What can we realistically expect from the G20?

US President George W Bush called the first crisis-related Heads of Government meeting in November 2008. The current incarnation of the G20 is entitled, therefore, to celebrate its second birthday at the forthcoming summit in Seoul. Over the past month, however, concerns have been raised about the health of this infant. Alternatively, parents may recognise the phrase ‘the terrible two’s” suggesting a more vibrant, if not necessarily easygoing, way ahead. What then should analysts realistically expect of the G20?

This column argues that much can be learned about the future of the G20 from its recent travails. The US decision to elevate discussions over global imbalances and currency matters to the G20 has been particularly instructive – not least for what it reveals about agenda-setting within the G20 and the capacity of any state to impose their will on their G20 partners.

Without this US intervention, the Seoul summit would have been a far duller affair, with G20 Leaders taking credit for the Basel III banking accords (pressure from them may well have gotten central bankers to move faster than their usual glacial pace), more warmed up rhetoric about completing the Doha Round, and throwing a few bones to those uninvited developing countries in the area of trade, aid, and development policy.

Don't go overboard in the criticism – or the praise

It is far too soon to write the obituary of the G20, as some observers appear to have done in the past few weeks. For sure, there is plenty to be cynical about. Having conducted careful monitoring of government policies that discriminate against foreign commercial policies during the crisis – in short, protectionism – the G20 governments have often failed to live up to their moratorium on beggar-thy-neighbour measures. The Eighth Global Trade Report, published on this site (Evenett 2010), reveals that over 430 protectionist measures have been taken by G20 governments since the November 2008 summit. Once measures likely to be protectionist are included, the total breaches the 500 threshold. Furthermore, for those hoping that the spotlight might constrain governments, our website summarises many of the harmful measures that Korea has sought to get away with – even though it is chairing this year's summit.

Yet just because the G20 doesn't appear to be suited to making and sticking to transparent policy commitments doesn't mean that, overall, it is useless. The trap to avoid here is the logic ”if-it-isn't-nailed-down-in-precise-legalese-it-won't-work.” This apparent logic hasn't stopped governments during the crisis from routinely circumventing clear obligations at the WTO and, quite probably, in the case of bailouts (subsidies) and stimulus packages (government procurement in WTO parlance) outright violations of existing international trade law. In severe systemic economic crises we should expect governments to throw the international rule book out of the window and take whatever actions they think are expedient. (This is not a recommendation for expediency, rather a recognition that often what one wants isn't what one gets.)

Defenders of the G20 have gone too far as well. No doubt some credit can be claimed for the G20 for helping to stabilise financial markets' nerves during late 2008 and early 2009. The appearance of close policy cooperation was successfully manufactured, even if the reality was something else. As to the reality, after two years defenders will be hard pressed to point to a single area of substantive policymaking where cooperation between the entire G20 membership was decisive. If there were such examples they would surely have been leaked to the press long ago. Still, market psychology being fickle, whatever works is what counts – and media reports at the time pointed to G20 success in this regard.

Another argument being put forward is that the crisis-related G20 brought in the heads of government of emerging markets for the first time, effectively displacing the G7 as a decision-making body on economic matters. Emerging market leaders no doubt wanted recognition of their countries' growing status. Meanwhile, industrialised countries implied that the burden sharing and adjustments brought upon by the crisis would be better shared across the backs of more rather than fewer governments. One might well counter that the former development was inevitable, crisis or otherwise. Moreover as to the latter, in the light of recent G20 discussions on imbalances, surely industrialised country governments are more than little disappointed?

It may be ironic but the fact that the governments of the large emerging markets can threaten not to attend G20 meetings may well focus minds and prompt those attending to deliver more than rhetoric. Much was made of the recent decision by Brazil not to attend the pre-Seoul summit meeting of Finance Ministers and Central Bankers. In contrast, much less was made of the fact that the Governor of the Bank of England sent a deputy. Keeping the emerging market governments on board no doubt provides those governments with some more negotiating chips, but it also enforces a relevance requirement on the G20. Overall, then, the threat of "exit" is one mechanism to focus minds (not least of the government chairing a G20 summit), reducing the chance that the G20 slips into G7-like farce and irrelevance.

Lessons from the G20 deliberations over current-account imbalances

Although one can question the amount of attention the US Administration has given to the Chinese exchange-rate regime, it is to the Administration's credit that it has taken the steam out of certain brazenly protectionist measures proposed by some in the US Congress. Part of the Administration's strategy has involved bilateral contacts with the Chinese. The latter being seen as fruitless in Washington DC circles, the Administration sought in the third quarter of 2010 to elevate the matter to the G20 grouping. Moreover, rather than focus on the nature of the exchange-rate regime, the Administration focused on the need to narrow current-account imbalances, of both surplus and deficit nations.

Now there is a lot we can say about the feasibility and desirability of adopting international “targets” for current-account imbalances. Moreover, there is much we could say about US tactics in this regard. One example is the choice of a 4% threshold of national income for abnormal current-account imbalances and the initial desire to ”isolate” the Chinese in the hope of encouraging Beijing to make concessions. Here, however, the focus will be on what can be learned about the G20's modus operandi and its potential as a vehicle for advancing international economic cooperation.

The recent episode clearly demonstrates that a large G20 member can even   relatively late in the day introduce a new, substantial topic on to the G20's agenda. Hosts of future G20 meetings need to bear this in mind, as they will not completely control the agenda-setting process. The same episode also demonstrates that the largest G20 country cannot railroad new items through, in particular when G20 members from both the emerging countries and the industrialised nations join in opposition. Given the exit option mentioned earlier, the most vulnerable G20 countries to a last minute push would appear to be the medium-sized industrialised countries in relative decline.

It is also difficult to identify areas of international economic policymaking where a single large G20 country could be effectively marginalised. For example, Germany enjoys large current-account surpluses, just like China. The UK as well as some EU states have jurisdictions that some view as tax havens, as does China (Hong Kong and Macao in the latter case.) The "rare earth" metals dispute, where China is almost the monopoly supplier, is the only example that comes to mind of an issue that pits one G20 country against the rest. The almost inevitable differences in initial position on most international economic policy matters protects against a bulldozer approach.

Developments since the pre-G20 summit meeting of finance ministers and central bankers, however, introduce another relevant dimension. At first consultations between Chinese and US officials, and statements by both, suggested that an accommodation of sorts was possible. Apparently this understanding meant that the governments concerned would take progressive steps to limit current-account imbalances, not according to some fixed targets or timetable. Later the senior Chinese G20 sherpa was reported as pouring cold water over any accommodation. Recent statement may well include an element of pre-summit posturing and ultimately some accord may be agreed. Still, these developments do raise the intriguing possibility that the G20 can act as a catalyst for informal, no doubt evolving, accommodations between its members.

Formal accords on serious matters are most unlikely. Neither China nor India want to be bound by formal rules that may limit or even modulate their ascent. There are just too many uncertainties that can't be taken account of when binding accords are written. Nor can the US complain too loudly, after all its legislators have time and again proved to be reluctant to take on binding international obligations. One can view this as the US reaping what it has sowed. My preferred explanation is that most large nations – and most definitely hegemons – have at best an instrumental view to international law and treaties. What they can't control, they don't feel bound by. If this is the case, then the era of grand treaty making of the kind that culminated in the agreements to create the World Trade Organization. is over.

Of course, even if an informal accommodation were reached, it is not clear it will be held to. After all, there must be some doubt that the US Administration could bring the US Congress along to take measures that narrow the US federal deficit, which is one of the contributing factors to the large US current-account deficit. The Chinese undoubtedly know this and for sure be following the implications of the US mid-term elections for the likelihood of cooperation between Congress and the Obama Administration on budgetary and international trade matters. Moreover, any perceived foot dragging by the Chinese will be used by some in Washington to renege on any informal accommodation that is established. There are many other reasons why informal accommodations might unravel.

Another feature of such accommodations is that they will have to evolve over time. As circumstances change, the best one can expect from the G20 are a series of accommodations, with occasional ruptures as one moves from accommodation to accommodation. This may give the impression of a sequence of fixes that "keeps the show on the road." For those who like their international relations clean and tidy, this is not going to be a happy time. With little serious interest in negotiating formal accords – witness the climate change negotiations and the Doha Round of multilateral trade negotiations – then evolving, mutual accommodation is the most viable alternative to anarchy and the law of the jungle.[1]

What next for the G20?

What can be expected of the G20 beyond its confidence-building role during the crisis? Perhaps less than many would like. For one, G20 leaders can provide an impetus behind technical negotiations in specific areas of regulation (like the Basel III accords) that technocrats would take an eon to complete. Second, the G20 could become the forum where senior ministers and Heads of Government develop evolving, informal accommodations on substantial matters of mutual interest. Translating those accommodations into formal accords is most unlikely. The most we can hope for is a mechanism that rubs down the sharper edges of international economic discord, allowing accommodations of different national priorities over time. If anything, the recent G20 deliberations over current-account imbalances bear out this trajectory for future international economic diplomacy.

Perhaps the biggest implications of this analysis are what to expect from the forthcoming French chairmanship of the G20. President Sarkozy has laid out an ambitious agenda for the G20, including international monetary reform. It is hard to think of a reform project less suited to the G20's established modus operandi.[2] There is no doubt that French diplomacy will be tenacious – the recent consultations in Paris between Mr. Sarkozy and his Chinese counterpart no doubt touched on plans for the G20. Yet the conflicting interests between the G20 countries over matters where there are literally trillions of dollars at stake guards against any dramatic changes. Either ambition proves for once infectious or, for the next year, following G20 summit preparations will be like opening a Russian doll, with each step representing a paring down of grander ideas into the smaller and smaller fry.

References

Evenett, Simon J (2010), “The state of protectionism on the eve of the Seoul G20 summit”, VoxEU.org, 8 November.

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