What China said the G-20 projected at the Shanghai meeting.
Facing “depressed market demand” and plunging global cross-border investment, the trade ministers of the G-20 countries along with folks from the IMF, the Organization for Economic Cooperation and Development, and the World Trade Organization, among others, met in Shanghai this weekend to hash out a plan.
As at all these meetings, they reached an agreement, of sorts. The G-20 countries account for about 85% of global trade and 70% of global investment, so they matter.
During the briefings on Sunday, everyone had their own version of what had been achieved, if anything. The Office of the US Trade Representative announced that the G-20 had reached an agreement “on a package of outcomes covering WTO multilateral and plurilateral trade agreements and negotiations, investment, and cooperation on global value chains.”
US Trade Representative Michael Froman “hailed the results as a good example of G-20 leadership and shared goals in promoting global trade growth and public support for trade.” That sort of thing.
Then there was the issue of “global excess capacity in key sectors, such as steel,” he said in the statement. This has been a sticking point between the US and China:
“On excess capacity, the G-20 took an important step in the right direction by recognizing that excess capacity is a global issue. Building on recent U.S.-China bilateral commitments, the G-20 has added to the chorus of voices calling for tackling the root causes of excess capacity for the benefit of both developing and developed countries.”
Excess capacity is of course the very result of harebrained monetary policies all around, and government subsidies in China and elsewhere. Cheap money and endless stimulus create the illusion of future demand, and businesses, fired up with cheap debt, start building capacity to meet this future demand that then never materializes. Hence overcapacity. It eventually destroys capital, banks, prices, and often entire industries, along with millions of jobs. So the first place to start addressing overcapacity would be central banks.
“Structural problems, including excess capacity in some industries, exacerbated by a weak global economic recovery and depressed market demand, have caused a negative impact on trade and workers,” the G-20 statement said, according to Bloomberg. Subsidies and other support from government “can cause market distortions.”
No mention of the root cause: central bank policies.
But the Chinese version was different. It wasn’t fretting about excess capacity. It was fretting about global demand, global trade, and investment. Chinese Commerce Minister Gao Hucheng at a news conference after the meeting:
“Global economic recovery remains sluggish, trade growth is lingering at a low level and investment flow has yet to recover to pre-crisis levels.”
It was all about global demand: “G20 countries should lead the way in tackling problems facing the world economy and reviving engines for global growth,” he said.
So maybe more stimulus and even lower interest rates? He didn’t say.
But Gao gave some insights into what was really discussed: he said the trade ministers at the meeting projected that cross-border investment would plunge by 10% to 15%!
Every economy counts on foreign investment as part of its growth model, some economies more so than others, and a global plunge of up to 15% of cross-border investment is what these folks were seeing and fretting about. Not a word about that in the US version.
So Gao said that the G-20 representatives pledged to increase their efforts to facilitate trade and urged other WTO member nations to do the same to revive global trade.
China’s Vice Commerce Minister Wang Shouwen too worried about trade. He said at the news conference after the meeting that the Brexit vote would hit global trade in the short term, and so there would be a G-20 workshop to study its impact. But he defended China in terms of overcapacity: his country is already cutting millions of tons of excess steel capacity, he said, while other countries are still just discussing how to do so.
If these trade ministers are right in their gloomy projections that global cross-border investments will plunge by 10% to 15% this year, on top of the already “sluggish” – as Gao had put it – global economic recovery and languishing global trade, then this will not bode well for the global economy.
Is this the gloomy scenario the “smart money” is betting on? Read… Fear, Loathing & Record Money-Making in Government Bonds