500 Cross-border movement of capital 450. Cross-border movement of people (number of immigrants)

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Chapter 3 Way Forward for the World and Japan to Realize an Ideal Society

Globalization has acted as a major driving force for developing the global economy by creating value added, including technological innovation, growth of emerging countries, expansion of the middle-income class and poverty reduction, through cross-border movement of people, goods, funds and ideas (Figure II-3-0-1).

Figure II-3-0-1 Growth of cross-border movement of trade, investments and immigrants in the 2000s

Source: UNCTAD, UN, WTO, IMF (Values in 2000 are converted to 100)

On the other hand, amid the novel coronavirus disease (COVID-19) pandemic, various exchanges that previously continued to increase with the progress in globalization became stagnant as seen in the disruption of supply chain and movement of people.

The COVID-19 pandemic occurred amid digitalization under the third unbundling. As a result of the COVID-19 pandemic, innovation and social implementation of digital technology is proceeding rapidly around the world. As the movement of goods has also become stagnant due to constraints on face-to-face communication caused by constraints on physical human mobility due to the pandemic, the emphasis of the pursuit of value added through cross-border exchange is expected to shift to the digital sector. 0 50 100 150 200 250 300 350 400 450

500 Cross-border movement of capital

(foreign direct investment)

Cross-border movement of people (number of immigrants)

Trade volume of goods Global GDP

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300 Figure II-3-0-2 Latest available data and forecasts

Notes: Regarding IMF’s GDP estimates, the basic scenario refers to the case where the COVID-19 pandemic is contained in the second quarter of 2020 (as for China, the first quarter of 2020). The scenario where COVID-19 pandemic continues and the second wave occurs refers to the case where the pandemic continues by the end of 2020 and the second wave occurs in 2021.

Source: Cisco (2019), IMF, WTO, UNCTAD (Values in 2005 are converted to 100) 0 50 100 150 200 250 300 350 400 450 500 2015 2016 2017 2018 2019 2020 2021 Data distribution Initial estimates Further expansion? 0 20 40 60 80 100 120 140 2015 2016 2017 2018 2019 2020 2021

GDP (actual) Base-case scenarioScenario where COVID-19 continues and the COVID-19 second wave occurs

Trade (actual)

Direct investment flow (actual)

Optimistic scenario Pessimistic scenario -3% -6% -13% -32%

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Therefore, it is necessary to aim to create ideal socio-economic systems based on the lessons learned from the public health crisis while overcoming the pandemic and keeping watch on how it will be brought under control, how the risks that materialized due to the crisis will evolve and how the economy and society will change in the future. The following three lessons have been learned.

First, the crisis has brought about global challenges and created divisive forces. The global COVID-19 pandemic cannot be contained through domestic measures taken individually by countries, but it requires a global response. However, as the distrust of multilateral frameworks that already existed has grown, some countries have put their own interests first in emergencies when dealing with the crisis. In response to such divisive forces, it is necessary to upgrade globalization in order to resolve global challenges by enhancing unifying forces that promote international cooperation.

The second lesson is the materialization of risks associated with economic efficiency and concentration. With respect to supply chains, geographical concentration of production in pursuit of economic efficiency proceeded amid the globalization of production activity. As a result, supply chain disruption risk materialized in emergencies. Likewise, with respect to the digital economy, the concentration of market power among big tech firms is proceeding. These developments indicate the importance of not merely pursuing economic efficiency but also developing resilient supply chains and economic structures.

Third, there have been interactions between the COVID-19 pandemic and the economy. To contain the pandemic, it was necessary to restrict activities involving face-to-face communication, and, as a result, the global economy fell into a severe recession. To overcome the constraint on face-to-face communication, the development and social implementation of digital technology is accelerating rapidly. Therefore, it is becoming an increasingly important challenge to evolve the way of communication and to promote economic and social digitalization, including improving the digital environment.

It is necessary to achieve more resilient socio-economic systems so that they can flexibly respond to crises and enable sustainable development based on these lessons while overcoming the ongoing crisis and cautiously watching the future direction of the changes at the same time. To that end, this white paper sets out the way forward for the world and Japan, focusing on coordinated global actions, the development of resilient supply chains, the evolution of the way of human communication, social investments intended to create a sustainable world, and the coordinated creation of new businesses with emerging countries under the accelerating global digitalization.

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302 Section 1 Upgrading of globalization

1. Global governance frameworks

To resolve global challenges, coordinated global actions are important. As shown in Chapter 2 of Section 1, various frameworks of international cooperation have been developed, including the postwar Bretton-Woods system, frameworks of global cooperation, promotion of regional cooperation and economic integration, and frameworks of sector-by-sector cooperation in trade. Those are also called global governance frameworks.

(1) Current status of global governance

The basic global governance frameworks that were put in place in the 20th century were developed in order to establish effective mechanisms for conflict prevention and arbitration based on the lessons of the failure to prevent the two world wars, particularly World War II.

A representative example is the United Nations, which provides a forum for negotiation as a conflict settlement means and conducts military interventions if necessary through U.N. forces. In addition, there are the International Monetary Fund, which is intended to prevent international financial disorder, the Marshall Plan, which was created on the basis of the perception that national poverty creates new conflicts, the World Bank as a development assistance organization originally created to reconstruct Europe, GATT as a means to develop international trade rules in order to prevent conflicts between mutual countries by establishing economic dependence among them, and the WTO as an advanced version of GATT.

The Organization for Economic Cooperation and Development (OECD), an organization of 36 high-income countries, also plays a major role as a forum for discussions on international economic issues and also develops policies, promotes consensus building and acts as an advisory organization by conducting research and surveys and providing data. There have also been other significant international discussion forums such as G5, which was established as a forum for major countries in the world to discuss political and economic issues, and G7 and G20, which are advanced versions of G5.

Those frameworks have supported globalization.

(2) Regional frameworks

At the regional level, international organizations such as the European Union (EU), the African Union, the Organization of American States, the League of Arab States, and ASEAN, are conducting activities as organizations responsible for political and economic governance in their respective regions. Although those organizations have different powers, all of them play an important role as a forum for regional consultations and consensus building.

While the activities of those organizations except for the EU are not governed by strong binding power, they are important for the development of global governance because they allow countries in different positions to discuss a broad range of themes.

(3) Trade-related frameworks

On the trade front, the GATT/WTO regime exists as a global framework. At the same time, regional and bilateral agreements play a major role.

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regional tariffs and non-tariff barriers, promoted regulatory harmonization, liberalized human mobility within the region, and achieved a currency unification in many countries by introducing the euro. As a result, the EU has promoted the exchange of people, goods and funds and realized the strongest regional economic integration among frameworks of economic integration around the world.

There are also customs unions, including the Economic Community of West African States (ECOWAS) and Southern Common Market (MERCOSUR). In addition, there are unions of countries sharing a single currency, such as the West African Monetary and Economic Union (UEMOA), which is a union within ECOWAS. All those unions have created a large single market and achieved economies of scale in terms of trade by bringing together countries within regions. At the same time, they are conducting wide-ranging activities that go beyond the confines of simple customs unions, such as resolving intra-region conflicts.

Other multilateral and bilateral free trade agreements are also important as trade-related frameworks. Representative trade-related multilateral frameworks include the North American Free Trade Agreement (NAFTA), the United States-Mexico-Canada Agreement (USMCA), which will be put into force in July 2020 in place of NAFTA, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP11), which is an agreement between Pacific-rim countries, and the Transatlantic Trade and Investment Partnership (TTIP), which is an agreement between the United States and European countries. They promote trade and mutual investment by abolishing or lowering tariffs and by achieving institutional and regulatory harmonization.

Moreover, many bilateral economic partnership agreements (EPAs) have been concluded. They contribute to economic revitalization by lowering trade barriers between trading partners.

(4) Technical frameworks

Among technical frameworks are the International Organization for Standardization (ISO), which aims to ensure consistency concerning technologies through de jure standards, and the International Electrotechnical Commission (IEC), which holds technical discussions related to electrical and electronic matters. Standardization efforts by those organizations, coupled with various initiatives by industry and academic associations in specific sectors, contribute to the promotion of trade on a global scale, and the promotion of international cooperation in the fields of science, technology and economy. In addition to the World Health Organization (WHO) and the Food and Agriculture Organization (FAO), the International Energy Agency (IEA) also plays an important role as an advisory organization. The Intergovernmental Panel on Climate Change (IPCC) in the field of climate change and related inter-governmental agreements, such as the Kyoto Protocol and the Paris Agreement, are also important frameworks.

Those global governance frameworks form the foundation for responding to crises. At the time of the global financial crisis, the G20 Summit was held in Washington in November 2008, and at the meeting, an agreement was reached on jointly adopting monetary policy support measures and fiscal measures with immediate effect in stimulating domestic demand as necessary as a countermeasure to the crisis. Furthermore, at the G20 Summit held in London in April 2009, an agreement was reached on taking coordinated fiscal measures worth a total of 5 trillion dollars by the end of 2010.

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2. Divisive forces that undermine international cooperation

In recent years, global governance has been challenged by “divisive forces.” Coupled with the trend of division that has emerged since before the onset of the COVID-19 pandemic, those divisive forces are undermining international cooperation in responding to the pandemic.

(1) Increase in trade-restrictive measures

As described in Chapter 1, Section 5, some countries put their own interests first when responding to emergencies amid the COVID-19 pandemic, leading to an increase in trade-restrictive measures. For example, in the U.S.-China trade dispute, both sides increased tariffs and introduced retaliatory measures.

In recent years, some countries have taken unilateral trade measures, such as imposing tariff hikes and other sanctions based on their own judgment alone, rather than using the dispute settlement procedures based on the WTO Agreements and other international rules. The U.S. policies taken since the inauguration of the Trump administration appear to be based on an approach that may be described as a return to the use of unilateral measures.

As the shortage of medical supplies important for the prevention of infection, such as masks and protective gowns, became acute in various regions, countries, including developed ones, focused on satisfying their domestic needs and imposed export restrictions in some cases. Moreover, in some countries, food export restrictions have been introduced. The hoarding of goods through such measures impedes the global response to the crisis. In particular, the failure to deliver goods to developing countries could pose the risk of prolonging or aggravating the pandemic.

(2) Risk of excessive market fragmentation80

In the United States and European countries, regulations on investments from abroad with the risk of leakage of information and technologies in mind are being strengthened. The United States enacted the Foreign Investment Risk Review Modernization Act (FIRRMA) and the Export Control Reform Act (ECRA) in August 2018 because of fears about leakage of the most advanced technologies that can be applied to military purposes to other countries about which it has security concerns.

European countries are also working together to prevent companies critical to industrial competitiveness from being acquired by companies outside the EU. For example, in July 2017, Germany, in an effort to strengthen the examination of acquisitions of German companies by foreign companies, amended the foreign trade control directive in order to expand the scope of cases subject to examination and extend the examination period. In addition, in December 2018, Germany amended the law once again in order to lower the threshold investment ratio for foreign investments subject to the regulation, and this resulted in the expansion of scope of corporate acquisitions subject to the regulation. In the United Kingdom as well, discussions are underway on efforts to strengthen the examination of inward foreign investments.

Moves like these are spreading in response to the COVID-19 pandemic. On March 25th, 2020, the EU announced a specific guidance on the acceptance of foreign investments in order to ensure that acquisitions of companies related to health and medical care do not undermine the health and sanitary environment for EU citizens. With respect to investments from foreign companies in strategic industries, 80 “China’s changing outward foreign direct investment” (Mizuho Research Institute, March 4th, 2020), and “Spreading

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including health- and medical care-related industries, the guidance calls for thorough risk evaluation of supply chains at the time of examination in the case of member countries that have their own examination systems. In the case of member countries that do not have examination processes, it calls for an early introduction of an examination system. Before the onset of the COVID-19 pandemic, the EU developed rules to strengthen examination through exchange of information between member countries with respect to acquisition cases that raise concern from the viewpoint of regional security and public interest and order, and in April, Phil Hogan, a commissioner in charge of trade at the European Commission, expressed an intention to introduce some rules early.

In India as well, as part of an effort to strengthen regulations, the Ministry of Commerce and Industry announced the revision of the investment policy on April 18th. Previously, the requirement for obtaining prior permission from the government for investments in India, regardless of business sector, was applied only to companies in Pakistan and Bangladesh, but the scope was expanded to include governments of other countries that have borders with India and companies, citizens and residents in those countries.

While these moves make it possible to protect domestic and regional interests, they may cause excessive market fragmentation.

(3) Disruptions of the functions of international organizations and regional integration

One factor behind that risk is the presence of distrust of multilateral frameworks. In some cases, countries are acting alone instead of acting through international organizations that ensure frameworks of global cooperation. In terms of trade, there are calls for reforming the WTO, including the Appellate Body, which virtually ceased to function.

With respect to climate change, the United States has announced its withdrawal from the Paris Agreement. In the field of international healthcare, U.S. President Trump announced his order to discontinue the provision of funds to the World Health Organization amid the COVID-19 pandemic.

Furthermore, in recent years, there have also been divisive forces that undermine regional integration. In 2016, the United Kingdom held a referendum on whether or not to leave the EU, and in January 2020, it formally withdrew from the EU.

In addition, during the course of the COVID-19 pandemic, there have been border closures in the EU, which was promoting regional integration that allows people to move around freely within the region.

(4) Risks associated with divisive forces that undermine international cooperation

As described above, if divisive forces continue to undermine international cooperation, there are concerns not only that it may become difficult to overcome the current crisis but also that risks may emerge in the medium to long term as well.

First, there is the risk of the COVID-19 pandemic becoming prolonged. If the pandemic is not contained in some countries/regions, if it becomes a chronic phenomenon, or if it remerges after being contained, overcoming the disease will become a medium- to long-term process, posing the risk that border closures and regional fragmentation will continue as the pandemic remains in place on a permanent basis.

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become fixed. If export restrictions, investment inducement measures, and border closures that are currently in place as emergency measures become permanent, import restrictions, restrictions on cross-border movement of people, and discretionary governmental interventions may continue after the crisis is contained.

There is also the risk that it may become difficult to adequately deal with global challenges, such as making a global response to risk factors, including future global crises and climate change.

3. Unifying forces that promote coordinated global actions

Since before the COVID-19 pandemic, there have been many challenges that should be addressed through international cooperation. The COVID-19 pandemic made it clear that the world was not fully prepared to take coordinated actions.

There are wide differences across countries/regions in the COVID-19 infection situation and the capacity to deal with the disease. Unless coordinated international actions are taken to contain the pandemic, individual countries cannot contain it. Therefore, it is necessary for countries around the world to cooperate in creating efficient risk management systems in preparation for future crises. Once the COVID-19 crisis has been contained, it is also necessary to remove emergency measures introduced during the crisis and make sure that emergency measures do not continue in normal times. At a time when there are moves that undermine global governance, the pandemic has made clear how important it is for countries around the world to take joint actions.

As indicated above, countries around the world must share challenges and take coordinate actions to resolve domestic and global challenges. With respect to truly global challenges, such as protecting global public goods, responding based on global governance is important.

In the meantime, there have been moves at the leaders’ and ministerial level to maintain the unifying forces that promote international cooperation. For example, the G7, G20, and ASEAN+3, with the participation of Japan, announced leaders’ statements.

BOX <Excerpts from major leaders’ statements and ministerial statements> G7 Leaders’ Statement (March 16th, 2020; excerpts)

We, the Leaders of the Group of Seven, acknowledge that the COVID-19 pandemic is a human tragedy and a global health crisis, which also poses major risks for the world economy. We are committed to doing whatever is necessary to ensure a strong global response through closer cooperation and enhanced coordination of our efforts. While current challenges may require national emergency measures, we remain committed to the stability of the global economy. We express our conviction that current challenges related to the COVID-19 pandemic need a strongly coordinated international approach, based on science and evidence, consistent with our democratic values, and utilizing the strengths of private enterprise.

Extraordinary G20 Leaders’ Summit (March 26th, 2020; excerpts)

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Consistent with the needs of our citizens, we will work to ensure the flow of vital medical supplies, critical agricultural products, and other goods and services across borders, and work to resolve disruptions to the global supply chains, to support the health and well-being of all people.

We commit to continue working together to facilitate international trade and coordinate responses in ways that avoid unnecessary interference with international traffic and trade. Emergency measures aimed at protecting health will be targeted, proportionate, transparent, and temporary. We task our Trade Ministers to assess the impact of the pandemic on trade.

We reiterate our goal to realize a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open.

G20 Trade and Investment Ministerial Statement (March 30th, 2020, excerpts)

We agree that emergency measures designed to tackle COVID-19, if deemed necessary, must be targeted, proportionate, transparent, and temporary, and that they do not create unnecessary barriers to trade or disruption to global supply chains, and are consistent with WTO rules.

We will ensure smooth and continued operation of the logistics networks that serve as the backbone of global supply chains. We will explore ways for logistics networks via air, sea and land freight to remain open, as well as ways to facilitate essential movement of health personnel and business people across borders, without undermining the efforts to prevent the spread of the virus.

We will continue monitoring and assessing the impact of the pandemic on trade. We call on the international organizations to provide an in-depth analysis of the impact of COVID-19 on world trade, investment and global value chains. We will continue working with them to establish coordinated approaches and collect and share good practices to facilitate flows of essential goods and services.

Joint Statement of the Special ASEAN Plus Three Summit on Coronavirus Disease 2019 (COVID-19) (April 14th, 2020; excerpts)

CONSIDER setting up an APT reserve of essential medical supplies that enables rapid response to emergency needs. Encourage tapping on existing regional emergency reserve facilities including the warehouses managed by the ASEAN Coordinating Centre for Humanitarian Assistance on disaster management (AHA Centre), among others, further consider the utilisation of the ASEAN Plus Three Emergency Rice Reserve (APTERR).

REAFFIRM commitments to keep markets open for trade and investment, and enhance cooperation among ASEAN Plus Three countries with a view to ensuring food security, such as the utilisation of the ASEAN Plus Three Emergency Rice Reserve (APTERR), and strengthening the resiliency and sustainability of regional supply chains, especially for essential goods such as food, commodities, medicines and medical supplies through smooth and continued operation of the logistics networks, while ensuring that measures deemed necessary for public health emergency response are targeted, proportionate, transparent and temporary and that they do not create unnecessary barriers to trade or disruption to regional supply chains, and are consistent with WTO rules.

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Response to the Corona Virus Disease (COVID-19) Outbreak (April 17th, 2020; excerpts)

Over the years, ASEAN and Japan have, on the basis of friendship and mutual trust, worked very closely on various crises from natural disasters in the region to the Asian financial crisis and global financial crisis. The Ministers believe that ASEAN and Japan will overcome the economic challenges brought about by the COVID-19 outbreak through continued and closer collaboration.

While recognizing the necessary measures adopted by ASEAN and Japan to respond to a public health emergency, the Ministers emphasize the need to explore creative solutions with industrial stakeholders, including micro, small and medium enterprises (MSMEs), to minimize disruptions in the conduct of trade and investment between ASEAN and Japan. These would include encouraging the use of digital technologies in business activities to overcome constraints caused by recent travel restrictions and measures adopted to contain the further spread of COVID-19.

Furthermore, the Ministers emphasize that ASEAN and Japan, as pivotal suppliers in global supply chains, will make their best efforts to provide various materials and products to the global market in order to mitigate the adverse impact not only on the regional but also the global economy to maintain market stability, and support protecting health and wellbeing of all people.

Noting that…it is therefore necessary to take into account multifaceted perspectives such as diversification, complementarity, transparency, redundancy and sustainability to realize resilient supply chains, which will enable businesses to achieve a better balance between risk management and cost competitiveness

Statement on COVID-19 and the Multilateral Trading System by Ministers Responsible for the WTO (May 5th, 2020; excerpts)

As Ministers responsible for the WTO, we are actively working to ensure the continued flow of vital medical supplies and other essential goods and services across borders during this health crisis. The WTO has an essential role to play in this regard. We stress that trade restrictive emergency measures aimed at protecting health, if deemed necessary, shall be targeted, proportionate, transparent and temporary, not create unnecessary barriers to trade or disruption to global supply chains, and be consistent with WTO rules. We pledge to lift any such measures as soon as possible.

We support the vital role of the WTO as it monitors trade-related measures implemented by WTO Members in response to the COVID-19 situation, and we encourage Members to continue notifying the WTO of any such measures as far in advance as practicable.

We support the full resumption of all WTO activities as soon as feasible. We will intensify our efforts to develop new WTO disciplines, to improve existing WTO disciplines and to find a lasting solution to the situation relating to the WTO Appellate Body in order to support long-term, sustainable economic growth. We will also support continued efforts to reform the WTO so that it is as effective as possible.

As seen above, further enhancement of global governance through enriched international cooperation is required to establish flexible, well-balanced socio-economic systems with high resilience against crisis based on reaffirming the importance of international cooperation, which is triggered by

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