This op-ed was originally published by Project Syndicate.
Three important recent initiatives from U.S. President Joe Biden’s administration illustrate America’s reengagement with the world and support for inclusive global multilateralism. The big question now, with the United States again seeking to play an international leadership role, is whether such cooperation can work—and how China will react to the U.S. proposals, given rising bilateral tensions.
The first major initiative was U.S. Treasury Secretary Janet Yellen’s call for a new $650 billion issuance of special drawing rights (SDRs, the International Monetary Fund’s reserve asset)—something that President Donald Trump’s administration had blocked.
Details of the plan, which has been endorsed by the G-20 finance ministers and central bank governors and the International Monetary and Financial Committee, are still to be worked out. It would not only involve a record new $650 billion SDR issuance to countries in proportion to their IMF quotas. It also calls on countries not needing these SDRs to reallocate them voluntarily to countries in need. For example, the U.S. has suggested lending some of them to the IMF’s Poverty Reduction and Growth Trust to boost the Fund’s concessional lending capacity.
This is a big deal in at least two ways. A new $650 billion allocation would more than double the existing stock of SDRs, boosting global liquidity and freeing up resources for much-needed investment. And it could lead to large support from advanced economies to developing countries.
While any SDR reallocation would be voluntary, countries could go beyond a piecemeal approach to develop a more coordinated mechanism. For example, the U.S. proposal could be extended to routinize donor governments’ contributions to institutions such as multilateral development banks to finance concessional loans to developing economies. In addition, the plan could involve the establishment of a new special purpose vehicle to attract private-sector resources.
China supports the proposed new SDR allocation, but it remains to be seen whether it will agree with the U.S. and other advanced economies on the implementation details and reallocate some of its own SDRs in a coordinated multilateral manner. It will also be interesting to see what role the Chinese-led Asian Infrastructure Investment Bank may play in such a scheme.
A second major U.S. proposal would allow countries to tax the largest and most profitable multinational corporations (many of which are American) based on their sales in each country, regardless of physical presence, and would set a global minimum corporate-tax rate of 21 percent. The Financial Times reported on April 8 that the U.S. Treasury floated the idea with the 135 countries involved in OECD/G-20 discussions on so-called base erosion and profit shifting.
The proposed regulations would be binding for large companies in all sectors, depending on their level of revenue and profit margins. Reaching a global agreement will be difficult, but it would allow Biden to raise U.S. corporate tax rates to pay for planned infrastructure investments without being undercut internationally and end the race to the bottom that has characterized corporate taxation for decades. The OECD framework provides another opportunity for U.S.-China multilateral cooperation on one of the most important and sensitive global economic policy issues.
Lastly, Biden has invited 40 world leaders to a virtual climate summit on April 22-23, which will be streamed live to the public. The attendees include the leaders of 17 major greenhouse-gas (GHG) emitters, as well as those from other countries that are “demonstrating strong climate leadership” and innovative approaches or are especially vulnerable to climate change. A small number of business and civil-society leaders will also participate.
The Biden administration endorses the goals of achieving global net-zero GHG emissions by 2050 and limiting global warming close to 1.5 degrees Celsius relative to preindustrial levels, while emphasizing the need for more ambitious emission-reduction targets by 2030 than what countries pledged under the 2015 Paris climate agreement. Most advanced economies, now including the U.S., are preparing strategies aimed at meeting global climate goals, although Biden’s ambitious plans will face stiff Republican opposition.
But the world will not achieve net-zero emissions, or close to it, by 2050 without China and the emerging economies as a whole immediately embarking on similar trajectories. They currently account for almost two-thirds of global CO2 emissions from fuel combustion, with China alone responsible for almost 30 percent. Last year, Chinese President Xi Jinping pledged that China would become carbon neutral before 2060, but did not outline a concrete strategy for achieving that goal. Most analysts agree that the country’s current policies and plans (especially regarding coal production and expansion of its oil and gas pipeline network) are inconsistent with this target.
Biden has invited Xi to the upcoming summit. U.S. Special Presidential Envoy for Climate John Kerry, who has said he is “hopeful [but] not confident” of Chinese cooperation in tackling climate change, recently visited China in an attempt to enlist the country’s support for a successful April summit. Both countries issued a joint statement that, while positive in tone, is short on detailed commitments.
Rich countries accept that most emerging economies, already hard-hit by the pandemic, need large capital inflows to help finance their green transitions. Much of the climate debate is therefore now focusing on how to leverage multilateral development banks’ balance sheets to attract substantial amounts of private capital in addition to public flows.
But even though China’s per capita income (in purchasing-power-parity terms) is still only about one-third of most of the advanced-economy levels, the U.S. wants the Chinese to announce a specific plan to cut emissions in the near future and to participate in financing a green transition in emerging economies. Insufficiently ambitious Chinese plans—and, crucially, actions—are sure to be used as ammunition by domestic opponents of Biden’s climate policies.
The Biden administration wants to pursue an overall approach that renders support for democracy and human rights around the world compatible with bilateral and multilateral cooperation with rivals both on common challenges. Despite extremely tense relations with Russia, for example, President Vladimir Putin will participate in the April 22-23 summit. Effective cooperation with rivals ahead of November’s United Nations COP26 climate summit in Glasgow will be a key test of how multilateralism, complemented by bilateral efforts, could work, despite great-power rivalry and strongly competing ideologies.