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Resident Senior Fellow
The G20 Leaders Summit takes place in Osaka, Japan later this week against a backdrop of escalating tension between China and the U.S. and talk of decoupling that goes beyond their economic and trade relationship. It also comes at a difficult time when the idea and practice of global economic multilateralism is under challenge, particularly in the area of global trade.
The G20 as an institution is best placed to cope with the challenges thrown-up in this age of ‘messy multilateralism’. It plays a key role in connecting traditional economic powers with emerging economies and, like the Bretton Woods institutions in their heyday, accommodates a plurality of pathways towards broadly-consensual goals.
China’s role within the G20 is unique. As the largest developing country and emerging market economy, it bears an obligation to promote a fairer and more equal global economic order. As the second largest economy, it bears an obligation to cooperate constructively with the developed countries to sustain the liberal international economic order.
China’s global current account surplus today is 0.4% of GDP, the yuan trades at fair market value, and the country is a key contributor to global economic balance – not imbalances. As an upper middle-income country, China now needs to embrace advanced country regulatory rules and standards as codified in OECD or equivalent practices. By doing so, it will be well-placed to intellectually and institutionally contribute to the future reform of the global economic architecture.
The meeting between President Xi and President Trump on the sidelines of the Osaka Summit will overshadow all else at the summit. Both presidents share a similar want – to exit their trade war with an honorable deal that is sellable back home to key political constituencies. Whether the two can thread this needle – or at least stabilize their negotiations, will be a touch-and-go affair.
If China and the U.S. are unable to arrive at a constructive consensus on their trade conflict, the current and future G20 presidencies will be left with a grave challenge on their hands. The G20 works best when its multiple stakeholders pull together in the same direction; the effect of its two foremost stakeholders pulling in opposite directions will likely be to splinter and paralyze the larger membership.
On June 28 and 29, the Japanese city of Osaka will play host to the 14th G20 Leaders Summit. The summit comes at a delicate time in the global economy with a growth slowdown clearly visible on the horizon. Key economic challenges include slowing worldwide productivity, stagnating wages, entrenched pockets of unemployment and rising inequality, continuing large sovereign debt overhangs in advanced economies, high corporate debt exposures in advanced and emerging economies as well as a variety of systemic threats related to climate change and migration. Compounding these challenges is the ongoing tension within the global trading system as it is buffeted by gale force winds of protectionism, mercantilism, and unilateralism unseen since the Great Depression days of the 1930s.
Japan is the third Asian country to host the G20 Leaders Summit after South Korea in 2010 and China in 2016. In Hangzhou, in 2016, the Chinese presidency had chaired the summit under the theme “Towards an Innovative, Invigorated, Interconnected and Inclusive World Economy.” A key contribution of China as chairperson that year was to elevate and place trade and investment on an equal footing with finance and banking within the G20’s agenda. The traditional finance ministers and central bank governors meeting, as well as a new mechanism of a trade ministers meeting, were to be the twin engines that would propel discussions forward on managing the global economy. Reform of the international monetary system, including maintaining a quota-based and adequately resourced International Monetary Fund (IMF) was an important priority too.
China’s role within the global economy today is staggering, having grown in leaps and bounds over the past decade. At the time of the first G20 Leaders Summit in November 2008 in Washington, D.C., the size of China’s economy was US$5 trillion; a little over a decade later, as the Osaka summit nears, its size today is just shy of US$14 trillion – an almost three-fold increase. China’s contribution to global growth, both in 2019 and over this past decade, has vastly outstripped its peers. China today is the world’s second largest economy, the largest merchandise exporter, the second-largest merchandise importer, the largest holder of foreign exchange reserves, and one of the premier destinations of foreign direct investment. In recent times, it has also become a huge source of outward foreign direct investment, courtesy of its Belt and Road Initiative (BRI). China is also the world’s largest net oil importer and the largest emitter of greenhouse gases today.
China’s standing with the G20, equally, is unique. As the largest developing country and emerging market economy, it bears an obligation to safeguard the interests of developing countries and facilitate a fairer and more equal global economic system. At the same time, being the second largest economy, China also bears an obligation to promote a more open global economic order and cooperate constructively with the developed countries to sustain the liberal international economic order. With the celebrated global value chains running through its industrial heartland, China is a key bridging link between the developing and the developed world. It is also self-evident that as China embarks on a new round of ‘reform and opening up’, a stable, rules-bound and open global economic order that satisfies its thirst for energy and raw materials, facilitates cross-border technology flows, and stimulates consumption at home and abroad is intimately linked to its enlightened self-interest.
The G20 is the premier leaders-led international forum for international economic cooperation and decision-making. Its members are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, United Kingdom, United States and the European Union. G20 members account for over 85 percent of the world economy, almost 80 percent of global trade and represent two-thirds of the world’s population. The G20 was originally was born in 1999 as a forum for Finance Ministers and Central Bank Governors in the aftermath of the Asian Financial Crisis. Following the Global Financial Crisis in the late-2000s, the body was converted into a Leaders-led forum and the first G20 Leaders’ Summit was held in Washington, D.C in November 2008. It has met at least once annually since then, with the Presidency rotating among its members according to a system that ensures regional balance and representation.
The number of countries, and institutions, represented at the G20 high table has increased over the years. Spain occupied one of France’s two seats at the very first Leaders’ Summit in 2008 (France held the rotating EU chair at the time) and has participated in every summit thereafter as a ‘permanent guest’. In 2010, the Canadian chair invited the African Union and its economic development program, known as the New Partnership for Africa’s Development (NEPAD) to the Toronto summit and it has been a regular attendee since then. The ASEAN chair too has been a permanent fixture at G20 summits, starting with an invitation from the South Korean chair in late-2010. International institutions have not been left behind either. Again, starting with the Canadian and South Korean presidencies, invitations have regularly been extended to the United Nations, the International Monetary Fund, the International Labor Organization, the World Bank, the World Trade Organization and the Organization for Economic Cooperation and Development. The chair of the Global Governance Group, an informal group of 30 small and medium-sized countries is represented too at the summit.
The G20 provides a platform on which both developed and developing countries can meet and freely discuss issues facing the global economy, with an emphasis on global economic growth, job creation and open trade. The G20 contributes to global governance and coordination in different economic policy domains, such as macroeconomic stability, exchange rates, financial regulation, development and trade and investment. Scholars and experts disagree on the effectiveness of the G20. While some critics note that the G20 has not been able to solidify global growth or reduce inequality, others point to the progress made by the G20 membership in reducing large current account imbalances as well as coordinating international commitments related to monetary and currency-related matters, among others. Both sides are in agreement though that the G20 has played – and continues to play – a key role in connecting traditional economic powers with emerging economies and clarifying mandates for the other key multilateral institutions represented at the summit. The G20, thus, is a critically important actor in the area of global economic governance.
Against the backdrop of escalating tensions between China and the US and talks of decoupling that go beyond their economic and trade relationship, is it true that the heyday of multilateral mechanisms institutions such as the G20 summit is long gone? What is the relevance of G20 in an increasingly leaderless, zero-sum world, especially when the two economic superpowers are heading for an economic cold war?
The heyday of global economic multilateralism is indeed behind us. The Bretton Woods institutions, including the global trading system that dates back to that era, are manifestly failing to keep up with the times. The developed countries are increasingly unable to bear its burdens but won’t share – let alone relinquish – effective control over these structures; the leading emerging economies are unwilling to bear its burdens, citing their ‘developing country’ status and the need to be accorded ‘differential treatment’ or embrace ‘differentiated responsibilities’. The former is able to set the agenda but unable to dictate outcomes; the latter are unable to set the agenda but are powerful enough to exercise blocking vetoes. The net effect is that the former has chosen to forego genuine multilateralism and prefer to work – and lead – within narrower, like-minded coalitions; the latter, denied rule-making powers, would rather set up their own embryonic institutional architectures (such as the AIIB and the BRICS Bank) while gradually accumulating voice within the existing structures as their economic star rises. At the end of the day, both are willing to compromise only on third-order issues – and not on the materially significant demands of the other side. It hasn’t helped either that the White House has for the better part of the past 10 of 19 years been occupied by a new breed of Republican Party leadership that is cynical of international institutions, dismissive of constraints on U.S. actions, and determined to milk its fleeting ‘unipolar moment’ down to the last drop.
Ironically, however, it is the G20 that is the best placed (among the poor options) to navigate this divide. It is relatively new, meaning that it does not carry the baggage of past intellectual or political capture by any one group of nations. The key developed and developing countries, both, were its founding members. It is leader-led and selective, meaning that it is not hostage to 190 member-strong ministerial bickering. Policy attention can be quickly focused on the burning issue of the day – be it global macroeconomic coordination following the global financial crisis or global pushback when President Obama contemplated deepening the U.S.’ armed involvement in Syria (following the use of chemical weapons there). It operates on the basis of a loose consensus and does not maintain a secretariat, meaning it neither issues prescriptive injunctions nor employs a permanent bureaucracy that maintains an interest in perpetually churning out legal outcome documents. The original strength of the Bretton Woods institutions in fact was their accommodation of a plurality of pathways towards broadly-consensual policy goals. And its practice of rotating chairpersonship means that both developed and developing countries get to shape the global agenda, including by requisitioning quality staff documents that are briefer, more concise, and touch upon a wider range of topical global challenges. In this messy interregnum between the past and (hopefully brighter) future of multilateralism, this messy multilateralism is perhaps the best that one can hope for at this time.
The expectations for the Osaka summit are modest. The G20 works best when there is a systemic crisis – preferably a systemic macroeconomic crisis, which requires a multi-stakeholder response. The G20 did yeoman’s work in the area of crisis management and global financial regulation at the moment of and in the wake of the Global Financial Crisis (GFC), respectively. Going into Osaka, there is indeed a pressing economic crisis (featuring the U.S. and China) but it does not require a multi-stakeholder response. The numerous stakeholders including the chair, Japan, will in fact be silent bystanders as the President Trump-Xi meeting overshadows all else in Osaka, much like it did in Buenos Aires in December (unless a hot conflict breaks out in the Persian Gulf).
On the other hand, the G20 is larger than any individual nation and not even the two biggest economies can turn the forum into a zero-sum battlefield with others at the table forced to choose sides – at least not in 2019 or in the foreseeable future. And so while the Trump-Xi meeting will grab the headlines, the quiet work will proceed in non-controversial areas, typically related to macroeconomic management, coordination and regulation where a cross-border, low common denominator consensus can be fashioned. If the U.S.-China trade conflict does however totally spiral out of control and drag the global economy down in tow in late-2019/2020, the Saudi chair and the other major economies will have a huge economic crisis on their hands and will need to find a way to fill the leadership vacuum in 2020. Very little confidence can be had that they or the larger G20 membership will be capable of filling this void. The G20 works best when all its stakeholders pull in the same direction; it probably will work worst when the effect of its two foremost stakeholders pulling in opposite directions is compounded by relative paralysis among the remaining others.
No, not at all. The G20 has no chance of breaking the logjam at the WTO, starting with the logjam in the WTO dispute settlement system – the crown jewel of multilateral dispute settlement. The Trump Administration is determined to disembowel the WTO’s Appellate Body (AB) and because the WTO and the G20 both operate on the basis of consensus, the U.S.’ singular obstructionist role is adequate in torpedoing progress at both fora on this question.
A fundamental conceptual pillar of Trump and USTR Lighthizer’s ‘America First’ ideology is that the United States should not submit to, and must not be bound by, third party arbitral or enforcement mechanisms – essentially any enforcement mechanism that it cannot dictate bilaterally. And so, despite being provided comfort by the entire WTO membership on each of its substantive points of Appellate Body-related grievance, the U.S. has been unwilling to take ‘yes’ for an answer. Rather, it insists on philosophically parsing ‘why the AB does what it does’ in the course of rendering verdicts (some of which have rightly gone against Washington) simply as a means to run out the clock on the AB’s quorum and kneecap the larger dispute settlement mechanism’s functioning. No amount of goodwill can resolve such obstinacy and bad faith dealing – although lower order priorities of WTO reform, such as updating its rulebook, enhancing disciplines on industrial subsidies, and improving the body’s transparency and notification system might still be amenable to incremental reform.
It is not coincidental either that this U.S. administration has liberally employed not just a number of previously sparingly-used unconventional domestic trade enforcement tools (Section 232 to investigate effect of imports on ‘national security’; Section 301 to investigate ‘unfair’ foreign trade practices; Section 701 to investigate currency undervaluation as a countervailable export subsidy) but that it has knowingly interpreted these enforcement tools in ways that are clearly in variance with the U.S.’ WTO legal commitments. With an election year soon upon us, the cause of WTO reform is a lost one. Worse, the bad precedents and irresistible unilateralist tendencies that are being unleashed within the Beltway’s politics on trade enforcement which will only widen the gap between the U.S.’ domestic and international law practices in this trade enforcement arena in the foreseeable future.
Aside from its contribution to global growth and rapidly growing role in infrastructure development and global connectivity (vide the AIIB and the Belt and Road Initiative), China’s responsible stakeholder ‘talk’ is still a couple of steps ahead of its responsible stakeholder ‘walk’. That said, China does not need to necessarily take an outsize role in reshaping the faltering global economic order. Rather, as an upper middle-income country, what China needs to do is begin to fully embrace advanced country regulatory rules and standards as codified in OECD or equivalent practices. These range from codes on capital account liberalization to corporate governance to anti-bribery to aid disbursement to state aid disciplines on industrial subsidies to Trans-Pacific Partnership (TPP)-equivalent standards on investment liberalization and intellectual property protection. This is no minor walk in the park. This is a long and arduous decade-long journey which China has only recently embarked upon by way of its liberally-written Foreign Investment Law. Once China comes up-to-speed with advanced country standards, it will be in a far better position to intellectually and institutionally contribute to genuinely becoming an indispensable pillar of the global economic architecture. Doing otherwise would be to put the cart before the horse.
In fairness to China though – and especially on this G20 summit occasion, it bears recognizing how far the country has come over this past decade. Ten years ago, China ran a global current account surplus of 10% of GDP, the yuan was significantly undervalued and the country was a key contributor to global economic imbalances. China’s global current account surplus is 0.5% of GDP today, the yuan has taken important steps towards internationalization and trades roughly at market value, and the country is a key contributor to global economic balance – not imbalances. To those who claim that China is an incorrigible, mercantilist free rider, they should review the evidence of the past decade.
Both the U.S and China share a similar want – both want to exit their trade war with an honorable deal that is sellable back home to key political constituencies. A full-blown trade and economic conflict with the world’s biggest trader and consumer of American farm products is not how Donald Trump wants to go into his re-election campaign. For Xi Jinping, the trade conflict is compelling China to regress to its debt and stimulus-laden ways in order to sustain economic growth as well as imposing a heavy price in terms of core technology denials. Whether the two can thread the needle on this front – or at least stabilize their negotiations, will be a touch-and-go affair in Osaka.
Over and above the trade conflict, the U.S. will probably (unsuccessfully) attempt to expand its ‘maximum pressure’ coalition against Iran. For its part, China will seek to provide a backstop to globalist and multilateralist G20 initiatives, knowing that the deepening of rules-bound economic multilateralism, from which it hugely benefits, is the strongest defense against America’s slash-and-burn unilateralism.
The Institute for China-America Studies is an independent nonprofit, nonpartisan research organization dedicated to strengthening the understanding of U.S.-China relations through expert analysis and practical policy solutions.
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