Rewiring Globalization

The past decade has seen a steady rise of populist movements across the political landscape in many societies. Unlike in the 1990s, when the antiglobalization movement opposed neoliberal economic integration with an emphasis on developing countries, today’s backlash against globalization is fueled by ire about its impacts in advanced economies. The most notable antiglobalization undertones were reflected in the June 2016 Brexit vote in the United Kingdom and the November 2016 election of president Donald Trump in the United States. The European Union (EU) is under threat from Euroskeptic political parties, North-South cleavages, and the markedly distinct vision for the EU favored in capitals like Budapest and Warsaw.

In the most recent era of globalization, many households have experienced a fall in their standard of living due to stagnant or declining wages coupled with the rapidly increasing costs of a middle-class lifestyle amid growing job insecurity.¹ Nativist arguments that open markets and globalization have impoverished the middle class and systematically attacked national identities resonate with segments of society that have become disenchanted with the purported benefits of the current system. The risks facing those living in precarious situations—a social class known as the precariat—are rooted primarily in technological factors or mismanagement of economic transformations rather than trade. Be that as it may, waves of immigration—another characteristic of this period—provide fertile ground for right-wing politics to capture these frustrations and blur the mechanisms of causality in terms of what creates this damage and who benefits from it.

It is clear today that those left behind view globalization as interlinked with job security and cannot tolerate transformations in the global or national economy without some form of support from the state. Given that this group will only grow in size with technological change, mainstream political parties are already recalibrating their long-held positions on issues such as trade and migration in response to this trend.

The political salience of antiglobalization sentiment not only in developing countries but also in industrialized nations will depend on the extent to which post-pandemic social contracts re-embed markets in social values. For centrist politicians, the challenge will be to convince electorates that they can deliver the necessary transformations in policy thinking to ease the sense of unfairness felt by those left behind and overcome their distrust of the elites who helped shape the system they oppose.

The coronavirus crisis has certainly magnified existing weaknesses in developing economies and elevated the status of questions such as the optimal design of capital controls. On the bright side, the pandemic has also produced new opportunities by exposing the risks inherent in global supply chains built around China. Ongoing debates over redundancy versus reshoring—the process of returning the production of goods to a company’s country of origin—will have significant implications for economies that can present an alternative to China in their region. As global foreign direct investment flows and trade are rejiggered, developing countries can be expected to pursue somewhat nationalist economic policies to deal with the crisis. In parallel, they are likely to seek to benefit from a broader restructuring of global value chains toward a more diverse, flexible, and region-focused architecture to ensure the sustainability of their industries in a new world.

A key challenge in this regard will be to galvanize capacity-building efforts to design localization policies rooted in identifying and advancing comparative advantages at a product level. Since labor cost differentials will continue to become less relevant with automation, the way developing countries manage this process will determine the political potency of globalization in the domestic political economy. After the pandemic, the management of countries’ debt-servicing obligations will be a major force in molding popular sentiment.

In summary, dissatisfaction with globalization has turned into a powerful political dynamic in many nations. It has triggered a backlash against established political systems and actors, propelling the emergence of populist and nativist platforms. At the same time, this dissatisfaction has created a domestic policy environment that is conducive to widespread trade protectionism and tighter immigration policies. It has therefore finally become clear that rampant and unimpeded globalization has produced an unsustainable model that creates ever-wider income disparities within and among nations. But more importantly, unchecked globalism is increasingly seen as a threat to the integrity of democratic rule. The predominant question for policymakers around the world is how to reframe globalization to mitigate its negative consequences while keeping its core growth-enhancing dynamics intact.

This compilation focuses on five key themes that underpin globalization: trade, data and technology, finance, tax, and climate change. The study’s first aim is to identify the concerns related to these anchor policies. The second aim is to explore regional convergences and divergences regarding possible solutions to these common problems. The compilation concludes with a road map that includes specific proposals designed to address the shortcomings of the current framework of globalization. These proposals benefit from sufficient multilateral support to drive an agenda of policy reform.

The compilation’s methodology was designed to collect regional perspectives on globalization by leveraging the know-how of Carnegie’s global presence. Thus, the chapters on the United States, the EU, India, Russia, and China were written by Carnegie experts; those on Latin America and Africa were commissioned to independent experts. The next chapter consists of a broad analysis of the prevailing criticisms and cleavages of globalization. It starts with an overview of the political implications of globalism gone wrong. It then focuses on the five major policy areas, which also constitute the core analysis for the following regional chapters.

The final chapter summarizes the main findings with the aim of charting a policy-relevant agenda for globalization reform. It also recommends the establishment of a high-level task force to streamline the various recommendations for rewiring globalization. This proposal aims to address a core deficiency of current debates: the lack of an inclusive discussion across the range of policy fields that shape globalization.

Notes

¹ Organization for Economic Co-operation and Development, Under Pressure: The Squeezed Middle Class (Paris: OECD Publishing, 2019), https://doi.org/10.1787/689afed1-en.

From the Local to the Global: The Politics of Globalization

Globalization has been a key driver of growth and affluence around the world. It has allowed industrialized countries to rely on their exports to boost their potential for growth. It has also helped developing nations diversify their economies and fight poverty. In China alone, nearly 800 million people have been lifted out of extreme poverty since the 1980s.¹

Yet, globalization has produced both winners and losers (see table 1), and their uneven distribution has started to raise concerns. A chief criticism of globalization is that in its current form, despite its overall welfare-generating nature, it has worsened inequality within and among countries.² Around the world, educated and highly skilled workers have enjoyed outsize growth in income and wealth, both of which are increasingly concentrated in the top percentile of earners.

In recent years, demand for unskilled workers in industrialized economies has steadily declined because of skill-biased technological change, the offshoring of labor-intensive jobs, and the substitution of local production with cheaper imports from emerging markets. This trend has depressed wages for low- and middle-income earners in advanced economies, especially since the 2008 global financial crisis. As a result, while the general welfare benefits have been immeasurable, distant, and diffused, the costs of globalization have been concentrated in specific communities, industries, or geographies that have suffered from dislocations.

Table 1: Winners and Losers of Globalization
Developing Countries		Developed Countries
Winners	Losers	Winners	Losers
Middle classes Workers and capital of export industries High-skilled workers Workers who can move to high-income countries	Poorest 5% Landlocked countries Isolated rural areas Low-skilled workers Low-productivity firms	Richest 1% High-skilled workers Research and development–intensive industries Consumers	Workers in labor-intensive sectors Low-productivity firms Middle- and low-income classes
Source: Authors’ analysis

At the same time, the commodification of labor during the competition for capital has exacerbated inequality, notably in underdeveloped economies. Globalization has redistributed income toward capital at the expense of labor, invigorated by the growing impact of technology and trade deals tilted in favor of capital and the wider financial community. As a result, the share of capital in total income and profits has grown steadily while conditions have become increasingly precarious for labor, which inevitably bears a disproportionate economic risk given its immobility relative to capital or goods. This picture has had important implications in the form of widespread political mistrust and thus a lower perceived effectiveness of democratic institutions.

This chapter highlights the main international cleavages in the reform of multilateral governance and the institutional processes that underpin globalization. After a review of the costs and risks of globalization, the chapter explores the five key themes of trade, data and technology, finance, tax, and climate change.

Costs and Risks of Globalization

As reform advocates rightly point out, the distribution of gains from free trade has been skewed at not only the national but also the global level.³ Wealthier nations that specialize in high-value-added trade grab a larger share of global economic growth.⁴ A major contributing factor has been the rising share of intangibles, such as patents and software, in global value added. When intangibles are accounted for, the United States’ overall trade deficit falls by nearly half from $763 billion to $390 billion in 2015, the year for which the latest data on value‐added trade are available.⁵

The industries of established economies have successfully leveraged the removal of trade barriers to reduce their costs and penetrate new markets with the help of global rules and trade deals designed in their favor. Most of the world’s largest companies and intellectual property owners are entities from developed countries, and the accumulation of their profits—protected by globally enforced intellectual property rights regimes—has sustained existing income and wealth disparities.

By contrast, even the best-performing developing countries—with the exception of China—face severe challenges to lift their populations out of poverty. Developing countries participate in global value chains at earlier stages, with increasingly limited opportunities to use their labor cost advantage to balance their technological disadvantage or move toward forward linkages and higher-value-added trade.⁶ As global value chains become more knowledge intensive, it is ever-more difficult for developing economies with limited access to a skilled workforce and other relevant capabilities to retain a market share.

For middle-income economies with lower productivity, the rise of China as the global manufacturing powerhouse has transformed the unbundling of production from an opportunity to a risk of premature deindustrialization.⁷ In 2016, East Asia accounted for $7 out of every $10 earned by the developing world from manufacturing exports.⁸ For most developing nations, the speed of automation, a lack of structural reforms, and the risk of becoming locked into a low-value trap have reduced the array and force of their growth prospects. These factors have also diminished the positive externalities of participating in global value chains, such as mass employment gains or large-scale skills upgrading.

Export opportunities for less developed economies have been further stifled by the quotas, subsidies, and trade barriers maintained by developed countries. This is especially true in agriculture, which remains among the most protected sectors globally despite being the primary source of income for large populations in many developing nations, which, furthermore, have a comparative advantage in the sector.⁹ The dynamism of upward mobility has therefore been lost.

Meanwhile, unimpeded financial globalization has nurtured devastating debt crises in developing economies. Much-needed help from international financial institutions has often come with strings attached in the form of austerity and costly structural adjustment programs.

Another fundamental problem centers on intrusions into the national autonomy of sovereign states—in other words, restrictions on countries’ policy spaces that prevent them from pursuing policies that best fit their unique circumstances.¹⁰ Globalization entails a functional need to transfer a certain degree of political authority to international entities, but this transfer inevitably fuels the politicization and contestation of global governance. The question is whether economic globalization threatens or unduly restrains the legitimate choices made in and by states.

On the one hand, the current form of globalization has brought with it structural changes and norms that disproportionately empower its drivers—investors, banks, multinational corporations—vis-à-vis national governments.¹¹ The owners of capital derive substantive bargaining power from states’ structural dependence on capital, the protections entrenched in investment treaties, and unhindered capital mobility. Notably, multinational corporations determine how a country links to global value chains. This, in turn, has great implications for the force and direction of gains in the industry and the economy as a whole. The risk of relocation precludes significant disturbances to the status quo created by a race to the bottom in terms of reductions in regulations and taxation. A government seeking to cut a budget deficit has powerful incentives not to raise corporate income taxes out of fear of prompting investors to exit its domestic market. Firms with vast resources lobby policymakers at critical junctures to secure outcomes that reduce their costs of doing business, both at home and abroad.

On the other hand, the institutions and legal frameworks that accompany global integration restrict the strategies and instruments that governments can use to pursue domestic objectives or respond to the practices of foreign counterparts. Deeper integration requires global rulemaking and stewardship in a growing number of areas to sustain harmony and address the systemic risks that arise from interconnectedness. Globalization asks states to adhere to international rules even if they do not align with those states’ interests or priorities, thereby impinging on governments’ ability to put their populations first.

Thus, governments that wish to increase their environmental ambitions or adopt stringent consumer-health regulations may stumble on World Trade Organization (WTO) rules, which prohibit discrimination among like products. Those seeking to retaliate against what they deem to be market-distorting practices by WTO members must accept defeat if the organization’s dispute settlement mechanism does not validate their discretion. Developing countries must design industrial policies meticulously to prevent them from being challenged as unfair trade practices.¹²

The central questions are then: Who makes the rules? What underpins their legitimacy? And are they subject to satisfactory oversight, transparency, and accountability mechanisms? A crucial consideration in this respect is the unbalanced representation of interests in the core bodies of global governance. There is evidence that rulemaking has so far favored rich nations and private creditors at the expense of developing countries. The latter too often occupy the position of rule takers without a powerful voice in debates that carry enormous implications for them. These nations are then compelled to implement regulations or ratify treaties designed primarily for mature economies or with business facilitation and investor protection in mind.

For each new domain regulated without inclusive multistakeholder processes, globalization has the effect of perpetuating the systemic inequities that widen the gap between rich and poor. An essential factor in this regard is the global regime for protecting intellectual property. Given the pace of technological change and the nature of value creation in the digital economy, global intellectual property rights risk fostering a new dependency between a tech-producing core and an importing periphery, entrenching the income disparities between them for the foreseeable future.

In the absence of adequate oversight mechanisms, the systemic risks of globalization cascade into crises with negative repercussions the world over. Uncontrolled globalization not only breeds volatility from short-term capital flows and hyperfinancialization but also spreads both the good and the bad effects faster and more broadly than ever before. Imbalances among nations in growth, trade, savings, and consumption patterns may appear to be irrelevant, but, in many ways, they are closely linked.¹³ Contemporary global finance has evolved into an oscillating system that creates boom-and-bust cycles in which the magnitude of the eventual bust gets bigger with interconnectedness. The probability of a crisis occurring is driven mainly by global conditions, while local outcomes appear to be idiosyncratic.¹⁴

Moreover, the crises that are endemic in hyperglobalization particularly harm the poor and the vulnerable, no matter where they live. Developing countries are now highly exposed to shocks from misguided practices, economic policies, or regulatory changes in the core countries of global financial networks. The 2008 global financial crisis provides a case in point. Burgeoning cross-border financial trade in the lead-up to the crisis helped foster excessive growth in the credit markets that were central to the initial stage of the downturn. Unlike previous episodes, the 2008 crisis had an impact on all types of countries. To be sure, the episode provoked notable changes in policy thinking. But the speed of integration has continued to outpace efforts to address the challenges of an increasingly complex configuration.

A final consideration is the deleterious impact of hyperglobalization on the Earth’s ecological infrastructure. The rise in industrial activity, the expansion of transportation networks, and changes in land use have severely degraded the environment and depleted vital resources on which current and future generations depend. The environmentalist critique of globalization initially targeted constraints on states’ autonomy to go beyond multilateral rules and adopt more ambitious standards. Nowadays, the struggle is to integrate increasingly strict environmental, health, and safety standards into international regimes that seem to ignore such standards or subordinate them to other policy goals.

The International Trade System

The international rules-based trade regime needs a revision to meet today’s realities, prevent frustrations with globalization from empowering protectionist forces, and create an equitable and sustainable model that helps developing countries grow. In recent years, the WTO has faced obstacles in providing a forum for multilateral negotiations on new and improved rules, monitoring trade policies, and resolving disputes among its members. The global economic downturn and the collapse in world trade, coupled with continued geoeconomic tensions between the world’s largest economies, have boosted the urgency of an exhaustive trade reform agenda.

The Future of Global Trade Negotiations: Multilateralism or Regionalism?

The frustration of inconclusive WTO negotiations has led industrialized economies to pursue alternatives to multilateral rulemaking. The result has been an increased emphasis on plurilateral approaches and the entrenchment of preferential trade agreements (PTAs). Regionalism has become a policy alternative for most countries and will be a permanent feature of the international trading system for the foreseeable future. Since the turn of the millennium, the number of PTAs has grown extensively to include increasingly sophisticated and comprehensive intercontinental and megaregional accords. Today, virtually all WTO members are party to, or in the process of negotiating, at least one regional trade arrangement.

Supporters present evidence that PTAs promote trade and growth both within and outside the trading area while addressing the free-rider problem of multilateralism.¹⁵ For example, these agreements reconfigure members’ economies to make further liberalization politically optimal and motivate nonmembers to join or emulate them. There are arguments that PTAs have a building-block impact by fostering the multilateral consolidation of comprehensive frameworks and diffusing standards that pertain to technical trade barriers.

It is often highlighted that some aspects of PTAs, such as transparency obligations and liberalization in services and investment, either are nonpreferential by nature, are easily extended to nonmembers on ratification, or benefit all economic actors by increasing predictability in the trading system.¹⁶ For developing countries, it is argued, PTAs may serve as a vehicle to lock in reforms that result in greater foreign direct investment (FDI) and reap economies of scale before countries are prepared to liberalize at the multilateral level.¹⁷

Critics, however, point to substantial risks that can ensue from the prevalence of regional arrangements.¹⁸ Regionalism can have negative impacts on welfare and the international trading system by diverting trade away from the most efficient global producers in favor of regional partners and diverting resources and incentives away from multilateral processes. PTAs can produce suboptimal results for developing countries as negotiations allow powerful partners to exert unilateral pressure on other parties to adopt onerous rules and strict enforcement mechanisms. Protectionist interests can capture labor and environmental standards embedded in PTAs.

Regionalism can also polarize the global trade system by establishing blocs that maintain high external trade barriers. The treatment of PTA partners may violate the WTO’s nondiscrimination principle and erode the preferences that developing countries enjoy under WTO rules. The rising number of PTAs may result in a patchwork of regulations that cover overlapping areas and complicate current business and future multilateral convergence. By encouraging or obligating the use of purpose-built dispute settlement mechanisms, PTAs can enable forum shopping, result in the fragmentation of case law, and weaken the relevance of the WTO’s own dispute settlement mechanism.

By contrast, plurilateral agreements (PAs) focus on limited issue areas.¹⁹ These accords allow like-minded members to bypass the hurdle of finding consensus in multilateral negotiations and respond to the changing needs of industries with agility in areas that are not yet covered or that, these members believe, are insufficiently covered in existing treaties. PAs are presented as a solution to maintain the WTO’s negotiation function and address the complications raised by multiple, overlapping PTAs. Developed countries favor flexible negotiating formats in the WTO to design rules in areas of interest to groups of members.

Developing nations remain committed to multilateralism and wary of rules shaped in exclusive forums. For them, the lack of inclusivity inherently risks perpetuating the imbalances of the existing regime by establishing de facto rules without considering the needs and interests of countries that are absent when those rules are formulated. Developing countries view efforts to circumvent the arduous task of reaching multilateral accords in the name of progress as a bid by industrialized members to undermine the power developing nations derive from the consensus rule of the WTO.

Blocking progress in new areas that developed members prioritize before existing mandates are completed is a bargaining tool that empowers developing members to pressure powerful countries to concede to their demands. Rather than inspiring a quest for shortcuts, this tool is meant to motivate negotiating parties to engage in constructive dialogue to develop common approaches and norms and seek creative issue linkages to reach an accord. Plurilateral approaches inevitably limit the developing world’s contribution to a choice between objection and consent, and restrict their demands to reforms and rectification, instead of allowing meaningful participation from agenda setting to ratification.

Development and Differentiation

The 1994 Marrakesh Agreement, which established the WTO, mandated the organization with helping less developed countries integrate into the global economy and achieve higher standards of living for their populations through trade. Developing countries require policy space and nonreciprocal market access to grow, adapt, and gradually open up to global competition while supporting their industries and populations against shocks that may ensue.

To that end, developing nations benefit from various forms of special and differential treatment (S&DT) embedded in WTO treaties. Through S&DT provisions, developing countries enjoy more favorable thresholds and longer time frames for undertaking specific commitments and are granted derogations from several restrictions on industrial policies. Additionally, through best-endeavor clauses, developed members are encouraged to support developing nations with institutional, technological, and financial assistance.

A crucial task of the reform agenda is to redefine the link between the international trade regime and development to ensure fairness and efficiency. With the 2001 Doha Declaration, all WTO members agreed to put development at the heart of the organization, and revise and strengthen the S&DT provisions to make them more precise, effective, and operational.²⁰ However, meaningful progress has not transpired throughout twenty years of negotiations. The Doha round of multilateral trade talks collapsed over a deadlock in agriculture—namely, over subsidies and barriers to market access maintained by developed economies.

From the perspective of developing countries, S&DT provisions are unconditional rights earned during political negotiations and a fair way to help address their economic and development challenges, especially given the historical roots of their circumstances. Recent successes have reduced the economic disparity between developing and developed countries in measures such as gross domestic product (GDP) and share of global trade, but the gaps in per capita income and human development indicators, like undernourishment and poverty, continue to widen. As such, developing countries see the preservation of S&DT in current and future negotiations as crucial for continued improvements in their development status. Accordingly, they want to strengthen and expand the scope of such treatment.

More fundamentally, the prescription often does not match the patient in the WTO’s existing differentiation regime. S&DT flexibilities that allow subsidies and safeguards are not enough to promote or protect disadvantaged groups in developing countries. Some provisions, such as those embedded in the Agreement on Agriculture, have even ironically led to a situation of reverse differentiation where, in essence, only developed WTO members can use the existing flexibilities.

During the WTO’s 2003 ministerial conference in Cancún alone, developing countries made a total of eighty-eight proposals on S&DT, to no avail.²¹ Among their demands was a call to substantiate the best-endeavor approach with legally binding obligations. In a nutshell, S&DT often rests on generalized processes that lack defined targets where noncompliance cannot really be shown, like the obligation to review the developmental impact of a particular measure imposed by developed countries. Even when a detrimental effect can be proved, key texts do not specify the withdrawal, modification, or remedy of the action concerned. Retaliation against such practices does not redress past damages and seldom carries enough weight to prompt policy changes.

For developed economies, offering blanket privileges to countries at varying levels of development complicates the way differentiation is handled in the WTO. The current architecture was designed in an era when the disparity between the leaders and the laggards was relatively clear cut. As emerging economies increase their market power and account for higher shares of world trade, linking strengthened S&DT with the WTO’s self-designation regime—in which members declare their own development status—becomes costly.

Developed members wish to share the burden of development with large emerging economies. To that end, they want to categorize developing members based on the sophistication of their economies and their capacity for growth and development. These categories are meant to help channel resources to the countries with the greatest need and provide the basis for a mechanism for the lifting of market access privileges. This is indispensable, according to developed members, if S&DT is to eventually enable all WTO agreements to apply universally.

In 2019, the United States proposed hard criteria to replace self-designation and define a developed country.²² These criteria included being designated a high-income country by the World Bank for three consecutive years, accounting for over 0.5 percent of global merchandise trade, and being a member of the Organization for Economic Cooperation and Development (OECD) or the Group of Twenty (G20). The European Union (EU) and the Ottawa Group of WTO members followed up with a more flexible approach based on needs and evidence to ensure that S&DT is as targeted as possible.²³ Under this proposal, members should be actively encouraged to graduate with clear road maps devised in close cooperation with the WTO secretariat. Requests for additional S&DT should be reviewed on a case-by-case basis.

Emerging markets generally reject differentiation among developing countries. Brazil and South Korea have renounced S&DT in future negotiations, citing their development successes or in return for political support elsewhere. China relinquished most S&DT measures when it acceded to the WTO in 2001, and many of its commitments go beyond the standard WTO accession–related policy commitments. Some smaller economies have shown a willingness to discuss categories if this brings them closer to least developed countries, rather than emerging markets, as the former are unlikely to lose access to S&DT under any framework.

Intellectual Property Rights

The 1994 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) established the global regime that governs the ownership and flow of knowledge, technology, and other intellectual assets. TRIPS set out minimum standards for the protection of intellectual property with extensive and binding rules for national policies, whether these are trade related or not. Developing countries were given until 2005 to incorporate TRIPS into their national laws. The transition period for least developed economies was extended to 2013 for most areas and to 2016 for pharmaceutical patents.

Often cited as a victory for firms that wanted to boost intellectual property protection in developing countries and forced the issue onto the agenda, TRIPS is a deeply contested agreement. Developing countries see the accord as a painful manifestation of disciplines enshrined under multilateral trade rules that blindsided these states about the extent to which they would benefit industrialized countries. As the United Nations (UN) Development Program put it in 1999, “intellectual property rights agreements were signed before most governments and people understood the social and economic implications of patents on life.”²⁴ Only twenty developing countries could mobilize the resources and expertise needed to follow the TRIPS negotiations and the matters at stake.²⁵ The deal was concluded when progress on improved market access for textiles and agriculture was made conditional on consent on intellectual property.

Technology-producing countries and firms see intellectual property protection as a prerequisite to drive research, investment, and innovation, and they wish to reinforce and expand the TRIPS regime. The existence of intellectual property rights in host countries is crucial for them to feel secure against the theft and reproduction of the fruits of their investment and research. This is why the EU and the United States lambast forced technology transfer in exchange for market access as a systematic problem that puts foreign operators at risk of losing their competitive edge. The chief strength of more robust global intellectual property rights lies in the reliability of a stricter international regime. This, Brussels and Washington argue, could stimulate domestic innovation and encourage FDI flows, technology transfer and licensing, and the diffusion of knowledge to the developing world.

Subsequently, over time, intellectual property regimes in advanced economies have expanded to cover tangible resources and intangible procedures, with the period of exclusivity spanning decades. Technology-producing countries and firms successfully expanded domestically granted rights and generally harsher intellectual property regimes to other countries through bilateral free trade agreements and parallel processes in other forums, such as the World Intellectual Property Organization. Intellectual property rights became an essential precondition for certain types of FDI from industrialized economies.

From the perspective of developing countries, strengthening TRIPS risks consolidating corporate monopolies over the ownership of ideas and cultural goods. This would aggravate the technology gap between rich and poor countries and expedite the transfer of capital from developing to developed nations. Critics agree that TRIPS enables firms in developed countries to lock in their appropriation of technological rents over innovation.²⁶ Stronger intellectual property standards would hurt the development prospects of developing countries, and most are ill equipped to exploit any purported gains.

For developing countries, the seemingly never-ending enlargement of the realm of property elevates intellectual property to a matter that has serious consequences. These include threats to food sovereignty, inaccessible medicines, reduced scope for innovation, and excessive outward capital flows. Meanwhile, data show that developing countries, especially least developed nations, are not getting what they bargained for. Specifically, developed countries are not satisfying the promise of technology transfers ingrained in TRIPS because of a range of textual and implementation-related issues. Scholars from various disciplines have urged the exclusion from TRIPS of certain categories, such as biomedicine.²⁷ Other analysts have objected to the handling of intellectual property at the WTO altogether.²⁸

Developing countries demand a clearer definition of the scope of TRIPS and an expansion of the debate on the agreement’s flexibilities. Least developed countries call for the effective implementation of the deal’s technology transfer requirements.²⁹ The relationship between TRIPS and the Convention on Biological Diversity when it comes to intellectual property rights over traditional knowledge and genetic resources, 90 percent of which originate in developing countries,³⁰ is also contested.³¹ Developing countries demand a TRIPS amendment to strengthen the link between the two regimes to stop the misappropriation and reckless patenting of plant varieties and traditional knowledge.³² Specifically, these countries seek measures such as “incorporation of the mandatory disclosure of a biological resource’s source or origin, evidence of prior informed consent, and benefit sharing from patent applicants before any patent is granted to a company.”³³

A fundamental cleavage that underpins TRIPS is that it is based on a Western conception of intellectual property. Developing and developed members disagree on the balance between the private right of ownership associated with patent holding and the public good of shared knowledge for the welfare of society. For example, some forms of traditional knowledge as shared among Indigenous communities do not conform to the codified model of individual and exclusive ownership. For Western advocates, modern genetic research aimed at increasing human welfare constitutes so-called bioprospecting, a form of intellectual property that is covered by the TRIPS framework. For Indigenous Peoples, meanwhile, the patenting of traditional knowledge resources like ancestral medicinal recipes can be tantamount to biopiracy.

TRIPS has come under fierce criticism for its implications on public health due to the inclusion of pharmaceutical patents and the adverse effects of increased protection on drug prices in developing nations. The 2001 Doha Declaration affirmed that TRIPS should not prevent members from taking measures necessary to protect public health.³⁴ Nonetheless, developing countries have long argued that the agreement’s flexibility provisions, such as compulsory licensing, are almost impossible to exercise. Similarly, critics assert that the safeguards to remedy the negative effects of patent protection or abuse are incompatible with the capacity constraints of less developed economies.

The WTO Dispute Settlement Mechanism

Perhaps the WTO’s most notable institutional innovation is a two-tier dispute settlement mechanism (DSM) to resolve trade disputes without members resorting to unilateral measures. Dubbed the WTO’s crown jewel and the only multilateral legal body of its kind, the mechanism consists of an independent adjudication panel and a seven-member Appellate Body (AB). The DSM’s findings are legally binding unless overturned unanimously by WTO members. Unlike its predecessor under the General Agreement on Tariffs and Trade (GATT), which used political mediation to resolve trade disputes, the DSM is based on judicial independence and legal reasoning, giving a rules-based character to the international trade regime.

In recent years, fundamental differences of opinion have emerged over how WTO law should be applied and how legitimate the DSM’s scope of interpretation is. The AB is currently in a state of paralysis. Due to a U.S. blockade of all new appointments, the body has been effectively disabled since December 2019 with only one remaining member—two short of the requisite number for hearing new cases. In practice, this means that the respondent to a case can unilaterally reject panel reports with which it disagrees.

The fundamental paradox that underpins the DSM debate is how to reconcile the international rules-based regime and its need for a global referee with the national sovereignty of a diverse membership—especially when the political will to negotiate clear rules on controversial matters is lacking. As of this writing, the WTO has 164 members at varying stages of development, with distinct policy agendas and divergent interpretations of what constitutes legitimate and market-distorting policies. WTO agreements leverage constructive ambiguity to find consensus among countries with diverse capitalist models. When disputes arise on clauses that are deliberately vague, the AB becomes both responsible for and empowered with legitimizing one party’s interpretation while disqualifying another’s.

Since China’s accession to the WTO, the AB has been compelled to rule on matters that pertain to the Chinese state capitalist model with its state-owned enterprises and use of subsidies. For instance, a 2011 U.S. complaint required the AB to rule on how a public body should be defined according to WTO law. Such a definition would ascertain the freedom with which state-owned or -subsidized banks and enterprises could engage with exporters in financing and production processes. The AB decided that an institution must perform an explicit government function to be classified as a public body, denying Washington the right to retaliate against practices it regarded as dumping.

Other grievances include outgoing AB judges’ continued involvement in cases and the body’s inability to settle appeals within the ninety-day deadline. According to former judges, these criticisms target an underresourced AB that seeks to preserve predictability in the international trading system by providing coherent case law while dealing with increasingly complex cases. Over the years, the AB’s workload has grown significantly, reflecting not only the high number of cases but also increases in the size of disputes, the number of issues raised on appeal, the number of participants, and the length of submissions. Thus, reforms are needed for the AB to deliver on its mandate without bending the normative framework that defines it.

To break the AB impasse, the EU suggested concrete reforms in a joint proposal with several WTO members.³⁵ The proposal set out new rules for outgoing AB members, conditions for extensions of the ninety-day time frame, and clarifications on AB discretion and the scope of admissible claims. The joint framework included annual meetings between WTO members and the AB to discuss systemic issues or trends in jurisprudence. The EU also proposed a single but longer term of six to eight years for an increased number of AB members. In March 2020, the group agreed on the Multiparty Interim Appeal Arbitration Arrangement for appeals of panel reports to be resolved among participating countries until the AB becomes operational again.

Global Governance of Data and Technology

Throughout history, technological change has been at the source of economic transformation. But an accelerating pace of innovation, coupled with a high degree of globalization, has heightened the impact of technological change as the major cause of social dislocations, alongside international trade. Innovation has enhanced populations’ standards of living, but it has also been responsible for considerable upheaval, including more precarious employment. The emergence of large global internet platforms, and their unmatched hoarding of data, risks creating permanent oligopolistic markets—with a significant impact on the global distribution of wealth.

The rise of the intangible economy, in which value creation depends on the acquisition and processing of vast amounts of information, has transformed data into a valuable commodity. As a result, the governance of technology and data has emerged as a critical consideration in the digital economy. But the current ways of governing cross-border data flows through trade agreements have not produced multilateral, binding, or interoperable rules for the use of data.

The ubiquitous transfer of data across borders has given rise to a range of privacy, national security, and commercial concerns from governments and citizens. U.S.- and Chinese-owned firms that enjoy near-monopoly power over the sector collect and use terabytes of data on a daily basis, often without the knowledge of those concerned. In response, more than one hundred countries have enacted laws to regulate or prohibit the transfer of data abroad, affecting trade in the process.³⁶

Internet and Data Governance

The three major digital markets—the United States, the EU, and China—have taken divergent approaches to internet and data governance. Both sides of the Atlantic support a free, rules-based cyberspace with limited state intervention. Beijing, along with Moscow and other partners in the Shanghai Cooperation Organization, advocates a strictly regulated internet in which national authorities retain the sovereignty to govern and define the network’s frontiers through domestic regulation, unfettered by external interference.

In accordance with these differences, the limits of privacy protection and data localization rules also vary strikingly across the world. The fragmented regulatory landscape complicates global commerce by raising compliance costs for businesses. Rule harmonization rooted in multistakeholder consultations is necessary to reduce barriers to trade and innovation, improve predictability for businesses, and prevent a complete technological rupture in a duopolistic or monopolistic global economy dominated by U.S. and Chinese interests.

In view of these disparate models of data and internet governance, emerging countries are searching for formulas that would allow them to capture a bigger or fairer share of the economic value generated by the processing of their citizens’ personal data. The interest in a digital services tax, to be imposed directly on the territorial turnover of large data-centric digital companies, illustrates this need. But more broadly, a new and transposable blueprint is required to create compatible data governance regimes that do not act as barriers to cross-border trade but still allow a fair allocation of the economic value derived from the use of global citizens’ personal data.

At the June 2019 G20 summit in Osaka, then Japanese prime minister Shinzo Abe declared the launch of the Osaka Track, a policy dialogue that aims to advance international rulemaking on the digital economy in alliance with the EU and the United States. By strengthening data protection, intellectual property rights, and cybersecurity norms, the Data Free Flow With Trust (DFFT) initiative, pursued through the Osaka Track, seeks to reinforce consumer and business trust, establish interoperability, and enable free data flows to harness the opportunities of the digital economy among members. The project consists of plurilateral negotiations in the WTO to regulate electronic commerce and trust building through regulatory cooperation in cybersecurity, privacy, and other areas. Fifty countries signed the declaration of the G20 Osaka summit, and eighty-six WTO members, including China, Russia, and the United States, have joined the e-commerce talks so far.³⁷

At the Osaka summit, some emerging-market economies, such as India, Indonesia, and South Africa, boycotted the DFFT initiative, arguing that multilateral negotiations remained the most appropriate platform to regulate the digital economy. The BRICS countries of Brazil, Russia, India, China, and South Africa, some of which have enacted substantive data localization rules that could contradict the DFFT, defend data sovereignty, given the vital role data will play in the economic development of emerging markets. India’s foreign secretary has said that data are a “form of trade” and should be addressed in the WTO.³⁸

Whether it is through the WTO, private or public multistakeholder initiatives, or trade agreements, most countries with sizable data-driven companies are locked in debates over how to govern these services and the data that underpin them. Developing countries are almost entirely absent from these processes.

A June 2019 report of the UN High-Level Panel on Digital Cooperation presented a vision for strengthening multilateralism and diversification of voices in digital cooperation.³⁹ A year later, the UN secretary general unveiled the organization’s road map for digital cooperation.⁴⁰ However, the document did not expand on three previous models offered by the panel as alternatives for reforming the global architecture for digital governance. These models were a strengthened and improved Internet Governance Forum Plus, a dispersed co-governance architecture that delinks the design of digital norms from their implementation and enforcement, and a structure that would treat the digital world as a global common requiring collective management.

A key consideration in this respect is the reinterpretation of competition rules to limit oligopolistic practices in the tech economy. For instance, the European Commission fined Google €2.4 billion ($2.6 billion) in 2017 for abusing its dominance as a search engine and €1.5 billion ($1.8 billion) in 2019 for abusive practices in online advertising.⁴¹ Many developing country governments believe that large technology firms are knocking out rooted local businesses and start-ups before they can establish themselves in their home markets. In August 2020, Mexico’s competition watchdog launched an investigation into the abuse of dominance in digital advertising space.⁴² And in April 2021, Turkey fined Google $25 million for breaching the country’s competition law.⁴³

Antitrust concerns have gained ground in the United States as well. In 2020, a report on big tech by the U.S. House of Representatives Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law asserted that companies exploited their dominant position to preserve a monopoly status. The report recommended measures that, if implemented, could result in the breakup of these companies.⁴⁴ A few months later, in a case against Google, the U.S. Justice Department brought the most significant antitrust charges yet for big tech.

Big tech has gotten even bigger during the coronavirus pandemic, adding to frustrations. The combined market capitalization of Alphabet, Amazon, Apple, and Meta (formerly Facebook) has exceeded $5 trillion.⁴⁵ In July 2021, U.S. President Joe Biden signed an executive order containing seventy-two initiatives to coordinate the federal government’s response to competition issues while focusing on administrative policies and urging federal agencies to take action.⁴⁶

Ultimately, there are noteworthy limits to the policy options available to developing nations that push them to adopt frameworks created by advanced economies and foreign companies. On the one hand, governments and private actors in developed countries have been instituting rules and standards that apply beyond borders. For instance, the EU’s General Data Protection Regulation (GDPR), which governs the processing of personal data, and the U.S. Clarifying Lawful Overseas Use of Data (CLOUD) Act, which allows U.S. law enforcement to request data stored by tech companies, apply extraterritorially. Yet, even if they did not, most developing countries constitute negligible markets in the revenue portfolios of large multinational firms. The fear of prompting companies to exit the market would suffice to restrain governments from diverging far from de facto global standards they had no input in establishing.

On the other hand, great power rivalry over the future of the internet and discrepancies among governments’ plans oblige states to choose strategically which set of standards to mirror. To illustrate, the EU increasingly incorporates GDPR principles into free-trade agreements and presents alignment with the regulation as essential to securing certain types of funding from the union’s institutions. Developing countries that want to preserve access to the European market, like the advanced economies pursuing the same goal, adopt regimes that follow the EU’s approach. The countries that write the rules and shape governance architectures derive considerable power from this arrangement. As other capitals choose to opt into their standards, complex technical and regulatory interdependencies are formed, over which developing countries have hardly any control.

Notably, the data-driven economy—in particular, new technologies like artificial intelligence and automation—inherently favors the first movers, as innovation is driven by the increasingly sophisticated processing of ever-larger amounts of data. The general paucity of data governance and enforcement has been an essential source of competitive advantage for U.S. tech companies in their global expansion and a catalyst in the rise of Chinese competitors. The interplay between these elements has enabled a few firms to assume control of the market and hoard troves of data sourced from across the world.

Against such a backdrop, it is increasingly difficult for developing nations to move ahead in the data economy and capture a share of the market—let alone present a real challenge to the dominance of U.S. and Chinese firms. Developing countries therefore need regulations and standards that create a level playing field between innovators and laggards and provide security and privacy while fostering data-driven innovation and growth.

Technology Governance

Like the framework for data governance, a lack of inclusivity underpins global governance of technology as well. In general, most norms and rules that govern the cross-border diffusion of technology have been devised by either private industrial actors, technical committees, or domestic policymakers in a small number of advanced economies.

Of crucial importance in this respect is the global regime of intellectual, industrial, and commercial property rights. The intellectual property standards entrenched in and diffused by the TRIPS agreement originated first and foremost in the practices of today’s advanced economies, where national patent regimes had developed over many years. These regimes require patents in all domains of technology, including where they may imperil other crucial goals, such as climate change adaptation and mitigation, public health, and food security.

Developing countries pay to use intellectual property that is held mostly by entities from developed economies, while the latter use their political heft to protect the fruits of their firms’ investments in research and development at home and abroad. Through bilateral trade agreements, developed countries push for more robust regimes in less developed markets, at times going as far as expanding the application of domestic intellectual property rights to free-trade partners. As a result, developing nations find themselves forced to conform to increasingly harsh intellectual property norms to ensure access to other components of the development equation.

Critics of strong global intellectual property rights put forth a range of arguments.⁴⁷ Such rights, it is contended, impose adverse welfare effects on developing countries, expedite the transfer of capital from developing to developed nations, and, in doing so, afford unfair gains to developed countries at the expense of developing ones. Opponents worry that intellectual property rights diminish access to knowledge, slow industrialization, stifle innovation, affect competition, and pose a barrier to technology transfers to developing countriesPatent protection increases the prices of essential goods such as agricultural inputs, threatening food sovereignty and access to medicines.

There are also concerns that intellectual property rights entrench existing disparities in the world economy and prevent developing countries from implementing the appropriate system of protection for their circumstances.⁴⁸ That is despite evidence that the impact of the rights regime differs for countries at different stages of development.⁴⁹ Indeed, there is no empirical evidence that patents increase innovation and productivity in developing countries.

Importantly, for many of today’s developed countries, intellectual property policies with weak patent protection were fundamental to their growth.⁵⁰ The United Nations Conference on Trade and Development (UNCTAD) noted in 1991 that “a premature strengthening of the international intellectual property system can then be viewed as a one-way scheme that favours monopolistically controlled innovation over broad-based diffusion through free-market competition, a scheme that does not conform to the practices of many of today’s most developed countries at earlier stages of their growth.”⁵¹

In issues of global governance of technology, developing countries focus on the way technology relates to economic development. This is because the structural changes required to leapfrog the barriers of the digital economy are extremely arduous. Developing countries face substantive risks to their labor force from skill-biased technological change. The latest technologies mean that the comparative advantages of low-income countries in conventional manufacturing will disappear before long. As more sectors undergo digitization, employing surplus unskilled labor may become more complicated, which may trigger dire social consequences. Developing countries therefore need support to devise agile regulations, alleviate the impact of technological disruptions in traditional sectors, and boost investments in human capital to keep up with the dynamism of the digital economy.

Finally, it is worth noting that in contrast to other issue areas, civil society organizations with thematic expertise in technological transformation and the data economy are few and geographically clustered in Western countries. There are compelling reasons to think that this has weakened the traditional role of civil society to fill crucial gaps; support developing countries with tailored policy guidance, technical information, or capacity-building efforts; and help them participate actively in global debates.

The International Financial System

Critics have long called out the international monetary and financial regime for reflecting the interests of post–World War II economic powerhouses, even though large developing countries occupy increasingly important positions as stakeholders and innovators in the global financial system. Despite some progress, international financial institutions continue to be criticized for promoting a logic that favors private interests, heightens volatility, and poses obstacles to healthy and sustainable growth, most notably in underdeveloped economies.

The importance of the financial sector in the global economy has grown considerably in recent decades with globalization and the digital revolution. Cutting-edge financial technology has brought millions of stakeholders into the financial system. However, this has not led to the establishment of mechanisms either to minimize the systemic risks that threaten to spill over into nontraditional financial institutions or to protect vulnerable groups with less capability to shield themselves from harm.

Amid the ongoing recovery from the 2008 global financial crisis, the world must now deal with the challenges of the coronavirus pandemic. More than $100 billion had already left emerging markets by May 2020 in the largest and fastest case of capital flight in history.⁵² Against this backdrop, there is an urgent need to enhance the workings of an increasingly fragmented global financial system and address sources of systemic risk in an ever-more interconnected world.

Governance Reforms

A fundamental grievance of developing countries is lopsided influence in the core councils of global financial governance, which undermines the legitimacy of the system and imperils more effective global coordination. Developing countries do not feel fairly represented in the decisionmaking processes of international financial institutions and standard-setting bodies. These nations contend that failure to implement governance reforms will weaken trust and the implicit social contract stipulated by G20 members when the forum gained prominence during the global financial crisis. Such failure could fuel regionalism and fragmentation—not in the name of effectiveness but as a reaction to the avoidance of critical and long-overdue reforms in multilateral institutions.

Although the World Bank and the International Monetary Fund (IMF) between them represent 190 countries, a small number of economically powerful nations hold disproportionate control over decisionmaking. This is due to the continued use of weighted voting mechanisms based on an outdated allocation of voting rights. The Bretton Woods institutions remain locked into a system that gives the United States veto power over major decisions and grants European countries significantly outsize influence.

For example, in the IMF, voting rights are allocated based on a system of quotas, which are calculated according to a formula that considers a country’s GDP, openness, reserves, variability, and financial contributions to the fund. This formula currently gives the United States a 16.5 percent share of the quotas and the twenty-seven EU member states 21.8 percent of the quotas.⁵³ A realignment of quota shares is crucial because disparities in voting weight fuel conflict when more and less developed countries disagree on essential policy problems, such as the amount of IMF resources, the purpose and content of IMF conditionality, and the deployment of special drawing rights.

Moreover, historically, the World Bank director has been an American and the IMF has been headed by a European, based on a gentlemen’s agreement fashioned by Western powers in the postwar period.⁵⁴ The arrangement has prevented candidates from other regions from taking leadership roles—at times despite superior credentials.

The decisions made in the World Bank and the IMF have profound impacts on developing nations. The principal borrowers from international financial institutions are developing countries, and the contributions of emerging markets to the Bretton Woods system have grown disproportionately to their voting weight over the last decade. Emerging-market governments feel that allocations of voting rights should reflect their nations’ heightened importance in the global economy.

At the same time, less developed countries highlight that decisions are too frequently made against their interests in the councils of global financial governance.⁵⁵ Since the first G20 summit in November 2008, developing countries have called for comprehensive adjustments to the governance of the Bretton Woods institutions.⁵⁶ Proposed areas for reform include the quota shares and the formula that links shares to voting power in the IMF, the composition of the IMF and World Bank boards of directors, the services provided by these institutions, and the selection procedures for their chief executive officers.

There have been efforts to make decisionmaking in global financial institutions more inclusive, such as an incomplete G20-led governance and quota reform of the IMF in 2010. Although some adjustments were made in both the World Bank and the IMF, these did not create meaningful improvements toward addressing the grievances of developing countries, as they primarily—albeit incrementally—improved the positions of China and a few middle-income nations. Despite repeated assurances to the contrary, low-income countries gained hardly any voting power in the Bretton Woods institutions. In fact, some lost voting power in the IMF, fitting a larger pattern of the marginalization of their interests.

In the IMF, quota reviews are supposed to take place every five years, but over the years, the G20 has made multiple requests to bring forward the schedules for these reviews. In an appreciable move, the Europeans agreed in 2010 to give up two of their seats on the fund’s executive board to emerging markets and make the body fully elected. In February 2020, the IMF officially abandoned its fifteenth quota review after failing to secure the necessary backing.⁵⁷

Like the Bretton Woods institutions, standard-setting bodies, such as the Basel Committee on Banking Supervision or the Financial Action Task Force, play critical roles in shaping the behavior of actors in the global financial system. Countries that are not represented in the executive committees of standard-setting bodies are profoundly affected by their regulatory decisions all the same. Accordingly, these bodies have material implications for economic development and the attainment of the UN Sustainable Development Goals. Even the world’s poorest economies are deeply integrated into the global system.

Be that as it may, these bodies tend to respond to the priorities and conditions of advanced economies and the interests of the financial community. There are concerns that the decisions made in standard-setting bodies, such as the move to introduce macroprudential standards in Basel III, do not adequately take into account the primary source of systemic risk in developing countries and are poorly calibrated for their regulatory priorities.

Developing nations’ insistence has prompted some standard-setting bodies to take actions to identify the unintended negative consequences of financial regulatory reform, but such attention continues to be an afterthought. After the global financial crisis, the memberships of several critical bodies were extended to include all G20 countries, giving developing nations a seat at the table for the first time. Nevertheless, a lack of deliberative parity lingers.

The International Debt Architecture

A core reason why debt crises recur, have such ruinous impacts, and require a long time to resolve is the lack of an insolvency regime akin to the procedures for corporations on a path toward default. The IMF has warned that the coronavirus pandemic presents a very serious threat to the stability of the global financial system as debt levels are rising rapidly around the world.⁵⁸ In 2020, global government debt increased by 13 percentage points to a new record of 97 percent of GDP. It rose in advanced economies by 16 points to 120 percent of GDP and in emerging markets by 9 points to 63 percent of GDP.⁵⁹

Emerging markets have reached the limits of sustainable debt and low-income countries are especially vulnerable, as their collective debt burdens rose by 12 percent in 2020 to a record $860 billion.⁶⁰ Even advanced economies might be at risk, because many of them entered the coronavirus crisis carrying more debt than at the start of the 2008 global financial crisis. Against this backdrop, there are mounting calls for a multilateral framework to ensure that future debt standstills are resolved fairly—and not through bargaining among unequal parties.

Since the global financial crisis, it has become best practice to design debt contracts with collective action clauses (CACs)—provisions to make it easier for creditors to agree to lighter terms for a debtor that would otherwise struggle to honor the original conditions. The G20 has endorsed CACs as an indispensable element of the international debt architecture, and the eurozone has adopted the clauses for all of its sovereign debt from 2022 onward.

A rise in sovereign debt that takes forms other than standard bond contracts—and therefore eludes the reach of CACs—has produced new risks. Much government-to-government debt is now undisclosed or owed to countries, such as China, that are not a part of traditional debt-negotiation groups. This makeshift structure, which lacks oversight of emerging creditors, perpetuates an information asymmetry that leads to misinformed lending decisions, makes traditional creditors reluctant to lend or participate in restructuring, and puts developing countries at the risk of predatory lending practices.

UNCTAD has repeatedly underlined that the ad hoc structure that has evolved to deal with debt crises in the current era of globalization strongly favors creditors. The organization has pointed out that the current system is inept at addressing chronic financial vulnerabilities and enhancing debt-servicing capabilities across developing countries in a debt landscape that has evolved massively in scale and complexity.⁶¹ The UN champions “an ordered multilateral debt settlement mechanism” that links debt restructuring to green debt swaps and buyouts to support countries in preserving biodiversity, shifting away from fossil fuels, and curbing global warming.⁶² As an initial step, UNCTAD has proposed the establishment of a global debt authority or standing body.

Previous initiatives aimed at multilateral reform of sovereign debt management have generated substantial opposition to a supranational authority, including from the United States and the EU. In late 2014, the UN General Assembly adopted a landmark resolution and formed a committee to develop a multilateral legal framework for sovereign debt restructuring. The EU, led by Germany and the United Kingdom, boycotted the committee’s sessions. Because of the boycott, the Group of Seventy-Seven (G77), a coalition of developing countries, agreed to adopt an alternative set of “basic principles on sovereign debt restructuring processes” instead of the multilateral legal framework.⁶³ However, the UN’s members could not reach a consensus on the proposal.

Meanwhile, the G20 continues to deliberate on a common approach to longer-term debt restructuring in addition to a debt freeze for low-income economies as an urgent measure to deal with the pandemic. In October 2020, senior IMF officials published a blog post underlining the urgency of reforms to the international debt architecture against the backdrop of the coronavirus.⁶⁴

Multilateral Lending Reform

Even before the coronavirus crisis, meeting the UN Sustainable Development Goals by 2030 was moving out of reach, in large part because of a growing investment gap. The international financial system currently does not allocate enough resources for long-term sustainable development, which is integral to progress in key areas such as infrastructure, healthcare, education, and renewable energies. There is a need to align the international financial system’s incentives for long-term investments that are consistent with sustainable development.

In recent years, this situation has set in motion the creation of alternative international financing options and given rise to emerging creditors. This trend has improved the availability of much-needed funding for projects in a wide range of areas, but it has also made the international financial architecture patchier and ineffective in certain ways. For example, in the words of one group of analysts, “the activities of multilateral development banks often overlap in specific sectors when they operate in the same countries, with limited coordination, even competition, among them.”⁶⁵ Moreover, there has been a rise in bilateral lending to countries that have trouble borrowing from international capital markets and are disinclined to approach lenders like the IMF or multilateral development banks. Loans approved at lower standards create new risks associated with opaque credit assessment and debt accumulation, especially in underdeveloped economies.

As regional arrangements gain prominence, multilateral development banks are in a unique position to streamline the achievement of the Sustainable Development Goals by mobilizing finance, addressing cross-border issues, and reaching the most vulnerable people. On that premise, there have been calls for reforms to ensure that multilateral and regional development banks establish common guiding principles and procedures, a more effective division of labor, and a more productive allocation of resources. The G20 Eminent Persons Group on Global Financial Governance has proposed a fundamental transformation in the business model of multilateral development banks from direct lending toward risk mitigation aimed at mobilizing private capital.⁶⁶ There have been no substantial moves toward multilateral lending reform so far.

The IMF has reformed its lending instruments since the bailouts prompted by the eurozone crisis. For instance, the fund introduced a flexible credit line and a precautionary liquidity line to enhance its lending capacity to members in cases that might otherwise be ineligible for assistance. The IMF boosted its resources and provided emergency financial assistance to eighty-five countries without full-fledged programs to help deal with the pandemic.⁶⁷ Critics, however, urge a review of the fund’s policy thinking in crisis management and the conditionality of IMF loans, especially now that countries need to support those suffering from income loss and prepare inclusive stimulus plans to recover from the coronavirus crisis.⁶⁸

The Global Reserve System

Another essential debate in the context of the global financial architecture concerns reliance on the U.S. dollar as the global reserve currency, and what happens when the stability of the system is inconsistent with the monetary policy objectives of the United States. This problem motivates developing countries to self-insure in the face of volatility in external financing by accumulating foreign exchange reserves. At the same time, this situation creates an inequity issue as investments are channeled to the assets of safe industrialized countries.

The coronavirus crisis has provided an impetus to debates about sources of liquidity in the global economy. Countries’ national reserves are not sufficient to deal with the financial shock of the pandemic. The lending facilities of the IMF and multilateral development banks are underresourced. Treasury repo facilities and swap lines from the U.S. Federal Reserve provide selected countries with access to U.S. dollars, but such arrangements do not create reserves and are not accessible to all countries. In light of this situation, demand for a new allocation and/or a reallocation of special drawing rights (SDRs) at the IMF to enhance the global reserve system has arguably reached its highest level.

The SDR is an international reserve asset that supplements IMF members’ official reserves.⁶⁹ SDR allocations expand countries’ international reserves in proportion to their IMF quota shares. A member can transfer SDRs to another member in exchange for credit in a convertible or hard currency at a certain interest rate. The interest earnings offset the variations in the cash position and borrowing requirements that may result from the exchange. To be approved, a new SDR allocation requires at least 85 percent of the votes at the IMF—that is, the consent of the United States and the EU.

The G20 Eminent Persons Group has proposed an SDR-based global reserve system to supplement bilateral swaps for U.S. dollars.⁷⁰ This approach seeks to generate unconditional liquidity with countercyclical allocations of SDRs while providing conditional liquidity to countries facing balance-of-payments crises with countercyclical IMF financing made entirely in SDRs.⁷¹ SDRs not used by countries to which they are allocated as deposits would be used to lend to countries in need.

Proponents argue that this would give developing countries a share in the seigniorage of creating international money—that is, the revenue from the manufacture of money, calculated as the difference between the money’s value and the cost to produce it.⁷² This system would also reduce the demand for foreign exchange reserves intended as self-insurance. Both advantages would be enhanced if there were an agreement to consider factors besides quota contributions to increase developing economies’ shares in SDR allocations. Another strength of such a system is that it would provide a degree of freedom from U.S. monetary policy and take some pressure off the Federal Reserve.

By contrast, critics believe that the relevance of SDRs is limited by the fact that they cannot be used outside the IMF and selected agencies.⁷³ They point out that SDRs impose interest charges and highlight the political infeasibility of redistributing the reserves.

In August 2021, the IMF approved a general allocation of SDRs equivalent to $650 billion to boost global liquidity.⁷⁴ About $275 billion of the new allocation will go to emerging markets and developing countries. Sub-Saharan African states will receive around $23 billion of this amount.⁷⁵ IMF Managing Director Kristalina Georgieva has stated that the fund will explore options for the voluntary channeling of SDRs from wealthier to poorer and more vulnerable member countries.⁷⁶

The International Tax Regime

Numerous interlinked factors have eroded the apparatus for taxing multinationals over the last few decades: falling tax rates, ever-increasing cross-border capital flows, loopholes that arise from inconsistencies between jurisdictions, and aggressive incentives from states that compete to attract multinational enterprises, to name a few. For several years, political leaders and civil society across the world have voiced concerns about tax avoidance by multinational corporations, which, unlike domestic companies, can take advantage of gaps in the interaction of diverse tax systems.

In the United Kingdom, a 2019 study found that over half of the subsidiaries of foreign multinationals reported no taxable profits.⁷⁷ In the United States, numerous Fortune 500 companies paid an effective federal tax rate of zero in 2018.⁷⁸ Depending on the methodology, studies estimate that between $500 billion and $600 billion in corporate income and $200 billion in individual income is lost to tax havens annually through legal and illegal means. Of these losses, about one-third occur in developing countries.⁷⁹

The rapid rise of the digital economy has raised essential questions about the taxation of companies that no longer need local employees, offices, or operations in a country to generate profits there. The current international tax regime requires multinationals to pay corporate income tax where production takes place, rather than where consumers or users are located. This principle of physical presence, which has underpinned the global tax system since 1924, needs to be adjusted to respond to the reality of today’s global economy. The urgency of this task grows with digitization, given that it is increasingly difficult to pinpoint where a technology firm’s production occurs—not to mention to clarify the link between its revenues and its reported profits.

The rise of intangible assets, like patents and software, as chief drivers of value in the global economy has fueled competition among governments to host a larger share of such assets, which can move across jurisdictions quickly. This environment has encouraged multinationals to structure their affairs to minimize tax liabilities, such as by reducing taxable income or moving profits to low-tax jurisdictions that report little or no economic activity. There is a shared sentiment around the world that the current system has enabled multinationals to free ride on the public goods needed for their businesses to thrive while eroding governments’ capacity to provide such goods. This picture underpins the allure of using minimum taxation to weaken tax-planning incentives.

In such a setting, developing countries face several additional constraints. Before the pandemic, they were already under pressure to invest in achieving the UN Sustainable Development Goals and to address developmental deficits while keeping their debt levels low. Investments, available aid, and borrowing mechanisms have remained scant, however, compared with the financing needs of growing populations, notably in infrastructure and healthcare.

On top of that, the surge in public spending and debt levels against falling government revenues due to the coronavirus crisis has amplified the urgency of mobilizing available sources of domestic income, turning the spotlight on corporate income taxes. Corporate income tax represents a higher share of tax revenues and GDP in developing countries than in rich economies. During the pandemic, multinationals have thrived and accrued significant profits, while most sectors have struggled to cope with the adverse circumstances. In this respect, the fair taxation of multinationals is a priority to release a much-needed, untapped source of revenue for all countries. But for many developing nations, it may be vital moving forward.

Finally, policymaking in host developing countries may be more susceptible to the influence of multinationals because of the risk of capital flight and business loss. A comprehensive tax regime would help level the playing field, increase predictability, and promote financial stability in developing economies.

Policy Directions

As a multilateral solution remains in the works, three policy directions have prevailed among countries seeking to deal with the challenge of aggressive tax avoidance. A first group of countries has implemented varying forms of a digital services tax (DST)—a tax on gross revenues of specific, defined, digital services. These taxes are often presented as interim measures to be repealed in the event of an OECD deal. Half of all European OECD members have either announced, proposed, or implemented a DST.⁸⁰ The European Commission is withholding details on a digital levy until countries finalize the global tax overhaul announced in October 2021.

Meanwhile, India and Turkey are among the developing countries that have enacted DSTs. The African Tax Administration Forum (ATAF) has also begun developing a DST tool kit for its members. More broadly, the coronavirus pandemic has provided an impetus for the introduction of such taxes across the world.

Although they answer legitimate grievances, uncoordinated DSTs risk fostering tax competition and uncertainty in the global economy. Unilateral actions can result in double taxation, retaliation, and even the weaponization of taxation. In brief, DSTs—much like other unilateral trade barriers—can create an environment that is conducive to new trade wars. Last but not least, in most cases, the cost of a DST is passed onto consumers, resulting in unintended consequences on household budgets.

A second set of countries, including India, Israel, Nigeria, and Slovakia, has sought to resolve the problem of local physical presence by formulating definitions of “permanent establishment.”⁸¹ Each nation experimented with a slightly different approach, involving the treatment of companies that have many online contracts or sales in a country as having a virtual permanent establishment there. There are indications that many authorities view potential changes in the way “permanent establishment” is defined as a soft target to increase their revenues. If this were true, it would increase the risk of double taxation and tax disputes worldwide, creating an uncertain landscape for taxpayers and consumers.

Third, some countries have pursued alternative ways to apply indirect taxes like value-added tax (VAT) and goods and services tax (GST) to cross-border digital services provided by nonresident suppliers to consumers. This approach requires nonestablished businesses to register and report VAT or GST locally. The EU has adopted a set of standards in this area, and several African and Latin American countries have expanded the scope of their existing indirect taxes to cover digital services.

From a government’s perspective, the effective collection of indirect taxes involves challenges and risks. Many jurisdictions offer a VAT exemption for imports of low-value goods because the related administrative costs tend to outweigh the expected revenue. The exemption threshold differs substantially from one country to another, increasing the volume of low-value imports and allowing businesses to take advantage of threshold differentials. Likewise, supplies of services and intangibles often lead to no or inappropriately low collection of VAT and result in additional competitive pressures on domestic suppliers.

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting

In July 2013, at the request of the G20, the OECD announced an action plan that identified fifteen steps to address base erosion and profit shifting (BEPS)—tax-planning strategies that exploit gaps and mismatches in fiscal rules to avoid paying tax—by multinational enterprises. Subsequently, the OECD and the G20 launched the Inclusive Framework on BEPS, which began working toward a multilateral scheme to address the challenges of the digital economy. The initiative’s current project found life in 2017, when the United States showed willingness to discuss limited, globally agreed reforms to avert unilateral measures against its firms.

In January 2019, the Inclusive Framework adopted a two-pillar work program on the tax challenges of digitization, which formed the basis of the tax deal announced in October 2021.⁸² One hundred thirty-seven of the Inclusive Framework’s 141 member jurisdictions have joined the agreement so far.⁸³ The OECD secretariat estimates that more than $125 billion of residual profit will be reallocated to market jurisdictions from the application of pillar one and around $150 billion of additional revenue from pillar two.⁸⁴ The G20 has acknowledged the deal as a “historic achievement” and called on the Inclusive Framework to swiftly develop the model norms and multilateral instruments in the detailed implementation plan to ensure that the new rules come into effect globally in 2023.⁸⁵

While the OECD is currently the dominant platform to address issues of international taxation, demands continue for tax reforms to be carried out at the UN with binding resolutions to ensure inclusivity and transparency. Indeed, over one-third of the world’s countries were absent from the OECD-led process. In the meantime, the UN has inserted a new article into its model for taxation of automated digital services to address the concerns of developing countries to get a larger and fairer share of tax revenues from digital companies.

The Inclusive Framework has a large membership and employs private and public consultations to ensure inclusive decisionmaking. However, developing countries argue that the political and technical complexities of the framework’s proposals and the time targets involved make it extremely challenging for less developed economies to participate in the process. They point out that some countries might commit to new rules without a full understanding of the revenue and investment implications, and the final product might not align with their interests. In several OECD consultations, delegations have reported that they feel ignored because they are not primarily market countries, so they might not benefit much from the proposed new rules.

Pillar One: New Taxation Rights

Pillar one of the Inclusive Framework’s program seeks to integrate new business models into the international income tax system through changes to the profit allocation and nexus rules that apply to business profits. This pillar expands the taxing rights of market jurisdictions where a business participates in the economy through activities in or directed at that jurisdiction. It introduces a new taxing right for jurisdictions over a share of firms’ residual profits, known as amount A.

Amount A applies to multinational companies with a global turnover of over €20 billion ($23 billion) and profitability of over 10 percent. About one hundred of the largest multinationals fall into this category.⁸⁶ For firms that are in scope, 25 percent of residual profit—defined as profit in excess of 10 percent of revenue—will be allocated to market jurisdictions with lower turnover thresholds. For smaller jurisdictions with GDP under €40 billion ($45 billion), the threshold will be €250,000 ($283,000).

The Global Alliance for Tax Justice and the European Network on Debt and Development argue that the deal is based on clear biases in favor of the countries where multinational corporations have their headquarters.⁸⁷ These watchdogs maintain that it is an unhealthy international principle that the country where a firm is headquartered should get the lion’s share of that firm’s tax income. Additionally, civil society groups have concerns over many of the exemptions in the OECD deal. The fact that countries will have to waive DSTs, which are important sources of revenue for some developing states, is also problematic and prompted Kenya, Nigeria, Pakistan, and Sri Lanka to reject the deal.

The G24, a group of twenty-four developing countries to coordinate on monetary and development issues, finds the agreement suboptimal and unsustainable in the medium run. The G24 and ATAF argue that “the reallocation percentage [of tax revenues to developing countries] should not be less than 30% of multinationals’ non-routine profits. With a limited number of companies and the nature of the business in scope any share of less than 30% will not ensure any meaningful revenue for developing countries.”⁸⁸ The G24 also believes that the removal of DSTs and other, similar measures should be gradual alongside the implementation of amount A.

According to the ATAF, “the reallocation of profits [should] be calculated as a portion of the MNEs [multinational enterprises] total profits instead of its residual profit. The quantum to be reallocated [should] be a Return on Market Sales based on the Global Operating Margin of the MNE group, whereby the higher the Global Operating Margin of the MNE, the higher the reallocation.”⁸⁹

The ATAF and the African Union “have stated . . . that there should be no form of Mandatory Binding Dispute Resolution mechanism for transfer pricing and permanent establishment disputes in the Pillar One rules for countries where there is little double taxation risk as this would impose a demanding and complex process on such countries.” The ATAF and the African Union demand that an “elective binding dispute resolution mechanism [be] made available to all African countries that have limited capacity.”⁹⁰

Pillar Two: A Minimum Corporate Tax Rate and Accompanying Rules

Pillar two of the work program provides for a global minimum corporate tax rate of 15 percent on all multinationals with annual revenue of over €750 million ($850 millino).⁹¹ Through this pillar, the OECD aims to limit how much countries can lower their corporate tax rates to lure company headquarters to their jurisdictions. The tax rate is accompanied by three rules that would make it much harder for firms to move taxable profits around to minimize their liabilities.

A major grievance regarding pillar two is that the turnover threshold would exclude 85–90 percent of the world’s multinationals.⁹² Many criticize the 15 percent effective rate for being far lower than the global average corporate tax rate of approximately 25 percent and closer to the 12.5 percent proposed by some low- or no-tax jurisdictions, which, some suggest, will put countries with higher corporate tax rates into a “race to the minimum.”⁹³ The ATAF and the African Union insist that the minimum effective tax rate should be at least 20 percent.⁹⁴ Furthermore, there are concerns that in many cases, extra tax paid by corporations topping up their tax bills to 15 percent will go to countries where those firms are headquartered. In many cases, these will be already-rich nations, such as the United States, the United Kingdom, and various EU countries.

Finally, while governments are not obliged to implement the pillar two rules, there are concerns that developed countries will use their economic advantage to pressure poorer nations into joining the plan. A similar move happened when the EU placed Namibia on its list of noncooperative countries and territories for tax purposes from 2016 to 2018 because the nation refused to comply with OECD guidelines.

Climate Change

Although it is difficult to measure the impact of globalization on climate change, it is indisputable that globalization has accelerated the leading causes of greenhouse gas emissions. Burgeoning international trade and investment have spurred global industrial activity and multiplied transportation networks within and across national borders. The global power supply, generated mainly from fossil fuels, has had to snowball to sustain this momentum, as countries have sought to reap the benefits of globalization.

Global warming is already producing dire consequences, especially for developing countries. Rising temperatures have fueled extreme weather events that have devastated communities, caused glacial melt in the Antarctic, and hastened the global rise of sea levels, among a plethora of other problems. The UN’s Intergovernmental Panel on Climate Change warns that food security and water availability will be prevalent concerns in the next decades and will disproportionately affect the most vulnerable.⁹⁵ Floods, droughts, and cyclones will become more frequent and intense, threatening the livelihoods and survival of large populations.

Scientists warn that the mounting effects of global warming require urgent changes from a committed international community to limit the rise in global temperatures this century to 2 degrees Celsius from preindustrial levels.⁹⁶ To that end, there is a growing need to decouple economic activity and greenhouse gas emissions to resolve the twin challenges of reducing poverty and combating climate change as well as preserve the conditions for future generations to thrive.

Equity in Climate Action

Equity concerns in climate action are rooted in the asymmetry between emissions and burden sharing, for example when it comes to the risk of exposure to impacts or the costs of emissions mitigation and adaptation. On the one hand, most human-driven greenhouse gas emissions stored in the atmosphere originate in economic activities performed in or for affluent countries—but natural processes place an astonishingly greater burden of the impacts on poorer nations. On the other hand, large emerging markets have become today’s main emitters and economic powerhouses, increasing international pressure for them to take action to address their emissions.

Industrialized countries are responsible for three-quarters of the cumulative global emissions released into the Earth’s atmosphere since the start of the Industrial Revolution; these countries still have much higher per capita emissions today.⁹⁷ Despite their commitments under the United Nations Framework Convention on Climate Change (UNFCCC), most OECD countries continue to have growing greenhouse gas emissions. So far, forty-seven countries—including Canada, Denmark, France, Germany, Hungary, New Zealand, Spain, Sweden, and the United Kingdom—have made legally binding commitments to meet net-zero emissions targets.⁹⁸

Currently, the EU operates the world’s most comprehensive emissions-trading system and is discussing a new carbon tax as part of its European Green Deal, which aims at decoupling the economy from resource use and achieving net-zero greenhouse gas emissions by 2050. Biden has returned the United States to the 2015 Paris Agreement on climate change, from which former president Donald Trump had withdrawn, and set a target of reducing U.S. emissions by 50–52 percent from 2005 levels by 2030.⁹⁹

Many in the industrialized world acknowledge their responsibility to spearhead the green transformation and support developing countries with the resources they need to grow in a climate-responsible manner. However, the rise of emerging powers, which introduce a greater diversity of interests into the core councils of governance, complicates the issue of equity in climate action. For industrialized countries, the developmental progress and the new power-political positions of emerging markets have transformed the notions of fairness and legitimacy in climate politics and made the binary worldview based on developing versus developed countries outdated. The current system, which gives rapidly growing emerging powers the same emissions rights as the less developed while binding industrialized economies to lower emissions, has given rise to concerns about competitiveness.

Developed economies concentrate on current emissions in climate debates and discuss equity as a matter of allocating mitigation targets. The United States and Europe have historically been the primary polluters in the global economy, but emerging markets have overtaken them as global production has moved to these countries, where weaker environmental standards often apply. Developed countries believe that today’s main emitters should jettison claims for special treatment and articulate how they will reduce their emissions over the next century with legally binding targets. For developed nations, emerging markets must grow in a climate-responsible manner to genuinely tackle global warming.

In the developing world, the main concern is that countries have to suffer impact burdens from climate change that do not match their historical responsibilities—an issue that, in their view, developed countries deliberately brush aside. The world’s poorest 3.5 billion people contribute little to carbon emissions but endure the greatest harm from the impacts of climate change.¹⁰⁰ Although it is mainly developing countries that placed equity on the agenda in climate change negotiations, governments and entities from the industrialized world defined the scope of that agenda. As a result, efforts have so far focused primarily on mitigation. Developing nations want impact burdens and adaptation to take center stage because while mitigation burdens are still up for debate, impact burdens are not. Developing countries therefore call on developed ones to honor their financial pledges and help them build resilience.

Differences in economic structures and vulnerabilities have fostered the formation of developing country subgroupings and issue-based alliances between developed and developing nations in climate negotiations. Least developed countries and small-island developing states, which face an existential threat from climate change, demand urgent solutions from both established industrialized nations and the newly industrialized countries of Brazil, South Africa, India, and China (BASIC), no matter how they feel about capabilities or culpability.

Members of the Organization of the Petroleum Exporting Countries want industrialized economies to pursue policies that would minimize the welfare losses of developing countries that depend on petroleum exports. The BASIC states divided when Brazil and South Africa accepted greater responsibility than India and China, although all defend the differentiation framework agreed at the 1992 Earth Summit in Rio de Janeiro. In a globally welcomed development, Beijing pledged in September 2020 to reach carbon neutrality by 2060.¹⁰¹

Emerging market economies, in coalitions with other developing countries, stress that issues of international responsibility and accountability on this matter were already debated, negotiated, and decided on in Rio when the climate regime was formed and unanimously accepted. They contend that their aggregate and per capita emissions need to continue to rise because despite recent developmental successes, they remain far from ensuring reasonable standards of living for their populations.

Having already adopted measures toward greener economies, developing countries oppose additional international obligations to constrain their growth and permit greater scrutiny of their emissions. The primary responsibility for global emissions reductions cannot be passed onto them, these countries argue, because while several emerging powers have caught up with industrialized nations on production-related emissions, the gap in per capita and consumption-related emissions remains wide.

The Current Climate Regime

At the 1992 Earth Summit, the UNFCCC institutionalized an architecture based on the principle of common but differentiated responsibilities and respective capabilities.¹⁰² This principle acknowledged countries’ different abilities and adjusted their responsibilities in addressing climate change. The Rio regime recognized sustained economic growth and poverty eradication as legitimate national priorities. It affirmed that the emissions of developing countries would need to grow to meet their current and future developmental needs. The scheme exempted developing countries from having to undertake any uncompensated mitigation actions, given their low per capita emissions. The follow-up 1997 Kyoto Protocol incorporated legally binding mitigation commitments with targets and timetables for developed but not developing countries.

The 2015 Paris Agreement did not explicitly refer to country groupings but leveraged respective capabilities as a subtle form of differentiation among countries at varying stages of development. Under the accord, all parties are required to make voluntary national pledges toward their long-term climate-mitigation targets and review their progress over time. Developing countries are allowed to increase their ambitions in light of their conditions. The agreement granted least developed economies and small-island developing states exclusive flexibilities in preparing mitigation actions and prioritized them for climate funding.

Finance and Technology Transfers

Finance has always been a focal point of climate debates, both as a core concern of developing countries and as an indicator to assess whether industrialized countries have met their responsibilities. Under the current regime, developed countries have agreed to provide funding and other resources to less developed economies to help them cope with climate change. At the 2009 UN Climate Change Conference (COP15) in Copenhagen, developed nations made considerable pledges on fast-start and long-term finance. Several funding mechanisms have been established to coordinate efforts since.

Yet, there is still a huge funding gap and distribution problem in global climate actions. The annual financing needed to deal with climate change is estimated to be a staggering $7 trillion.¹⁰³ Industrialized nations have consistently failed to honor their pledges, and it is unclear how much space the coronavirus-driven rise in debt levels will leave for climate goals. The distribution of existing funds has been problematic as well. Market-rate debt has prevailed as the preferred instrument in most climate finance, and most tracked finance continues to flow toward mitigation activities, with adaptation accounting for only around 5 percent of total flows in 2017–2018.¹⁰⁴

A Global Price Mechanism for Carbon

According to many in industrialized nations, environmental goods must enter the market system and be valued so that market forces can optimize the consequences of policies on global competition.¹⁰⁵ To this end, there have been suggestions of a global carbon-pricing mechanism in the form of a tax or an emissions-trading system (ETS). A carbon tax sets a price on carbon by defining a tax rate on greenhouse gas emissions or the carbon content of fossil fuels. Under a carbon tax, regulators determine the carbon price, while the quantity of emissions reductions depends on measures adopted by the industry. An ETS,also called a cap-and-trade system, caps the total level of greenhouse gas emissions and allows industries with low emissions to sell their extra allowances to larger emitters. Under an ETS, the market determines the price, while regulators decide on the quantity of emissions reductions.

For proponents, the chief strength of a global price mechanism for carbon is that it provides a low-cost way to shift the burden for the harm caused by climate change onto the market forces that are responsible for it. Such an arrangement would encourage producers in all countries to adopt—and innovate in—low- or zero-carbon technologies by emitting an economic signal, as opposed to laying down who should reduce emissions where or how. It would also reduce uncertainty in the private carbon-offset markets used by companies and individuals that seek to compensate for their emissions.

Although it cannot be relied on to substantially solve the problem, a price that is applied simultaneously in all countries can help level the international playing field. In June 2021, IMF staff proposed global carbon price floors of around $75 per ton to help meet Paris Agreement goals. The fund estimates that this scheme could help achieve a 23 percent reduction in global emissions below baseline by 2030.¹⁰⁶

Meanwhile, critics argue that the barrier to technological change that carbon prices address is ceasing to be relevant for current climate policy ambitions.¹⁰⁷ There is little evidence that carbon pricing has produced deep emissions reductions to date.¹⁰⁸ To some, global carbon pricing fails to resolve the contentious issue of allocating emissions rights fairly between developing and developed countries. A global ETS would leave an ever-smaller carbon space for less developed economies. Indian career diplomat Shyam Saran has suggested that such an approach carries the risk of positing the “survival emissions” of developing countries and the “lifestyle emissions” of developed countries as equal.¹⁰⁹ Carbon taxes can also aggravate poverty by raising the prices of basic goods and services, such as food, energy, and travel.

The increase in energy costs that would arise from reduced fuel consumption in wealthier countries may curtail economic activity in markets that cannot absorb such price changes. In countries where economic structures depend on energy-intensive activities that are heavily exposed to international competition, industries fear competitive disadvantages in international markets, which could result in job losses.

Developing countries reject ETSs for sidelining the multilaterally agreed international regime and establishing ad hoc norms. These countries want multilateral negotiations to lead on the creation of norms, as these talks focus not only on meeting mitigation targets but also on minimizing subsequent welfare losses. At the same time, plans that exempt developing countries from emissions limits run the risk of carbon leakage, as carbon-intensive industries could shift their operations to these locations, undercutting the goals of the climate regime while harming the competitiveness of industrialized countries.

Domestic Carbon Prices and Border Tax Adjustments

Another policy direction discussed in developed countries in response to carbon leakage is a domestic carbon tax levied together with border tax adjustments on imports from countries that do not impose equivalent carbon prices on their producers. In July 2021, the EU announced a proposed Carbon Border Adjustment Mechanism, which would put a carbon price on imports of selected products.¹¹⁰ The news ruffled feathers around the world. In a joint statement, ministers from the BASIC countries expressed their concern about “trade barriers, such as unilateral carbon border adjustment, that are discriminatory and against the principles of Equity and [common but differentiated responsibilities and respective capabilities].”¹¹¹ U.S. Special Presidential Envoy for Climate John Kerry warned Brussels in March 2021 that a carbon border tax adjustment should be a “last resort” as it would have “serious implications for economies, and for relationships, and trade.”¹¹²

A fundamental issue with border tax adjustments is how to make them compatible with WTO rules to avoid trade disputes and retaliatory escalation. Under WTO law, countries are prohibited from discriminating between like products based on process-related factors, such as energy inputs, and from discriminating between imported and domestic products, for example by imposing different taxes on substitutable or directly competitive products. While border tax adjustments are permitted under certain conditions, they must not impose arbitrary discrimination, subsidize exports, or constitute a disguised barrier to trade. The technical issues of definition, admissibility, and rule order complicate the relationship between climate policies and the international trade regime.

Border adjustments can help reduce leakage in some key emitter sectors and help countries make great strides toward carbon-neutrality targets. Supporters of this approach view it as an efficient way to let consumers in industrialized economies take responsibility for their carbon footprint in terms of both domestic and foreign emissions. This logic is underpinned by an assumption that unilaterally imposed border adjustments would incentivize exporting countries to impose equivalent domestic carbon taxes to prevent their companies from paying taxes at the importer’s borders. In this way, border adjustments would act as a building block toward global price mechanisms. Among the ideas floated to prevent the mechanism from functioning as a de facto tariff is to channel the revenue collected at the border to overseas climate aid programs.

Critics point to several pitfalls with this policy direction.¹¹³ There is mixed evidence of the carbon leakage the measure seeks to address, yet there are many obvious and complex trade-offs. Border adjustments can, in effect, act as tariffs given that the importer retains the revenue with no assurance over how the funds will be used. In food and agricultural products, the UN’s Food and Agriculture Organization has found that technical and legal constraints on the effective application of border measures to prevent carbon misallocation are extremely challenging, and that such measures could result in protectionism.¹¹⁴

Developing countries have less capacity to offer offsets to compensate for the border adjustment measures of developed countries. Their industries would suffer a competitive disadvantage against international competition as a result. Such mechanisms would therefore hinder the competitiveness of exporters, posing a particularly unfair burden on those from less developed countries, unless they are exempted, as the UN has warned.¹¹⁵ Importantly, border adjustments may raise the price of energy-intensive products, such as steel and cement, which would increase the cost of construction and imperil infrastructure development in developing countries that import these products. In light of these dynamics, developing countries view such arrangements as unfair burdens and disguised protectionism.¹¹⁶

Against this background, the following chapters provide the perspectives of seven regional and national actors involved in shaping the rules of multilateral governance. These perspectives are needed to assess in more detail the areas where globalization reform can realistically be advanced.

Notes

¹ Carolina Sanchez, “From Local to Global: China’s Role in Global Poverty Reduction and the Future of Development,” World Bank, December 7, 2017, https://www.worldbank.org/en/news/speech/2017/12/07/from-local-to-global-china-role-global-poverty-reduction-future-of-development.

² Andreas Bergh and Therese Nilsson, “Do Liberalization and Globalization Increase Income Inequality?,” European Journal of Political Economy 26, no. 4 (2010): 488–505.

³ Branko Milanović, Global Inequality: A New Approach for the Age of Globalization (Cambridge, MA: Belknap Press, 2018).

⁴ Carlos Aguiar de Medeiros and Nicholas Trebat, “Inequality and Income Distribution in Global Value Chains,” Journal of Economic Issues 51, no. 2 (2017): 401–8.

⁵ Xiaolan Fu and Pervez Ghauri, “Trade in Intangibles and the Global Trade Imbalance,” World Economy 44, no. 5 (2020): 1448–69, https://doi.org/10.1111/twec.13038.

⁶ See Dani Rodrik, “New Technologies, Global Value Chains, and Developing Economies,” National Bureau of Economic Research, October 2018, https://doi.org/10.3386/w25164.

⁷ For premature de-industrialization, see Dani Rodrik, “Premature Deindustrialization,” Journal of Economic Growth 21, no. 1 (2016): 1–33, https://doi.org/10.1007/s10887-015-9122-3. For evidence of reprimarization from Latin America, see Paul Cooney, “Reprimarization: Implications for the Environment and Development in Latin America: The Cases of Argentina and Brazil,” Review of Radical Political Economics 48, no. 4 (2016): 553–61.

⁸ “Unbalanced Trade Adding to Anxiety and Inequality, United Nations Warns,” United Nations Conference on Trade and Development, September 26, 2018, https://unctad.org/press-material/unbalanced-trade-adding-anxiety-and-inequality-united-nations-warns.

⁹ Jomo Kwame Sundaram, Oliver Schwank, and Rudiger von Arnim, “Globalization and Development in Sub-Saharan Africa,” United Nations Department of Economic and Social Affairs, February 2011.

¹⁰ Dani Rodrik, The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist (New York: W. W. Norton Company, 2012).

¹¹ See Dani Rodrik, “What Do Trade Agreements Really Do?,” Journal of Economic Perspectives 32, no. 2 (2018): 73–90, https://doi.org/10.1257/jep.32.2.73. See also: Doris Fuchs, “Commanding Heights? The Strength and Fragility of Business Power in Global Politics,” Millennium 33, no. 3 (2005): 771–801, https://doi.org/10.1177/03058298050330030501.

¹² See Robert Hunter Wade, “What Strategies Are Viable for Developing Countries Today? The World Trade Organization and the Shrinking of ‘Development Space’,” Review of International Political Economy 10, no. 4 (2003): 621–44 https://doi.org/10.1080/09692290310001601902.

¹³ Michael Pettis, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy (Princeton: Princeton University Press, 2013), 1–25.

¹⁴ See Sarah Bauerle Danzman, W. Kindred Winecoff, and Thomas Oatley, “All Crises are Global: Capital Cycles in an Imbalanced International Political Economy,” International Studies Quarterly 61, no. 4 (December 2017): 907–23, https://doi.org/10.1093/isq/sqx054.

¹⁵ Richard Baldwin and Caroline Freund, “Preferential Trade Agreements and Multilateral Liberalization,” in Preferential Trade Agreement Policies for Development, eds. Jean-Pierre Chauffour and Jean-Christophe Maur (Washington, DC: World Bank Group, 2011), 121–41, https://doi.org/10.1596/9780821386439_ch06.

¹⁶ Iza Lejárraga, “Multilateralising Regionalism: Strengthening Transparency Disciplines in Trade,” Organization for Economic Development and Cooperation, June 26, 2013, http://dx.doi.org/10.1787/5k44t7k99xzq-en.

¹⁷ Mark S. Manger, Investing in Protection: The Politics of Preferential Trade Agreements Between North and South (Cambridge, UK: Cambridge University Press, 2009).

¹⁸ Jagdish Bhagwati, Termites in the Trading System: How Preferential Agreements Undermine Free Trade (Oxford: Oxford University Press, 2008); Kenneth Heydon, “Plurilateral Agreements and Global Trade Governance: A Lesson From the OECD,” Journal of World Trade 48, no. 5 (2014): 1039–55, https://kluwerlawonline.com/journalarticle/Journal+of+World+Trade/48.5/TRAD2014036.

¹⁹ See a review of the arguments for and against making it easier for issue-specific clubs to form in the WTO: Bernard M. Hoekman and Petros C. Mavroidis, “WTO ‘à la Carte’ or ‘Menu du Jour’? Assessing the Case for More Plurilateral Agreements,” European Journal of International Law 26, no. 2 (2015): 319–43, https://doi.org/10.1093/ejil/chv025.

²⁰ “Doha WTO Ministerial 2001: Ministerial Declaration,” World Trade Organization, November 20, 2001, https://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm#special.

²¹ “Special and Differential Treatment: Grappling With 88 Proposals,” World Trade Organization, ministerial notes, 2003, https://www.wto.org/english/thewto_e/minist_e/min03_e/brief_e/brief21_e.htm.

²² “Draft General Council Decision—Procedures to Strengthen the Negotiating Function of the WTO,” World Trade Organization, February 15, 2019; “An Undifferentiated WTO: Self-Declared Development Status Risks Institutional Irrelevance—Communication From the United States,” World Trade Organization, January 16, 2019.

²³ “Communication From the European Union, China, Canada, India, Norway, New Zealand, Switzerland, Australia, Republic of Korea, Iceland, Singapore and Mexico to the General Council,” World Trade Organization, November 23, 2018.

²⁴ “Human Development Report 1999: Globalization With a Human Face,” United Nations Development Program, September 11, 2013.

²⁵ Carolyn Deere, The Implementation Game: The TRIPS Agreement and the Global Politics of Intellectual Property Reform in Developing Countries (Oxford: Oxford University Press, 2008), https://doi.org/10.1093/acprof:oso/9780199550616.001.0001.

²⁶ Ha-Joon Chang, “Kicking Away the Ladder: An Unofficial History of Capitalism, Especially in Britain and the United States,” Challenge 45, no. 5 (2002): 63–97; Henrique Zeferino de Menezes, “South-South Collaboration for an Intellectual Property Rights Flexibilities Agenda,” Contexto Internacional 40, no. 1 (2018): 117–38, https://doi.org/10.1590/s0102-8529.2017400100006.

²⁷ Helen Gubby, “Is the Patent System a Barrier to Inclusive Prosperity? The Biomedical Perspective,” Global Policy 11, no. 1 (2020): 46–55, https://doi.org/10.1111/1758-5899.12730.

²⁸ Jagdish Bhagwati, “From Seattle to Hong Kong,” Foreign Affairs, December 2005, https://web.archive.org/web/20060828045323/http://www.foreignaffairs.org/20051201faessay84701-p0/jagdish-bhagwati/from-seattle-to-hong-kong.html.

²⁹ “Proposal on the Implementation of Article 66.2 of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement,” World Trade Organization, February 16, 2018.

³⁰ “Facts and Figures: About Plant Genetic Resources,” Food and Agriculture Organization of the United Nations, http://www.fao.org/english/newsroom/action/facts_ag_treaty.htm.

³¹ David Vivas-Eugui and María Julia Oliva, “Biodiversity Related Intellectual Property Provisions in Free Trade Agreements,” International Centre for Trade and Sustainable Development, September 2010.

³² See for instance, Karine Peschard and Shalini Randeria, Taking Monsanto to Court: Legal Activism Around Intellectual Property in Brazil and India,” Journal of Peasant Studies 47, no. 4 (2020): 792–819, 10.1080/03066150.2020.1753184.

³³ See Nirmal Sengupta, Traditional Knowledge in Modern India: Preservation, Promotion, Ethical Access and Benefit Sharing Mechanisms (New Delhi: Springer, 2019); and “Draft Decision to Enhance Mutual Supportiveness Between the Trips Agreement and the Convention on Biological Diversity Communication From Brazil, China, Colombia, Ecuador, India, Indonesia, Peru, Thailand, the ACP Group, and the African Group,” World Trade Organization, April 19, 2011.

³⁴ “Declaration on the TRIPS Agreement and Public Health,” World Trade Organization, November 20, 2001, https://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm.

³⁵ “Communication From the European Union,” WTO.

³⁶ “Data Protection and Privacy Legislation Worldwide,” United Nations Conference on Trade and Development, https://unctad.org/page/data-protection-and-privacy-legislation-worldwide.

³⁷ “Osaka Declaration on Digital Economy,” Group of Twenty, 2019, http://www.g20.utoronto.ca/2019/osaka_declaration_on_digital_economy_e.pdf; “E-commerce Negotiations: Members Finalise ‘Clean Text’ on Unsolicited Commercial Messages,” World Trade Organization, February 5, 2021, https://www.wto.org/english/news_e/news21_e/ecom_05feb21_e.htm#:~:text=Background,members%20now%20stands%20at%2086.

³⁸ “Transcript of Media Briefing by Foreign Secretary After BRICS Leaders’ Informal Meeting in Osaka,” Indian Ministry of External Affairs, June 28, 2019, https://www.mea.gov.in/media-briefings.htm?dtl/31516/Transcript_of_Media_Briefing_by_Foreign_Secretary_after_BRICS_Leaders_Informal_meeting_in_Osaka.

³⁹ “The Age of Digital Interdependence: Report of the UN Secretary-General’s High-Level Panel on Digital Cooperation,” United Nations, June 2019, https://www.un.org/en/pdfs/HLP%20on%20Digital%20Cooperation%20Report%20Executive%20Summary%20-%20ENG.pdf.

⁴⁰ “Report of the Secretary-General: Roadmap for Digital Cooperation,” United Nations, June 2020, https://www.un.org/en/content/digital-cooperation-roadmap/assets/pdf/Roadmap_for_Digital_Cooperation_EN.pdf.

⁴¹ “Antitrust: Commission Fines Google €2.42 Billion for Abusing Dominance as Search Engine by Giving Illegal Advantage to Own Comparison Shopping Service,” European Commission, June 27, 2017, https://ec.europa.eu/commission/presscorner/detail/en/IP_17_1784; “Antitrust: Commission Fines Google €1.49 Billion for Abusive Practices in Online Advertising,” European Commission, March 20, 2019, https://ec.europa.eu/commission/presscorner/detail/en/IP_19_1770.

⁴² “Investiga COFECE posibles prácticas monopólicas relativas en el mercado de servicios de publicidad digital y servicios relacionados,” Mexican Federal Commission for Economic Competence, August 24, 2020, https://www.cofece.mx/investiga-cofece-posibles-practicas-monopolicas-relativas-en-servicios-de-publicidad-digital/.

⁴³ “Google Reklamcılık ve Pazarlama Ltd. Şti., Google International LLC, Google LLC, Google Ireland Limited ve Alphabet Inc. hakkında yürütülen soruşturma sonuçlandı,” Rekabet Kurumu, April 14, 2021, https://www.rekabet.gov.tr/tr/Guncel/google-reklamcilik-ve-pazarlama-ltd-sti--b127c3cc1e9deb11812e00505694b4c6.

⁴⁴ “Investigation of Competition in Digital Markets,” U.S. House of Representatives Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law, 2020, https://www.congress.gov/117/cprt/HPRT47833/CPRT-117HPRT47833.pdf.

⁴⁵ “Facebook, Apple, and Amazon Add a Combined $274 Billion in Market Value Following Earnings,” Markets Insider, July 31, 2020, https://markets.businessinsider.com/news/stocks/facebook-apple-amazon-alphabet-stock-price-add-market-value-earnings-2020-7.

⁴⁶ “Executive Order on Promoting Competition in the American Economy,” White House, July 9, 2021, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.

⁴⁷ Dean Baker, Arjun Jayadev, and Joseph Stiglitz, “Innovation, Intellectual Property, and Development: A Better Set of Approaches for the 21st Century,” University of Cape Town Intellectual Property Unit, July 2017, http://ip-unit.org/wp-content/uploads/2017/07/IP-for-21st-Century-EN.pdf.

⁴⁸ Graham Dutfield and Uma Suthersanen, “Harmonisation or Differentiation in Intellectual Property Protection? The Lessons of History,” Prometheus 23, no. 2 (2007): 131–47, 10.1080/08109020500085528.

⁴⁹ Rod Falvey, Neil Foster, and David Greenaway, “Intellectual Property Rights and Economic Growth,” University of Nottingham Centre for Research on Globalisation and Economic Policy, May 2004.

⁵⁰ Hiroyuki Odagiri, Akira Goto, Atsushi Sunami, and Richard R. Nelson, Intellectual Property Rights, Development, and Catch Up: An International Comparative Study (Oxford: Oxford University Press, 2012).

⁵¹ “Trade and Development Report, 1991,” United Nations Conference on Trade and Development, 1991.

⁵² Sebnem Kalemli-Ozcan, “Emerging Market Capital Flows Under COVID: What to Expect Given What We Know,” International Monetary Fund, 2020.

⁵³ “IMF Members’ Quotas and Voting Power, and IMF Board of Governors,” International Monetary Fund, November 8, 2021, https://www.imf.org/en/About/executive-board/members-quotas.

⁵⁴ “What Is the ‘Gentleman’s Agreement’?,” Bretton Woods Project, July 23, 2019, https://www.brettonwoodsproject.org/2019/07/what-is-the-gentlemans-agreement/.

⁵⁵ Rakesh Mohan and Muneesh Kapur, “Emerging Powers and Global Governance: Whither the IMF?,” International Monetary Fund, October 2015, https://www.imf.org/external/pubs/ft/wp/2015/wp15219.pdf.

⁵⁶ See for instance IMF spring meetings civil society forum event: “IMF Reform in Developing Country Perspective,” International Monetary Fund, April 24, 2013, https://www.brettonwoodsproject.org/2013/04/art-572442/.

⁵⁷ “Fifteenth and Sixteenth General Reviews of Quotas—Report of the Executive Board to the Board of Governors,” International Monetary Fund, February 13, 2020, https://www.imf.org/en/Publications/Policy-Papers/Issues/2020/02/13/Fifteenth-and-Sixteenth-General-Reviews-of-Quotas-Report-of-the-Executive-Board-to-the-Board-49049.

⁵⁸ “Global Financial Stability Report—COVID-19, Crypto, and Climate: Navigating Challenging Transitions,” International Monetary Fund, October 2021, https://www.imf.org/en/Publications/GFSR/Issues/2021/10/12/global-financial-stability-report-october-2021.

⁵⁹ Ayhan Kose, Franziska Lieselotte Ohnsorge, and Naotaka Sugawara, “A Mountain of Debt: Navigating the Legacy of the Pandemic,” World Bank Group, October 8, 2021, http://documents.worldbank.org/curated/en/258761633705709997/A-Mountain-of-Debt-Navigating-the-Legacy-of-the-Pandemic.

⁶⁰ “International Debt Statistics 2022,” World Bank, 2021, https://openknowledge.worldbank.org/handle/10986/36289.

⁶¹ “Sovereign Debt Workouts: Going Forward: Roadmap and Guide,” United Nations Conference on Trade and Development, April 2015, https://unctad.org/system/files/official-document/gdsddf2015misc1_en.pdf; and “From the Great Lockdown to the Great Meltdown: Developing Country Debt in the Time of Covid-19,” United Nations Conference on Trade and Development, April 2020, https://unctad.org/system/files/official-document/gdsinf2020d3_en.pdf.

⁶² “UN Calls for Comprehensive Debt Standstill in All Developing Countries,” United Nations Development Program, October 15, 2020, https://www.undp.org/press-releases/un-calls-comprehensive-debt-standstill-all-developing-countries.

⁶³ “Basic Principles on Sovereign Debt Restructuring Processes,” United Nations General Assembly, July 29, 2015, https://unctad.org/system/files/official-document/a69L84_en.pdf.

⁶⁴ Kristalina Georgieva, Ceyla Pazarbasioglu, and Rhoda Weeks-Brown, “Reform of the International Debt Architecture Is Urgently Needed,” IMFBlog, International Monetary Fund, October 1, 2020, https://blogs.imf.org/2020/10/01/reform-of-the-international-debt-architecture-is-urgently-needed/.

⁶⁵ Annalisa Prizzon et al., “Six Recommendations for Reforming Multilateral Development Banks: An Essay Series,” Overseas Development Institute, December 2017, https://cdn.odi.org/media/documents/11908.pdf.

⁶⁶ “Making the Global Financial System Work for All,” G20 Eminent Persons Group on Global Financial Governance, October 2018, https://us.boell.org/sites/default/files/10-3-18_report_of_the_g20_eminent_persons_group_on_global_financial_governance.pdf.

⁶⁷ “Behind the Numbers: A Dataset on Spending, Accountability, and Recovery Measures Included in IMF COVID-19 Loans,” Oxfam, March 15, 2021, https://oi-files-d8-prod.s3.eu-west-2.amazonaws.com/s3fs-public/2021-03/Final%20IMF%20COVID%20Financing%20Tracker%20-%20Phase%202%20%28March%2015%202021%29.pdf.

⁶⁸ “The IMF Must Immediately Stop Promoting Austerity Around the World,” Oxfam International, October 6, 2020, https://oxfam.medium.com/the-imf-must-immediately-stop-promoting-austerity-around-the-world-49a8d7ba7152.

⁶⁹ “Special Drawing Rights (SDR),” International Monetary Fund, August 5, 2021, https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR#:%7E:text=The%20SDR%20is%20an%20international,of%20the%20global%20financial%20crisis.

⁷⁰ “Making the Global Financial System Work for All,” G20 Eminent Persons.

⁷¹ See José Antonio Ocampo, “The Provision of Global Liquidity,” in Resetting the International Monetary (Non)System, (Oxford: Oxford University Press, 2017), https://doi.org/10.1093/oso/9780198718116.003.0002.

⁷² José Antonio Ocampo, “The SDR’s Time Has Come,” Finance & Development 56, no. 4 (2019): 62–63, https://www.imf.org/external/pubs/ft/fandd/2019/12/future-of-the-IMF-special-drawing-right-SDR-Ocampo.htm.

⁷³ Alexander Nye, “The G20’s Impasse on Special Drawing Rights (SDRs),” Yale School of Management, August 11, 2020, https://som.yale.edu/blog/the-g20-s-impasse-on-special-drawing-rights-sdrs.

⁷⁴ “IMF Governors Approve a Historic US$650 Billion SDR Allocation of Special Drawing Rights,” International Monetary Fund, August 2, 2021, https://www.imf.org/en/News/Articles/2021/07/30/pr21235-imf-governors-approve-a-historic-us-650-billion-sdr-allocation-of-special-drawing-rights.

⁷⁵ Authors’ calculations.

⁷⁶ “IMF Governors Approve a Historic US$650 Billion SDR Allocation of Special Drawing Rights,” International Monetary Fund.

⁷⁷ Katarzyna Anna Bilicka, “Comparing UK Tax Returns of Foreign Multinationals to Matched Domestic Firms,” American Economic Review 109, no. 8 (2019): 2921–53, https://ssrn.com/abstract=3682277.

⁷⁸ Matthew Gardner, Lorena Roque, and Steve Wamhoff, “Corporate Tax Avoidance in the First Year of the Trump Tax Law,” Institute on Taxation and Economic Policy, December 2019, https://itep.sfo2.digitaloceanspaces.com/121619-ITEP-Corporate-Tax-Avoidance-in-the-First-Year-of-the-Trump-Tax-Law.pdf.

⁷⁹ Nicholas Shaxson, “Tackling Tax Havens,” Finance & Development 56, no. 3 (2019): 7–10, https://www.imf.org/external/pubs/ft/fandd/2019/09/tackling-global-tax-havens-shaxon.htm.

⁸⁰ Elke Asen, “What European OECD Countries Are Doing About Digital Services Taxes,” Tax Foundation, March 25, 2021, https://taxfoundation.org/digital-tax-europe-2020/.

⁸¹ Daniel Bunn, Elke Asen, and Cristina Enache, “Digital Taxation Around the World,” Tax Foundation, 2020, https://files.taxfoundation.org/20200527192056/Digital-Taxation-Around-the-World.pdf.

⁸² “Addressing the Tax Challenges of the Digitalisation of the Economy—Policy Note,” Organization for Economic Cooperation and Development, 2019, https://www.oecd.org/tax/beps/policy-note-beps-inclusive-framework-addressing-tax-challenges-digitalisation.pdf.

⁸³ “Members of the OECD/G20 Inclusive Framework on BEPS Joining the October 2021 Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy as of 4 November 2021,” Organization for Economic Cooperation and Development, November 4, 2021, https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-members-joining-statement-on-two-pillar-solution-to-address-tax-challenges-arising-from-digitalisation-october-2021.pdf.

⁸⁴ “Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy,” Organization for Economic Cooperation and Development, October 2021, https://www.oecd.org/tax/beps/brochure-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf.

⁸⁵ Ibid.

⁸⁶ “International Community Strikes a Ground-breaking Tax Deal for the Digital Age,” Organization for Economic Cooperation and Development, October 8, 2021, https://www.oecd.org/tax/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-age.htm.

⁸⁷ “The ‘Deal of the Rich’ Will Not Benefit Developing Countries,” Global Alliance for Tax Justice, 2021, https://www.globaltaxjustice.org/sites/default/files/GATJ%20Statement%20on%20the%20G7-G20-OECD%20tax%20deal%20081021.pdf; Tove Ryding, “Eurodad: OECD Tax Deal Is Unfair and Fails to Solve the Problem,” European Network on Debt and Development, October 8, 2021, https://www.eurodad.org/eurodad_oecd_tax_deal_is_unfair_and_fails_to_solve_the_problem.

⁸⁸ “Comments of the G-24 on the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy Agreed by 134 Jurisdictions of the Inclusive Framework on the 1st of July 2021,” Group of Twenty-Four, September 19, 2021, https://www.g24.org/wp-content/uploads/2021/09/Comments-of-the-G24-on-the-IF-July-Statement.pdf.

⁸⁹ “130 Inclusive Framework Countries and Jurisdictions Join a New Two-Pillar Plan to Reform International Taxation Rules – What Does This Mean for Africa?,” African Tax Administration Forum, July 1, 2021, https://www.ataftax.org/130-inclusive-framework-countries-and-jurisdictions-join-a-new-two-pillar-plan-to-reform-international-taxation-rules-what-does-this-mean-for-africa.

⁹⁰ Ibid.

⁹¹ “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy,” Organization for Economic Cooperation and Development, October 8, 2021, https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf.

⁹² “Tax Challenges Arising From Digitalisation—Report on Pillar One Blueprint,” Organization for Economic Cooperation and Development, October 2020, https://doi.org/10.1787/beba0634-en.

⁹³ Tove Ryding, “Eurodad Reaction to G7 Finance Ministers’ Tax Deal,” European Network on Debt and Development, June 5, 2021, https://www.eurodad.org/eurodad_reaction_to_g7_finance_ministers_tax_deal.

⁹⁴ “130 Inclusive Framework Countries and Jurisdictions Join a New Two-Pillar Plan to Reform International Taxation Rules—What Does This Mean for Africa?,” African Tax Administration Forum, July 1, 2021, https://www.ataftax.org/130-inclusive-framework-countries-and-jurisdictions-join-a-new-two-pillar-plan-to-reform-international-taxation-rules-what-does-this-mean-for-africa.

⁹⁵ “Climate Change and Land,” United Nations Intergovernmental Panel on Climate Change, August 2019.

⁹⁶ “Global Warming of 1.5°C,” United Nations Intergovernmental Panel on Climate Change, October 2018.

⁹⁷ Hannah Ritchie, “Who Has Contributed Most to Global CO2 Emissions?,” Our World in Data, October 1, 2019, https://ourworldindata.org/contributed-most-global-co2.

⁹⁸ “Net Zero Tracker,” Energy & Climate Intelligence Unit, 2021, https://eciu.net/netzerotracker.

⁹⁹ “FACT SHEET: President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target Aimed at Creating Good-Paying Union Jobs and Securing U.S. Leadership on Clean Energy Technologies,” White House, April 22, 2021, https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/22/fact-sheet-president-biden-sets-2030-greenhouse-gas-pollution-reduction-target-aimed-at-creating-good-paying-union-jobs-and-securing-u-s-leadership-on-clean-energy-technologies/.

¹⁰⁰ “Global Warming of 1.5°C,” IPCC.

¹⁰¹ Leslie Hook, “China Pledges to Be ‘Carbon-Neutral’ by 2060,” Financial Times, September 22, 2020, https://www.ft.com/content/730e4f7d-3df0-45e4-91a5-db4b3571f353.

¹⁰² “United Nations Framework Convention on Climate Change,” United Nations, 1992, http://unfccc.int/resource/docs/convkp/conveng.pdf.

¹⁰³ “Financing Climate Futures: Rethinking Infrastructure,” Organization for Economic Cooperation and Development, World Bank, and United Nations Environment Program, 2018, https://doi.org/10.1787/9789264308114-en.

¹⁰⁴ Barbara Buchner et al., “Global Landscape of Climate Finance 2019,” Climate Policy Initiative, November 7, 2019, https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2019/.

¹⁰⁵ Michael Keen, Ian Parry, and James Roa, “Border Carbon Adjustments: Rationale, Design and Impact,” International Monetary Fund, September 2021.

¹⁰⁶ Ian Parry, Simon Black, and James Roaf, “Proposal for an International Carbon Price Floor Among Large Emitters,” International Monetary Fund, June 18, 2021, https://www.imf.org/en/Publications/staff-climate-notes/Issues/2021/06/15/Proposal-for-an-International-Carbon-Price-Floor-Among-Large-Emitters-460468.

¹⁰⁷ Anthony Patt and Johan Lilliestam, “The Case Against Carbon Prices,” Joule 2, no. 12 (2018): 2494–8, https://doi.org/10.1016/j.joule.2018.11.018; Daniel Rosenbloom, Jochen Markard, Frank W. Geels, and Lea Fuenfschilling, “Opinion: Why Carbon Pricing Is Not Sufficient to Mitigate Climate Change—and How ‘Sustainability Transition Policy’ Can Help,” Proceedings of the National Academy of Sciences of the United States of America 117, no. 16 (2020): 8664–8, https://doi.org/10.1073/pnas.2004093117.

¹⁰⁸ Endre Tvinnereim and Michael Mehling, “Carbon Pricing and Deep Decarbonisation,” Energy Policy 121 (2018): 185–9, http://dx.doi.org/10.1016/j.enpol.2018.06.020.

¹⁰⁹ Shyam Saran, “Paris Climate Talks: Developed Countries Must Do More Than Reduce Emissions,” Guardian, November 23, 2015, https://www.theguardian.com/environment/2015/nov/23/paris-climate-talks-developed-countries-must-do-more-than-reduce-emissions.

¹¹⁰ “Towards a WTO-Compatible EU Carbon Border Adjustment Mechanism,” European Parliament, March 10, 2021, https://oeil.secure.europarl.europa.eu/oeil/popups/printsummary.pdf?id=1654463&l=en&t=D.

¹¹¹ “Joint Statement Issued at the Conclusion of the 30th BASIC Ministerial Meeting on Climate Change Hosted by India on 8th April 2021,” South African Government, April 8, 2021, https://www.gov.za/nr/speeches/joint-statement-issued-conclusion-30th-basic-ministerial-meeting-climate-change-hosted.

¹¹² Camilla Hodgson, “EU Rebuffs US Concerns Over Carbon Border Tax Threat,” Financial Times, March 31, 2021, https://www.ft.com/content/d31ec6c9-453a-4705-b47b-1c9e46de817a.

¹¹³ Ben McWilliams and Georg Zachmann, “A European Carbon Border Tax: Much Pain, Little Gain,” Bruegel, March 5, 2020, https://www.bruegel.org/2020/03/a-european-carbon-border-tax-much-pain-little-gain/.

¹¹⁴ David Blandford, “Border and Related Measures in the Context of Adaptation and Mitigation to Climate Change,” United Nations Food and Agriculture Organization, 2018, http://www.fao.org/3/CA2343EN/ca2343en.pdf.

¹¹⁵ “LDCs and the Proposed EU Carbon Border Adjustment Mechanism,” United Nations LDC Portal, https://www.un.org/ldcportal/ldcs-and-the-proposed-eu-carbon-border-adjustment-mechanism/.

¹¹⁶ William Nordhaus, “Climate Clubs: Overcoming Free-Riding in International Climate Policy,” American Economic Review 105, no. 4 (2015): 1339–70, https://www.aeaweb.org/articles?id=10.1257/aer.15000001.

The United States: A Cautious Return to Internationalism

U.S. President Joe Biden struck many familiar and reassuring notes in his initial foreign policy speeches. He pledged to defend “cherished democratic values” and uphold “America’s abiding advantage.” He promised to repair the country’s strained relations with close allies, stating that “America’s alliances are our greatest asset.” And he rallied the diplomatic corps by declaring “diplomacy is back at the center of our foreign policy.”¹

While offering a vision of U.S. reengagement globally, the president also emphasized the need to reinvest at home. Over the past two decades, American households have faced a major financial crisis, significant trade shocks, technological change favoring skilled workers, declining public investment, and the accumulation of climate-related risks—a toxic combination that stoked a populist backlash. In this environment, a full-throated defense of free trade, liberal immigration policies, unfettered capital mobility, and global governance appears to be a political nonstarter. Instead, Biden’s advocacy of a foreign policy for the middle class argues for a domestic-foreign policy mix that delivers more tangible benefits to a broader swath of the American working public while preserving the benefits of economic openness.²

At the same time, realism about the growing constraints on American power abroad has taken hold across the foreign policy community. Two decades of continuous warfare secured only modest improvements in political stability and democratic governance in Afghanistan and Iraq. This disappointment fed calls to rescope the U.S. national security mission, including the full withdrawal from Afghanistan carried out in summer 2021, and to refocus on domestic needs. Meanwhile, Chinese ambitions in technology, trade, military capability, finance and development lending, and institutional influence are contributing to a sense that the United States needs to husband its national resources and get more serious about defining its strategic interests.

In short, the Biden administration faces a difficult balancing act. It needs to better manage the downsides of globalization and counter the significant challenges to democratic capitalism—even as it offers an updated vision of an open, tolerant, and inclusive world order in which the United States continues to play a significant leadership role. To do so effectively, the administration will need to articulate national interests clearly and persuasively and pursue them in a coordinated fashion across many policy domains.

The United States will approach foreign economic policy in a more deliberate and pragmatic manner than in the past. America will continue to defend general principles, like economic openness in the face of increasing protectionism, democratic accountability and the rule of law in the face of growing authoritarianism, and respect for basic human rights in the face of intensifying great power competition. But it will do so with a keener eye on securing good middle-class jobs, protecting the financial and economic stability of households, fostering a global business environment in which American firms of all sizes can thrive, and ensuring a better environmental outlook.

Recoping the U.S. Trade Agenda

After four years of harsh rhetoric and hardball negotiating tactics, the current U.S. administration seems determined to restore a degree of normalcy to the way in which the United States interacts with its trade partners. The administration’s clear embrace of economic diplomacy over economic conflict has calmed the waters and created more political space for negotiation. The new emphasis on diplomatic engagement should not be mistaken, however, for a reversal of the previous administration’s attempt to reshape certain relationships, improve overall burden sharing, and answer domestic calls to address unfair trade practices. In an October 2021 speech laying out her “strategic vision” for trade policy, U.S. Trade Representative Katherine Tai stated,

We need to show that trade policy can be a force for good in the lives of everyday people. We will create durable trade policy that benefits a broad range of stakeholders by rebuilding trust with our workers and aligning our domestic and foreign policies. . . . [We will] work with allies to shape the rules for fair trade in the 21st century, and facilitate a race to the top for market economies and democracies.³

These goals hardly represent an unbridled return to the neoliberal economic policies of the post–World War II order. Nor do they make for straightforward talks with major trade partners. In sum, the pace of U.S. trade negotiations is likely to remain measured for the near term.

To date, new trade deals have been subordinated to the goal of spurring domestic economic recovery after the coronavirus pandemic and the early foreign policy priorities of global coordination on climate and tax. The July 1, 2021, expiration of the Trade Promotion Authority (TPA), a time-limited power that the U.S. Congress had used to establish trade negotiations, points to this lack of urgency. For now, bold action on major new trade deals, which have proved time consuming to negotiate and difficult to manage politically, is off the table.

Instead, the administration will focus on more issue-specific agreements that can be framed as solving concrete problems and implement upgrades and revisions to existing trade and investment framework agreements. Alongside these efforts, the administration will calibrate its investments in multilateral institutions to maintain the legitimacy and effectiveness of these bodies without tying U.S. hands.

lateral and Regional Trade Deals on a Quieter Track

Bilateral trade deals offer attractive foreign policy wins for countries—from cementing long-standing alliances to gaining toeholds in important regions and from solidifying trade rules to building ties across business communities. For the United States, with its vast national economy, bilateral agreements have also had more limited domestic impacts. This has brought political breathing room at home and a significant degree of leverage with prospective partners.

On entering office, Biden inherited ongoing bilateral trade negotiations with Japan, Kenya, and the United Kingdom. Each deal represented a serious effort by the administration of former U.S. president Donald Trump to take up thorny issues like financial services, healthcare markets, trade capacity building, and digital services. So far, in keeping with its cautious approach to trade, the Biden administration has dampened near-term expectations by refusing to commit to any timelines and allowing the TPA to expire.⁴ This hesitation reflects the complexity of the core issues, many of which involve trade in services, and a reluctance in the Biden administration to embrace bilateralism too heartily and undermine multilateral institutions. But it also reflects a political calculation that leading with trade is a serious risk in an era marked by populism and nationalism.

All this makes the prospects for major regional trade deals particularly dim. However, with the United States now on the periphery of the Asia-Pacific’s two major trade blocs, some countermove seems necessary. Many analysts view an expanded U.S. role in regional economic frameworks as crucial to balancing Chinese economic influence and keeping U.S. businesses competitive across the region. For example, emerging rules of origin across the fifteen members of the Regional Comprehensive Economic Partnership (RCEP) could push U.S. companies to relocate to Asia to remain competitive in those markets.

Meanwhile, the hope that multilateral institutions could nudge China into greater compliance with a rules-based order has faded, pushing U.S. leaders to consider other ways of countering Beijing’s nationalist and expansionist agenda. As Tai noted in October 2021, “We need to take a new, holistic, and pragmatic approach in our relationship with China that can actually further our strategic and economic objectives for the near term and the long term. As our economic relationship with China evolves, so too must our tactics to defend our interests.”⁵

Because joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) remains politically difficult for the U.S. administration, the United States looks more likely to pursue limited executive-level agreements with key Asia-Pacific partners, like Australia, India, and Japan. These deals would allow Washington to maintain a foothold and exert rulemaking pressure despite lacking CPTPP membership.⁶ The United States will also use its bargaining power to push for fairer terms from China in certain areas.

Issue-Specific Wins Through Plurilateral Deals

Even as the U.S. administration de-emphasizes major new trade deals, it is teeing up several critical issues for a plurilateral approach. These negotiations aim to shape the future operating system of the global economy through close work with a handful of partners. Given the strategic importance of these discussions, many world leaders would prefer to see them occur in a multilateral setting, where smaller and lower-income countries would have seats at the table. But the complexity of the issues and slow-moving processes in multilateral bodies will probably dictate otherwise.

For the United States, the focus areas include environmental goods, digital economy governance, and capital taxation. They allow the Biden administration to advance specific policy priorities in a more timely and targeted manner than traditional multilateral negotiations or broader trade deals. Some agreements may attempt to regionalize new model language drawn from the United States–Mexico–Canada Agreement (USMCA) and the U.S.-Japan Digital Trade Agreement. Some of this language exceeds that of either the CPTPP or the RCEP, although the challenge of imposing such new rules without awarding deeper U.S. market access remains substantial.

In the best case, such agreements can serve as building blocks for broader arrangements if pursued across regions and issues concurrently. So-called open plurilateralism may help resolve logjams in multilateral forums if enough signatories join a specific agreement over time. Some analysts also argue that these types of deals will be subject to less legal wrangling and, potentially, create more innovative policy solutions.⁷

A Recommitment to Multilateralism

In recent decades, the growth of bilateral and regional free-trade agreements (FTAs), plus the increasing focus on issue-specific plurilaterals, is pressuring multilateral institutions to better define their unique role in managing international trade. As globalization has proceeded, membership in these organizations—foremost among them the World Trade Organization (WTO)—has become larger and more diverse. Deliberations in these institutions have also grown more tendentious, especially on the scope for rulemaking and the role of the state in the economy. Clarifying the core rationale and strategic functions of these multilateral bodies seems paramount. Hence, a final pillar of the U.S. trade agenda seems to be a recommitment to multilateralism in ways that support effective dispute settlement while safeguarding national sovereignty and principles of market competition.

The WTO has provided a useful forum for settling trade disputes among its members, including for the United States, which has filed the most complaints among WTO members and won the vast bulk of its prior suits.⁸ Several key losses have created concern among U.S. officials, however, and led the past two U.S. administrations to block appointments to the Appellate Body (AB)—the WTO arm that hears appeals in disputes brought by members—and effectively disable it. In the October 2021 confirmation hearings for Biden’s nominee for U.S. envoy to the WTO, María Pagán, the AB’s future was a subject of intense questioning. In that testimony, Pagán called WTO reform a top priority but also cautioned that “this won’t be easy.”⁹

Two main issues are at stake for the United States. First, the organization needs to address procedural concerns with the AB, including panel members working on cases after their terms have expired and not abiding by the ninety-day deadline for making decisions. These concerns are fairly concrete and reasonable solutions have been proposed to resolve them, some of which the United States is likely to support. Second, AB decisions have added binding language to WTO agreements, a development to which the United States continues to reject.¹⁰ Washington argues that the AB should treat national law as fact and not open to WTO interpretation. This latter point lies at the heart of the impasse, and the United States is highly unlikely to concede on it. Indeed, Biden continues to block AB appointments and retain the leverage bought by the two previous administrations.

Still, continued paralysis in such a central dispute settlement body is not in the long-term U.S. interest. Other countries have begun to create alternative systems as stopgap measures, such as the Multiparty Interim Appeal Arbitration Arrangement among some twenty-two members plus the European Union (EU).¹¹ The longer the AB remains suspended, the more entrenched these other frameworks could become. While Tai has yet to clarify specific U.S. negotiating objectives with respect to AB reform, broader WTO reform has featured prominently in her meetings with international counterparts and congressional testimony. In the latter, she has had to contend with pervasive bipartisan frustration at the sclerotic pace of WTO decisionmaking and growing calls to take a tough stance on Chinese practices seen to hurt U.S. workers and businesses.

Engaging With the International Monetary Fund

The growth of China, India, and other populous developing nations has fed debates about the need to reallocate voting power in international financial institutions. With respect to the International Monetary Fund (IMF), Biden reversed the previous administration’s decision to block a new allocation of special drawing rights (SDRs)—an international reserve asset that supplements the official reserves of IMF members—of $650 billion; the allocation became effective in August 2021.¹² Critics of the Biden decision worry that the transfer of U.S. taxpayer dollars will indirectly fund projects in China or other countries with which the United States has poor relations.¹³ On the other side, supporters argue that increased reserve capacity at the IMF will help countries recover from coronavirus-related shocks and engender greater financial stability. Moreover, the United States can reserve the right to refuse SDR allocations to specific countries.¹⁴

While the SDR debate grabbed some initial policy attention, the U.S. administration will soon need to adapt its strategy to meet China’s rising influence inside and outside the Bretton Woods institutions. So far, the Biden administration has not articulated its approach to the Asian Infrastructure Investment Bank (AIIB) or the New Development Bank established by Brazil, Russia, India, China, and South Africa beyond announcing a cooperative campaign with Japan to create a digital alternative to China’s Belt and Road Initiative and floating the idea to other world leaders.

In short, the United States is unlikely to engage in outright collaboration with China’s development initiatives, though some arm’s-length dealings remain possible. For example, the AIIB coordinates with Western-led multilateral development banks—something the United States has tolerated because the AIIB does not finance Belt and Road projects to the same extent as China’s other policy banks.

Coordinating Global Taxation

With the 2017 Tax Cuts and Jobs Act, the Trump administration pushed through a major corporate tax reform that brought the statutory U.S. corporate rate much closer to the global average. The reform also shifted away from worldwide taxation and toward greater territoriality in its treatment of corporate income earned abroad. Together, the two measures aimed to enhance U.S. tax competitiveness and encourage repatriation of U.S. corporate earnings held overseas.

Yet, the act did little to rein in major tax havens, which some wealthy individuals and corporations have been using to minimize taxes. Frustration with the perceived inequity of the current system, the loss of potential revenue to governments, and rising concerns about the relative ease with which growing technology companies could avoid taxation drove conversations about the need for international tax coordination. But the Trump administration expressed little interest in such an effort, and it stalled.

Much of the focus for global capital taxation has centered on the framework to address base erosion and profit shifting—tax strategies that exploit gaps and mismatches in tax rules—proposed at the Organization for Economic Cooperation and Development (OECD). Yearslong discussions have debated the merits of a global minimum tax rate that would fix some of the worst inconsistencies across national tax systems and address growing questions about how to resolve major differences on digital services taxes. With the change in U.S. administration, those discussions got back on track and have finally yielded an agreement.

Global Minimum Tax Rate

In February 2021, U.S. Treasury Secretary Janet Yellen signaled the shift in U.S. policy when she announced that the United States was dropping its demand for safe-harbor provisions, which might have exempted some companies from new OECD tax rules. Then, in April, the administration offered a significant proposal to the OECD, setting out criteria to tax large multinational enterprises. The head of tax administration at the organization, Pascal Saint-Amans, lauded the Biden proposal, saying, “This reboots the negotiation and is very positive.”¹⁵ By May, the United States had followed up with a proposed 15 percent floor for the global minimum corporate tax rate.¹⁶

In June, the Group of Seven (G7) announced the outlines of a deal that would serve as the road map for a broader OECD framework, and the Group of Twenty (G20) followed suit a few weeks later. By October, the OECD had worked through enough details to reach a political agreement on a two-pillar solution that consists of a global minimum tax rate and a digital services tax regime. The G20 formally adopted the agreement at its summit later that month, calling it “a historic achievement through which we will establish a more stable and fairer international tax system.”¹⁷ The G20 then charged the OECD with developing model rules and multilateral instruments to take effect in 2023. To date, 136 countries, representing more than 90 percent of the global economy, have agreed to the reforms.¹⁸

The final political agreement put in scope the overseas profits of multinational companies with at least €750 million ($850 million) in global sales revenue.¹⁹ Governments can still set local corporate tax rates, but a company’s home country can insist that the company top up taxes owed on overseas earnings to hit a 15 percent minimum. In addition, sales revenue would be taxed on a country-by-country basis according to where sales occur. That is a major shift from long-standing tax standards that have allowed companies to shift profits into low-tax jurisdictions around the world, even when they do little business on the ground there.

Under the new agreement, a government can tax up to 25 percent of a multinational’s excess profit—defined as profit above 10 percent of revenue—that originates in its country. Even so, some argue that the agreement does not go far enough. For example, the place of employment is not included in the tax formulation, only the place of sale, meaning that less revenue will be directed to developing countries, where a large amount of offshore labor in services resides. Furthermore, a range of deductions and exceptions were incorporated into the deal to limit the impact on certain low-tax countries like Ireland, which is home to some large U.S. multinationals, leaving the agreement vulnerable to accusations of favoritism and critiques of business as usual.

In coming months, the global minimum tax rate will likely garner increased political attention in the United States because it must be implemented in 2022 for the agreement to come into force in 2023. Given the highly partisan environment in Washington and the agreement’s ties to the Biden administration’s desire to unwind parts of Trump’s corporate tax reform as a way to fund its domestic policy agenda, the accord will face stiff headwinds.²⁰ For example, the administration had announced plans to raise the corporate tax rate on domestic income to 28 percent from the current 21 percent. But that proposal has now been pulled from pending congressional legislation in light of lukewarm support from some Democrats and uniform hostility from Republicans.²¹

Digital Services Taxes

A second line of effort in global tax policy concerns digital services taxation. As major online platforms like Amazon, Facebook, and Google have grown into massive social and commercial entities, they have upended the channels through which companies earn revenue. National tax authorities around the world took notice and introduced digital services taxes to capture more of that revenue. These tax proposals raised legitimate questions about where the revenues from online activity should be taxed, but they also seemed squarely aimed at large U.S. tech companies, like like Meta (which operates Facebook) and Alphabet (the parent company of Google), raising hackles in the United States, which saw the taxes as highly discriminatory. Not surprisingly, digital services taxes became part of the broader international debate about global taxation and were successfully folded into the agreement announced in October 2021.

In late 2018, France was the first major economy to announce a digital services tax, and many other countries followed suit, including Brazil, India, the United Kingdom, and several EU states. Because many of these taxes disproportionately affect U.S. companies, they triggered retaliation from the Trump administration in the form of investigations under section 301 of U.S. trade law. In the first part of 2021, the Biden administration maintained the pressure, even announcing in late March that it was taking “next steps” in its section 301 processes.²² Indeed, Tai reported that six countries had adopted digital services taxes that unfairly hurt U.S. companies and that together their taxes had generated a combined tax liability of $880 billion for U.S. companies.²³

As these issues became more intertwined with the global minimum tax deal, however, the Biden administration softened its approach. In June, Tai announced an immediate suspension of tariffs related to section 301 investigations into digital services taxes.²⁴ In negotiations, the United States favored a sector-neutral approach to digital taxation—a major ask from the Digital Economy Group, which represents major U.S. digital companies—and the final global tax agreement adheres to this principle. Yet, until the deal is fully implemented in 2023, the United States has agreed that Austria, France, Italy, Spain, and the United Kingdom can retain their digital services taxes without the threat of U.S. retaliatory tariffs.

Revitalizing the Environmental Agenda

With his immediate commitments to rejoin the 2015 Paris Agreement on climate change and cancel the proposed Keystone XL oil pipeline, Biden marked a sea change in climate policies on his first day in office. The president also invited forty countries to join a climate leadership summit in April 2021, which concluded with the United States announcing an ambitious climate agenda and pledging to take action on numerous fronts. Among them are environment-focused agreements, environmental standards, green financing mechanisms, and new carbon-pricing policies. In November 2021, Biden traveled to Glasgow to attend the United Nations Climate Change Conference (COP26) and deliver on those early pledges to recommit the United States to cooperative climate policies.

Challenges to executing this agenda are significant, such as the twenty-one U.S. states that sued over the Keystone XL pipeline decision and a one-vote Senate majority that rests on a member from coal-rich West Virginia who also chairs the Senate Energy Committee.²⁵ Indeed, the United States’ conspicuous absence from the group of forty countries that pledged at COP26 to stop coal development at home almost certainly reflects these political constraints.²⁶ Even as a younger generation pushes the United States into a greener future, resistance will remain in certain segments of the American electorate and business community.

Greening the Trade Agenda

In her first public speech as U.S. trade representative, Tai observed, “The view that environmental issues are not an inherent part of trade ignores the reality that the existing rules of globalization incentivize downward pressure on environmental protection.”²⁷ She also gave credit to the Trump administration for achieving the “most comprehensive environmental standards” of any U.S. trade agreement in its USMCA negotiation. A week later, Republicans urged Tai to relaunch the Environmental Goods Agreement (EGA), a plurilateral accord devoted to reducing trade barriers on more than fifty climate-friendly goods, such as solar panels, equipment to control air pollution, energy-efficient light bulbs and equipment, and wind turbines.

In the increasingly dynamic arena of trade and environmental sustainability, the U.S. trade representative will pursue many diverse opportunities to green the U.S. trade agenda, like phasing out fossil-fuel subsidies from global supply chains, pursuing anti-subsidy measures at the WTO to protect global fisheries, and setting up more robust environment enforcement actions. The announcement at COP26 that the United States and China will seek to strengthen cooperation on climate-related actions adds to the multipronged effort and the complexity.

Nonetheless, as a medium-term policy focus, the EGA is likely to survive in some form or other for several reasons. First, it connects directly to a reenergized environmental agenda and offers a concrete talking point, allowing the administration to link greener trade with freer trade. Second, because tariffs on these goods tend to be lower in the United States than in many other potential signatories, the U.S. administration can rest its arguments on basic reciprocity principles, which have popular appeal. This gives the agreement bipartisan appeal—no small thing in Washington these days. Over summer 2021, the EGA garnered the support of Democrats in the U.S. House of Representatives and the Cato Institute, a conservative and libertarian think tank.²⁸

Finally, the negotiations are housed within the WTO, which allows the administration to lean into multilateralism even as it pursues a plurilateral deal. This approach also helps blunt criticism that the agreement will narrowly serve the interests of developed economies.²⁹ In late October 2021, former WTO deputy director general Alan Wolff urged progress on these questions and offered the prompt restarting of an ambitious EGA as a prime example of what a multilateral trading system can and should achieve in this arena.³⁰

Financing the Transition

In addition to integrating environmental concerns into trade policy, the Biden administration has committed to strengthening the green finance agenda. In January 2021, Biden directed the preparation of a climate finance plan, which was released as the conclusion of the April summit. On a parallel track, U.S. Special Presidential Envoy for Climate John Kerry publicly pledged that the United States would “make good” on its promise to fund the United Nations (UN)–backed Green Climate Fund. This promise refers to a $2 billion shortfall—out of the $3 billion promised by former president Barack Obama—that neither Obama nor Trump provided to the fund.³¹

With Biden’s plans on climate finance taking more concrete shape, the United States is signaling a greater willingness to engage in development-oriented spending, albeit in a narrower framework than many lower-income countries would like. The climate finance plan promised to double annual U.S. climate financing to developing countries over the next few years. Although the baseline for that doubling was somewhat vague, Leonardo Martinez-Diaz, a former Obama administration official, estimated that the newly doubled amount would be around $5.6 billion.³² In Glasgow, the United States joined France, Germany, the United Kingdom, and the EU in a joint $8.5 billion pledge to South Africa, signaling a willingness to selectively target developing countries not only with significant emissions problems but also, perhaps, with geostrategic importance.³³

Currently, climate mitigation projects—ones that reduce emissions from existing sources—garner the vast majority of green finance dollars.³⁴ These projects are usually found in emerging markets, where investing in the improved sustainability of an existing industry often provides a healthy return on investment to funders. The subsequent benefits from reducing those emissions are experienced globally, creating broad social returns. But another category of climate-related spending involves climate adaptation projects, which typically help communities prepare for impacts of climate change and thereby provide more localized benefits. Consequently, these projects usually entail smaller financial and social returns, making them less popular with possible funders. To meet some of these needs, the U.S. administration has pledged to triple its contributions to funds dedicated to climate adaptation projects, possibly up to $1.5 billion, which represents a modest shift in green finance.³⁵

Along the same lines, the administration has directed the U.S. International Development Finance Corporation (DFC) to reach a net-zero investment portfolio by 2040. The corporation has hired its first chief climate officer and established a $50 million fund to provide technical assistance on green finance in developing countries.³⁶ An early example of the potential for innovation in this space is the DFC’s backing of Belize’s 2021 debt restructuring, in which the country agreed to pay back its new blue bond via spending on marine conservation in its waters.³⁷ The administration also directed the Millennium Challenge Corporation to deepen its investments in climate-smart development.

Pricing Carbon

The carbon-pricing debate is taking on international dimensions as the EU seeks to finalize its Carbon Border Adjustment Mechanism. Under the scheme, an imported good would be taxed according to the carbon intensity of its production. The implications for U.S. exporters, especially farmers and energy-intensive manufacturers, are significant, and the plan has already forced a U.S. response, with Kerry arguing that the EU carbon border tax should be a “last resort.”³⁸

The U.S. position reflects the historically weak political support at home for a domestic carbon tax, which would be needed to comply with WTO rules that prohibit discriminatory taxes against foreign goods. Moreover, the implementation of a carbon tax would be subject to heated debate in the United States, given the levy’s possible pass-through to American households, its regressive nature, and its implications for American businesses. Progressives tend to favor more comprehensive redistributive schemes that address a range of social concerns, while conservatives generally prefer direct rebates of tax revenue in the form of carbon dividends.

For now, the U.S. administration seems set on making concessions in other key areas and then seeking flexibility with the EU. The Biden administration’s pledge to halve U.S. emissions by 2030 relative to a 2005 baseline—together with its wide array of other climate-friendly policies, including many undertaken jointly with EU partners—should help in this regard and strengthen Washington’s hand as it seeks future waivers for U.S. exports.

Cooperation With China

As the world’s two largest carbon emitters, the United States and China will need to cooperate—or, at least, compete constructively—on reducing greenhouse gas emissions, advancing green technology, and devising adaptation strategies in the coming decade. But many wonder whether climate issues can be kept separate from other areas of ever-increasing geopolitical tensions and whether a more realistic framework needs to be considered.³⁹ With the announcement at COP26 of enhanced climate cooperation between the two countries, the United States seems intent on maintaining political space for more sustained dialogue and calming the waters.

At the April 2021 climate leadership summit, Chinese President Xi Jinping reiterated his 2020 commitment to reach peak emissions by 2030 and Beijing’s continued adherence to the principle of common but differentiated responsibilities among nations. This concept calls on developed countries to accommodate developing countries’ climate change reduction timelines and be more generous with green financing. The United States has partly accepted this principle, but Kerry has questioned the value of climate commitments by states such as China when the timelines are too long.⁴⁰

As for taking historic responsibility for climate change, the United States has acknowledged its role in past emissions in previous international agreements and regularly releases public data on its cumulative greenhouse gas emissions. However, Washington will resist efforts to link its past emissions too tightly to current and future obligations. Instead, it will choose to pay down its emissions debt in a more discretionary manner, such as by financing global mitigation efforts, providing green technologies to lower-income countries, and reducing emissions at home.

With limited prospects for extensive cooperation on lowering emissions, the most likely arena for U.S.-China coordination seems to involve shared capacity building in the development and deployment of green technologies. Electrification of vehicle fleets, energy-efficient infrastructure building, and cooperative standard setting are possible focus areas. That said, leaders face an increasingly securitized technology space and a growing desire to create fully independent supply chains, including for the rare-earth elements needed to make electric vehicle batteries. The Biden administration has minimal political room to appear soft on China, so cooperation here would require accountability measures to mollify the national security community and concerned constituencies.

Securing a Healthy Digital Economy

As the global economy moves online, competing visions have emerged over digital regulation, digital taxation, forced transfer of digital intellectual property rights, and data storage and transfer. In the EU, a universalist approach has arisen that champions privacy protections for individuals, and this is enshrined in article 8 of the union’s Charter of Fundamental Rights and evidenced in its General Data Protection Regulation. In China, a more particularist stance has emphasized data sovereignty and the importance of state-level interests, as shown in Beijing’s insistence on national sovereignty carve-outs in international data agreements. In the United States, a more utilitarian approach has welcomed market forces that enable private data flows, upheld intellectual property rights, and adopted a looser regulatory environment, with ex-post accountability placed on companies for breaches that compromise personal data.

In the decades ahead, societies will stand to gain enormously from a healthy, robust, and competitive information environment. Perhaps these potential gains will be enough to spur creative problem solving and resolve conflicts at the global level. But it is also possible that interstate rivalries and fundamental debates about the values that should govern the digital economy will feed fragmentation and degrade the digital ecosystem. Over the long term, global and national data governance schemes will need to reach greater harmonization—a major strategic endeavor that will require sustained leadership and compromise. Until then, U.S. policy attention will focus on near-term efforts, like the rules governing digital trade and international taxation of digital services, as Washington seeks to advance its model of a more open and dynamic digital ecosystem.

Digital Trade and Data Transfers

As governments try to address public concerns about privacy and security, the growth of new and conflicting rules for digital business practices is creating risks for the global digital economy, including many U.S. information companies. Worries about the direction of these restrictions led the Obama administration to develop digital trade provisions for the Trans-Pacific Partnership and led the Trump administration to roll many of those provisions into the USMCA in November 2018 and the U.S.-Japan Digital Trade Agreement in October 2019.

Both administrations sought to establish basic rules for the nondiscriminatory treatment of digital products, acceptance of electronic authentication methods, electronic transfer of information across borders, digital intellectual property rights, and more. While the U.S.-Japan agreement took a cautious approach on issues that impinged on national law and international treaties, it found ways to enable cross-border data flows, limit data localization, and enforce consumer protections for trade in digital products. Several of these issues are now being taken up in the reopened U.S.-India trade talks and have entered into on-and-off trade dialogues with other developing nations, like Kenya.

Another priority for the United States will be to resolve its ongoing dispute with the EU over the Privacy Shield framework, which the European Court of Justice struck down in 2020. The Privacy Shield offered legal certainty to companies that transfer EU citizens’ data to the United States for commercial purposes. The European court determined that the framework did not offer adequate protection due to excessive surveillance of noncitizen data by the U.S. government, particularly the intelligence community.⁴¹ The court also raised concerns about some of the standard contractual clauses used in the industry.

In March 2021, the Biden administration pledged to “intensify negotiations” on an enhanced shield.⁴² With discussions advancing through the summer, the U.S. Chamber of Commerce announced its full support for a new EU-U.S. Privacy Shield that “brings legal certainty to data transfer mechanisms” and estimated that the “data transfer relationship” is worth about $7.1 trillion to the two parties.⁴³ Revisions to the framework seem likely to include limits on bulk intelligence collection, mechanisms to adjudicate complaints about U.S. collection efforts, or a more comprehensive legislative solution in the United States to enhance data protection.

Global Data Governance

In 2019, around the same time that the United States was solidifying several bilateral digital trade deals, Japan launched a major global initiative, known colloquially as Data Free Flow With Trust. It aimed to enhance cooperation on cross-border digital flows by creating a tractable policy architecture for digital governance and providing an ongoing policy dialogue within the G20, called the Osaka Track.⁴⁴ The OECD is working on a similar effort. Some analysts suggest these multiple lines of effort could provide a useful focus for U.S. reengagement in Indo-Pacific trade and serve as the building blocks for a major plurilateral agreement on digital trade.⁴⁵ Such a deal would knit together the digital provisions in the CPTPP and numerous upgrades made by countries throughout the region, ensuring that the United States plays a role in the Indo-Pacific’s growing digital economy.

Despite promising movement on some digital trade issues among subsets of countries, broader multilateral progress has lagged. Currently, eighty-six members of the WTO are negotiating an e-commerce agreement, but concerns about “e-readiness” among lower-income countries and the potential for data—and, therefore, value—to be extracted from their populations have struck a political chord.⁴⁶ Developing countries also voice worries about how the growth of digital trade will erode customs revenues, how their limited regulatory and technical capacities will hinder compliance, and how the power wielded by the world’s largest information companies will undermine national sovereignty. The split between developing and developed countries continues as India and South Africa push back against a G7 proposal to prohibit customs duties on electronic transmissions and continued limits on digital technology transfers to developing economies.⁴⁷

A Divided America Reengages Globally

After decades of rapid globalization, technological change, and declining public investment, the U.S. public is skeptical, restive, and divided. In 2016, Trump won the White House by offering an economic nationalism that rejected global cooperation as ineffective and argued for an America First mentality. In 2020, despite losing the presidential election, he increased his support by 11 million votes.⁴⁸ This is the political reality of the United States today.

Since taking office, Biden has repeatedly declared that “America is back” and rededicated the country to its extensive set of international alliances and agreements.⁴⁹ He has appointed a seasoned foreign policy team that reflects those ideals. He has reversed Trump administration decisions to withdraw from international commitments and upped U.S. contributions to fight the coronavirus and climate change. While the Trump administration represented a turn inward, the Biden administration seems set to turn outward. But it is doing so with a caveat.

Notes

¹ “Remarks by President Biden on America’s Place in the World,” The White House, February 4, 2021, https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/02/04/remarks-by-president-biden-on-americas-place-in-the-world/.

² Salman Ahmed and Rozlyn Engel (eds), Making U.S. Foreign Policy Work Better for the Middle Class, Carnegie Endowment for International Peace, 2020, https://carnegieendowment.org/files/USFP_FinalReport_final1.pdf.

³ “A Conversation With Ambassador Katherine Tai, U.S. Trade Representative,” Center for Strategic and International Studies, October 4, 2021, https://www.csis.org/analysis/conversation-ambassador-katherine-tai-us-trade-representative.

⁴ Aamer Madhani, “Britain’s Boris Johnson Presses Biden for New Trade Deal,” AP News, January 24, 2021, https://apnews.com/article/joe-biden-global-trade-health-coronavirus-pandemic-jen-psaki-332faf002eb52c7db6429704b7c8ff9b.

⁵ “A Conversation,” CSIS.

⁶ Thomas L. Friedman, “Biden Made Sure ‘Trump Is Not Going to Be President for Four More Years,’” New York Times, December 2, 2020, https://www.nytimes.com/2020/12/02/opinion/biden-interview-mcconnell-china-iran.html?auth=login-google.

⁷ Brendan Vickers, “The Relationship Between Plurilateral Approaches and the Trade Round,” E15 Initiative, December 2013, https://e15initiative.org/wp-content/uploads/2015/09/E15-Functioning-of-the-WTO-Vickers-FINAL.pdf.

⁸ Jennifer A. Hillman, “The United States Needs a Reformed WTO Now,” Council on Foreign Relations, July 29, 2020, https://www.finance.senate.gov/imo/media/doc/29JUL2020Hillman~CoFRSTMNT.pdf.

⁹ “Opening Statement—María L. Pagán,” U.S. Senate Finance Committee, October 26, 2021, https://www.finance.senate.gov/imo/media/doc/Maria%20Pagan%20DUSTR%20Geneva%20Opening%20Statement%20FINAL.pdf; “Hearing to Consider the Nomination of Maria L. Pagan, of Puerto Rico, to Be a Deputy United States Trade Representative (Geneva Office), With the Rank of Ambassador,” U.S. Senate Finance Committee, October 26, 2021, https://www.finance.senate.gov/imo/media/doc/Maria%20Pagan%20Senate%20Finance%20Committee%20QFRs.pdf.

¹⁰ “Hearing,” U.S. Senate Finance Committee.

¹¹ Terence P. Stewart, “WTO Dispute Settlement Body Meeting of August 28, 2020—How Disputes Are Being Handled in the Absence of Reform of the Appellate Body,” Washington International Trade Association, August 29, 2020, https://www.wita.org/blogs/disputes-appellate-body/.

¹² “IMF Managing Director Announces the US$650 Billion SDR Allocation Comes Into Effect,” International Monetary Fund, August 23, 2021, https://www.imf.org/en/News/Articles/2021/08/23/pr21248-imf-managing-director-announces-the-us-650-billion-sdr-allocation-comes-into-effect.

¹³ James M. Roberts, “Will Biden Force U.S. Taxpayers to Fund a Massive International Monetary Fund Bailout of China?,” Heritage Foundation, February 5, 2021, https://www.heritage.org/monetary-policy/commentary/will-biden-force-us-taxpayers-fund-massive-international-monetary-fund.

¹⁴ Maurice Obstfeld and Edwin M. Truman, “The New SDR Allocation Will Benefit All Countries,” Peterson Institute for International Economics, March 25, 2021, https://www.piie.com/blogs/realtime-economic-issues-watch/new-sdr-allocation-will-benefit-all-countries.

¹⁵ James Politi, Aime Williams, and Chris Giles, “US Offers New Plan in Global Corporate Tax Talks,” Financial Times, April 8, 2021, https://www.ft.com/content/847c5f77-f0af-4787-8c8e-070ac6a7c74f.

¹⁶ Liz Alderman, Jim Tankersley, and Eshe Nelson, “U.S. Proposal for 15% Global Minimum Tax Wins Support From 130 Countries,” New York Times, July 1, 2021, https://www.nytimes.com/2021/07/01/business/global-minimum-tax.html.

¹⁷ “G20 Rome Leaders’ Declaration,” Group of Twenty, October 2021, https://www.g20.org/wp-content/uploads/2021/10/G20-ROME-LEADERS-DECLARATION.pdf.

¹⁸ “International Community Strikes a Ground-Breaking Tax Deal for the Digital Age,” Organization for Economic Cooperation and Development, October 8, 2021, https://www.oecd.org/tax/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-age.htm.

¹⁹ “OECD/G20 Base Erosion and Profit Shifting Project: Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy,” Organization for Economic Cooperation and Development, October 8, 2021, https://www.oecd.org/tax/beps/brochure-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf.

²⁰ “Finance Committee Questions for the Record,” U.S. Senate Committee on Finance, January 21, 2021, https://www.finance.senate.gov/imo/media/doc/Dr%20Janet%20Yellen%20Senate%20Finance%20Committee%20QFRs%2001%2021%202021.pdf.

²¹ Letter to U.S. Treasury Secretary Janet Yellen, U.S. House of Representatives Committee on Ways and Means, April 8, 2021, https://gop-waysandmeans.house.gov/wp-content/uploads/2021/04/Letter-to-Sec.-Yellen-OECD-4.pdf.

²² “USTR Announces Next Steps of Section 301 Digital Services Taxes Investigations,” Office of the U.S. Trade Representative, March 26, 2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/march/ustr-announces-next-steps-section-301-digital-services-taxes-investigations.

²³ Ana Monteiro, “U.S. Forges Ahead on $1 Billion Tariff Plan Over Digital Taxes,” Bloomberg, April 5, 2021, https://www.bloomberg.com/news/articles/2021-04-05/u-s-forges-ahead-on-1-billion-tariff-plan-over-digital-taxes.

²⁴ “USTR Announces, and Immediately Suspends, Tariffs in Section 301 Digital Services Taxes Investigations,” Office of the U.S. Trade Representative, June 2, 2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/june/ustr-announces-and-immediately-suspends-tariffs-section-301-digital-services-taxes-investigations.

²⁵ Josh Lederman, “21 Republican-led States Sue Biden Over Keystone XL Rejection,” NBC News, March 18, 2021, https://www.nbcnews.com/politics/joe-biden/21-republican-led-states-sue-biden-over-keystone-xl-rejection-n1261356.

²⁶ Brad Plumer and Lisa Friedman, “Over 40 Countries Pledge at U.N. Climate Summit to End Use of Coal Power,” New York Times, November 4, 2021, https://www.nytimes.com/2021/11/04/climate/cop26-coal-climate.html.

²⁷ “Remarks From Ambassadaor [sic] Katherine Tai on Trade Policy, the Environment and Climate Change,” Office of the U.S. Trade Representative, April 2021, https://ustr.gov/index.php/about-us/policy-offices/press-office/speeches-and-remarks/2021/april/remarks-ambassadaor-katherine-tai-trade-policy-environment-and-climate-change.

²⁸ James Bacchus and Inu Manak, “Free Trade in Environmental Goods Will Increase Access to Green Tech,” Free Trade Bulletin no. 80, Cato Institute, June 8, 2021, https://www.cato.org/sites/cato.org/files/2021-06/free-trade-bulletin-80.pdf.

²⁹ Jaime de Melo and Jean-Marc Solleder, “What’s Wrong With the WTO’s Environmental Goods Agreement: A Developing Country Perspective,” VoxEU, March 13, 2019, https://voxeu.org/article/what-s-wrong-wto-s-environmental-goods-agreement.

³⁰ “Defining Success for MC12,” Peterson Institute for International Economics, October 29, 2021, https://www.piie.com/sites/default/files/documents/wolff-2021-10-29.pdf.

³¹ Jess Shankleman, “John Kerry Says U.S. Will ‘Make Good’ on Climate Finance Pledge,” Bloomberg, January 25, 2021, https://www.bloomberg.com/news/articles/2021-01-25/john-kerry-says-u-s-will-make-good-on-climate-finance-pledge.

³² Chloé Farand, “US Pledges to Double International Climate Finance at Earth Day Summit,” Climate Home News, April 22, 2021, https://www.climatechangenews.com/2021/04/22/us-pledges-double-international-climate-finance-earth-day-summit/.

³³ Jeff Mason, Andrea Shalal, and Emma Rumney, “South Africa to Get $8.5 Bln From U.S., EU and UK to Speed Up Shift From Coal,” Reuters, November 2, 2021, https://www.reuters.com/business/environment/us-eu-others-will-invest-speed-safricas-transition-clean-energy-biden-2021-11-02/.

³⁴ Rob Macquarie et al., “Updated View on the Global Landscape of Climate Finance 2019,” Climate Policy Initiative, https://www.climatepolicyinitiative.org/wp-content/uploads/2020/12/Updated-View-on-the-2019-Global-Landscape-of-Climate-Finance-1.pdf.

³⁵ Martinez-Diaz estimated the level was $500 million in the late Obama years. See Farand, “US Pledges.”

³⁶ “U.S. International Climate Finance Plan,” The White House, April 2021, https://www.whitehouse.gov/wp-content/uploads/2021/04/U.S.-International-Climate-Finance-Plan-4.22.21-Updated-Spacing.pdf.

³⁷ Marc Jones, “Analysis: Belize Offers Ocean ‘Blue’ Print With Debt-for-Reef Swap,” Reuters, November 5, 2021, https://www.reuters.com/business/cop/belize-offers-ocean-blue-print-with-debt-for-reef-swap-2021-11-05/.

³⁸ Leslie Hook, “John Kerry Warns EU Against Carbon Border Tax,” Financial Times, March 12, 2021, https://www.ft.com/content/3d00d3c8-202d-4765-b0ae-e2b212bbca98.

³⁹ “U.S.-China Joint Statement Addressing the Climate Crisis,” U.S. Department of State, April 17, 2021, https://www.state.gov/u-s-china-joint-statement-addressing-the-climate-crisis/.

⁴⁰ Timothy Puko, “John Kerry Says U.S. Will Hold China to Account on Climate Pledges,” Wall Street Journal, April 13, 2021, https://www.wsj.com/articles/kerry-says-u-s-will-hold-beijing-to-account-on-climate-pledges-11618338675?mod=article_inline.

⁴¹ “EU Data Transfer Requirements and U.S. Intelligence Laws: Understanding Schrems II and Its Impact on the EU-U.S. Privacy Shield,” Congressional Research Service, March 17, 2021, https://crsreports.congress.gov/product/pdf/R/R46724.

⁴² “Intensifying Negotiations on Transatlantic Data Privacy Flows: A Joint Press Statement by European Commissioner for Justice Didier Reynders and U.S. Secretary of Commerce Gina Raimondo,” European Commission, March 25, 2021, https://ec.europa.eu/commission/presscorner/detail/en/statement_21_1443.

⁴³ “Transatlantic Data Flows: Moving Data With Confidence,” U.S. Chamber of Commerce, September 20, 2021, https://www.uschamber.com/technology/data-privacy/transatlantic-dataflows.

⁴⁴ “Data Free Flow With Trust (DFFT): Paths Towards Free and Trusted Data Flows,” World Economic Forum, May 2020, http://www3.weforum.org/docs/WEF_Paths_Towards_Free_and_Trusted_Data%20_Flows_2020.pdf.

⁴⁵ Wendy Cutler and Joshua P. Meltzer, “Digital Trade Deal Ripe for the Indo-Pacific,” Brookings Institution, April 5, 2021, https://www.brookings.edu/opinions/digital-trade-deal-ripe-for-the-indo-pacific/.

⁴⁶ Isabelle Durant, “Developing Countries and Trade Negotiations on e-Commerce,” United Nations Conference on Trade and Development, February 19, 2021, https://unctad.org/news/developing-countries-and-trade-negotiations-e-commerce.

⁴⁷ Amiti Sen, “At WTO, India and South Africa Call for Inclusive Development of Global e-Comm,” Hindu Business Line, November 10, 2021, https://www.thehindubusinessline.com/news/national/at-wto-india-and-south-africa-call-for-inclusive-development-of-global-e-comm/article37426016.ece.

⁴⁸ Ford Fessenden, Lazaro Gamio, and Rich Harris, “Trump Found More Than 10 Million New Voters. They Were Not Enough,” New York Times, November 17, 2020, https://www.nytimes.com/2020/11/17/us/trump-found-more-than-10-million-new-voters-they-were-not-enough.html.

⁴⁹ “Remarks by President Biden at the 2021 Virtual Munich Security Conference,” The White House, February 19, 2021, https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/02/19/remarks-by-president-biden-at-the-2021-virtual-munich-security-conference/.

The European Union’s Competitive Globalism

The European Union (EU) has demonstrated a growing concern in recent years with rewiring globalization. The bloc’s focus on reforming key elements of globalization is not new, but it has intensified in the last decade. This is significant because many European governments and the EU collectively played important roles in shaping globalization; their policies over many years help explain why the phenomenon took on the characteristics it assumes today. The EU has increasingly questioned many elements of globalization for which it was partly responsible in earlier decades.

The EU has never seen itself as supporting unchecked, laissez-faire globalism. A narrative of taming globalization has long been at the forefront of the EU agenda. Indeed, European integration was partly about harnessing globalization and partly about containing it. The union has had a major influence over the regulations that provide global governance frameworks. This is the area in which the EU sees itself as making the biggest contribution internationally and reflects a conceptual preference for regulated globalism.

However, in recent years, the EU’s efforts to steer globalization in particular political directions have intensified. The EU’s emerging approach to rewired globalization is not yet fully defined; the bloc is in the midst of rethinking many of its global policies, and its internal debates are still lively and unresolved. Yet, the broad outlines of a recalibrated strategy have begun to appear. The central thread is an aim to combine global dynamics with a reassertion of sovereign control over key areas of international policy. A dominant narrative of European sovereignty and autonomy has started to imbue EU approaches to globalization with a different tone. European leaders and policymakers insist this is not a repudiation of globalism as such but an effort to take more strategic control over its contours.

To some extent, this EU approach echoes analysts’ calls for more measured forms of globalization. However, it is also an approach tailored more closely to the union’s immediate interests. Despite much European rhetoric about more equitable globalization, the EU’s rejiggered priorities do not constitute a form of globalization aimed at mutually beneficial problem solving or the kind of rebalancing sought by most other states around the world. If anything, the EU has moved in the other direction of a more competitive globalism, trying to craft a globalization more tightly attuned to its own concerns. A difficult and unresolved question is whether the EU’s strategy amounts to a qualitative rewiring of globalization or simply a preference for less globalism.

Global Trade

Over many decades, the EU was a powerful force in extending international trade. The union supported multilateral trade accords, the creation of the World Trade Organization (WTO), and the gradual widening of the trade agenda. In more recent times, the EU has sought to keep the WTO functioning as various of its procedures have atrophied. In the early 2010s, a crisis-hit EU turned to many, often subtle, forms of protectionism. However, rather than proceed down a path of outright protectionism, the union has more recently pursued a series of nuanced changes in its international trade policies.

Crucially, flanking its support for open trade, the EU has played a leading role as the world’s regulator of global markets. It is through this regulatory prism that the EU has found its most distinctive place in, and influence over, globalization. The EU developed a policy of regulated globalism in part because the union had to put in place regulatory frameworks for the governance of European integration, meaning that these frameworks offered themselves as templates when interdependence gathered pace at the global level. But this policy also represented a preference for managed globalism in the guise of rules on competition, healthcare, safety, the environment, and other domains.

Over the last decade, the EU has moved incrementally to adjust its international trade policies, with implications for the way the bloc positions itself with respect to globalization. In a delicate balancing act, the union has sought to contain other powers’ protectionism while defending itself from some dimensions of hyperglobalization. The EU’s narrative has shifted to embrace terms such as autonomy and economic sovereignty—or, in the words of EU High Representative for Foreign Affairs and Security Policy Josep Borrell, an outlook under which “[we] rely on ourselves to guarantee our future.”¹ The union’s adjusted approach to international trade denotes a different stance on globalization.

The clearest shift has been toward bilateral trade deals and a policy of setting tighter conditions on other powers’ access to European markets. In 2006, the EU reversed its prohibition on bilateral accords.² In recent years, the EU has completed or launched more preferential trade negotiations than any other power. The union now has over seventy bilateral trade accords, and many other talks are still open.³ While the EU insists these trade agreements are WTO compatible, the union has clearly used them to tailor trade policy to its immediate commercial interests.⁴ The EU’s focus is increasingly on instrumentalized globalization through political negotiation, as opposed to rules-based market liberalization.

The changed approach is seen equally in the EU’s evolving positions at the multilateral level. The bloc is now strikingly assertive in concentrating its efforts in multilateral institutions on pushing back against practices that run counter to its interests. For example, the union has fought in the WTO for tougher measures against trade-distorting subsidies and state-owned enterprises, fewer exemptions for developing states, and more scope for plurilateral deals to advance its interests. The EU has also come to share some of the United States’ interest in issue-specific multilateral accords.⁵

The EU has become less, not more, generous toward poorer economies in its trade policies. It is now somewhat less unconditionally supportive of the WTO’s system of special and differential treatment (S&DT) for developing states. The union no longer focuses so strongly on WTO reform as a development tool to make globalization more equitable. It has sought to bring developing countries that have done well more fully under WTO norms. The EU has not been as severe on S&DT rules as Washington but has looked for more subtle ways of narrowing states’ designations as developing economies to limit the extent of differentiation within the WTO.

The EU now shapes its economic partnership agreements with African, Caribbean, and Pacific (ACP) states much more closely around its economic interests than previous agreements under the union’s ACP partnership; for this reason, many African countries have refused to sign such accords. The EU also uses many of these bilateral trade deals to push third countries to accept intellectual property restrictions that go beyond the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The union’s approach has moved from nonreciprocal market opening to more reciprocal trade and investment policies.

As part of this shift, the EU has mobilized its regulatory influence in more instrumental and sharper ways. In the last several years, the union has made more efforts to get regulatory standards onto the WTO agenda than it has for commitments to further trade liberalization. The EU’s stated policy since 2015 has been to use its regulatory norms to protect consumers from many types of imports.⁶ A new Global Gateway initiative published in 2021 is based expressly on an aim to push third countries to adopt EU norms in return for the union mobilizing several hundred million euros worth of investment financing.⁷ The union is widely seen to have become more assertive in pushing EU technical regulations in an attempt to protect its commercial advantage.⁸ Other powers complain that this is a form of soft protectionism to hinder access to European markets and have increasingly pushed back against such regulations.⁹

Since 2018, several EU member states have been calling for the bloc’s competition laws to be relaxed to allow support for European champions to compete internationally. The union’s updated industrial strategy is framed expressly as necessary for “Europe’s sovereignty.”¹⁰ In addition, in 2020, the EU created a European-level investment screening process. Under this, by the end of 2021, the commission had considered over 400 bids and in 3 percent of these cases issued an opinion to block or limit incoming investment.¹¹ An international procurement instrument has been working its way through the EU institutions for several years, designed to limit third country access to EU procurement contracts where they decline to offer EU companies similar access in return; the instrument finally cleared a European Parliament vote in December 2021.¹² The EU insisted that this tougher push for reciprocity and market leverage paid off in the Comprehensive Agreement on Investment that the EU reached in principle with China at the end of 2020. If implemented, this accord would give European firms enhanced access to the Chinese market and dilute Chinese government requirements on joint ventures.

The coronavirus pandemic has intensified these trends in EU external economic policy. The crisis has deepened concerns about the EU’s dependence on global supply chains. French President Emmanuel Macron argued that France and other EU states needed to bring back manufacturing and medical production from China and elsewhere.¹³ The European Commission’s post-coronavirus recovery instrument included a clause on using new funds to support European champions against external takeovers. Most EU states and the United Kingdom opposed a TRIPS waiver to help vaccine production in developing states (although by late 2021 they were starting to consider a number of ad hoc, targeted waivers). The WTO called the EU’s moves in early 2021 to control vaccine exports the most serious threat to multilateral open trade since World War II—a striking indictment against the bloc, which promotes itself as the strongest upholder of those rules.¹⁴

Responding to the coronavirus crisis, Borrell argued in April 2020 that the EU needed to bring production “as close as possible to the place of consumption . . . a balance between the undeniable advantages of open markets and interdependence, and between the sovereignty and security of countries.”¹⁵ A new trade strategy released in February 2021 confirmed this evolution; the European Commission promised an assertive defense of the union’s interests in reforming international institutions, supporting domestic industry, and protecting the EU from other powers’ trade practices.¹⁶ In a new strategy on multilateralism published the same month, the union tied itself to “a more interests-based approach” alongside support for open markets and rules.¹⁷ And in September 2021, the commission brought forward a new anti-coercion instrument that allows the EU more systematically to counteract offensive trade measures taken by other powers.¹⁸

These changes to the EU’s international trade and investment strategies are the result of both global and domestic factors. Policymakers have felt increasingly defensive as the EU has lost market shares around the world over the last two decades. Domestic politics have added further pressures. Most populist parties that have gained ground in recent years have exhibited varying degrees of hostility to open, international trade and large inflows of investment from China and elsewhere. Large-scale protests took place in many European countries against EU trade deals with Canada, South Korea, and the United States.

To rebut accusations of protectionism, the EU has increasingly adopted the terminology of open strategic autonomy—although some member states, like France, have expressed unease at the “open” prefix. In June 2020, then European commissioner for trade Phil Hogan defined this concept as standard support for open trade combined with “a tougher, more assertive approach to protect our businesses and consumers, notably through stronger trade defence and enforcement.”¹⁹ At the end of 2020, Hogan’s successor, Valdis Dombrovskis, reinforced the message that the EU’s approach was “to ensure that we remain open for business and trade, while at the same time becoming more assertive in defending and enforcing our interests, rights and values.”²⁰

Technology Governance

The political tailoring of EU policies has been especially noteworthy in the digital technology sector. In February 2020, the commission oriented itself around the goal of “European technological sovereignty” and stressed that this required an effort to decrease Europe’s reliance on the rest of the world for important technologies.²¹ In her mission letter at the end of 2019, European Commission Executive Vice President Margrethe Vestager was given an explicit instruction to foster European strategic autonomy in the digital domain.²² European control over European data has emerged as a guiding digital leitmotif. This has involved two components: constraining U.S. technology giants and supporting the EU’s self-reliance.

Restraining U.S. Tech Giants

It is well known that the EU has progressively toughened its policies toward U.S. tech giants. The current European Commission has moved to tighten restrictive measures against these companies. Both the commission and member-state governments have developed a more assertive combination of regulations, standard setting, competition policy, and taxation of tech giants. The EU fined Google €4.3 billion ($5 billion) in 2018 for antitrust transgressions.²³ In addition, the union has increasingly pushed for rules to ensure that trade deals do not undermine digital privacy or safeguards on companies’ use of data.

In May 2018, the EU’s General Data Protection Regulation (GDPR) placed a range of obligations on companies, including mandatory user consent, the anonymization of data, notifications for data breaches, and safe cross-border data transfers.²⁴ Many other jurisdictions have used the GDPR template as a means of enhancing data privacy.²⁵ The regulation and the related Osaka Track in the Group of Twenty (G20) are nominally aimed at building in guarantees that would help cross-border e-commerce. Still, many other powers see the GDPR as a protectionist tool, and several have raised the issue in the WTO against the union. Linked to this regulatory influence, the union has stepped up several connectivity initiatives in developing states to help governments that meet EU tech standards resist the Chinese digital orbit.

The EU’s proposed Digital Services Act (DSA) will oblige tech companies to increase the transparency of their algorithms and be more assiduous in removing and curating content. The penalties for breaking DSA rules will be severe, with fines of up to 6 percent of a firm’s annual revenue.²⁶ In parallel, the Digital Markets Act will function like antitrust law, prohibiting tech gatekeepers from taking advantage of access to competitors’ data and forbidding them from favoring their own services over competitors operating on their platforms. Anticompetitive behavior will lead to fines of up to 10 percent of turnover, and repeated violations could mean the breakup of the company.²⁷ This package is the EU’s most comprehensive assault to date on large tech companies. In April 2021, the commission took these steps further with proposals for a legislative framework to govern future artificial intelligence (AI) developments.²⁸

Fostering EU Self-Reliance

In terms of the second component of the EU’s digital autonomy, the European Commission’s 2020 digital strategy set the aim of “reducing [our] dependency on other parts of the globe.”²⁹ An AI white paper published the same year included a goal of attracting investment of over €20 billion ($23 billion) per year for AI development. The paper also talked of firms needing to develop AI based on EU data, not data generated in other countries.³⁰ The European Investment Fund has coordinated AI incubation efforts through six venture-capital funds, while a new EU public-private partnership is attempting to spur a leap