The Club That Matters

The solutions to global threats rest with Chinamerica, not the G20, argues Hancock.

By: /
3 November, 2011
By: John Hancock
Senior Counsellor at the World Trade Organization

G20 leaders meeting in Cannes, France, like to pretend they are the world’s executive board. But real power increasingly lies with a more exclusive club—call it the G2—comprised of the U.S. and China.

Europe has effectively dealt itself out of a global power role because it can’t manage itself—as the paralysis over Greece makes embarrassingly clear—let alone project a unified foreign policy. As long as Britain, Germany, France and Italy insist on their own seats at the G20 table, the E.U. president might as well stay home. Japan could be a bigger global force, but it shuns the limelight (and responsibility). India, Brazil, and Russia dream of global power status, but they remain regional players. Meanwhile, Canada is in the club because the U.S. wants a friend. Australia is in because Canada is in. Argentina and Mexico are in because Brazil is in. And Turkey, Saudi Arabia and South Africa are in because… well, no one quite knows why they are in.

It is U.S.-China agreement—or, more likely, disagreement—that matters on all the big issues. Take global imbalances, the subject that should have been at the top of the G20’s agenda were it not for Europe’s ADD. The instability and uncertainty that has rocked the global financial system for a decade will only get worse as long as China—the world’s biggest exporter and saver—accumulates ever larger surpluses, and the U.S.—the world’s biggest importer and consumer—accumulates ever larger deficits. Although the problem is global, the solution rests mainly with the U.S. and China.

The same is true of the deadlocked Doha Round of free trade talks. With a $45.6 billion trade deficit in August, imports from China exceeding exports by a factor of four, and real unemployment approaching 16%, the U.S. desperately needs China to cut tariffs and stimulate imports if it is to have any hope of selling a global free trade deal at home. But the U.S. has limited leverage since its market is already largely open and China’s export powerhouse benefits enormously from the status quo. So world trade negotiations—already in their 10th year—remain on hold until the U.S. and China figure out how to untie this Gordian knot.    

It’s a similar story with climate change negotiations. Even if the U.S. were prepared politically to commit to more radical and immediate carbon emissions targets, it will not do so without China—the world’s second biggest economy and already the biggest C02 emitter— moving in lockstep, not least because of fears that a decision to “go it alone” would place U.S. manufacturing at a competitive disadvantage vis-a-vis China’s industrial machine. As with free trade, a global breakthrough on climate change will only result from a China-U.S. breakthrough.

What places America and China in a league of their own is shear economic weight. Despite the housing bubble collapse and lingering recession, the U.S. economy still represents almost 20% of world output and China’s economy over 14% (calculated at purchasing power parity). In comparison, Brazil makes up only 2.8% of the global economy, Russia 3%, and Canada 2%. Just as significant is the way the U.S. and China have grown so economically intertwined, even co-dependent—as a result of mutually reinforcing trade and financial flows—despite their political differences. Chinamerica—Niall Ferguson’s label for their symbiotic relationship—has essentially become the core of globalization.

Likewise, when the U.S. and China clash, the reverberations are felt worldwide. Frustrated by repeated failures to persuade China to raise an undervalued Renminbi, the U.S. Senate has passed legislation that would allow America to slap punitive trade sanctions on China for unfair currency manipulation. At the same time, the U.S. is effectively de-valuing the dollar—and flooding the world with liquidity—through its policy of quantitative easing. In response to the global shock waves emanating from China and America, a number of countries (notably Japan and Switzerland) have been aggressively intervening in money markets to drive down their exchange rates, while Brazil is threatening unilateral tariff hikes to cope with a fast-rising Real. With good reason, Brazil’s finance minister has warned darkly of coming “currency wars” if the U.S. and China do not get their acts together. 

Does this make the G20 pointless? Not at all. It provides a useful way to shroud our bipolar world in a cloak of multilateralism. It allows helpful countries, like Canada, to inject creative ideas into the policy mix—ideas that, curiously, great powers often seem lack. And it encourages the 18 other actors in the G20 drama to take collective ownership for what are effectively bilateral decisions. But while the G20 provides lofty communiqués and great photo ops, no one should be under any illusions that it is calling the shots. That’s the job of the G2.

Photo courtesy of Reuters.

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