The G20’s Misguided Globalism

HAMBURG – This year’s G20 summit in Hamburg promises to be among the more interesting in recent years. For one thing, US President Donald Trump, who treats multilateralism and international cooperation with cherished disdain, will be attending for the first time.

Trump comes to Hamburg having already walked out of one of the key commitments from last year’s summit – to join the Paris climate agreement “as soon as possible.” And he will not have much enthusiasm for these meetings’ habitual exhortation to foreswear protectionism or provide greater assistance to refugees.

Moreover, the Hamburg summit follows two G20 annual meetings in authoritarian countries – Turkey in 2015 and China in 2016 – where protests could be stifled. This year’s summit promises to be an occasion for raucous street demonstrations, directed against not only Trump, but also Turkey’s Recep Tayyip Erdoğan and Russia’s Vladimir Putin.

The G20 has its origins in two ideas, one relevant and important, the other false and distracting. The relevant and important idea is that developing and emerging market economies such as Brazil, India, Indonesia, South Africa, and China have become too significant to be excluded from discussions about global governance. While the G7 has not been replaced – its last summit was held in May in Sicily – G20 meetings are an occasion to expand and broaden the dialogue.

The G20 was created in 1999, in the wake of the Asian financial crisis. Developed countries initially treated it as an outreach forum, where they would help developing economies raise financial and monetary management to the developed world’s standards. Over time, developing countries found their own voice and have played a larger role in crafting the group’s agenda. In any case, the 2008 global financial crisis emanating from the United States, and the subsequent eurozone debacle, made a mockery of the idea that developed countries had much useful knowledge to impart on these matters.

The second, less useful idea underpinning the G20 is that solving the pressing problems of the world economy requires ever more intense cooperation and coordination at the global level. The analogy frequently invoked is that the world economy is a “global commons”: either all countries do their share to contribute to its upkeep, or they will all suffer the consequences.

This rings true and certainly applies to some areas. Addressing climate change, to take a key problem, does indeed require collective action. Cutting carbon dioxide emissions is a true global public good, because every country, left to its own devices, would rather free ride on others’ cuts while doing very little at home.

Similarly, infectious diseases that travel across borders require global investments in early-warning systems, monitoring, and prevention. Here, too, individual countries have little incentive to contribute to those investments and every incentive for free riding on others’ contributions.

It is a small step from such arguments to consider the G20’s bread-and-butter economic issues – financial stability, macroeconomic management, trade policies, structural reform – in the same vein. But the global-commons logic largely breaks down with such economic problems.

Consider the topic that will be on all G20 leaders’ minds in Hamburg (except for Trump’s, of course): the threat of rising trade protectionism. A new report from Global Trade Alert warns that the G20 has failed to live up to its previous pledges on this issue. So far, Trump’s bark has been worse than his bite on trade. Nonetheless, the report argues, the thousands of protectionist measures that still impede US exports in other countries may well give Trump the excuse he needs to increase barriers of his own.

Yet the failure to maintain open trade policies is not really a failure of global cooperation or a result of insufficient global spirit. It is essentially a failure of domestic policy.

When we economists teach the principle of comparative advantage and the gains from trade, we explain that free trade expands the home country’s economic pie. We trade not to confer benefits on other countries, but to enhance our own citizens’ economic opportunities. Responding to other countries’ protectionism by erecting barriers of our own amounts to shooting ourselves in the foot.

True, trade agreements have not brought benefits to a large number of Americans; many workers and communities have been hurt. But the skewed and unbalanced trade deals that produced these results were not imposed on the US by other countries. They were what powerful US corporate and financial interests – the same ones that support Trump – demanded and managed to obtain. The failure to compensate the losers was not the result of inadequate global cooperation, either; it was a deliberate domestic policy choice.

The same goes for financial regulation, macroeconomic stability or growth-promoting structural reforms. When governments misbehave in these areas, they may produce adverse spillovers for other countries. But it is their own citizens who pay the greatest price. Exhortations at G20 summits will not fix any of these problems. If we want to avoid misguided protectionism, or to benefit from better economic management in general, we need to start by putting our own national houses in order.

Worse still, the knee-jerk globalism that suffuses G20 meetings feeds into the populists’ narrative. It provides justification for Trump and like-minded leaders to deflect attention from their own policies and lay the blame on others. It is because other countries break the rules and take advantage of us, they can say, that our people suffer. Globalism-as-solution is easily transformed into globalism-as-scapegoat.

The reality, as a latter-day Caesar might put it, is that the fault is not in our trade partners, but in ourselves.