Lost spirit of the G20

As Japan prepares to host its first G20 leaders’ summit later this month, little remains of the open and cooperative spirit that marked the first such gathering in 2008

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On June 28-29, Japan will host its first G20 summit. The initial gathering of G20 leaders, back in November 2008, took place amid the turmoil that wracked global financial markets following the collapse of Lehman Brothers. It produced a clear statement: “We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty.” In other words, the leaders of the world’s largest economies agreed not to repeat the policy mistakes that aggravated the Great Depression in the 1930s.

Unfortunately, little of that open and cooperative spirit remains today. Even before Donald Trump was elected US president, the world’s leading economies were yielding to protectionist temptations. But Trump has brought the problem to the boiling point: his withdrawal of the United States from the Trans-Pacific Partnership (TPP) was the first of many reckless trade measures, among which his current tariff offensive against China stands out. And Trump’s inflexibility at last year’s G20 summit in Buenos Aires resulted in the first communiqué that did not include a vow to resist protectionism.

Although Trump’s commercial crusade is constantly improvised and meshes confusingly with other vectors of US foreign policy, it nonetheless reflects a set of clear economic beliefs. Essentially, Trump regards international trade as a zero-sum game in which countries win solely by exporting more than they import. For countries that run external deficits, like the US, he believes that “trade wars are good, and easy to win.” It’s enough, he claims, for the US simply to stop trading with countries that run a large bilateral surplus with it.

The truth is that international trade is not a zero-sum game at all. Historically, free trade has been linked to a general increase in prosperity, and a country’s success in the global economy does not necessarily depend on its exports exceeding its imports. The US easily finances its trade deficit thanks to the dollar’s status as the main international reserve currency – the “exorbitant privilege” to which former French President Valéry Giscard d’Estaing once referred.

But Trump’s allergy to trade deficits will not be cured with a dose of orthodox economics, mainly because America’s largest bilateral deficit is with China, the power that threatens its global hegemony. White House trade adviser Peter Navarro, who wrote the book Death by China and then made a documentary out of it, is feeding the administration’s sense of US vulnerability. Applying the same lack of subtlety as the book title suggests, Navarro blames China exclusively for the disappearance of US manufacturing jobs, ignoring other relevant factors such as increasingly automated production processes.

A faulty diagnosis leads to the wrong remedy. The Trump administration is trying to bring back US jobs by making imports more expensive through tariffs. But protectionism cannot compensate for the effects of automation. Furthermore, the growth of global value chains has led to a spectacular increase in trade in intermediate products. Consequently, raising the price of imports can hit a country’s exports (the US imports a large volume of production inputs from China, for example). Higher tariffs have also led to considerably higher prices for US consumers and US producers are likewise feeling the heat as China and other countries introduce retaliatory tariffs.

Proposing higher tariffs when labor markets are being disrupted may be economically counterproductive, but, as Harvard economists Rafael Di Tella and Dani Rodrik have shown, it is popular in the US. Demagogic discourses gain traction even more easily when they focus on countries with relatively weak labor standards, such as China. Moreover, the mistaken idea that opening up to China has hurt the US reflects an additional factor: China’s economic lift-off accelerated markedly after the country joined the World Trade Organization in 2001.

Trump argues that China enjoys favorable conditions in the WTO (which is true) and that the organization’s dispute-resolution mechanisms are biased against the US (which is blatantly false). Based on this reasoning, the US is blocking the appointment of new judges to the WTO’s Appellate Body, which may become inoperable by December as a result. Although other WTO members are already considering possible patches to avoid paralysis, the organization itself should take a more proactive stance in order to find a lasting solution.

Another tendency of US trade policy that threatens to become chronic is appealing to “national security” to justify tariffs, which constitutes an abuse of WTO rules. If other countries want the multilateral trade system to survive Trump’s arbitrary attacks, they will need to exert substantial efforts to keep Pandora’s box closed. This is not incompatible, however, with reforming the WTO in order to close the indefensible and unsustainable regulatory loopholes that China routinely exploits.

The US will most likely continue its protectionist drift at the upcoming summit in Osaka, but other G20 countries should use the occasion to make a clear case for free trade. For example, the Economic Partnership Agreement between the European Union and Japan (whose government has also managed to revive the TPP) entered into effect a few months ago. With this new pact, two of the world’s largest economic powers have managed to advance trade liberalization despite US reticence, while incorporating the promotion of ambitious social and environmental standards.

In light of Trump’s constant blackmailing, some countries may even contemplate more drastic measures. The US president does not hesitate to exploit the hegemony of the dollar by imposing extraterritorial sanctions designed to hamper international trade, as illustrated by his attempt to isolate Iran. A reasonable response would be to work toward diversification of the currencies in which international trade is denominated.

Ironically, this scenario – which is remote, but not impossible – could finally give Trump a viable formula to reduce the US trade deficit. The demise of the dollar’s hegemony would benefit US exports, but also increase long-term US interest rates and reduce Washington’s geostrategic leverage. One thing is certain: instead of frankly explaining these trade-offs to US voters, Trump will keep doubling down on magical thinking.

 

Javier Solana is a former secretary-general of NATO, and foreign minister of Spain and is currently president of the ESADE Center for Global Economy and Geopolitics, Distinguished Fellow at the Brookings Institution, and a member of the World Economic Forum’s Global Agenda Council on Europe.

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Date

21 Jun 2019

Channel

Capital Markets

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