The wrong cure

The meeting of the leaders of the Finance Track of the Group of 20 economies, or the G20, was held in Asheville, North Carolina, this week as part of the United States’ presidency. The United States’ (US’) approach to the Finance Track has prioritised three issues: Growth, global imbalances, and financial literacy. These priorities are shared by New Delhi and by most members of the grouping. However, consensus nevertheless eluded the Asheville summit for reasons that are easy to understand. Nineteen of the 20 members signed up to the chair’s declaration, but one did not: China. As the beneficiary — in terms of reserves and trade surpluses — of global imbalances, it has consistently refused to see them as a problem. But, as the chair’s declaration noted, large-scale imbalances are both a cause of major global instability and have negative spillover effects. They are also a symptom of non-market conditions and non-tariff barriers in some of the economies that are party to it. 

It is evident, in this case, that the concern is well founded. Chinese markets are excessively closed to outside companies; the Communist Party’s continuing control over the economy forces it to prioritise investment, even overinvestment, over healthy consumption, which would lift aggregate demand globally; and its targeted, if hidden, subsidies into certain production and export lines violate market principles and contravene the terms on which it was welcomed into the World Trade Organization in 2001. The fact that Beijing stands isolated on this issue is a signifier of the fact that it has consistently refused to address these concerns, and is now in fact denying that they even exist. It seeks to present this summit, and other such attempts to address its persistent imbalances problem, as an attempt by the US to constrain the growth of the Chinese economy. 

This claim would find no takers if the US had not, over the same period, destroyed its credibility by claiming that unilateral tariffs are an appropriate method by which the problem of imbalances could be addressed. Just as China is globally isolated about its non-market practices and its exploitation of the trade architecture, the US is in a similar position when it comes to the unilateralism and mercantilism it has displayed in the past years, particularly since Donald Trump became President for his second term. His original slate of tariffs was designed to directly target trade deficits. But trade imbalances are symptoms of deeper problems — a lopsided approach to savings and investment, economies geared too much towards either savings or consumption — and so trying to address the symptom rather than the disease, particularly in a unilateral and untargeted manner, is irrational policymaking. The fundamental approach must be cooperative — in that it is essential for all of China’s trading partners to push it into reforming its economy in such a way that domestic consumption increases, and it becomes more of a market for foreign final goods. 

From New Delhi’s point of view, it might be tempting to welcome a summit that so clearly isolates Beijing. But India’s growth trajectory is threatened by both a closed trading system manipulated and dominated by China and by a new period of economic nationalism and tariff walls brought in by the US. The purpose of the G20 should be to address both these issues in a collegial manner. From that perspective, the summit did not achieve its objective.