Why markets and political scientists disagree on the G7
To say that this month’s summit of G7 leaders in Canada was an unusual one would be an understatement. A traditionally friendly and predictable gathering of like-minded countries was marred by finger-pointing and disagreement, resulting in an inability to achieve consensus on a final communique. But, while political analysts were quick to declare the end of the G7’s coherence, integrity and usefulness, markets were unfazed. In fact, the longer-term outcome may well prove markets right, albeit with some important qualifications.
Participants at the G7 summit reportedly clashed over issues like climate change and the possibility of readmitting Russia. But the highly publicized discord was fueled mainly by disagreements over the effects of trade among the members. Those disagreements — amplified by persistent differences on basic facts — impeded progress in other areas where greater consensus might have been possible, including Iran, some other Middle East issues, North Korea, migration, and refugee relief.
Representatives of the US accused the other G7 members of “unfair trade practices,” which they claim have disproportionately harmed the US economy and its workers. The rest of the G7 — all traditional US allies — confronted President Donald Trump with data that they hoped would prove that trade had been highly beneficial to all countries.
But the US held firm. Without concessions from its trading partners, including more reciprocity, the US, its government representatives unequivocally declared, would implement new tariffs on imports from Canada, the EU, and Japan.
This approach marks a sharp departure from the past, and another shock to the establishment and expert opinion. While some tweaks to trade relations are needed, in the past such changes would have been pursued in an orderly and cooperative fashion — not under constant and growing tariff pressure. Instead, the major economies of the geopolitical West seem set to engage in a tit-for-tat tariff dispute that could escalate into a full-blown trade war, harming all of its members.
But it is not only other Western economies that had the US up in arms. The Trump administration is pressuring China to address intellectual property theft and to reduce non-tariff barriers (such as joint venture requirements). Here, all other G7 members agree that America’s grievances are legitimate, and that they are being harmed as well.
Some political scientists had declared the end of the G7; yet, when markets opened, they were utterly unaffected by the unsuccessful meeting.
Mohamed A. El-Erian
Yet, given conflict over intra-G7 trade, the group was unable to unite on a comprehensive and coordinated response to China. The summit was followed by an escalation of the trade dispute between China and the US, compounding the uncertainty now jeopardizing a synchronized growth pickup that, owing to insufficient policy reforms, is already running out of steam in many countries other than the US.
The failed G7 summit dealt a very public blow to a once-powerful grouping that had already been challenged by global economic realignment, the emergence of the more representative G-20, and new forms of regionalism. So it is perhaps not surprising that some political scientists have declared the end of the G7. Yet, when markets opened on the following Monday morning, they were utterly unaffected by the weekend’s developments; for them, the G7 summit had essentially been a non-event.
On one level, this disparity can be explained by the fact that G7 infighting will have only a small and narrow impact on growth, especially compared to factors like monetary policy. More fundamentally, markets have been conditioned to postpone significant price adjustments until there is overwhelming evidence of negative economic and financial effects.
In recent years, markets have faced an unusually large (and expanding) set of unconventional political statements and maneuvers. But, for the most part, the rhetoric has not been translated into reality, and what actions have been taken have proved largely inconsequential for economic activity and asset prices.
That was true of Trump’s rhetorical sparring match last year with North Korean leader Kim Jong Un, which some political analysts predicted would lead to armed conflict. It was also the case with rising Russian revanchism, which some viewed as a precursor to a disruptive new Cold War, and the electoral success of Euroskeptic and populist parties in the EU, which some declared would lead to the bloc’s dissolution.
For markets, waiting for strong evidence of an economic impact, rather than reacting to every statement or event, has proved profitable. That is likely to be the right approach for the G7 summit, too — and not just because the body’s impact on global outcomes has diminished in recent years. Given the large number of long-standing economic, financial, institutional, political, and social links among the G7’s members, all of which act as stabilizers, this month’s summit may well be followed by a more congenial and constructive one.
The G7 has not been dealt a fatal blow; it can and will still play a role on the global stage — albeit a less important one. But that does not mean that the debacle in Canada will be cost-free. G7 members lost a valuable opportunity to develop common positions on issues about which they could agree, and the rest of the world was shown more evidence that the global system’s long-standing core-periphery relations are no longer reliably buttressed by unity among established economic and financial powers. At a time of considerable political and social fluidity, destabilizing the remaining anchors represents a risk to the system as a whole.
- Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO, where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. Twitter: @elerianm