The Trade Numerologist: Why the G7 Can’t Save Global Trade
In 1975, with oil prices spiking and the US rocking from the shock of Watergate, the world's six biggest industrialized democracies met in a chateau near Paris. In the midst of the Cold War, the clubby gathering was a way for the Washington-led Western bloc - the "Free World", they liked to call it -- to strategize about steering the global economy, which they dominated.
France, Germany, the US, Japan, the UK, and Italy agreed to meet once a year. When Canada joined in 1976, the group became the G7. The group's annual meetings focus on coordinating economic policies, international security and energy. (The European Union has sent representatives to G7 gatherings since 1981, as a "nonenumerated" member.)
That was then. As last month's contentious G7 summit in rural Quebec demonstrated, that sense of shared purpose has been weakened, in large part by the protectionist worries about free trade that helped Donald Trump get elected.
Mr. Trump feuded with Canadian prime minister Justin Trudeau and refused to sign the meeting's final communiqué, which called for "free, fair and mutually beneficial trade", and on the need to combat protectionism. "We strive to reduce tariff barriers, non-tariff barriers and subsidies," their statement said.
Instead, Mr. Trump called Mr. Trudeau "very dishonest & weak." Amid his complaints about trade barriers imposed by other countries, Mr. Trump raised the possibility of getting rid of tariffs entirely for G7 members, effectively turning the club into a free-trade bloc.
Such a deal appears unrealistic. The World Trade Organization has been stuck in overseeing a new global trade treaty since the collapse of the Doha Round in 2008, crippled, incidentally, by conflicts between the G7 and China,
Countries protect selected markets - like automotive, steel and food - for strategic, cultural and economic reasons, many of them valid.
And even if such a G7 free trade deal is passed, it's unlikely to make much of a dent in the US trade deficit, which has increased every year for five consecutive years, and is due in large part to China.
US trade deficits
- 2013: $689.5 billion
- 2014: $734.5 billion
- 2015: $745.5 billion
- 2016: $736.6 billion
- 2017: $795.7 billion
A recent paper by the OECD found that reducing tariffs charged by G20 countries to zero on a basket of goods would increase US export by over 2%. That amounts to a $30 billion jump in US exports. Reversing the US trade deficit is going to require stronger medicine than that.
The problem is that the G7 simply doesn't have the clout it used to. Total gross domestic product of G7 member states constitutes almost half the global economy, down from around 75% when it was founded. Six of the G7 countries are among the top ten exporting countries, but the first, fourth, fifth and sixth top exporting countries are not. Canada is the world's 11th biggest exporter. Russia is ranked 14th.
Top exporters, 2017 (*G7 members)
- China $2.3 trillion
- US* $1.5 trillion
- Germany* $1.45 trillion
- Japan* $698.3 billion
- Netherlands $652.5 billion
- South Korea $573.7 billion
- Hong Kong $550.3 billion
- France* $535.2 billion
- Italy* 506.5 billion
- UK* $443.9 billion
The G7 would appear to be on fragile ground. It's not a formal institution like the UN, EU or NATO. The presidency rotates among members, who set the agenda they desire.
In an article in Foreign Affairs in 2011, economist Nouriel Roubini wrote that "we are now living in a G-Zero world, one in which no single country or bloc of countries has the political and economic leverage-or the will-to drive a truly international agenda."
It looks like the more unwieldy, but more important, G20 could supersede the G7. The G20, which first met in 2008 after the financial crisis exploded, includes China, Brazil, India, Mexico and South Korea. President Obama called it the "premier forum" for coordinating economic policy.
Mr. Trump also called for Russia to be admitted to the club. After the fall of the Berlin wall in 1989, Russia was regularly invited to parallel talks. Moscow was formally admitted in1998, and remained in the so-called G8 until 2013, when it withdrew over conflicts surrounding its annexation of Crimea. "We believe it is essential to demonstrate to the Russian leadership that it must stop its support for the separatists in eastern Ukraine," a statement said at the time.
The integration of Russia that many hoped for after the fall of the Soviet Union hasn't happened. Only four of Russia's top ten trading partners are in the G7.
Russia's top ten total trading partners 2017 (*G7 members)
- China $87 billion
- Germany* $49.8 billion
- Netherlands $39.5 billion
- Belarus $30.7 billion
- Italy* $23.9 billion
- US* $23.2 billion
- Turkey $22.1 billion
- South Korea $19.2 billion
- Japan* $18.2 billion
- Kazakhstan $17.5 billion
But Russia's membership is controversial not only because of its lack of economic engagement and Ukraine. The club is meant to be reserved for democracies. That's why China is not a member.
How to regulate a global trading economy not led by democracies is one of this century's biggest challenges - and a good question for next year's G7.
The Trade Numerologist is the IHS Markit unique weekly look at global trade by award-winning journalist John W. Miller, formerly of the Wall Street Journal, using proprietary numbers from the IHS Markit Global Trade Atlas database, the world's most complete and accurate set of trade numbers.
What topic would you like the Trade Numerologist to cover? Email email@example.com with comments and questions.
- The Trade Numerologist: Early Impacts of US-China Trade War
- The Trade Numerologist: Trade and the Mexican Election
- The Trade Numerologist: Lessons from US-China trade war
- The Trade Numerologist: Canadian Firms At Risk In US Trade Spat
- The Trade Numerologist: US escalates trade disputes with allies
- Is global meat trade overdone?
- EU Faces Tough Decisions On Iran Trade
- The Trade Numerologist: The South Korean Miracle
Population growth, less arable land, and sustainability driving demand for controlled-release fertilizers. China a… https://t.co/UyZcz0nUEZ
Our Second Quarter and Year-to-Date 2018 Financial Performance saw broad-based organic revenue growth across… https://t.co/KyAhvE2AvL