The G20 Osaka Summit's Prospective Trade Success
John Kirton, Director, G20 Research Group
May 16, 2019
Seven weeks before the most powerful leaders of the world's most powerful countries gather in Osaka, Japan, for their 14th G20 summit, the world is focused on a single question that will importantly define the summit's overall success. Will these leaders tame the escalating trade tensions and tariff war between U.S. president Donald Trump and Chinese president Xi Jinping, and between Trump and many other G20 members, including Europe, neighbouring Canada and Mexico and Japan itself.
This question has been thrust once again to the centre of global attention and anxiety by the new tariffs that Trump imposed on China on Friday, May 10, and by China's promised and predictable response of another $60 billion worth of tariffs on U.S. imports on Monday, May 13. This latest, more conflictual phase of the U.S.-China tariff war is likely to remain until it peaks at the Osaka Summit on June 28-29. There, Trump and Xi will meet face to face by themselves and together with their other deeply concerned G20 colleagues across the table in the same room.
Amid all the unpredictability again produced by the U.S. president, few foresee as likely, and as especially durable, any Osaka Summit trade success. Yet the prospects are that the G20 Osaka Summit will bring a tariff war truce and even cooperative moves on the broader, newer trade agenda, led by reform of the multilateral trade system and World Trade Organization (WTO) for the new digital age.
The previous G20 summit, in Buenos Aires, Argentina, on November 30-December 1, 2018, had achieved the first — a truce — for a few months. It promised on paper to do the second — cooperation — but has not. Osaka is likely to do better, by actually doing both.
There are three key reasons why: the United States, China and Japan's G20 as a whole.
The first propeller of Osaka's prospective trade success lies in the United States. The increasingly export-dependent U.S. economy is showing signs of stress, especially in its emerging sectors, in its highly visible stock market, and its less visible bond and other financial markets. Trump's ability to escalate or even stay the course is constrained by his government's limited room for fiscal or monetary policy stimulus to offset the current fragility, fear and coming economic slowdown. His promise of another $50 billion in subsidies for his farmers whom he has just newly damaged through the recent tariffs will face increasing limitiations from a House of Representatives that controls the spending power and is itself controlled by the opposition Democratic Party, the escalating U.S. fiscal deficit and farmers demanding ever more money for their fields flooded as a result of climate change.
Politically, recent polls show that Trump has net negative approval ratings in a majority of states, including the ones with most electoral college votes, the swing states he won in 2016 and the ones he must win again to secure a second term. His tough talk and action do indeed have some broad political and popular appeal. Yet that flows from deeper dissatisfactions with China's unfair trade practices, and the WTO's inability to stop them, rather than Trump's domestically painful unilateral tariffs that will soon once again prove not to work.
The second propeller of Osaka's prospective trade success is China. It is predictably not giving in to Trump's unilateral imposition of tariffs, just as Canada did not when Republican U.S. president Richard Nixon unilaterally imposed a 10% import surcharge on Canada — America's closest partner — on August 15, 1971. What Canada did then in resisting, as an export-dependent country one tenth the size of the United States, China can certainly do now. It is an economic superpower with a far greater economic growth rate and a far larger domestic population than the United States. In 2017 Chinese exports accounted for only 18% of its gross domestic product (GDP), a sharp decline in its international trade vulnerability from its 35% export dependence in 2006. By 2019 China's exports to the United States represented only 4% of a GDP that was steadily growing at over 6% every year. China can thus afford to wait out Trump's trade tactics, focused on the tariff instrument so popular, central and consequential in the global economy a century ago.
China has used its time since the Buenos Aries Summit trade truce to pre-emptively prepare a path to a balanced and mutually acceptable new Osaka trade truce, both bilaterally between itself and the United States and more broadly among the trade powers that count. While Xi's economic advisor Vice Premier Lui He focused on Washington, Chinese foreign minister Wang Yi met with ministers and senior officials in several consequential G20 members, notably his Asian neighbours of Russia, Korea, India and Japan itself, and also Indonesia, France and Argentina. He met the latter three at the second Belt and Road forum, which furthered a global infrastructure corridor that will breed a trade corridor untouched by the United States.
Xi himself called Saudi Arabia's King Salman bin Abdulaziz Al Saud to express China's support for Saudi Arabia's 2020 hosting of the G20, which will strengthen multilateralism. China has thus engaged all three members of the G20's governing troika — Argentina, Japan and Saudi Arabia — in its multilateral trade cause. Yet few believe that Saudi Arabia as G20 host in 2020 has the same incentive to make trade and WTO reform a top priority, as Japanese prime minister Shinzo Abe did from the very start of his G20 presidency this year.
The third propeller of Osaka's prospective trade success is thus Japan and the G20 partners it will assemble there. Japan has every incentive to avoid having to make a cruel choice between the United States and China, for economic reasons and security ones as well. Abe has pioneered a trade-liberalizing third way, by proceeding with the Comprehensive Progressive Trans-Pacific Partnership of 11 countries (CPTPP), from which China remains absent and from which Trump's United States pulled out. Abe then added a full free trade agreement between Japan and the European Union, even as the United Kingdom proceeded to try to exit this greatest economic union in the world.
At Osaka Abe will be not only the host but also one of the most experienced summiteers there, surpassed by only Chancellor Angela Merkel of an export-dependent, trade-liberalizing, and multilaterally committed Germany. He knows that G20 summits can make many trade commitments and have its members comply with them — at an average of 67% that is close to the G20's overall 71% score, according to G20 Research Group findings. Abe has made trade his summit's top priority and signature success from the start — in his concluding remarks at the Buenos Aires Summit and at the World Economic Forum in Davos in January 2019 to launch his year as host. At the latter, he highlighted the "Osaka Track" for creating digital trade rules. His focus on the traded economy's future further promises to make his G20 Osaka Summit a trade policy success.
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