The Think20 must think of appropriate policy responses to anti-trade populism which could undermine global economic Revival.
A dramatic turn
Trade policy has taken a spectacular turn in 2016. Underlying the Brexit and election outcomes in the United States is deep discontent with the globalized trading system. The way in which it is organized and conducted, the fragmentation of production across borders, and its effects upon employment and migration are all under question. Change has being asked for in the UK and the US, and there is also reason to be concerned about similar shifts toward more inward-oriented policies in other advanced countries. Ironically, this ire is directed at a trade and investment regime that delivered strong growth across developed and developing countries for over two decades. But even as per capita incomes were encouraged towards convergence in the latter, joblessness and inequalities in the former have risen. Now, due to growing discontent, unencumbered flows of goods, services, capital and workers are at risk as countries seek to erect protective barricades in an apparent retreat from the spirit of openness.
This amounts to an extraordinary set of challenges for the G20, which must now confront both the political spillovers of a prolonged post-crisis slowdown in growth, as well as the negative fallout from trade and globalization policies that preceded the 2007-2008 crisis by decades. This is a far more complex problem for the G20 than coordinating macroeconomic policy interventions as in 2009, or even reconciling the subsequent disagreements amongst members as growth paths and policies began to diverge. Recent developments indicate objectives that were previously accepted as being fundamental for the G20, could now be potentially divisive and therefore, require careful but adequate reformulation. Signs of the G20’s appreciation for this shifting global context were visible at the Hangzhou summit in September, when G20 leaders warned of the need to address voters’ concerns on globalisation; the IMF too broadened its April World Economic Outlook theme of global growth having been “Too Slow for Too Long” to say that “growth had been too slow for too long for too few” (IMF Managing Director Christine Lagarde ).
But further developments since the Hangzhou summit underline the shakiness of the political consensus that has underpinned world trade and investments until now. Recent and developing political circumstances have important and layered implications for the G20 and its core goals of ensuring growth, stability and investment in the world economy. The challenge for the Think20, whose priorities include trade and investment, is to imagine what these circumstances might imply for the G20’s efforts to achieve consensus in its policy actions.
What role for the Think20?
Open trade and investment is a cornerstone of the G20’s plans to invigorate the world economy. These plans critically rely upon reviving global trade, which has barely kept pace with economic activity since 2012. The G20 has constantly avowed freer international trade, cautioning against protectionist measures within the prevalent multilateral, rules-based framework. But now the drift is in another direction: rules-driven governance is being undermined, while alternate, regional formulations could emerge under new configurations of leadership; existing trade pacts and those in the pipeline are being rejected; bilateral trade agreements on ‘nation-first’ principles are gaining currency; while the role of the US as the anchor of world trade is no longer sure, as is the alternative replacement. Can the G20 proceed within existing governance structures, while simultaneously ignoring the political angst that has originated precisely from these same structures?
The Think20 can help by anticipating the directions of change, how achievement of the G20’s core objectives could be influenced by shifting contexts, and by examining and proposing appropriate policy responses in the light of these. For example, there is the likelihood that some of the G20’s largest economies have altered their perspectives on free trade, such that it is now seen as a symbol of their economic woes. On the other hand, an equally important segment of G20 members depend upon exports, foreign investments and local production being integrated into a network of global supply chains. Can these divergent interests potentially disturb the G20’s leaders’ consensus on the trade and investment agenda? How can the G20 best reconcile the seemingly opposing interests amongst its prominent members, who account for majority of the world GDP? The Think20 has a role to play in this space.
An immediate concern is if the G20’s September pledge at the Hangzhou summit to “build an open world economy, reject protectionism, and promote global trade and investment” can be replicated ahead. How realistic is this expectation given the strong anti-trade political endorsements since then? It is noteworthy that even as the G20 rebuffed protectionism three months ago, various members initiated 85 new trade-restrictive measures in the five months to mid-October 2016, or 17 trade constraints per month on average, according to the World Trade Organization. There is a need to reflect upon the widening gap between G20 pledges and reality, where barriers to trade and international capital movements are on the ascent. How can this gap be bridged? Should future commitments in this regard be modified, and if so, then how?
Towards a new approach on trade?
Would a nuanced shift in the G20’s focus on free trade be more appropriate? This is a valid question in the light of the cause of anti-trade politics, and disproportionate outcomes amongst trading nations. Theory and experiences both show that cross-border trade and investments boost productivity and overall economic welfare but inflict adjustment costs on some. Current political events are feeding off these uneven dynamics. Economic realities are compelling G20 members in different directions, pointing to the need to reassess policy responses. The Think20 can suggest acceptable solutions and find a middle ground that preserves positive gains of the past and that pays attention to redistributive actions that ought to be considered. Several analysts have advocated a shift to ‘managing globalization’ better instead of its outright rejection. Perhaps this can be echoed at the G20.
This year’s developments raise other fundamental questions too. For example, what are the consequences for the world economy if barriers to trade and capital movements continue to increase? How far are countries willing to go in appeasing protectionists? Might a global trade war actually occur? Is the slowing of goods, services and capital flows part of an inevitable historical process? What are the possibilities of a structural shift in trade and investment governance? The answers to many of these questions, directly or indirectly, will affect macroeconomic policies and outcomes. Nearly all will have a bearing upon the G20’s objective of achieving sustainable global growth. The Think20 can especially contribute in anticipating answers to these questions, backed by facts and evidence. Being an apolitical and unconstrained network, it can help give a positive focus and direction to fractious matters, assist in the development of a consensus amongst important G20 members, and help avert further fragmentation in the world economy.