Leave China Out of a Trade Pact at Your Peril

When trade ministers meet in the World Trade Organization in Geneva next week, they will arrive with a set of marching orders from their bosses.

In Cannes last month, the Group of 20 leaders recognized that the present approach to the Doha Round could not succeed and that the world would have to confront broader challenges facing the multilateral trading system. One of the biggest challenges is how to deal with the rise of China. Ministers, in our view, need to prepare for a new "China Round" of multilateral trade negotiations.

China is the world's largest exporter and by 2020 the country's trade will be nearly one-and-a-half times as much as that of the United States. China is set to become an economically dominant power. That in itself should not be a cause for worry because China's economic transformation has been, and will remain, so predicated on an open trading system that Beijing will have a stake in preserving it.

But some of the most contentious issues in trade over the past few years—such as the perceived "beggar-thy-neighbor" effects of undervalued exchange rates and the opaque purchasing and investment practices of government entities—have involved China. World leaders have an interest in ensuring that these issues are resolved without undermining the open trading system. The world has an interest in tethering China more firmly to the multilateral system.

Frustrated by slow progress in the multilateral Doha initiative, a number of countries, including the United States, are turning to regional approaches to revitalize trade liberalization. The Trans-Pacific Partnership (TPP) championed by Barack Obama, the US president, on his tour of Asia last month is the most notable recent example. The TPP might help push the frontiers of liberalization. However, its scope is narrow, including only a handful of countries and excluding China. The TPP would be like Hamlet without the Prince of Denmark. And worse, it could provoke China into playing the regionalism game. Imagine if China were to retaliate by negotiating a free trade agreement which would exclude the United States. Down this path lies the fragmentation and folly of the inter-war years.

On the other hand, if China were to be part of the process of creating the rules for such a trade partnership, why exclude the other big players such as Europe, Brazil, and India? If the problem of a rising China is that it will have a lot of bargaining power by virtue of its economic size and dominance, then a multilateral process will add more negotiating heft on the other side of the negotiation. China is more likely to agree to disciplines on contentious issues if there is a consensus among a broader group of countries.

Regional and discriminatory solutions make less sense. The challenge of anchoring China in the multilateral trading system—as well as providing a fillip to growth in industrial countries through further liberalization—can be addressed by embarking on a new and comprehensive multilateral initiative. This would anticipate the changing interests and concerns of all the big trading nations in a way that the Doha agenda did not. A new initiative would also pave the way for a reciprocal liberalization mechanism—you open your markets in return for me opening mine—that has been the basis for previous successes in the trading system.

To make this reciprocity possible a wider range of issues must be on the agenda. China's trading partners remain concerned by Beijing's exchange rate policies, as well as the protection and discrimination that stem from China's state capitalism. China and other countries have an interest in ensuring that their exports are not subject to anti-dumping and trade restrictions. And everyone has an interest in preventing export protectionism, encouraging goods and services liberalization and opening government procurement markets.

Any new initiative will have to break from the past in one key respect. Countries in the west have in the past been the drivers of trade negotiations. Now, China and the other big emerging market countries must take the lead in negotiating further multilateral liberalization.

Economic power is shifting towards the rest and China in particular. But those acquiring the power will have to work harder to preserve the open system that has sustained their growth dynamism. Noblesse oblige but geared to an outcome that is in the self-interest too.