August 16, 2022

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Long term news

Germany’s Chaired G7 Summit Is A Watershed Opportunity For Leading Democracies To Capitalize On Teetering Authoritarian Economies

When German Chancellor Olaf Scholz convenes the 48th summit of the other leaders of the G7 nations on the grounds of Schloss Elmau castle in the Bavarian Alps late next month, the political economy environment in which the globe’s leading industrialized democracies find themselves is startling different from the previous G7 summit, chaired by the U.K. just 12 months ago.

As if the global shock of the still lingering COVID pandemic weren’t enough, two of the world’s largest authoritarian economies, Russia and China, which rightly preoccupied much of the G7’s activities over the years since its founding in 1975, are now teetering. The timing of their faltering is largely coincidental, and it is arising for each in unique ways and for different reasons.

Russia is largely a national security, rather than an economic concern, for the G7. But China is another matter. It poses significant economic risks to G7 prosperity because our firms have ceded technological sovereignty to China as Beijing has adroitly played off our businesses against one another, especially their deployment of applied R&D.

There is now a unique opportunity for G7 leaders to proactively “right the ship” and build a new architecture of international science and technology (S&T) agreements among advanced democracies for businesses, labs, universities, and research institutes in those countries to collaborate on precompetitive research and development.

Such science and technology agreements will complement the long-standing network of treaties and agreements governing cross-border investment and trade activities among the G7 and other democracies. Think of them as forming the robust three-legged stool that is the foundation for fostering competitiveness.

Given its strength in S&T activities Germany is, of course, extraordinarily well-placed to shepherd this initiative. Fortunately, it and the rest of the G7 can tap into valuable lessons readily available from how G7 agreements in trade and investment have matured over the years.

However, in light of the nature of the functioning of the G7, Japan takes over as chair next January. Chancellor Scholz, therefore, has his work cut out for him over the coming six months.

The Contrasts Between Russia And China

In the case of Russia, Vladimir Putin’s unprovoked attack on Ukraine has evinced that his military’s prowess, his territorial expansionist dream to further recreate the Soviet Union westward, and his nation-building model of a kleptocracy based on natural resource rents, are bankrupt.

The G7’s focus on Russia will surely be squarely on military and foreign policy threats compared to economic concerns. After all, Russia is just the world’s 11th largest economy in nominal GDP terms, and the financial ramifications for the G7 associated with Putin’s actions are largely self-imposed by the West—the oil embargo, which is driving up oil prices globally, and the commercial sanctions, which restricts or bans conducting business with Russia.

That Putin’s gambit in Ukraine means the end of globalization (or as some have said the death of capitalism) is hyperbolic at best and ill-informed at worst, as I have argued earlier in this space.

China, as the world’s most populated country and the second largest economy, is a wholly different matter.

Despite implementing progressively innovative domestic economic reforms in the 1990s and gaining accession to the WTO in 2001, since then the state has steadily reemerged as the dominating force whether explicitly or implicitly in Chinese commerce both at home and abroad.

Beijing’s economic policy of strengthening the country’s “socialist market economy”—which is of course a contradiction in terms—says it all. Not surprisingly, the economy’s underbelly has grown very soft and become hypersensitive to public confidence in the country’s economic leadership. Think: the leadership’s need to bailout citizens’ investments in the country’s stock market when it has gyrated and the value of their stock portfolios plummeted.

Yet, Xi Jinping has not only emerged as the nation’s strongest autocrat in modern times, most recently pushing for the effective elimination of term limits, but he has also mishandled the country’s COVID crisis by relying on old style Communist “command and control” techniques such as mandating lockdowns of Shanghai and other cities rather than providing the population with effective vaccines produced by foreign suppliers.

News stories of unprecedented citizens’ protests of the lockdowns have emerged, including at Peking university, one of the country’s leading educational institutions; indeed, even photos of the public jumping outside apartment building windows to their death.

Not surprisingly, the impact of Xi’s handling of the pandemic, which of course has meant production stoppages, halts in major forms of urban transportation, and constrained consumption, has been deleterious to the country’s economic growth. Retail sales for April plummeted 14 percent compared to a year ago and urban unemployment of college age graduates has climbed to 18 percent.

All this has only compounded erosion of public morale, and even some business leaders have voiced criticism of Xi—quite unthinkable for China. Worse still for Xi—perhaps—are stories reporting that some in the Party leadership, most recently Premier Li Keqiang, the second in command, have publicly questioned Xi’s economic strategy. (I write “perhaps” because while the veracity of Li’s remarks on the economy’s troubles and challenges appears to be accurate, it is unclear whether they are intended as criticisms of Xi or whether Xi asked him to be the bearer of bad news.)

Meanwhile the economic stance of the G7 nations towards China remains schizophrenic. Owing to the significant trade, investment and technology interlinkages they have created with China, their competitiveness—both among themselves and globally—has come to depend critically on Beijing’s policies.

Epitomizing this is that a significant portion of the “value capture” from G7 basic research is enjoyed by China. At the same time, the G7 countries compete against each other seeking better deals with China rather than engaging in collaboration among themselves—especially on applied R&D, which is where the commercial value from basic R&D is realized.

While I and others have argued in the past that the G7 countries long ago should have reoriented their applied R&D activities toward collaboration, the current state of affairs of the Chinese economy presents the G7 with a watershed moment to capitalize structurally and strategically on the challenges—and the opportunities—that Beijing’s troubles present.

Germany In The G7 Chair

At Schloss Elmau, Chancellor Scholz can make significant headway to make this happen—and he should. Fortunately, under the UK’s leadership at the 2021 G7 Summit in Cornwall, a healthy “down payment” was made for such an enterprise.

In the Cornwall communique the G7 committed to enter into a “Research Compact” to maintain collaboration in scientific endeavors, explicitly recognizing that such partnership is consistent with the G7 countries functioning as open societies with democratic values who believe in academic freedom to increase the transparency and integrity of basic research, facilitate data free flow with trust to drive innovation and advance knowledge, and jointly address global challenges and opportunities.

With Germany now in the chair, June’s summit communique should build on the Research Compact, with the G7 committing to expand further collaboration in applied R&D with the explicit objective to enhance their and other liberal democracies’ abilities to capture the economic value of such R&D. They should state they explicitly recognize such collaboration will harness and fortify liberal democracies’ global competitiveness, economic growth and national security.

To illustrate the urgent need to strengthen such collaboration, the G7 leaders should call attention in the communique to several global problems and opportunities that desperately need attention and that lie at the frontier of international economic competition. These could include:

(i) combatting, reversing, and adapting to climate change, including hardening coastal zone infrastructure in the face of sea level rise developing, rolling out sustainable aviation fuels and propulsion systems, and implementing traditional and new approaches to reducing biogenic methane emissions;

(ii) improving the management of global cross-border supply chains to bolster national economic resilience in an interdependent world economy;

(iii) building, testing, and standardizing future wireless systems, such as 6G;

(iv) capitalizing on digital epidemiology to address cross-border disease and health vulnerabilities; and

(v) reducing and removing the growing amount of debris in outer space.

Since collaboration in R&D among liberal democracies is not wholly new, the communique should articulate why a different focus for such collaboration is key. As a former U.S. lead negotiator for international agreements in science and technology (S&T), I was honestly puzzled as to why the traditional raison d’etre underlying such accords worldwide was generally explicitly agnostic regarding markets and commercialization of inventions. Indeed, the discussions with counterparts in other countries centered on fostering cross-border scientific inquiry to build diplomatic bridges between nations.

It is clear that today we must move beyond “science diplomacy.” To that end, the Schloss Elmau communique would do well to highlight that enhancing international competitiveness through technological innovation lies at the core of how citizens measure their ability to achieve, maintain, and raise their standards of living.

In this context the communique needs to indicate how such collaboration will be mediated. My own view is that the G7 countries should commit to redesigning their approaches to negotiating and enforcing the regime of sovereign-to-sovereign international science and technology agreements to cross-leverage our sovereign-to-sovereign international trade and investment agreements.

Why is that important? Because G7 trade and investment agreements have supported openness by adhering to principles of (i) reciprocity and (ii) national treatment and by allowing private sector actors to seek (iii) enforcement actions by their governments. The G7 should formally recognize that these standards should apply equally to international science and technology agreements, reflecting the reality that our democracies need new R&D strategies, tactics, and cross-border collaboration to adjust to both dispersed global innovation processes and the increasingly important role of state-dominated economic competitors in the world market—especially, of course, China.

At the same time, the G7 needs to explicitly acknowledge that while the traditional practice for R&D collaboration has been centered at the national level, i.e., cross-national R&D protocols, now, such collaboration also needs to span intra-nationally: that is, between G7 countries’ governmental agencies and laboratories; companies; universities; and independent research entities.

Finally, the communique should outline agreement and a timetable on the steps G7 countries will undertake to operationalize this initiative.

Borrowing from my experience negotiating international investment treaties and international trade agreements, I would propose that each G7 country commits to developing a robust “model” (or “template”) international S&T agreement. Such model texts would serve as the basis for each nation to initiate the negotiation and adoption of international S&T agreements—bilateral and plurilateral—that establish clear, enforceable rules for applied, precompetitive R&D collaboration. The text embodied in these model agreements will necessarily evolve over time as economic and technological conditions change.

The process each G7 country would undertake in devising such model agreements is as important as the product. In particular, they should be the product of a systemic broad consultative process involving each country’s relevant domestic constituencies, complementing that utilized in forging sovereign-to-sovereign international trade and investment agreements.

Germany’s Handover of the G7 Baton to Japan

Surely a surprise to the uninitiated, the G7 is actually an informal group. Not only does the G7 chair rotate annually but there is also no permanent secretariat. Just as the U.K. passed the baton over to Germany at the start of 2022, on January 1, 2023, Japan will take over from Germany as chair.

This structure places a significant premium on maintaining open communication among the seven countries; deployment of sharp managerial skills; and preserving as best as possible institutional memories embodied in humans.

It is not too early for the Japanese to start to engage closely with the Germans to ensure a smooth and robust handoff.