G20 and the importance of multilateral consultations
Last weekend the finance ministers and central bank governors of the G20 nations gathered. The only member from the Arab world was Saudi Arabia, which is one of just three Muslim-majority countries alongside Indonesia and Turkey. The presidency alternates every year, and next year it will be the Kingdom’s turn to assume the mantle.
The backdrop to the meeting was increased fears over the impact of trade wars on the global economy. Earlier in the week, the World Bank had drastically revised its growth projections downward to 2.6 percent for 2019. This is a far cry from January 2018 when the International Monetary Fund (IMF) forecast the global economy to grow 3.9 percent this year.
All the participants agreed that trade wars constituted a major threat to global growth. The communiqué quoted that major risks emanated from “global trade and geopolitical tensions,” and leaders vowed to “address these risks and stand ready to address the issues.”
To a certain degree the US was the odd man out at the meeting: The trade wars began when President Donald Trump started issuing tariffs on Canadian and European steel and aluminum, and hundreds of billions worth of Chinese goods. The worries came to a head when Trump linked immigration issues to trade, threatening a levy on Mexican imports.
The president is highly skeptical of the multilateral approach of the G20. He prefers bilateral trade negotiations.
While the communiqué did not mention US-China trade disputes, it was clear that leaders were most concerned with how the rift between the world’s two largest economies would evolve. These tensions do not just affect China and the US. Global trade and supply chains are interconnected and particularly affect export-oriented economies in Europe, ASEAN and Japan, which depend on open trading lanes. Gulf Cooperation Council countries are affected too, as less trade means lower demand for oil and the infrastructure offerings of major trading hubs like the UAE.
When US Treasury Secretary Steven Mnuchin emerged from a meeting with China’s Central Bank Governor Yi Gang, he reiterated that Trump stood ready to levy 25 percent import tariffs on the hitherto untaxed $300 billion of Chinese imports, if there was no breakthrough until the Trump — Xi Jinping meeting at the end of June.
There was some relief that Trump suspended threats to impose tariffs on Mexican imports over the weekend. This could mean that the US-Mexico-Canada (USMCA) trade agreement might finally be ratified. The USMCA is particularly important to the North American automotive industry with its highly integrated supply chains. It also matters to agriculture, steel and other products.
While global equity markets rallied on the news, the relationship between the US and Mexico is a side show compared to what happens with China. IMF chief Christine Lagarde said trade tensions could shave $499 billion off global GDP.
The central bank governors of the OECD (Organization for Economic Cooperation and Development) participants reiterated they would grow balance sheets and lower interest rates, should their economies require stimulus.
The Australians moved first when they lowered rates last week. Bank of Japan Governor Haruhiko Kuroda said he still had room for expansionary measures and interest rates would remain low. The European Central Bank’s Mario Draghi made clear interest rates would remain low, and the Italian central bank contemplated several measures.
Depending on analysts, markets have priced in between one and three rate cuts in the US for this year alone. The outlook is far from rosy when traditionally cautious central bankers openly contemplate larger balance sheets and lower interest rates for longer.
The US increasingly favors bilateral approaches, but the world is larger than just the US and China.
The finance chiefs could point to a concrete result when it came to the taxation of tech giants like Google Amazon and Facebook. The OECD had suggested minimum taxation on a global level for some time, as had the EU. The G20 ministers vowed to work on common rules to close loopholes and find a solution by 2020. This may result in a minimum tax as well as taxes being levied where profits are earned.
The wording was vague and Mnuchin voiced concerns about unfair treatment of individual companies. Despite the fanfare, we shall have to see whether the 20 countries will be able to agree on a framework, especially should the US be at odds with the decision.
Apart from the “digital tax” there were no firm outcomes from the meeting. However, these G20 gatherings may now be more important than ever. The US increasingly favors bilateral approaches, but the world is larger than just the US and China. Trade is, of course, global by nature. Therefore, it is important for the leaders of the world’s largest economies to meet, share their concerns and jointly deliberate how they want to address common problems — on a multilateral, bilateral or national level.
Taking stock of the status quo and consulting on ways forward is invaluable — especially as the multilateral frameworks risk coming unstuck.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources