The disparity can be explained by the fact that G7 infighting will have only a narrow impact on growth, especially compared to factors like monetary policy.
To say that this month’s summit of G7 leaders in Canada was an unusual one would be an understatement. A traditionally friendly and predictable gathering of like-minded countries was marred by finger-pointing and disagreement, resulting in an inability to achieve consensus on a final communiqué. But, while political analysts were quick to declare the end of the G7’s coherence, integrity, and usefulness, markets were unfazed. In fact, the longer-term outcome may well prove markets right, albeit with some important qualifications.
Participants at the G7 summit reportedly clashed over issues like climate change and the possibility of readmitting Russia. But, the highly publicised discord was fuelled mainly by disagreements over the effects of trade among the members. Those disagreements—amplified by persistent differences on basic facts—impeded progress in other areas where greater consensus might have been possible, including Iran, some other Middle-East issues, North Korea, migration, and refugee relief.
Representatives of the United States accused the other G7 members of “unfair trade practices,” which they claim have disproportionately harmed the US economy and its workers. The rest of the G7—all traditional US allies—confronted president Donald Trump with data that they hoped would prove that trade had been highly beneficial to all countries.
But, the US held firm to its stance. Without concessions from its trading partners, including more reciprocity, the US, its government representatives unequivocally declared, would implement new tariffs on imports from Canada, the European Union, and Japan.
This approach marks a sharp departure from the past, and another shock to the establishment and expert opinion. While some tweaks to trade relations are needed, in the past, such changes would have been pursued in an orderly and cooperative fashion—not under constant and growing tariff pressure. Instead, the major economies of the geopolitical West seem set to engage in a tit-for-tat tariff dispute that could escalate into a full-blown trade war harming all of its members.
But, it is not only other Western economies that had the US up in arms. The Trump administration is pressuring China to address intellectual-property theft and to reduce non-tariff barriers (such as joint-venture requirements). Here, all other G7 members agree that America’s grievances are legitimate, and that they are being harmed as well.
Yet, given conflict over intra-G7 trade, the group was unable to unite on a comprehensive and coordinated response to China. The summit was followed by an escalation of the trade dispute between China and the US, compounding the uncertainty now jeopardising a synchronised growth pickup that, owing to insufficient policy reforms, is already running out of steam in many countries other than the US.
The failed G7 summit dealt a very public blow to a once-powerful grouping that had already been challenged by global economic re-alignment, the emergence of the more representative G20, and new forms of regionalism. So, it is perhaps not surprising that some political scientists have declared the end of the G7. Yet, when markets opened on Monday morning, they were utterly unaffected by the weekend’s developments; for them, the G7 summit had essentially been a non-event.
On one level, this disparity can be explained by the fact that G7 infighting will have only a small and narrow impact on growth, especially compared to factors like monetary policy. More fundamentally, markets have been conditioned to postpone significant price adjustments until there is overwhelming evidence of negative economic and financial effects.
In recent years, markets have faced an unusually large (and expanding) set of unconventional political statements and manoeuvres. But, for the most part, the rhetoric has not been translated into reality, and what actions have been taken proved largely inconsequential for economic activity and asset prices.
That was true of Trump’s rhetorical sparring match last year with North Korean leader Kim Jong-un, which some political analysts predicted would lead to armed conflict. It was also the case with rising Russian revanchism, which some viewed as a precursor to a disruptive new cold war, and the electoral success of Eurosceptic and populist parties in the European Union, which some declared would lead to the EU’s dissolution.
For markets, waiting for strong evidence of an economic impact, rather than reacting to every statement or event, has proved profitable. That is likely to be the right approach for the G7 summit, too—and not just because the body’s impact on global outcomes has diminished in recent years. Given the large number of long-standing economic, financial, institutional, political, and social links among the G7’s members—all of which act as stabilisers—this month’s summit may well be followed by a more congenial and constructive one.
The G7 has not been dealt a fatal blow; it still can and will play a role on the global stage—albeit a less important one. But, that does not mean that the debacle in Canada will be cost-free. G7 members lost a valuable opportunity to develop common positions on issues about which they could agree, and the rest of the world was shown more evidence that the global system’s long-standing core-periphery relations are no longer reliably buttressed by unity among established economic and financial powers. At a time of considerable political and social fluidity, destabilising the remaining anchors represents a risk to the system as a whole.
The author is Chief economic adviser at Allianz, former chairman of US president Barack Obama’s Global Development Council
Copyright: Project Syndicate, 2018