One day after yesterday's at times painfully uncomfortable first official meeting between Angela Merkel and Donald Trump, it will hardly come as a surprise that during today's G-20 meeting in Baden Baden, Germany- the first for the Trump administration, whose delegation is led by Treasury Secretary Steven Mnuchin - where the dominant topic is trade, and specifically globalization vs protectionism, that a row would break out over how the post-Trump world will deal with trade.
At stake is the language in the official communique to be released later on Saturday and which is expected to serve as the blueprint for future trade relations, which pressured by Trump may be increasingly transformed from multi-lateral to bilateral.
As Bloomberg reports, at the heart of the disagreement are globalist (and mercantilist) powers such as Germany (and China) defending the existing rules-based system, on the other the U.S. is calling for a recognition that trade must be "fair" without however explicitly stating what that means. Chinese Finance Minister Xiao Jie said in a Saturday statement that the G-20 should be “adamantly against” protectionism. According to reports, China has been the most insistent on a commitment to the current system that the World Trade Organization represents, which is understandable: together with such exporting powerhouses as Germany and South Korea, China has the most to lose from a dramatic overhaul of the status quo.
Yet while many had expected difference to emerge, the degree of immediate animosity and disagreement caught most by surprise. According to Bloomberg, negotiations were bogged down on Saturday with the U.S. rejecting the latest German compromise on wording over trade. Meanwhile, an earlier German suggestion that accommodated some U.S. concerns was rejected by delegations including France, the U.K., Italy, Brazil and the European Union.
The standoff is over how to deal with trade pledges from previous G-20 meetings, such as a commitment to “resist all forms of protectionism,” Bloomberg's sources reported. The surprisingly bitter impasse reflects the atmosphere the previous day at the White House, where U.S. President Donald Trump met German Chancellor Angela Merkel and repeated his complaints that his country has been treated “very, very unfairly” in trade arrangements.
Meanwhile, the French who are likewise facing a bitter presidential election and where the topic of protectionism is at the top of political issues, are desperate to avoid giving in to US demands to unwind multilateral trade as Marine Le Pen would promptly seize on the weakness and demand similar terms for France, ostensibly boosting her approval.
“It’s an administration, the fruit of American democracy, that needs to be respected, but also with a lot of resolve on the French position, which is shared by a lot, if not to say all the members of the G-20 except for this country,” French Finance Minister Michel Sapin told reporters on Friday. “We don’t want a rollback on what was said before by the G-20.”
"We" don't, but Trump does, and therein lies the rub.
Of course, if Trump is successful at overturning years of draft language in G-20 communiques, all those nations reliant on the status quo would be impacted. If Trump sees Germany, with whom the US has a $68 billion trade deficit...
... as having gotten the better of trading arrangements, then China (and South Korea, Taiwan, and many other smaller Asian nations) would also fall into the same category. Its newly found stance as the prime defender of the status quo reflects its economic gains under the rules-based system since it joined the WTO in 2001.
“China has been able to do well based on the multilateral system; it has been able to leverage the gray areas,” said Dominico Lombardi, director of global economy at the Centre for International Governance Innovation in Waterloo, Ontario. “The Trump administration is for a level trading field. In the case of China, there are complaints of subsidies so ‘fair’ trade is what Washington wants to push for.”
* * *
Reflecting just how important the trade relationship between China and the US is, Bloomberg adds that Mnuchin and Xiao held a bilateral meeting in Baden-Baden on Saturday, a G-20 official said. While Trump started his presidency by shooting down regional trade deals and floating measures such as a border tax, his Chinese counterpart Xi Jinping laid out his position at the World Economic Forum in Davos this year when he said protectionism was like “locking oneself in a dark room.” That his sentiment is shared by many in Baden-Baden was shown when delegations knocked back a proposal by Germany to compromise by referring to “fairness, openness and inclusiveness” in trade: terms demanded by Trump and whose inclusion would suggest admission of creeping change to the status quo.
“We’ve been having these G-20 summits for quite some time and there is an appropriate wording there” on trade, Turkish Deputy Prime Minister Mehmet Simsek said in Bloomberg Television interview on Saturday. “Openness to trade is key. There is no evidence that trade is destroying jobs.”
Yet while most nations remain adamant in not conceding to any changes to the G-20 draft, Germany is - perhaps surprisingly - the nation most willing to concedde and accommodate some U.S. concerns to keep it involved in the multilateral process, rather than to isolate and antagonize the delegation, giving the Trump administration an excuse to turn its back.
That approach, of course, assumes that Trump would be content with a modest diplomatic concession instead of a shortgun transformation to global trade overnight, which is dubious at best. For his part, Mnuchin stressed that trade is only fair if it’s balanced, and although he argued that the U.S. is unfairly treated, he didn’t elaborate on what that meant in detail, a G-20 official told Bloomberg.
Finance ministers and central bankers aren’t usually the key officials for trade talks, but their statements normally reflect a consensus. This time, if they can’t agree, the topic could be pushed to a leaders’ summit in July, France's Sapin said.
Needless to say, such an acrimonous end to the weekend's summit would likely result in a surge in FX volatility when markets open for trading late on Sunday, reflecting the new state of global trade flux, in which the future of the US Dollar is completely unknown, and reflecting the emerging chaos over the future parameters of trade.
Which is why in the summit's last hours, delegates are making a last ditch scramble to reach an agreement before they head out of the German spa town. Japan, whose Prime Minister Shinzo Abe has been keen to foster relations with the Trump administration, has joined Merkel in pushing for a compromise language, and isn’t opposed to mentioning fairness. Likewise, Canada's Finance Minister William Morneau referred to “fair trade” in a Frankfurt speech one day before the G-20. Canada, like Japan, may be tempted to avoid conflict as it prepares for potential NAFTA talks, while also carrying on exploratory talks with China and pushing for ratification of its EU trade deal. That said, Morneau is pushing for pro-trade language in the final communique, a Canadian government official said on Friday, adding that the inclusion of such a reference is more important than the precise wording.
The nations who will be most vocal in their opposition to inclusion of the "fair" language are those whose net trde surplus with the US is measured in double digit % of GDP terms as they stand to lose the most.
* * *
And speaking of Sunday's FX open, Bloomberg also notes that among the other language in the communique under review is a pledge to refrain from currency manipulation, which however is expected to remain unchanged from last year. Little time is being devoted to global banking regulations, with major developments not expected. In a move that is set to infuriate environmentalists, the whole section on climate change is set to be dropped.
In any case, the focus remains trade: “The U.S. has been pushing a more protectionist agenda - the high uncertainty at the moment is what that will exactly look like,” said Torsten Slok, chief international economist at Deutsche Bank in New York. “It makes sense that in this case the Chinese, who benefit from a rules-based trade system, are trying to preserve it. We just don’t have any firm ideas about what the alternative will be.”