Inicio > funcas europe > The G20 at times of bilateralism
Puntero indicador
funcas europe
The G20 at times of bilateralism

Raymond Torres, Director for Macroeconomy and International Analysis, Funcas

The G20 Summit which is taking place in Japan these days happens at a critical juncture for the global economy. For one thing, world trade is slowing down significantly –it is estimated to be growing at an annual rate of just 0,7%, compared with nearly 5% last year--, thereby compromising economic prospects, especially in open economies like Europe.

Of course, the escalation of trade restrictions between the US and China is one of the factors at work. The Trump Administration has imposed tariffs on around $200 billion of Chinese imports and is threatening to extend the measures to all remaining import items. This is leading China to retaliate by imposing its own import duties and threatening to restrict exports of key minerals such as rare earth, which are crucial to the US high-tech sector. Apparently, the main bone of contention is the large imbalance that characterizes trade relations between the two superpowers –an imbalance which seems to remain largely unaltered by the trade measures, at least so far. However, a more fundamental consideration for the US government is the intention to force a relocation of American businesses back to the home country, with the aim of maintaining its economic and technological leadership.

Trade issues go beyond the dispute between the top two world economies. Indeed, the WTO is facing growing constraints in performing its mission of implementing multilateral trade rules. It is unable to reach agreement in new areas where the global economy is expanding. And, more worryingly, the WTO’s dispute settlement mechanism, which is already overloaded with mushrooming complaints, may cease to operate in the next few months, when two of its three present panelists are expected to leave, without being replaced. Without an operational WTO dispute settlement mechanism, the credibility of the multilateral trade system will be severely undermined, thus strengthening the role of regional and bi-lateral agreements.

In view of all this, it is unlikely that the trade issues will be solved during the Summit, despite all the efforts deployed by the Japanese hosts.

In addition to the ongoing trade disputes, geo-political tensions are intensifying, thus spreading a sense of uncertainty throughout the world. The impacts are most visible in oil markets, which is exerting upward pressure on prices and further dampening economic prospects in resource-dependent countries such as Europe. The increase in gold prices is another sign of a flight to safety, so characteristic of uncertain times. But, according to President Emmanuel Macron, the issue goes beyond pure economic concerns. In his speech earlier this month at the International Labour Conference in Geneva, he highlighted that the multilateral system was in crisis, and that this was eroding the very foundations of social stability and global peace.

In principle, coordinated G20 action could attenuate some of the negative impacts of trade conflicts and geo-political tensions. The G20 has proved effective on a number of occasions, most prominently in 2009 when it engineered a macroeconomic response to the global financial crisis, which proved instrumental at the time. This also paved the way to reforms in key areas that required international action, such as financial markets and tax evasion.

Central banks, in particular, could engage in a new wave of quantitative easing or intensify existing initiatives. The ECB and the US Federal Reserve have announced measures in this direction, while China central bank has already launched a credit support programme. However, there is a growing sense that monetary stimulus is less and less effective, therefore triggering a debate on the scope for fiscal action. But this is hampered by the different fiscal positions of countries, not least within the Eurozone.

In sum, the rise of bilateralism is complicating the task of the G20, which had emerged as the only multilateral body capable of tackling global problems in a swift manner. In view of the geo-political issues at stake, it is unlikely that the G20 will move out of its near-paralysis situation any time soon. This makes a stronger Europe even more important, and requires a new economic strategy which counterbalances the growing global uncertainties.