G-20 Communique Removes Pledge To Refrain From Competitive Devaluation

Update: the final communique is out, and it has been endorsed by Steven Mnuchin and the US delegation. Notably, below we show the redline comparison of the first paragraphs in the March and July communiques, with the pledge not to engage in devaluation notably missing:

"We will refrain from competitive devaluations, and will not target our exchange rates for competitive purposes."

And instead has been replaced with the following:

We reaffirm our exchange rate commitments made in March.

Here are the key differences.


The global currency war just got an official blessing.

While this weekend's G-20 meeting in Argentina will not be a repeat of the diplomatic calamity that was Canada's recent G-7 meeting, which concluded in disarray after Trump refused to endorse the joint statement, with US Treasury Steven Mnuchin expected to sign the final communique, a key omission in the final draft may have far greater consequences for the world than the theatrical Quebec fiasco, because as Bloomberg reports, pledges made by G-20 member nations in their March statement to refrain from competitive devaluations were removed from the draft statement.

Canadian Finance Minister Bill Morneau told Bloomberg that the issue - arguably the single most important economic development in the context of the ongoing trade and currency war between the US and China - didn’t come up on Saturday, which effectively greenlights further devaluations in the coming weeks and months as countries respond to the threat of global slowdown as a result of rising tariffs.

And speaking of the economy, the draft Group of 20 statement notes that "global economic growth is less synchronized and faces increasing threats, including from trade tensions" adding that "downside risks over the short and medium term have increased." A final version of the statement will be published later on Sunday.

Other economic risks cited include "rising financial vulnerabilities, heightened trade and geopolitical tensions, global imbalances, inequality" which is also a change from the G-20's March statement which didn’t exclusively mention trade tensions.

The IMF also warned that the recent wave of trade tariffs would significantly harm global growth.

IMF Managing Director Christine Lagarde presented the G20 finance ministers and central bank governors meeting in Buenos Aires with a report warning that existing trade restrictions would reduce global output by 0.5 percent.

In the briefing note prepared for G20 ministers, the IMF said global economic growth may peak at 3.9 percent in 2018 and 2019, while downside risks have increased due to the growing trade conflict.

The G20 draft statement also warns on the threat to EMs as a result of the rising dollar, noting that while emerging markets are better prepared, they still face market volatility and possible capital outflows.

Ahead of the Argentine G-20 round, President Trump had raised the prospects of an "intense debate" on Friday with his tweets on trade and currency that accused the European Union and China of weakening their currencies to obtain trade benefits; and now that devaluation is not explicitly singled out, world leaders may see it as an endorsement to follow Trump in pressuring monetary authorities to pursue an easier monetary policy which takes the world back to "square one" in beggar thy neighbor policies. 

Curiously, Trump's trade policies received a tacit endorsement from Australian Treasurer Scott Morrison, who said Trump had an unconventional but understandable approach to push for free trade.

"There are some grievances that have been around for a decade, Morrison said in an interview with Bloomberg News at the G-20 summit. "There is legitimate frustration about the failure of the system to resolve the issues that concern the U.S. and others."

Separately, Reuters reported that the US sought "to woo Europe and Japan with free trade deals on Saturday to gain leverage in an escalating tariff war with China but its overtures faced stiff resistance from France at a G20 finance ministers meeting dominated by trade tensions."

Treasury Secretary Steven Mnuchin told reporters at the gathering of the financial leaders of the world’s 20 largest economies in Buenos Aires that he was renewing President Donald Trump’s proposal that G7 allies drop trade barriers between them.

“If Europe believes in free trade, we’re ready to sign a free trade agreement,” Mnuchin said, adding that such a deal would require the elimination of tariffs, non-tariff barriers and subsidies. “It has to be all three issues.”

Europe, however, did not, and French Finance Minister Bruno Le Maire said the European Union would not consider launching trade talks with the United States unless Trump first withdraws the steel and aluminum tariffs and stands down on a car tariff threat.

Repeating a phrase uttered previously by Macron, Le Maire told reporters on the G-20 sidelines that "we refuse to negotiate with a gun to our head."

And while it is too soon to call for a collapse of the existing global order, the sense that increasingly more nations are taking their fate - both fiscal and monetary - in their own hands with little regard for how it will impact the rest, will be reinforced by today's G-20 communique, whether the US ends up signing it or not.