Japan-U.S. bilateral trade is analyzed. From the perspective of exports, Japan’s exports to the U.S. from the perspective of value added is slightly higher than traditional exports. Averagely, exports after value-added adjustment are 105% of traditional exports, which means Japan’s exports to the U.S. obtain a high value added, which is greater than Japan’s total exports to the United States, and some of the value added to Japan from the U.S. comes through with other countries’ exports to the United States (e.g., China). It implies that Japan’s exports to the U.S. rise slightly rather than decline after value-added adjustment. In terms of net exports, it’s averagely 167% of traditional exports, which is quite impressing, and it was even up to 279% in 2009 and 200% in 2011 after the financial crisis, which means Japan’s exports to the U.S. after value-added adjustment has their peak of around 2.8 times of Japan-U.S. traditional trade. Hence, both exports and net imports measured by value-added adjustment mean the rise of Japan-U.S. trade imbalance and rebalancing pressure. Next, Germany-U.S. bilateral trade is analyzed. From the perspective of exports, Germany’s exports to the U.S. in the perspective of value added is slightly lower than traditional exports. Averagely, exports after value-added adjustment are 97% of traditional exports, which is higher than all countries with an average figure of 75%. Germany’s exports to the U.S. obtain a high added value, which is greater than Germany’s total exports to other countries. After value-added adjustment, Germany’s exports to the U.S. slightly decline without obvious differences. From the perspective of net exports, they are far higher than traditional net exports after value-added adjustment, with an average figure of 121% of traditional net exports, which means the value added that accounts for 20% of exports comes through with other countries’ exports to the United States (e.g., other E.U. countries). Therefore, exports measured by value-added adjustment mean that German-US rebalancing pressure remains largely unchanged while net exports mean German-US rebalancing pressure rises. It shows that, from the perspective of bilateral trade of exports and net exports to the U.S., the rebalancing pressures in descending order are: Japan, Germany and China. The analysis of bilateral trade based on the GVC indicates that the rebalancing pressure between China and the United States has been significantly reduced while the rebalancing pressures between Japan and the United States, and Germany and the United States have risen.

26.1.3 Summary and Prospects The improvement of value-added trade data based on the GVC provides a new perspective and thought for discussing rebalancing policy research. The analysis of the major surplus countries (China, Japan and Germany) and major deficit countries

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(the United States) shows that the rebalancing pressure faced by China is overestimated from the current traditional perspective, while that of Japan, Germany and the United States is underestimated. Potential impact of the GVC should be fully taken into consideration when discussing rebalancing issues. At present, the OECD-WTO TiVA database has been updated to version 2.0. However, the value-added trade data based on the GVC hasn’t been widely used in the discussion of rebalancing due to the following hampering factors: Firstly, it’s easy to see from the above analysis that among the surplus countries, only China’s rebalancing pressure has decreased, while Japan and Germany’s rebalancing pressures have both increased. In a sense, the decrease of China’s rebalancing pressure essentially means a transfer of pressure to these countries, which makes it difficult to reach a consensus on this perspective at the international level and is bad for international coordination. Secondly, in terms of data frequency, the OECD-WTO TiVA database is used as the mainstream data presently. The data is based on the World Input–Output Table (WIOT) which is annual data and only updated to 2011. Therefore, there is a lag and low frequency in the data. Traditional trade data, in contrast, is more suitable for policy study since it is updated timely and can be acquired easily. Thirdly, the value-added data only changes bilateral trade pattern but has no impact on the overall current account balance. It’s very difficult for the value-added data to play its role in the more conventional model of discussing imbalances based on the current account as a share of GDP.

26.2 The Spillover Effects of QE in Developed Economies: An Analysis Based on the GVAR Model It should be noted that all countries formulate macroeconomic adjustment policies mainly based on the trend of internal economic indicators, with less consideration of the impact of their own policies on external economy. Obviously, it will inevitably lead to policy spillover and conflict effects when the global economy is becoming more and more interconnected. Monetary policy is one of the most important macroeconomic policies. As a policy measure in a special period, the transmission mechanism and effects of QE face greater controversy and uncertainty compared with conventional monetary policies. In the context of globalization, the spillover effects and risks of this policy on other economies have become an important topic on such international economic governance platforms as the G20. On the other hand, it is a new monetary policy model, and the traditional theoretical models have obvious limitations on analyzing the domestic transmission mechanism and international spillover effects of the policy, so it’s necessary to conduct an in-depth analysis of the specific connotation, domestic mechanism of action and effects, cross-border spillover channels and practical experience of QE while traditional theories can’t be used directly. These

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issues are going to be discussed in the following section, and the Global Vector Autoregressive Modeling (GVAR) approach will be used to measure and calculate the spillover effect of QE.

26.2.1 Characteristics of the Implementation of QE in Developed Economies (I)

QE Versus Conventional Monetary Policies

In traditional monetary theory, the most important transmission mechanism is adjusting investment and consumption activities through the price effect of interest rate. However, the marginal effect of this channel has been very limited when interest rates are near zero. More importantly, since the financial system and a large number of assets held by private sectors have suffered catastrophic losses, the credit markets need to reassess financial institutions and borrowers’ solvency credibility, and meanwhile market uncertainty is rising, resulting in the broken of the traditionally stable and reliable interconnection between official and market interest rates. That is to say, the transmission mechanism of conventional monetary policies doesn’t work to some extent. A remarkable fact reflecting this phenomenon is that although short-term interest rates in the interbank market are close to zero, and long-term government bond yields have reached historic low levels, the actual private sector borrowing rates have declined relatively limited, resulting in a widening gap between corporate borrowing rates and federal funds. The difference between interest rates widened and remained at a relatively high level. Against this background, theoretical analysis and practical experience of conventional monetary policies can’t be used directly because transmission channels and spillover effects of the non-standard QE tool rely on the specific form of QE and the financial market environment. (II)

Forms of QE

After the financial crisis, due to different concrete issues faced by different countries, diverse features of the financial systems and differences existing in the judgment of the central banks of each country, non-conventional monetary policies implemented by developed economies have no standardized plans but include various forms. These monetary policies are mainly divided into two types. One is reflected in policy communication, namely the so-called forward guidance. When short-term interest rates are close to 0%, the central banks would communicate with the public on future monetary policy trends to directly influence the public’s expectations for interest rates in a longer term, thus having an impact on longer-term interest rates. In this way, forward-looking guidance will finally have an impact on the aggregate demand of the real economy. The second type of monetary tools directly operates on the asset side of the balance sheet of a central bank, which is the core of QE.

444

(III)

26 Three Key Topics for the G20 Macroeconomic Policy …

Operation Scale of QE

QE mainly operates directly on the asset side of the balance sheet of a central bank. Therefore, since the crisis, changes of size and composition of central bank balance sheets in developed economies reflect the operation scope of QE. Image 3–10 shows the expansion process of central bank assets in major developed economies from 2007 to 2012. Compared to early 2007, central bank assets in major developed economies have expanded by 170%. The assets of the Bank of England have increased by 3.3 times, the assets of the Federal Reserve have increased by 2.3 times, the European Central Bank has increased by 1.7 times, and the Bank of Japan has doubled.

26.2.2 Theoretical Mechanism and Effectiveness Evaluation of QE (I)

Challenges of Financial Crisis to Conventional Monetary Policies

The financial crisis raised serious questions about the effectiveness of conventional monetary policies for post-event clean-up. Firstly, according to the traditional Taylor rule, the short-term nominal interest rate should fall below zero when developed economies face deep recessions. However, economies always hold cash with a zerointerest rate, so market interest rate always faces a lower zero limit. It means that conventional monetary policies don’t work. Secondly, since the financial system and the large number of assets held by the private sectors have suffered catastrophic losses, the credit markets need to reassess the solvency credibility of financial institutions and borrowers. Meanwhile, market uncertainty is rising, resulting in the broken of the traditionally stable and reliable interconnection between official and market interest rates. That is to say, the transmission mechanism of conventional monetary policies has partially failed. A remarkable fact reflecting this phenomenon is that although short-term interest rates in the interbank market are close to zero, and long-term government bond yields have reached historic low levels, the actual private sector borrowing rates have declined relatively limited, resulting in a widening gap between corporate borrowing rates and federal funds. The difference between interest rates widened and remained at a relatively high level. (II)

Mechanism of QE: Channels of Asset Portfolio Re-allocation Effect

The core mechanism of QE lies in that the central bank swaps highly liquid monetary assets for other assets of the public or private sectors to change the composition of the assets of the relevant entities, leading to changes in their behaviors, namely the so-called asset portfolio re-allocation effect. Its effectiveness depends on how assets swap affects the cost and availability of credit in the private sectors, which in turn affects the aggregate demand in the economy. What’s more, it is also worth considering how they influence the composition of assets purchased by the central

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445

bank, and whether the effectiveness is different if the central bank purchases private sector assets or public sector bonds, etc. There are two channels through which the central bank’s asset portfolio reallocation effect of purchasing long-term government bonds affects domestic demand. The first one is to reduce the government bond yields to lower the term premium as well as other long-term risky assets yields, which will increase the wealth of the private sector and ease credit constraints, thus spurring domestic demand. The second one is to increase the availability of bank credit by increasing banks’ liquid assets to spur domestic demand. (III)

Empirical Evidence of the Effect of QE

According to relevant studies, QE can indeed lower long-term interest rates, which has a positive effect on economic recovery. However, in recent five years after the financial crisis, developed economies have a weak economic recovery, which indicates that the forces of recession are powerful or QE has little effect. If so, it is probably because monetary policy itself has limited effect, and is also constrained by decreasing returns, so other measures need to be implemented to promote economic growth. A relevant question is, even if QE is effective, what might be the cost? A notable issue is that large-scale excess reserves have decreased the scale of interbank lending in the interbank market, resulting in a malfunctioning market. How will central banks reduce this high level of reserves and avoid high inflation when the economy recovers? Furthermore, central banks’ purchases of large amount of government bonds facilitates government debt rising, which means fiscal, financial and inflation crisis, and the spillover effects on global economy will also be produced through this channel.

26.2.3 Analysis of QE Spillover Effects Theoretically, for open economies integrating into the global economic and financial system, their macroeconomic and financial fluctuations will cause changes in economic and financial structure, economic and financial aggregate and prices of related assets and goods, and then directly impact economies that have close economic and financial connections with them. Adjustment changes of economies impacted by them will further outwardly impact other related economies, and such impact will ultimately indirectly spread to many countries and even the world. Form this point of view, the economic fluctuation of any open economies will have large or small spillover effects. After the financial crisis, the Federal Reserve carried out an unprecendented superloose monetary policy. Eurozone, Britain, Japan and other countries followed one by one, which resulted in the flood of international liquidity and great impact on financial variables like global market interest rates, exchange rates, asset prices, capital liquidity and bulk commodity price directly or indirectly. On the other hand,

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there is significant heterogeneity in the policy shock that other economies face from QE of developed economies, which depends on the state of macroeconomic cycles of specific countries, market maturity and relevant regulatory policies. The following part firstly reviews the theoretical analysis of the spillover effects of monetary policies in general and then analyzes the spillover effects of QE in detail. (I)

Theoretical Analysis of the Spillover Effects of Monetary Policies

Traditional analysis emphasizes the impact of a country’s monetary policy changes on relative prices, output, and income through the current account of the balance of payments, as well as the flow of capital under the balance of payments caused by interest differentials, to achieve the interest rate parity on top of the elimination of risk premiums, taxes, and transaction costs. Quantity theory of money normally summarizes the transmission mechanism as reverse-flow transmission mechanism, and then price-arbitrage mechanism. Keynesian economics summarizes it as interest rate adjustment of absorption and portfolio-balance channels. 1.

Traditional Theories About the Spillover Effects of Monetary Policies

Traditionally, exchange rate arrangements have been considered to play a key role in the international transmission of currency shocks. It is because, according to relevant theories, currency shocks under the floating exchange rate system are insulated to a large extent. Under capital control, an increased supply of a nation’s currency leads to a rising current account deficit, and then devaluation of the nominal exchange rate always follows, and thus the effects on monetary income and expenditure are counteracted via current account. The nature and expectations of monetary policy independence establish a theoretical foundation for the move to a floating international monetary system. However, recent experience shows that floating exchange rates do not produce the insulating effect predicted by previous theories (Rey 2013). Theoretically, explanations for macroeconomic interdependence under a floating exchange rate system include accelerating capital flows, exchange rate expectations, policy interdependence, etc. According to the Mundell-Fleming-Dornbusch (MFD) model, impacted by floating exchange rate and free capital flow, an increased supply of a nation’s currency not only leads to a rising current account deficit and then following devaluation of the nominal exchange rate, but also results in the nation’s exchange rates going down and following capital outflow, which, in turn, devalues the currency and has a deflation on foreign economies. 2.

New Open Economy Macroeconomics

Although the MFD model acts as a mainstream tool in policy analysis of new open economy macroeconomics, it also has some limitations. Firstly, it hasn’t established a money demand function, saving and investment behavior and balance of trade formula based on intertemporal optimization behavior. Secondly, expectation in the model is static. Thirdly, the impact of the size of a country on the effectiveness of monetary and financial policies hasn’t been considered. Fourthly, it only considers

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equilibrium in the sense of capital flow, without considering stock in equilibrium. Fifthly, the model hasn’t considered the wealth effect after cross-border allocation of assets and currencies. Since the 1980s, many researchers have been remedying above limitations from different perspectives and revising the theoretical model of international transmission under the open economy. A direction is incorporating rational expectations and uncertainties into the two-country general equilibrium model of full employment and price flexibility. The other direction is introducing monopolistic competition, nominal rigidities and other conditions demonstrating market imperfections in intertemporal optimization model. (II)

Spillover Effects of QE Implementation and Exit

Analysis above shows that, different from conventional monetary policies, QE directly or indirectly changes risk premium and liquidity supply of multiple market interest rates through expanding the central bank’s balance sheet to change the asset structure of the financial system when the short-term interest rates are near zero. The financial market takes the center stage of delivering the asset reallocation effects. More and more scholars have put more effort and concern into the key role of the financial market in the international transmission and amplification of macroeconomic shocks since the global financial and economic crisis caused by the United States subprime mortgage crisis. For example, Krugman (2008) suggests that traditional multi-country business cycle models lack a critical “international finance multiplier” by which financial shocks in one country affect investment both in the original country and in other countries through financial or balance sheet linkages.

26.2.4 Analysis of the Spillover Effects of QE with the GVAR Model During the actual evaluation of the spillover effects of QE, dynamic characteristics, a kind of feedback phenomenon that economic shocks back and forth between economies, of the spillover effects are a character that deserves extra attention. The feedback is not only geographical but also cross-sector, integrating interaction effects between real economy and financial sectors. For example, shock transmission from real economy will affect the financial market and lead to cross-border transmission in the financial market, which will lead to further reactions of real economy in turn. At the current level of globalization achieved by the major economies, the economic and financial data observed at any point in time across have interweaved multiple feedback processes that differ in temporal frequency. It is generally acknowledged that the feedback of real economy is slower than that of the financial market. With the changing times, almost all macroeconomics has become the macroeconomics of the open economy now. Governments, international financial organizations and transnational corporations have to consider the interdependence or the

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spillover effects among different economies when conducting policy analysis or risk management. Therefore, a new set of thoughts have been developed in the field of macro econometric modeling in recent years, which is called GVAR, the abbreviation for Global Vector Autoregressive. The GVAR approach is originally proposed by Pesaran, Schuermann and Weiner in 2004. Based on the country-specific VAR model, it is extended to be applied in analyzing the interplay among global economies. The first advantage of the GVAR model is that it keeps all technological strengths of the VAR model (as well as the VECM model developed based on the VAR model), including identification of long-term relationships and structure shock, structure and general shock reaction analysis, variance decomposition analysis, etc. The second advantage is that the models of all economies are interconnected under a consistent framework based on the trade matrix. Therefore, short-term and long-term interconnections between different variables can be manifested clearly. Both the long-term interconnection complying with economic theories and the short-term interconnection complying with data generating process can be statistically tested under the GVAR model framework. The third advantage is the model can be extended flexibly, which means the maintenance cost is relatively low. (I)

The GVAR Modeling

Considering a system with N economies, for any economy, the core setup of its standard VAP model of macro variables is connecting it with its multi-level lags in closed conditions. However, in the condition of openness, the macro variables of any economy are impacted by foreign variables. Therefore, the GVAR model reflecting interconnections between economies is a set of equations connected by exogenous variables. For each economy i = 1, . . . , N, the lags of foreign variables is added to the VAR model of its macro variables besides its own lags. The equation is as follows: yit = µi + λi t +

p 

Ais yi, t−s +

s=1

p  s=0

Bis y∗i, t−s +

p 

Cis dt−s + εit

(26.1)

s=0

where yit denotes a vector formed by k endogenous variables of country i. yit∗ denotes a vector formed by k endogenous variables relative to country i. Compared with yit , yit∗ is a weak exogenous variable. dt donates a vector formed by kd global variable. Different from yit∗ , dt is the same for all economies. In the GVAR model, foreign variables are set up to give it the most important factor of its structure features. yit∗ can be defined as the sum of foreign variables weighted according to bilateral coefficient. The equation is as follows: y∗it =

N  j=1

ωij yjt ,

N  j=1

ωij = 1, ∀i, j, ωij ≥ 0, ωii = 0

(26.2)

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These coefficients denote economy j’s impact on economy i. The weighted foreign variables relative to economy i capture the information of overall external environment of economy i. p  Cis dt−s + λi t + μi , denote the impact brought by global variables and Let hit = s=0

deterministic trend on macroeconomic variable i. Equation (26.1) can be rewritten as: p 

i0 zit =

is zi, t−s + hit + εit

(26.3)

s=1 



where zit = (yit , yit∗ ) , i0 = (Ik , −Bi0 ), is = (Ais , −Bis ). Vector yt =    (y1t , y2t , . . . yNt ) formed by zit and all endogenous variables of the system can also be denoted with following equation:  zit = Wi yt , Wi =

· · · Ik · · · 0 ωi1 Ik · · · ωii Ik · · · ωi N Ik 0

 (26.4)

Replace the above equation back to Eq. (26.3), we now obtain  Wi =

· · · Ik · · · 0 ωi1 Ik · · · ωii Ik · · · ωi N Ik 0

p 

i0 Wi yt =



is Wi yt−s + h it + εit

(26.5)

s=1

G 0 yt =

p 

G s yt−s + h it + εit

s=1

i0 Wi is ak × N k matrix. Stack above VARX equations of individual country,  and let G 0 = W1 10 , . . . , W N N 0 , we now obtain G 0 yt =

p 

G s yt−s +h t + εt

(26.6)

s=1

By multiplying Eq. (26.6) by G −1 0 from both sides, we can obtain a regimeswitching global vector autoregressive model, namely the GVAR model. yt =

p  s=1

Fs yt−s +h˜ t + u t

(26.7)

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−1 −1 ˜ where Fs = G −1 0 G s , h = G 0 h t , u t = G 0 εt . The derivation above shows that the GVAR model’s parameters can be derived based on the VARX model of individual countries. Equation (26.7) is equivalent to a simple VAR model for yt , but model parameter matrix is subject to multiple constraints. From Eq. (26.7), we can use standard VAR technological tools to conduct analysis and studies.

(II)

Basic Structure and Estimation Process of the GVAR Toolbox 2.0

The GVAR model is essentially used to integrate the VAR models of each country through a traffic matrix formed by economic transactions between countries. Therefore, the model is still based on the country-specific VAR model. However, it is different from the closed economy model, that is to say, foreign variables are added to the VAR models of each country. The development of the GVAR model contains three specific ways of interconnections between countries. Firstly, domestic variables rely on the current values and lagged values of foreign variables. Secondly, variables of countries are affected by global weak exogenous variables (e.g., oil price), resulting in the existence of interconnections. Thirdly, a country may be affected by current shocks suffered by another country, and the shocks reflect in the covariance matrix of errors. This study will use the GVAR Toolbox 2.0 as an econometric analysis tool to evaluate the spillover effects of major economies. This toolbox has a great advantage, which means different variables can be weighted with different weights. Financial weight and other weights can be selected besides trade weight. The model covers 25 countries in the world, including the U.S., Japan, Britain and China, as well as eight Eurozone countries including Germany, France, Italy, Spain, Netherlands, Belgium, Austria and Finland. Hence, it totally covers 33 countries with an output accounting for more than 90% of global output. Standard GVAR Toolbox 2.0 examines six endogenous variables of each country, namely real GDP, CPI inflation, real security price, short-term and long-term interest rates and real exchange rate. All these variables are sourced from the International Financial Statistics Databank of the IMF. What’s more, crude oil price is also added to the model as a global variable using WTI crude oil prices from the U.S. Energy Information Administration. Compared with the influence of other countries, crude oil prices are influenced greatly by American economy. Therefore, crude oil prices are set as an endogenous variable in the U.S. model while as a weak exogenous variable in other country’s models. (III) 1.

Calculation of the spillover effects of the U.S. QE Recognition of QE Shocks

Monetary policy shocks normally use short-term interest rates as a proxy variable. Since QE mechanism is different from that of conventional monetary policies, economies are normally constrained by interest rate of zero when it is used. Therefore, presently, the literature on the impact of quantitative easing policy usually uses other types of variables as proxy variables for monetary policy shocks.

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2.

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Data and Model

This part will use the GVAR Toolbox 2.0 to evaluate the spillover effects of the U.S. QE. The model uses monthly data collected from January 2005 to December 2013, and the built-in database of the GVAR Toolbox 2.0 covers the time interval. The main data source includes the IFS databank of the IMF and the IDB LMW database developed by Inter-American Development Bank. Quarterly frequency data are converted to monthly frequency using the Chow-Lin interpolation with reference to industrial output data. There are 13 economies, including China, the U.S., Britain, Japan and Eurozone. Compared with the built-in database of the GVAR Toolbox 2.0, it is a little bit more focused. Besides the U.S., all the other countries’ exchange rates use the nominal exchange rate of the direct quotation method against the U.S. dollar. The nominal effective exchange rate of the U.S. dollar is used in the American VARX model. All data are seasonally adjusted with the Census-X12 approach in the Eviews. The model of endogenous variables contained in each country’s VARX models are built in the following ways: Real GDP: yit = ln

G D Pit C P Iit

Inflation: πit = ln(C P Iit ) − ln(C P Ii,t−1 )  Real Stock Index: eqit = ln

E Q it C P Iit



Short-term interest rate: rits = 0.25 ∗ ln(1 + Rits /100) Long-term interest rate: ritl = 0.25 ∗ ln(1 + Ritl /100)  Exchange rate: exit = ln

E X it C P Iit



One of the core steps of the GVAR modeling is building external variables for each country. In the models used in this part, foreign variables corresponding to domestic variables of each country are weighted values of corresponding variables for other countries. Therefore, the selection of weighting methods relates to the way to grasp the economic relationship between nations. Weights based on trade links are the most widely used. Bilateral trade weight is based on total imports and exports of any two countries. The IMF DOTS database provides a good data source. Moreover, the external variables are calculated with fixed weights at each time point. Besides considering trade links between countries, the IMF CDIS database that reflects cross-border direct investment or the CPIS that reflects cross-border security investment can be used to demonstrate financial linkages between countries to establish a weight matrix based on financial linkages. Presently, in the CDIS

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database, China only reports foreign direct investment in China, excluding data of China’s direct investment in foreign countries. China has already announced its participation in the CPIS database, but it hasn’t released relevant data. Therefore, this paper establishes the weight matrix based on the summation of trade flow and foreign direct investment flow and based on which to calculate external variables of each country. To show the centrality of the U.S., only two external variables are set in the American VARX model: external real GDP and exchange rates of foreign countries’ currencies against the U.S. dollar, according to which, the U.S. will influence foreign economies, but will not be influenced by various factors of foreign economies. Compared with models of other countries, oil prices are treated as endogenous variables instead of weak externality in the VARX model of the U.S. After building the country-specific VARX model, it can be converted to the GVAR model using above-mentioned approach, and then the shock response function can be obtained based on the GVAR model. Relevant shocks are not orthogonal to each other, which makes it difficult to explain the shock response function. To estimate orthogonal shock response function, a series of zero constraint and symbolic constraint can be used to recognize exogenous shock on the Fed balance sheet, according to the approach put forward by Gambacorta et al. (2014). This distinction is important because there are also balance sheet changes that may be endogenous against other variables in the model. Some assumptions shall be proposed to recognize the Fed balance sheet. Firstly, this monetary shock has a lagged impact on economic growth and inflation. Secondly, the shock will not lead to VIX index rising, which reflects that QE plays a role in eliminating financial instability. A shock is defined as a financial market risk shock if it causes a rise in the VIX and an expansion of the balance sheet at the same time. For example, after Lehman Shock, the Fed bought a record amount of mortgage-backed securities to cope with rapid rising of financial market risks. Lehman Shock is not an exogenous monetary shock. 3.

Shock Response to QE

The GVAR Toolbox can be used to measure and calculate the shock response function of QE. The impact of a one-standard deviation of the Fed’s balance sheet expansion on the real GDP, CPI and VIX index of the United States indicates that a one-standard deviation of shock is equivalent to an expansion of the Fed’s balance sheet of about 3 percentage points. It can be seen that the real GDP and CPI of the United States have a positive response to QE, and the peak response values respectively reach about 0.02 and 0.05%. The VIX index has a real-time negative response on QE, and the response is very significant in three months. The significant response of the U.S. real economy and financial market to QE is the basis of its external spillover effects. From the shock response function of emerging economies to the U.S. QE, the US QE truly has significant spillover effects. The impulse response result shows that, because of closer financial linkages, the real GDP of developed economies has a slightly stronger response to the U.S. QE than

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that of most emerging economies, which mainly benefits from the stabilizing effect of QE on financial market risks. Emerging market economies also have significant response, but what they face is real exchange rate rising brought by QE shock, which will bring expenditure-switching effect to emerging market economies relying more on export market in some extent, and thus offset part of the positive effects of the U.S. QE. What’s more, the U.S. QE has a significant effect on global capital market. the maximum response coefficient of the stock index of these emerging economies is up to an average of 1.2%. The significant capital market effect is caused by the U.S. QE’s suppression on the uncertainty of in the financial market as well as the capital inflow caused by QE shock. Since the capital account has the lowest degree of openness among these economies, the maximum response coefficient of China’s stock index is also the lowest. Emerging economies with a higher degree of openness of capital account like Thailand, Malaysia and Indonesia have a better stock market response than developed economies. QE shock leads to the exchange rate rising in these economies. The actual exchange rate response range of economies like Eurozone, Malaysia, Indonesia, South Korea and other economies exceeds by 0.4%. Different actual exchange rate response range is not only related with capital inflow size but also related with currency policy response of different countries, macro prudential policies and exchange rate policies. 4.

Summary

From the GVAR analysis of the U.S. QE, it can be found that the U.S. QE has a greater impact on the financial market as well as the spillover via financial channels. In terms of the financial market, the U.S. QE can significantly reduce the VIX index and the uncertainty of the financial market represented by it. The VIX index reduction means valuation of risk conducted by financial institutions has changed. Therefore, there will be more risk-taking behaviors. That is to say, the U.S. is willing to take relatively greater risks to get higher returns. The capital market of emerging economies will be impacted positively only through expected channels. Moreover, the loose liquidity in the U.S. market also has a positive impact on the capital market of the emerging economies through capital flow channels via global financial institutions. In terms of the real economy, the impact on emerging economies is both positive and negative, and it is positive in general. In terms of positive impact, the U.S. EQ boosts capital price after stabilizing the financial market of the United States, driven by which household consumption expands in the United States, causing the expansion of overall domestic demand in the United States. The spillover of the U.S. domestic demand will have a positive effect on other economies. In terms of negative impact, QE shock also boosts a general appreciation of the real exchange rate, which will bring an expenditure conversion effect to emerging market economies relying more on export market, and thus offset part of the positive effects of the U.S. QE. What’s more, different economies are impacted by the U.S. QE in different degrees, which mainly depends on the degree of trade and financial linkages between different economies and the United States, capital account openness degree and

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monetary policy response ways of different economies. China has closer trade linkages with the United States, but the relative capital account openness is low. Meanwhile, its elasticity of exchange is smaller than other emerging economies. Therefore, compared with other emerging economies, China suffers the least financial impact from America’s loose monetary policy, and its real economy suffers medium shock among emerging economies.

26.3 International Coordination of Taxation on Multinational Corporations International fiscal policy coordination has previously focused more on the coordination of fiscal expenditure policies and less on the coordination of fiscal revenue policies. At present, as more significance has been attached to the latter, its focus has been mainly on the coordination of taxation on multinational corporations.

26.3.1 Necessity of International Coordination of Taxation on Multinational Corporations Cross-border taxation is becoming increasingly important. Economic globalization has led to a significant increase in the number of multinational corporations and a rapid growth of transnational economic activities. The economic activities of multinational corporations account for an increasingly greater proportion of the tax base of relevant economies, with increasingly important contribution to the fiscal revenue of the economies concerned. Since the 2008 financial crisis and the sovereign debt crisis in Europe in recent years, the fiscal balance of the economies concerned has been under great pressure, and the fiscal incentive to generate revenue has increased significantly. The different tax systems and tax rates of the economies in question have left room for multinational corporations to avoid taxes, leading to the erosion of their own tax base and disruption of the domestic and international economic order. The coordination of the taxation on multinational corporations is relatively highly practical. The transnational economic activities of multinational corporations result in the establishment of a specific cross-border value chain, specifically a regional or global value chain, which links related economies more closely together and becomes the common tax base of these economies, serving as the basis of international taxation policy coordination. The international coordination of taxation on multinational corporations has two main aspects, namely the exchange of tax information and the formulation of a unified international action plan to solve base erosion and profit shifting.

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26.3.2 International Coordination of Tax Information Exchange Information exchange is currently the main form of international tax collection and administration assistance. Automatic exchange of tax information, together with “special exchange” and “spontaneous exchange,” constitute the three main ways of exchanging tax information. The main categories of these special earnings include interest, dividends and royalty income; wages, salaries, allowances, bonuses and pension income; commissions and remuneration for services; as well as property gains and business income. International tax information exchange activities originated in Europe in the midnineteenth century, developed and applied in the 1970s, rapidly expanded after 2008, and ushered in an era of automatic global tax information exchange in 2014. (I)

Historical Evolution

The legal provisions of international tax information exchange can be traced back to around the middle of the nineteenth century. Belgium signed various tax treaties with France in 1843 and also with the Netherlands and Luxembourg in 1845, with one of the provisions being the exchange of registered tax information. The OECD Model Convention for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital (hereinafter referred to as the “OECD Model Tax Convention”, Article 26) provides for the exchange of information. The strengthening of tax information exchange between countries, although advocated by international organizations such as the League of Nations, the OECD, the UN and the European Union (EU), was not fully developed and applied until late 1970s. After 2008, the issue of exchanging tax information was included in the agenda of the G20. In 2010, the treaty was revised by the OECD based on international standards for the exchange of tax information. In 2011, with consensus made among the G20 countries, the treaty entered into force on June 1 and was aimed at “realizing a more automatic exchange of tax information between countries”. In 2013, the “Automatic Exchange of Information” (AEOI) was scheduled by the G20 to be implemented by the end of 2015. And in 2014, the G20 approved a global standard for AEOI based on the principle of reciprocity, and international taxation has since entered an era of fully promoting the Standard for Automatic Exchange of Financial Account Information (hereinafter referred to as the “Common Reporting Standard”/CRS). The AEOI had been implemented between the G20 countries by the end of 2015, and between the G20 members and other economies by the end of 2017 or 2018. In just five years, bank account information was shifted from being strictly confidential among banks to being shared among almost all of the world’s major financial centers, which was unimaginable in the past. Bilateral tax information exchange systems have long been the mainstay of international tax information coordination. In recent years, the more influential bilateral tax information exchange practices have been based primarily on the Foreign Account Tax Compliance Act (FATCA) of the U.S., which was passed by the U.S. Congress

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in June 2011 and became effective on July 1, 2014. FATCA requires all foreign financial institutions to report the global information of U.S. account holders to the U.S. Internal Revenue Service (IRS). Failure to comply will result in a punitive 30% withholding tax on foreign institutions’ income originating in the U.S. FATCA includes not only an information reporting system, but also obligations regarding the confidentiality of information and privacy protections. To reduce resistance to the implementation of FATCA, the U.S. announced two models of intergovernmental cooperation, namely information exchange through the government (with both reciprocal and non-reciprocal sub-models) and direct reporting of information by financial institutions to the U.S., which have gradually gained recognition from scholars, international intergovernmental organizations, and non-governmental organizations. (II)

Characteristics of the International Tax Information Exchange Systems

The operability of international tax information exchange provisions has been increasing. First, the scope of the subjects of information exchange has been clearer. The CRS stipulates that, financial institutions undertaking the obligation of AEOI include custodial institutions, storage institutions, investment entities, and special insurance companies, unless their risk of tax evasion is significantly low. Second, the content of the exchange has been clearer. The financial information required to be reported under the CRS include interest, dividends, account balances, proceeds from certain insurance products, sales of financial assets and other income or expenses from assets held in the account. Reportable accounts include individual accounts and entity (including trust and fund) accounts. Strict distinctions are made between duties of care, such as personal accounts versus entity accounts, existing accounts versus new accounts, and high-value accounts versus low-value accounts. Third, the paradigms (e.g., terms, concepts and methods) have been standardized (Ma 2015). The effectiveness of the implementation of international tax information exchange agreements remains to be further improved due to restrictions regarding enforcement conditions and power. The implementation of CRS depends on the willingness of the economies concerned. None of the G20 leaders (national leaders, central bank governors, or finance ministers) has ever confirmed on a specific timetable, and any competent authority can unilaterally terminate its exchange of information on the grounds of significant non-compliance by its partner. Some economies lack basic implementation conditions, especially IT systems, such as standards for presentation of information and information security safeguards (including user login procedures, necessary administrative procedures, and so forth). (III)

China in the Coordination of International Tax Information Exchanges

The Multilateral Convention on Mutual Administrative Assistance in Tax Matters is the first and currently the only multilateral tax agreement signed by China. It was formally signed by China as the 56th signatory on August 27, 2013, entered into force for China on February 1, 2016 and has been implemented since January 1, 2017. According to the Convention, the relevant rights and responsibilities of China have the following characteristics. First, the Convention does not apply to the

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Hong Kong Special Administrative Region and the Macao Special Administrative Region of China for the time being. This is because the Convention is only open to sovereign states, and the Hong Kong and Macao Special Administrative Regions cannot sign the Convention independently. In accordance with the Basic Law of the two Special Administrative Regions and the relevant domestic laws of China, and after consulting the governments of the two Special Administrative Regions, China has made a specific declaration to this effect in its instrument of ratification of the Convention. Second, international administrative assistance in tax matters provided by China currently covers 16 types of taxes (except only customs duties and ship tonnage taxes), while covering mainly income tax prior to China’s accession to the Convention. Third, the international tax administration assistance carried out by the Chinese tax authorities is currently limited to information exchange assistance, with no assistance in tax recovery and document service.

26.3.3 International Coordination of Responses to Base Erosion and Profit Shifting Base Erosion and Profit Shifting (BEPS) is a tax evasion strategy that makes use of differences and mismatches in international tariff rules to deliberately shift profits to the places (where nearly zero economic activities are conducted in these places) with low taxes and even zero taxes to minimize global tax burden, thus reducing the fairness and consistency in the tax system. The developing economies’ reliance on corporate income tax, especially multinational corporate income tax, exceeds that of developed economies, so more attention shall be paid to BEPS’s international coordination. Since the launching of BEPS project, more than 80 developing economies and non-OECD or non-G20 economies discussed the challenges of BEPS, and many economies finally joined in this inclusive framework. (I)

Historical Evolution

In 2012, the initiative to develop an Action Plan on BEPS was agreed by the G20 and referred to the OECD for study. In 2013, the Action Plan on BEPS (APBEPS) was officially released by the OECD and endorsed by the G20 leaders. The full content of APBEPS, including fifteen action elements of five categories, was released in October 2015 and adopted at the G20 Summit in November of that year (State Administration of Taxation 2015). The international community has higher expectations for international collaboration on BEPS. Prior to the G20 Hangzhou Summit, the Tax Justice Network argued that BEPS had failed (Cobham 2016). The Hangzhou Summit in 2016 showed continued support for international collaboration on BEPS, including the establishment of an inclusive framework for BEPS, timely, sustained and extensive implementation of the BEPS package, as well as a call for more countries and tax jurisdictions to commit to the BEPS Project and for equal participation in this framework (G20

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2016). Following the Summit, ActionAid, a partner of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), argued that the G20 countries had failed to take “bold action to end tax avoidance in developing countries.” (II)

Achievements and Prospects

The release of the 15 final outcomes of the BEPS Project “represents the most fundamental changes to international tax rules in almost a century” (OECD 2015). The project has made positive achievements in the following areas, and expectations for the future are becoming clearer. 1. (1)

(2)

(3)

2.

Achievements Improved consistency. The project has eliminated the use of differences in domestic tax laws to avoid income tax, built an effective tax regime for controlled foreign enterprises, developed a common approach to interest deductions, established best practices for mandatory disclosure systems, ensured that enterprises are on an equal footing with governments, eliminated or revised preferential tax provisions with harmful elements, and exchanged information on specific rulings. Strengthened substantive requirements. Transfer pricing rules have been updated and mechanisms for simplification of product transactions and low value-added services have been designed. To avoid treaty shopping, it has been agreed to implement a minimum standard to ensure that benefits of the agreement are granted only to suitable recipients. Guaranteed tax transparency and enhanced certainty. Proposals have been developed to establish a mandatory disclosure system, and broad exchange of ruling information has been agreed. Also, dispute resolution mechanisms (including arbitration) have been strengthened. Additionally, minimum standards have been established for “treaty shopping, country-by-country reporting, dispute resolution and harmful tax practices,” and all parties have committed to jointly implementing relevant measures and preventing inaction by individual countries. Prospects

The scale and impact of the BEPS issue has yet to be accurately assessed. Due to the complexity of the BEPS issue and data limitations, the current research outcomes are still far from the desired goal and can only describe the BEPS issue in a relatively rough way. Therefore, BEPS Action Point 11 is an extremely challenging task. It is necessary to strengthen the legal support of all countries for BEPS measures, especially the development and signing of the Multilateral Instrument. The Multilateral Instrument should clarify the relevant toolkit, including profit attribution rules, guidelines for the application of the profit splitting method, and the application of intra-group ratios in the interest deduction rules.

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3.

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International BEPS Governance Mechanism and China

The BEPS problems faced by China are more prominent, and China is in urgent need of strengthening international cooperation to safeguard its own tax rights. China has a high proportion of foreign direct investment from low-tax countries and regions. Data from corporate tax returns show that the profitability of foreign-invested enterprises is lower than that of domestic enterprises when such main factors as size of business and industry are equal. This indicates that China’s tax rights and interests over multinational corporations in China are most likely not well maintained. China is involved in such international anti-tax avoidance cooperation as drawing on the OECD’s anti-avoidance concept in Chinese practices, expanding the network of international tax treaties, establishing mechanisms for international tax information exchange, launching bilateral anti-avoidance investigations, as well as actively participating in various cooperation and joint actions of the OECD, the UN and other international organizations, including participation in international rule-making. Multinational corporations in China and Chinese multinational enterprises overseas should strive for active dialogue and collaboration with global tax authorities to realize enhanced transparency and improve certainty on taxation on the basis of strengthening risk management. In the future, when providing international administrative assistance in tax matters, China will take into account the provisions of the Convention and other tax treaties, and choose the most favorable treatment for itself to maximize the protection of China’s tax rights and interests.1

26.3.4 Prospects of International Taxation Coordination and China’s Countermeasures The political support for international tax reform may be unsustainable. For one thing, the operational mechanism of international tax reform is to seek the greatest consensus among relevant countries. Due to the huge differences between the interests, economic characteristics and tax rules of these economies, the tax reform is bound to progress slowly. For another, the direct driving force for the current round of BEPS tax reform was the 2008 financial crisis. So once that crisis is alleviated, the political support for international tax coordination is likely to decay. China should participate more extensively and deeply in mechanisms of international tax administration cooperation and actively reserve the human resources and policy supply needed for international tax governance. China should participate more deeply in the activities of global tax governance of such international organizations as the UN Committee of Experts on International Cooperation in Tax Matters, 1

Where both countries are parties to the Convention and have signed bilateral tax treaties, the Convention allows both countries to choose the most effective and appropriate treaty for enforcement. To ensure consistency in the treatment of cases, the Convention provides that the two countries may not apply more than one treaty to a single case.

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the Study Group on Asian Tax Administration and Research, and the Inter-American Center of Tax Administrations, and strive to play an active role in these organizations as a major force in combating international tax avoidance.

References Cobham, A. 2016. The U.S. Treasury Just Declared Tax War on Europe. https://www.taxjustice. net/2016/08/24/us-treasury-tax-war-europe/. Accessed 10 Nov 2018. G20. 2016. The Communiqué on G20 Hangzhou Summit, The People’s Daily. Gambacorta, L., B. Hofmann and G. Peersman. 2014. The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-country Analysis. Journal of Money, Credit and Banking 46(4): 615–642. Krugman, P. 2008. International Finance Multiplier, Working Paper. Princeton: Princeton University. Ma, Le. 2015. Developments and Limitations of Automatic Exchange of Information by OECD. Journal of Jinan University (Philosophy and Social Sciences) 37(5): 119–127. OECD. 2015. BEPS 2015 Final Reports. http://www.oecd.org/tax/beps-2015-final-reports.htm. Accessed 29 Nov 2018. Pesaran, M.H., T. Schuermann, and S.M. Weiner. 2004. Modeling Regional Interdependencies using a Global Error-correcting Macroeconometric Model. Journal of Business & Economic Statistics 22(2): 129–162. Rey, H. 2013. Dilemma Not Trilemma: The Global Cycle and Monetary Policy Independence. https://www.nber.org/papers/w21162. Accessed 28 Nov 2018.

Chapter 27

Countermeasures for China’s Better Participation in International Economic Policy Coordination

Whether from a theoretical or historical perspective, the coordination of international economic policies is not only necessary but will become increasingly important as the interdependence of national economies and spillover effects intensify. However, compared with other countries, dominant countries that are at the top of the whole international economic, trade and financial system have unsymmetrical influence and power. They mainly consider more domestic factors and even never take the international implications of their polices into account when formulating policies. Under such circumstances, other countries try their best to control negative spillovers of their own policies based on reality, pay enough attention to the negative spillovers of foreign policies, and find their own optimal policies on this basis. This is the core of international macroeconomic policies at this stage.

27.1 Status Quo and Challenges of China’s Participation in International Economic Policy Coordination Countries around the world have several options for macroeconomic policy coordination. Firstly, is such coordination necessary? What attitude should be held? Secondly, within what scope should coordination take place? This includes with which countries and in which areas (including policy instruments and policy areas, etc.) to coordinate. Finally, what is the best coordination strategy? From the basic definitions of coordination or cooperation, policy cooperation or coordination requires that the policies carried out by concerned countries cooperate with each other for a common goal. Therefore, two issues are involved in coordination, namely coordination goals and coordination methods.

© China Social Sciences Press 2022 Y. Zhang, The Change of Global Economic Governance and China, https://doi.org/10.1007/978-981-19-0699-2_27

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27.1.1 Target Coordination in International Economic Policy Coordination From the perspective of international economic policy coordination, all concerned countries shall reduce the negative externality to the degree that can be accepted by other countries. However, in the real world, dominant countries have unsymmetrical power and position compared with other countries, so when dominant countries make macroeconomic policy decisions based on their domestic economic trends, other countries bear less pressure brought by international macroeconomic policy coordination as facing possible negative externality shocks, and then they are relatively free to determine policy variables based on negative externality degree and the need for their own stable economic growth. In addition, dominant countries claim that their inward-looking policies may impose negative externality on other countries, but their economic upturn will be the key power for the leading recovery of global economy ultimately. Similarly, other concerned countries can also use the same logic to defend their policies. Undoubtedly, all countries may benefit from the growth of the global economy. Yet, the problem lies in that the policy itself may have both positive and negative externalities. If policies that can stimulate domestic economic recovery have positive externality, then they are definitely satisfactory to all, otherwise the policy coordination is required. Major countries are well-matched with checks and balances, so it’s relatively difficult to conduct coordination. Since small countries have limited influence, they will not get too much attention. Therefore, the so-called policy coordination may impose real pressure on the middle powers, which will be particularly obvious when policies of these countries are different from that of all major countries.

27.1.2 Behavior Equation of Policy Coordination: Inconsistency Between Model Setting and Time In principle, the process of international macroeconomic policy coordination is to combine the macroeconomic models of various countries, and then figure out the different policy variables based on the optimal function of maximizing output or consumer welfare of each country. It is obvious that if the policy goals, variables and models of all countries are the same, it is easy to solve the policy variables of n countries through the n-country equation. However, if each concerned country has different policy goals, variables and models, then the explained variables in the simultaneous solution process may increase, significantly increasing the difficulty of figuring out coordinated policies. In addition, the state of each country itself may need a set of equations to describe. As indicated by the dynamic stochastic general equilibrium model (DSGE), interest rates may depend on prices, and prices determine exports and imports. Exports and imports, together with prices, in turn affect output, and exports link the economies of various countries around the world through foreign

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output. Taking into account capital flows, interest rates will also affect capital flows. If only the coordination of two countries is considered, even if each country has only five components, including households, manufacturers, banks, government and foreign sectors, then at least ten equations are needed. In general, besides increasing the technical difficulty of equation solving, another fatal problem faced by the simultaneous multi-equations is the sensitivity of the solution. In a casual chain with a greatly complicated logical relationship, the combination of small errors in the estimation of the coefficients of each variable will have enormous influence on the final result. What’s more challenging is that the estimation of variable coefficients itself may be problematic. The thinking of using models to make policy decisions is to use social science as an engineering science. It not only assumes that decision-makers are well informed, but also that can accurately estimate the relevant parameters given social preferences and make optimal policy decisions based on established behavioral equations. However, standardized simulation assumes that the model formation is based on history, and policy adjustments are also expected. The truth is probably that any policy changes will modify the model structure. Policy changes themselves will change not only the intensity of behavior but also the behavior itself.

27.1.3 Costs and Gains of Policy Coordination From the perspective of pure absolute gains, international economic policy coordination may have relatively small gains. According to the most classic estimation made by Sachs and Oudiz (1984), it may be only 0.5% of GNP for major countries. Only major countries whose trade focuses on final products are involved in their model framework, so the popular GVC analysis in recent years will not significantly change their conclusions. Subsequent studies have always questioned whether the gains of international economic policy coordination are too small. Of course, there will always bevoices affirming that the gains of policy coordination are sufficient to promote international policy coordination. Putting the debate on the technical problems in the calculation of absolute gains aside, estimation of the gains of international economic policy coordination should probably contain more content, such as the consideration of multiphase gains, the discount estimation of future gains, and the definition of the concept of gains. Firstly, in the economic literature, the consideration of the gains of policy coordination is mainly single-phase, and even the analysis carried out in the framework of game theory focuses on the impact on current gains. Secondly, a discount rate assessment is inevitably involved as long as multiphase and future gains are considered, which is a problem that will not be included when absolute or relative gains are considered separately. Thirdly, different countries may have different definitions in terms of their gains.

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27.1.4 Challenges Faced by China’s Participation in International Economic Policy Coordination The spillover of economic policies of each country provides the most traditional driving force for international economic policy coordination. As a means of global governance, international economic policy coordination itself is a public product. It should at least contain policy coordination content and policy coordination rules and tools. How to coordinate the goals and tools of macroeconomic policies is the challenge China faces in participating in international economic policy cooperation. In terms of China’s monetary policy goals, the People’s Bank of China attaches great importance to price stability, which is a goal shared by all central banks. Economic growth and employment have a considerable overlap, which is also the goal of some other central banks. However, China’s central bank has a special function, i.e., reform and opening up, the development of financial market and the balance of international payment. It also places emphasis on other government sectors. The People’s Bank of China must focus on the balance of international payment as well as undertake functions such as managing exchange rates, foreign exchange reserves, gold reserves, and balance of payments statistics. There is no doubt that central bank’s multi-target monetary policies will cause lots of problems. Firstly, the central bank encounters a multi-objective optimization problem when pursing multiple objectives. Secondly, there may be overlaps and conflicts between multiple objectives. However, for a country’s central bank, this issue can be alleviated by setting the tolerance range of the objectives, adjusting the weight in the optimization model and conducting dynamic adjustment. Lastly, multi-objective optimization also complicates the macroeconomic models of a central bank.

27.2 SWOT Analysis of China’s Participation in International Economic Policy Coordination As an emerging developing country, China is becoming increasingly important in global market, but the costs and benefits shared by China’s participation in international economic policy coordination are uncertain. On the one hand, compared with developed countries, China, as a developing country, has more serious problems with goal differences of international economic policy coordination and inconsistency of model dynamic caused by a faster changing economic structure. Under the circumstances, the cost may be higher and the benefits may be relatively smaller when considering discount rate and government reputation. On the other hand, as a major developing country, China’s discourse power and influence, although has improved, still fails to occupy a dominant position. It needs to make further efforts to widen and deepen its integration with global economy for further development. Presently, it still can’t behave independently. Combining both positive and negative effects, China faces more challenges in making policy decisions. It needs to make comprehensive

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judgment based on the integration of advantages, disadvantages, opportunities and threats.

27.2.1 International Environment of China’s Participation in International Economic Policy Coordination Affected by economic globalization and a new round of the internet industrial revolution, trade contacts and economic relationships between countries all over the world are more closely linked and more interdependent. For economies at different development stages, there are big differences in economic growth speed and fluctuation degree. Generally speaking, European countries, the United States, Japan and other developed countries have stepped into a low-speed, sustained and stable growth stage with relatively steady economic growth and small fluctuation range while developing countries like China are in the period of converging to equilibrium or rapid catching-up with higher economic growth rate and larger fluctuation range. Generally speaking, the degree of gains sharing in international macroeconomic policy coordination depends on competitiveness of countries whether it is a zerosum game or win–win result. Only countries with a strong international standing and competitive advantages will play a leading role in policy information sharing and economic policy coordination.

27.2.2 SWOT Analysis of International Economic Policy Coordination The results of macroeconomic policy coordination between countries and the sharing of benefits rely on the competitive strength of the participating countries. This part adopts a SWOT analysis to comparatively analyze China’s advantages, disadvantages, opportunities and threats of economic strength relative to Europe, the United States, Japan and other countries. In this way, the benefits of China’s microeconomic policy coordination in investment, trade and industry and the benefits from macroeconomic policy coordination in exchange rate, currency and finance can be better understood. (I)

Advantages of China’s Participation in International Economic Policy Coordination

China has a complete range of national economy and sturdy and well-developed national economic system. Since the reform and opening up, many Chinese industries have gradually established the competitive advantages in the international market and have greatly improved the investment environment both at home and abroad after more than 30 years’ constant and rapid development.

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From the view of production factors, China has comparative advantages such as low labor cost and abundant natural resources. In the ever-deepening international division of labor, China can provide cheap labor with a large scale with varied levels of education. From the perspective of market demand, China has a vast consumer market advantage. With a large population and huge market purchase potential, it’s easier for enterprises to gain scale and scope benefits. Rapid development of business entities and the internet and modern logistics are closely related to the expansion of market. Under the circumstances, the enormous market share gives our government an extremely important bargaining chip in the international economic policy coordination, which is an essential condition for China’s government sectors to participate international policy coordination at present and in the future. With a vast domestic market, China has a large buffer room when suffering external shocks. (II)

Disadvantages of China’s Participation in International Economic Policy Coordination

The revenue structure is imblanced and the investment proportion is too high. In the process of economic structural adjustment, economic growth will face huge difficulties and challenges, such as declining investment, unsatisfactory consumption status and sluggish economic growth caused by weak external demand. In recent years, asset bubbles and industry hollowing are forming in China. If the local government debt is not solved in a timely manner, risks will continue to spread upward, eventually endangering the macroeconomic policies of the central government. Another issue is the slow upgrading of industrial structure and serious overcapacity. Governments at all levels use “ensuring growth and maintaining social stability” as an excuse to subsidy unprofitable enterprises continually and make additional investment, resulting in further vicious circle of excess production capacity. With the deepening of economic globalization and social division of labor, China’s industrial structural adjustment is increasingly affected by the structure of foreign trade. (III)

Opportunities of China’s Participation in International Economic Policy Coordination

After the 2008 financial crisis, economic recovery of European countries, the United States, Japan and other developed countries is unsatisfactory while China still has the fastest economic growth in the world even its economy growth is slowing down. It also has plenty room for future growth and will get favor from international capital. In the third industrial revolution, China can still make the best of the late-comer advantages in the process of global technology upgrading to promote the upgrading of industrial structure. The arrival of technologies such as the mobile internet, IoT and big data has robustly promoted the integration of the real economy and the virtual world, which involves China’s manufacturing industry naturally and inevitably. (IV)

Threats of China’s Participation in International Economic Policy Coordination

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Along with the United States’ “pivot” to the Asia–Pacific militarily and politically, the U.S. aims to constrain China’s economic development space and improve its own enterprises’ ability to compete in the global economy. Under competition and containment led by the United States and Japan, currency and trade wars keep cropping up. As a result, the international competitiveness of China’s labor-intensive industry itself has also begun to decline. In the complex international economy, the demand-side economic trends in Europe and the United States directly influence the process of global economic recovery. Europe and the United States account for a large proportion of China’s total exports. Their sluggish economic recovery seriously affects China’s export trade. (V)

Summary

Through the SWOT analysis of China’s internal and external economic environment, it can be found that China has clear advantages and disadvantages. Opportunities and risks coexist. On the one hand, China has a complete range of industries and a vast market. There is still a lot room for development in urbanization and regionalization. On the other hand, China has a large income gap, serious overcapacity, slow upgrading of the industrial structure, unsteady structural adjustment, asset bubble and an obvious industrial hollowing trend.

27.3 Countermeasures and Conclusion of China’s Participation in International Economic Policy Coordination At present, the theoretical and empirical studies in the international academic community haven’t achieved a consensus on international economic policy coordination, and there are still a lot of academic and policy issues and challenges. So far, international economic governance has received theoretical and intentional support far more than collective actions of all concerned countries, which gives us more freedom. The improvement of value-added trade data based on the GVC provides new perspectives and thoughts for discussing rebalancing policy research. The analysis of major surplus countries (China, Japan and Germany) and deficit countries (the U.S.) indicates that China’s rebalancing pressure is overestimated from the existing traditional perspective while the rebalancing pressures of Japan, German and the United States are underestimated. When discussing rebalancing issues, the potential impact brought by the GVC should be fully considered. Our study also shows that the spillover effect of China’s economic policy is globalizing, but the main impact is limited in Asia. Based on its own huge economic an international trade scale, the overall spillover effect of China’s economic policy is being close to developed economies such as the United States, Germany, France, Britain and Japan.

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Generally speaking, the core concept of international economic policy coordination lies in dynamics, cooperation and win–win rather than benefiting a country itself at other’s expense. Firstly, multi-round policy coordination should be a focus. In multi-round policy action taken by multiple economies, the spillover effects of each policy may offset or overlap with each other instantly or at staggered time and finally have positive or negative, bigger or smaller and even zero net effect on the short-, medium- and long-term economic operation of each economy. Secondly, the launching process and strength of economic policies with huge spillover effects should be step by step to avoid excessive spillover effects from occurring too quickly. Thirdly, before launching key economic policies (making decisions), during and after policy implementation, concerned economies should communicate sufficiently so that the affected economies could deal deliberately. Fourthly, concerned economies should be mutual compensatory in different policy implementation rounds to give the countries who have no gains in round A opportunities to benefit from round B. Fifthly, facing with external policy shocks, the affected economies may comprehensively use fiscal, financial (currency included), industrial and various policy tools. Sixthly, the right to speak and the ability to lead in international economic policy coordination and policy rule-making relies in the country’s overall industrial competitiveness. Only counties with core competitive advantages in the global industrial chain can benefit the most from international economic policy coordination. From the perspective of monetary policy spillover and coordination, the response of real GDP of developed economies to the U.S. QE is slightly stronger compared with most emerging economies because of closer financial ties. This is mainly due to QE’s stability effect on risks in the financial market. Emerging market also responds to QE significantly, but what they are facing with is real exchange rate appreciation brought by QE, which will bring a certain expenditure conversion effect to emerging market economies that rely more on export market, thus offsetting part of the positive effects of the U. S. QE. Different real exchange rate responses are not only related with the scale of capital inflow but also the currency policy responses, macro-prudential policies and exchange rate policies of different countries. Hence, in this sense, if China participates in international economic policy coordination, or if China needs to respond to the negative externality of international economic policies, it must use a comprehensive set of policies, including at least capital control, monetary policies, macro-prudential policies and exchange rate policies. From the perspective of the spillover effect and coordination of, countries should adhere to dynamic coordination concept firstly. Affected economies’ countermeasures for the spillover effect of fiscal consolidation may also in turn have spillover effect on economies implementing fiscal consolidation, resulting in fluctuations in the output of the latter. The spillover effects of multi-round fiscal policies may offset or overlap with each other instantly or at staggered time and finally have positive or negative, bigger or smaller and even zero net effect of the short-, medium- and long-term economic operation of each economy. Therefore, any concerned economy should focus on multi-round policy coordination and interests balance rather than singleround policy gains and losses. Secondly, fiscal consolidation should be gradual and orderly. Any economy should control the process and strength when conducting fiscal

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consolidation to avoid the spillover effect impacting other economies too heavily or too fast. Thirdly, before conducting (decision- making), during and after fiscal consolidation, concerned economies should communicate sufficiently and exchange information timely, including decision-making information. Externality of China’s fiscal consolidation mainly spill over to Asia, especially Japan, Korea and India. However, fiscal consolidation carried out by the U.S., Japan, Germany, France, Britain and Netherlands has a worldwide impact. Fiscal consolidation in most economies will encumber the output of other affected economies while only few economies’ fiscal consolidation will promote the output of other economies. The spillover effect of a country’s fiscal consolidation on different economies may vary, but the difference between most large-scale economies will not be too great. In short, international economic policy coordination should be based on strong international political trust. When the foundation of international political trust is not strong, economies participating in international economic policy coordination should not lose their dominance of domestic economic policy just for accommodating themselves to the coordination of international economic policy coordination. They must integrate into the international community without losing themselves or acting independently. When making domestic economic policy decisions, China should adhere to the fundamental policy of focusing on itself and taking coordination as a complementary measure and make independent decisions to mainly restrain spillover of foreign countries and properly give consideration to China’s negative spillover based on the spillover of major countries’ economic policies and steady domestic growth. Meanwhile, China should also participate in international economic governance actively, settle international pressure skillfully and try the best to create international public opinion and policy environment favorable to China.

Reference Sachs, J. and Oudiz, G. 1984. Macroeconomic Policy Coordination among the Industrial Economies. Brookings Papers on Economic Activity 1: 1–64.