The G20 in a Zero-Sum World

The G20 rose to prominence in the depths of the 2008 global financial crisis. By facilitating a coordinated policy response, it was able to prevent a great recession from turning to a global depression. 

That experience perfectly encapsulated the relevance of the G20. The G7 no longer had the economic heft to rescue the global economy on its own, nor the diversity of membership to provide leadership in a world where developing economies now produced over half of global output. In the absence of broader coordination, individual countries faced an incentive to provide less fiscal stimulus than optimal (as much of the benefit would spill across borders) and to pursue beggar-thy-neighbor trade and currency policies that would exacerbate the downturn. 

The G20 was thus borne out of a recognition that the global economy is a positive sum game – that everyone can be made better off through such coordination – and that the rise of large emerging economies meant they needed to have a seat at the table.

The relevance of the G20 is built upon this basic framework. While it has to some extent struggled with its “peace time” role, it has gone about quietly making progress in a number of areas where its membership makes it well placed to provide global economic coordination and leadership, including forwarding efforts to enhance global financial stability, improve international tax cooperation, and reform the International Monetary Fund. 

But like other multilateral forums, the G20’s basic framework is now under pressure from the actions and agenda of the Trump administration. President Donald Trump has brought a zero sum mentality of winners and losers to most walks of public life, but especially so in the international sphere. He eschews multilateralism (and U.S. leadership) as a bad deal for America, is hostile to globalisation, says climate change is a hoax, and derides any agreement he himself did not negotiate. 

The recent G7 and Asia Pacific Economic Cooperation summits both resulted in no agreed leader communiques. Given these bland diplomatic documents essentially reflect the lowest common denominator among the group, the truth is painfully obvious – that there is no lowest common denominator other than an agreement to disagree.

The upcoming G20 will likely be judged by what progress is made or not on the issue of the U.S.-China trade war. The prospects are not good going in. But with Donald Trump a deal is always possible as long as he can claim to have “won”, as we have seen with the relatively minor changes embodied in the new U.S.-Mexico-Canada trade deal and the revised U.S.-Korea free trade deal, as well as Trump’s dealings with Kim Jong Un of North Korea. 

However, even if some kind of U.S.-China trade deal is achieved in Buenos Aires, it is unlikely to be the end of the story. This is the more fundamental challenge that will dog the G20 as a global economic governance mechanism and it goes much beyond Trump alone, as attitudes towards China on both sides of U.S. politics harden around a zero-sum mentality.

The U.S.-China trade war has always been about many things. Initially, it seemed about protectionism and the backlash against globalization, echoing Trump’s campaign populism. But in the Section 301 report prepared by U.S. Trade Representative Robert Lighthizer, it paradoxically morphed to also incorporate the complaints of America’s business and policy establishment about China’s industrial policies, especially around foreign investment and technology. More recently, a national security justification appears in the ascendance, as the United States eyes China as a geostrategic rival and talks of “decoupling” the two economies from one another. 

In reality, these trade war motivations are mutually inconsistent. Resolution of the Section 301 complaints would only enmesh the United States and China further together – working against both the protectionist desire to re-shore manufacturing jobs and the national security objective of decoupling. Meanwhile, a broad protectionist agenda will hurt U.S. competitiveness and thus diminish its global economic prominence and national capabilities. 

But in practice, all three motivations are aligned in bringing a zero-sum mentality to America’s relations with China. 

The protectionist idea that trade deficits reflect an economic loss belies the positive sum gains economists have long argued come from trade according to comparative advantage. America’s bilateral trade deficit with China is equally a reflection of the United States benefitting from cheap goods and cheap credit that allows it to have a standard of living much beyond its means otherwise. To be sure, trade with China has had distributional impacts within U.S. society. But it is only one part of a broader phenomenon of globalization and technological change and more a failure of U.S. domestic, rather than trade, policy. 

Meanwhile, though the business perspective tends to see the gains from trade, it also tends to see global competition in a mercantilist lens. The rise of China as a competitor in more technologically advanced areas threatens existing U.S. commercial interests while the potential gains are dispersed across American consumers and business interests, some of which may not yet even exist. The idea that industrial policy might be a legitimate development strategy for China (and indeed something that previously greatly benefitted foreign investors and is in any case a common part of most countries’ technology policies) falls on deaf ears and has instead given rise to fears of a “hollowing out” of U.S. competitiveness in advanced industries and technologies. 

Finally, geostrategic rivalry is, by its very nature, zero sum. Even if it was more widely accepted in U.S. politics that its economic relationship with China has been mutually prosperous, China has been gaining more, relatively speaking. In geostrategic terms, it is such relativities that matter, not absolutes. So, China’s continued economic rise by definition imposes geostrategic costs for the United States as the incumbent world power. 

It is not clear at this point what the U.S. agenda of “decoupling” might entail. It could for instance take on a narrow form targeted to specific security risks. Alternatively, it could take on a broader form seeking to reduce direct entanglements with China across the U.S. economy. More worrying would be a multilateral form, where America sought to enlist others to also decouple from China in a broad way. So far we have seen elements of each, including tighter investment screening and export controls, broad-based tariffs on Chinese imports, and the inclusion of the so-called “poison pill” clause in the U.S.-Mexico-Canada agreement. 

So where does that leave the G20? Such forums can never do more than provide a platform for discussion and cooperation. Some cooperation can also still go on, even if the United States and China are at loggerheads, though it will inevitably be much more difficult and limited. 

However, the fundamental challenge is that, unlike the G7 which carries a broader geopolitical mandate, the G20 is specifically built around the prospect of positive sum economic cooperation. It will inevitably struggle in a zero-sum world.