Dark Clouds Over Free Trade In G20 – Analysis

President Trump’s “America First” rhetoric has eroded support for the commitments that leaders made at previous G20 summits regarding trade: rejecting protectionism and strengthening the multilateral trading system. What implications does this have for global trade? Will the more moderate voices in the administration get heard?

By Claudia Schmucker*

The meeting of the G20 finance ministers in Baden-Baden in March 2017 was the first test of how the Trump administration is likely to respond to the economic and financial discussions of this informal forum. Wolfgang Schäuble, German Finance Minister and chair of the G20 meeting, had hoped to convince attending U.S. treasury secretary Steven Mnuchin to support the previous G20 commitments regarding trade.

In Hangzhou, China, the G20 leaders had reiterated their support for an open world economy. This included a rejection of protectionism, a promotion of global trade and investment, and a strengthening of the multilateral trading system (WTO).[1]

But in light of the “America First” rhetoric of U.S. president Trump, Treasury Secretary Mnuchin was no longer willing to sign up to the outcomes of the previous G20. The declaration from Baden Baden now only supports the importance of trade, eliminating references to protectionism: “We are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth.” [2] The German presidency now hopes to find a compromise with the new U.S. administration in the upcoming ministerial meetings leading to the Hamburg summit in July 2017.

This is an unprecedented shift in economic multilateralism which reflects the new “America First” trade policy. U.S. President Trump is a mercantilist who only values exports, trade surpluses, and production at home. In order to abolish the U.S. trade deficit–in his view, a result of unfair competition by the U.S.’s trading partners–and to bring manufacturing back to the U.S., he is willing to introduce new tariffs and “Buy America” provisions, and to disregard the panel decisions of the WTO dispute settlement body.

Wrong signal for world trade?

What does this failed consensus on protectionism mean for global trade? Starting with the first leaders’ summit in Washington in November 2008, the G20 has underscored the importance of rejecting protectionism. However, in reality, G20 countries have ignored their commitments throughout the years. According to the latest Global Trade Alert from July 2016, G20 countries were responsible for 599 new discriminatory measures out of a total of 736 in 2015—that is, 81% of protectionist measures in 2015. The most frequent users were the U.S., India, Russia and Argentina.[3]

To look at the economic reality, the refusal to introduce this commitment does not really make any difference. The worrying sign lies in the fact that for the first time G20 members were no longer able to reach a consensus on the benefits of open and free trade and a rules-based multilateral trading system. In the worst scenario, this could be interpreted as a first step in the wrong direction towards increasing new trade barriers (protectionism), bilateralism and uncertainty in world trade. In the best scenario, this could be interpreted as part of a development (growing up) process of the new U.S. administration, which could result in a common understanding in the long run, if the more moderate voices in the government gain influence.

Impact for the future of the G20

The new Trump administration changes the negotiating dynamics in the G20 and leads to the creation of new and unexpected coalitions. The EU/Germany and the U.S. have traditionally been close partners on economic and trade issues. The U.S.–together with its allies–had helped build the liberal trading system after World War II and defended the principles of free trade and open markets. This has changed for the time being. New coalitions are emerging in the pursuit of free trade. At the forefront, there is China, trying to establish itself as the new defender of an open trading system. At the World Economic Forum in Davos in January 2017, Chinese President Xi Jinping said that his country was taking over the role of America as the champion of free trade and open markets.[4]  Japanese Prime Minister Shinzo Abe said in March, when he opened the CeBIT technology fair in Hanover with Chancellor Angela Merkel, “Japan, having gone through reaping in abundance the benefits of free trade and investment, wants to be the champion, upholding open systems alongside Germany.”[5]

On a German/EU level, these developments could lead–probably more in the long term–to a closer trade alliance between the EU and China. But there are a lot of obstacles in place. Besides, the support of common values with Japan and the U.S. abandonment of the Transpacific Partnership (TPP), and probably the Transatlantic Trade and Investment Partnership (TTIP), will lead to a new political impetus to finish talks on the ongoing EU-Japan free trade agreement in 2017, which now gets a more strategic component.

At the G20 level, leaders must try to re-introduce, in no uncertain terms, their support of free trade and open markets (that is, a moratorium on protectionism) into the final declaration in Hamburg. This group was created in the midst of the global and financial crisis to give a strong and coordinated signal to open markets. As a group with no input legitimacy (regarding the participative process) it needs to achieve it through its effectiveness (output legitimacy).[6] A commitment to free trade and an open rules-based trading system has always been at the core of its identity. Therefore, eliminating this in the final declaration will weaken the impact of the informal group. The German presidency therefore needs to keep up a constructive dialogue with the new U.S. administration and their more moderate voices (e.g. Gary Cohn, director of the White House National Economic Council). The loss of a shared understanding of the language of trade will be a huge blow for the G20 as a group.

About the author:
*Dr. Claudia Schmucker
is Head of the Globalisation and World Economy Programme at the German Council on Foreign Relations, Berlin.

Source:
This feature was written for Gateway House: Indian Council on Global Relations.

References:
[1] G20 Information Centre, University of Toronto, G20 Leaders’ Communique: Hangzhou Summit, 5 September 2016, <www.g20.utoronto.ca/2016/160905-communique.html>

[2] G20 Information Centre, University of Toronto, Communique: G20 Finance Ministers and Central Bank Governors, 18 March 2017, <http://www.g20.utoronto.ca/2017/170318-finance-en.html>

[3] Evenett, Simon J., Fritz, Johannes, Global Trade Plateaus: The 19th Global Trade Alert Report, Centre for Economic Policy Research, 2016, pp. 28-30 <http://www.globaltradealert.org/sites/default/files/GTA%2019%20-%20World%20Trade%20Plateaus_0.pdf>

[4] Elliott, Larry, Wearden, Graeme, Xi Jinping signals China will champion free trade if Trump builds barriers, The Guardian, 18 January 2017, <https://www.theguardian.com/business/2017/jan/17/china-xi-jinping-china-free-trade-trump-globalisation-wef-davos>

[5] Martin, Michelle, Germany’s Merkel and Japan’s Abe urge free trade with jabs at U.S., Reuters, 20 March 2017, <http://uk.reuters.com/article/uk-germany-cebit-merkel-idUKKBN16Q0UV>

[6] Gnath, Katherina, Mildner, Stormy-Annika, Schmucker, Claudia, G20, IMF, and WTO in Turbulent Times: Legitimacy and Effectiveness Put to the Test, Stiftung Wissenschaft und Politik German Institute for International and Security Affairs, August 2012, < https://www.swp-berlin.org/fileadmin/contents/products/research_papers/2012_RP10_Gnath_mdn_Schmucker.pdf>

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Gateway House: Indian Council on Global Relations is a foreign policy think-tank established in 2009, to engage India’s leading corporations and individuals in debate and scholarship on India’s foreign policy and its role in global affairs.Gateway House’s studies programme will be at the heart of the institute’s scholarship, with original research by global and local scholars in Geo-economics, Geopolitics, Foreign Policy analysis, Bilateral relations, Democracy and nation-building, National security, ethnic conflict and terrorism, Science, technology and innovation, and Energy and Environment.

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