By Adam Triggs.
This article was originally published by East Asia Forum.
US President Donald Trump is no fan of the G20. His extreme views and unreasonable demands mean G20 meetings have quickly become the ‘G19 versus one’. Bilateral deals are a tactic to help him avoid this problem. So it is no surprise that Trump has made his bilateral meeting with Chinese President Xi Jinping the centre of attention at this year’s G20 meeting in Buenos Aires.
The G20 must not allow itself to be sidelined so easily. If it does, it will suffer the same fate as the recent APEC meeting in Papua New Guinea, where — for the first time — leaders were unable to reach consensus on a final communique.
None of the big challenges facing the world can be solved bilaterally. Trump’s 1980s are over. Bilateral responses to multilateral problems conducted via megaphone diplomacy outside the forum will — at best — entrench APEC-style deadlocks. At worst, they will legitimise fake solutions that risk permanently damaging the global system.
Trade is a clear example. The US trade deficit cannot be ‘solved’ bilaterally with China. A country that invests more than it is saves (like the United States) imports foreign capital from other countries (like China) to finance investment. This inflow of capital appreciates the US dollar, which reduces exports and increases imports, resulting in a trade deficit.
The US trade deficit simply reflects its capital inflows from countries like China. It reflects the fact that US consumers, firms and the government borrow to finance investment and consumption. Trade deals with China will not change this underlying saving and investment behaviour nor alter the overall trade balance.
The best way for Trump to reduce the US trade deficit is to rein in his fiscal policy. Trump’s massive increase in the fiscal deficit, which has done nothing to lift investment or productivity, will require a US government bond issuance of US$1.34 trillion by the end of 2018. If history is any guide, about half of that will have to be financed by foreign investors. This capital inflow will push up the US dollar and worsen the US trade deficit even further.
The US trade deficit is ‘Made in the USA’ not ‘Made in China’.
There are issues in the global trading system that Trump has correctly identified as problems. But they cannot be solved bilaterally. They require a multilateral response, for which the G20 is eminently suited — provided Trump has the will to work with other countries.
For one, global trade liberalisation has been asymmetric. Barriers to goods trade have been lowered while barriers to services trade remain high. This penalises service-based economies like the United States and, as Trump correctly laments, makes it difficult for their firms to gain a foothold in countries like China and India.
The United States should use the G20 to push for a multilateral agenda to liberalise trade in services and reform the World Trade Organization. This would halve the global trade imbalances that are fuelling political tensions, according to the Bank of England, without reverting to protectionism. Countries like China can be more readily brought along if liberalisation is part of a broader multilateral effort.
Reducing supply chain barriers to trade would increase world GDP over six times more than removing all tariffs, according to the World Economic Forum. Supporting digital trade and data flows across borders would help small and medium-sized enterprises access global markets — better spreading the benefits of globalisation throughout communities. Yet many countries, including the United States, remain fixated on traditional barriers to trade.
The G20 could deliver these outcomes if countries, particularly the United States, use the forum strategically. Conversely, an outcome in Buenos Aires where China agrees to buy more products from the United States will legitimise a nonsensical policy objective and a bully-approach to international relations. It will do nothing to reduce the US trade deficit and will take the world further away from real and effective solutions. China’s response to US calls for trade opening need to be framed as a multilateral liberalisation that is open to the world.
If Trump uses the G20 strategically, he could also use it to advance his domestic priorities. This year’s G20 host country, Argentina, has emphasised reforms to make infrastructure its own asset class. The agenda focusses on promoting greater standardisation in infrastructure projects across countries, strengthening investment environments and improving project development.
Infrastructure is one of the few priorities Trump shares with the rest of the G20, as well as with his newly minted Democratic House of Representatives. The G20’s agenda can help redirect the global pool of savings into productivity-enhancing US infrastructure — allowing Trump to do a deal with the Democrats and deliver real results on one of his core election promises before 2020.
There are plenty of other challenges the G20 needs to turn to. All of them require a collaborative, multilateral response: strengthening the global financial safety net and the inadequate role of the International Monetary Fund (IMF) within it, addressing climate change, reforming outdated global institutions and development. None of them can be achieved bilaterally.
It has been a rocky year for Argentina in 2018. The country has been embroiled in a currency crisis and has sought a bailout from the IMF. Given the challenges facing the G20 this year, it is perhaps appropriate that its host country has been dealing with crises of its own. Hopefully some of the crisis-fighting skills learned by Argentina’s President Mauricio Macri are transferable to the G20.
Image Credit: President of Russia.