With the US appearing to be tilting toward protectionism, it allows China, still a single-party communist state, to be the champion of free trade.
The G-20 convened its first summit during the global financial crisis in 2008, sending a signal to the world that emerging markets deserved a greater role in global finance and trade. After the Trump administration last weekend shaped a final communique that was against free trade, many are beginning to question the future role of the G-20 and all the institutions born after World War II including the World Trade Organization, the World Bank and the International Monetary Fund.
The world’s biggest economies dropped what was boiler-plate language at all their gatherings, with a public endorsement for free trade. Absent was the phrase “we will resist all forms of protectionism” and instead they only acknowledged the contribution of trade to their economies.
For host Germany, it was not the greatest moment of economic diplomacy, especially after what was viewed as a frosty bilateral meeting between German Chancellor Angela Merkel and US President Donald Trump.
Trump campaigned for the White House on a promise to reverse America’s more than half-trillion-dollar trade deficit; just under $350 billion of that is with China alone. The president does not believe the playing field for global trade is an even one and the communique was one vehicle he used to send his message.
“So far rhetoric from the US has, if anything, been consistent and anti-trade. What is not clear at the moment is what the US is actually asking for,” said Marios Maratheftis, global chief economist for Standard Chartered Bank.
According to Maratheftis it could be a bargaining position to garner better bilateral agreements, or perhaps President Trump believes lower levels of trade will help correct the stubbornly high deficit and drive growth higher if US workers create products to replace imports.
“If it is the latter, then there will be costs involved,” said Maratheftis, “And an isolationist US which is not open to competition would not help productivity growth to improve.”
There is a much bigger geopolitical picture that is being framed as well. With the US appearing to be against globalization and tilting toward protectionism, it allows China, still a single-party communist state, to be the champion of free trade.
China’s President Xi Jinping staked out that position in January two days before the US president was inaugurated, and his premier reiterated that message at the start of the recent National People’s Congress in Beijing.
“China will stand on the side of peace and stability, oppose protectionism in its different forms and become more involved in global governance,” declared Li Keqiang, receiving a strong applause from the party faithful gathered in Beijing’s Great Hall.
Geopolitical strategist Ian Bremmer, president of the Eurasia Group, believes that President Trump’s position is forcing his Chinese counterpart to step onto the global stage well ahead of his preferred timeline.
Bremmer and colleague David Gordon came up with the term “G-Zero,” which described the void of global leadership in this period of uncertainty, with the focus in Europe and the US on domestic priorities.
“This G-20 failure is one of the clearest examples we’ve had to date of today’s G-Zero world, where the US doesn’t want to lead... and nobody else can step into its shoes,” said Bremmer on a visit to the UAE.
“With ‘America First’ comes a deep mistrust of multilateralism. And so, it’s no surprise that the Trump administration doesn’t want to put forward a free-trade agenda for the G-20,” he added.
Maratheftis of Standard Chartered Bank is in lockstep with that thinking since China is building outwards with its “One Belt, One Road” strategy to support infrastructure in more than 60 countries. While Trump is against the World Bank, President Xi recently launched the Asian Infrastructure Investment Bank (AIIB) with $100 billion of capital, based in Beijing.
“The sphere of influence in global affairs for China is expanding. And an isolationist US with an ‘America First’ policy would make it easier for China.”
But this potential tug-of-war over trade and globalization is loaded with risks as well. A highly protectionist move by the US Congress back in 1930 was a key factor behind the Great Depression. The Smoot-Hawley Tariff led to retaliatory measures by US competitors — and the rest, as the saying goes, is history. The value of imports and exports dropped by half in that decade.
The fall of communism in the late 1980s and early nineties ushered in a wave of reforms and the lowering of trade barriers, which in turn fuelled global growth. But the transition has been a painful one for the higher-cost producers of goods in the developed world and the new US president seems willing to pursue a highrisk policy to try and correct years of unfettered competition.