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The Hangzhou G20 Summit: The AmbiguousGap Between Aspiration and Action
2017-03-11 17:01

The Hangzhou G20 Summit: The AmbiguousGap Between Aspiration and Action

 

Scott Kennedy

Deputy Director, Freeman Chair in ChinaStudies, and Director, Project on Chinese Business and Political Economy

 

China hosted the 11th G20 leadership summiton September 4–5, 2016, in the city of Hangzhou, about 110 miles southwest ofShanghai. The meeting brought together the regular G20 members, plus the headsof seven international organizations and several developing countries invitedespecially for this year’s event. In addition, there were a large number ofbilateral meetings, including between U.S. president Barack Obama and Chinesepresident Xi Jinping, on the sidelines of the summit.

Q1: What were the biggest areas ofsuccess of the summit?

A1: Althoughthe G20 is widely recognized as “the premier forum for international economiccooperation,” there was no obvious single signature success in Hangzhou.President Xi Jinping urged the G20 to shift from being a talk shop to an“action team.” China certainly did expand the “team,” with leaders from atleast 27 countries, the European Union, and seven international economicorganizations all in attendance, making the event feel closer to a generalassembly meant to be broadly representative rather than a small grouping meantto deliver results.

To the extent the G20 took action, onMonday night it produced an extremely long communique(48 paragraphs totaling over 7,100 words) and an annex listing 37 additionaldocuments that had been agreed upon by the participants (but not yet publiclyavailable). No single decision stands out; instead, we have dozens ofincremental steps adopted on a wide range of issues. In some instances, such anapproach just serves as empty filler when nothing serious can be accomplished;in others, it is just this kind of seemingly tedious, technical detail that iscritical for ensuring the long-term health of the global economy. Time willtell which kind of meeting Hangzhou really was.

Several areas of potential progressstand out.

  1. The G20 attempted to “forge a     comprehensive and integrated narrative for strong, sustainable, balanced     and inclusive growth.” It called on countries to utilize structural,     monetary, and fiscal measures, individually and jointly, to generate     greater growth. They adopted a “New Industrial Revolution Action Plan” and     stressed the importance of creating a new wave of technology innovation to     undergird future growth.

  2. Climate change: The United States and     China announced that they have formally joined the Paris Agreement and     used their example to encourage others to follow suit. To date 26     countries accounting for 39 percent of global carbon emissions have     joined; the magic number is 55 percent for the agreement to come into     force. No other G20 members have yet to ratify     the accord, but several said they expect to do so soon. (India has     said it is unlikely to complete this task in 2016.) The G20 also proposed     strengthening green financing (such as through local green bonds),     fostering renewable energy, and expanding conservation initiatives.

  3. A series of recommendations were made on     how to strengthen the global financial architecture by, among things,     promoting sound prudential regulation of banks and other financial     institutions, appropriately managing sovereign debt, limiting wide     fluctuations in exchange rates, and reducing volatility in capital flows.     Most of the actual steps in this area will be taken by individual     countries, as well as the Financial Stability Board, the Bank for     International Settlements, and the International Monetary Fund.

  4. The G20 leaders adopted “Guiding     Principles for Global Investment Policymaking.” With nothing like the     World Trade Organization (WTO) for ensuring fair treatment of foreign     investment, the G20 is trying to establish some baseline principles about     how countries should treat inward direct and portfolio investment. Based     on the draft text agreed upon in the summer by trade ministers, the     language is quite general, but they emphasize providing equal treatment to     foreign investors and limiting the use of security and industrial policy     criteria in investment reviews.

  5. Since the G20 cannot mandate compliance     with agreements, it is increasingly utilizing transparency—requiring     reports on members’ actions—in the hope that the reputational benefits or     costs will generate improved performance. This approach is applied to,     among other areas, efforts to limit protectionism, reduce fossil fuel     subsidies, and clarify tax laws.

Q2: What were the biggestdisappointments of the summit?

A2: The areaof least progress was on cutting overcapacity, a symptom of extensivedistortions and a major obstacle to renewed faster growth. Reports suggest thatChina had hoped to keep discussion of this problem out of the final communique,but that was very unlikely since it had already been discussed in statementsearlier this year by the G20 finance and trade ministers. But China was able toexplicitly avoid being blamed for the imbalance in supply and demand in thefinal communique: “We recognize that excess capacity in steel and otherindustries is a global issue which requires collective responses.” This letsChina maintain its view that the problem is caused, or at least exacerbated, byinsufficient demand elsewhere. The G20 agreed to create a “Global Forum,”facilitated by the Organization for Economic Cooperation and Development, tocarry out discussions on the issue and report back to the G20 next year.Previous similar efforts on steel have gone nowhere but around in circles, andit is hard to imagine this effort achieving more.

The second (and related) area that ought toraise skepticism, or even hackles, is the pledge against protectionism: “Wereiterate our opposition to protectionism on trade and investment in all itsforms.” That blanket statement affirms an admirable norm, but it is divorcedfrom reality given the extent of trade and investment barriers that every G20member maintains, the collapse of the Doha Round, and the rise of regionalpreferential arrangements that expand openness for some but necessarily reduceit for others. Moreover, the WTO condones limited steps toward protectionism aslegitimate for reasons of public health, environment, national security, and toprotect domestic industry from sudden external shocks. Grand claims are lesseffective than more pragmatic and feasible statements. In this vein, it ishighly welcomed that the G20 leaders offered strong endorsements for the WTO’sTrade Facilitation Agreement and Environmental Goods Agreement.

Q3: What does China’s hosting of the G20say about China’s place in global economic governance?

A3: In thespan of less than two decades China has gone from being a rule taker to a rulemaker. China originally was a passive observer, then turned its focus onintegrating into the existing system according to the current rules and norms.Recently, it has pursued having a greater voice and influencing the evolutionof the international system. If WTO entry in 2001 was China’s first communion,hosting the G20 in 2016 was its confirmation.

Although some accuse the United States andother advanced economies of trying to contain China or limit its internationalinfluence, the United States, Europe, and other advanced economies encouragedthe expansion of the G20’s role in 2009 and welcomed China’s role as host thispast year. There were plenty of areas of disagreement, but the world’s leadingeconomies actively engaged with China at every step of the way.

China did invite several developingcountries to attend and put development more front and center on the agenda,but China’s substantive positions are not those of the global “South” but of acountry that benefits immensely from the existing global order yet seeksincremental changes that would allow it to continue to carry out industrialpolicy, carefully calibrate the degree of openness of its economy, and promotestability of the international financial system.

The United States, too, has also adopted areformist stance, but it is more focused on extending global governance to newareas largely uncovered by existing arrangements, including the digital economy,competition policy, investment, and state-owned enterprises (SOEs). Animportant story going forward will be to watch how these two different visionsof reform coincide and conflict in the coming years.

Another important and related narrativewill be the story of compliance. Even as China becomes more of a rule maker, itis still widely perceived as a rule breaker when the existing rules do not suitits interests. Excessively limiting market access to foreign products andinvestors, explicit and implicit subsidies for domestic national champions,misusing competition policy, setting distinctive technology standards, andpressure on foreign investors to share technology are just some of the concernsthat many of China’s trading partners still have. Noncompliance and gaming thesystem may undercut China’s effort to provide global leadership. In sum, theworld’s eyes and ears will be on China to see if it not only can “talk thetalk” of being a rule maker but also “walk the walk” of being a fair player whoabides by the rules.

Q4: What was most newsworthy about theU.S.-China bilateral meeting?

A4: This wasthe eighth meeting between Presidents Obama and Xi, and certainly the UnitedStates has focused on expanding the depth, breadth, and frequency of engagementas a way to foster cooperation where possible, while limiting the potentialdamage of various areas of conflict (such as the South China Sea, cyber, andNorth Korea) to the rest of the relationship.

The bilateral meeting outcomes, as reportedby theWhite House, covered much of the same ground as the broader G20 but wentfurther in several areas. The top outcome was the joint announcement that Chinaand the United States both have formally joined the Paris Agreement. The twosides also went more deeply into the issue of China’s overcapacity problem. Itwas placed in the context of China’s effort to carry out structural reforms;that is, to move up the value-added chain, develop services, and expanddomestic consumption. In each area, the two sides affirmed that abiding bymarket norms and openness was critical to success. The United States was alsoable to persuade China to state that bankruptcies should be part of theequation of reducing overcapacity, not just mergers and acquisitions andrestructuring of SOEs. In addition, China pledged that its technology policieswould not be discriminatory or rely on subsidies. Achieving meaningful results inthe short term in these areas is a long shot, but getting China on the record(again) has some utility over the medium and long term.

China also received commitments fromPresident Obama regarding governance of the U.S. economy. The United Statespledged to pursue a more “predictable” budget process, to “put governancefinances on a sustainable path over the medium term,” and pursue “strong,sustainable, and more balanced growth.” Surprisingly, no mention was made ofU.S. interest rate policies. China has sought greater information about how theFederal Reserve sets interest rates, and it clearly would like the UnitedStates to take into consideration how raising interest rates would affectChina’s economy. It is possible the topic was discussed, but no language couldbe agreed upon.

Q5: Is a U.S.-China Bilateral InvestmentTreaty (BIT) more likely given the progress reported in Hangzhou?

A5: In aword, no, at least not any time soon. The two sides announced that they havemade substantial progress and exchanged “the third revised and significantlyimproved negative list offers” and would “further intensify the negotiationwith a view to concluding a mutually beneficial and high-standard treaty.” Thatdoes sound positive, but rumors circulated prior to Hangzhou that the two sidesmight announce a date by which they would aim to complete negotiations. No timeframe was included in the statement.

If the United States is being genuine insaying that nothing short of a high-value agreement that substantially opens upChina to greater foreign investment and reduces other barriers is the truestandard, then it is hard to see an agreement being achieved soon given China’sheavy dependence on government intervention and the rise in trade andinvestment barriers that U.S. companies have reported over the past few years.And even if the United States and China could reach an agreement, the Obamaadministration’s prioritization of the Trans-Pacific Partnership (TPP) meansthat anything that might weaken support for TPP will be kept on the back burnerfor the time being. And it is hard to imagine that Donald Trump or HillaryClinton would make a U.S.-China BIT a high priority or soften their standards.That said, if Clinton were unencumbered by a pursuit of TPP, she couldconceivably use the prospect of a BIT to tackle investment problems in Chinarather than walking away from the negotiations altogether.

Scott Kennedy is deputy director of theFreeman Chair in China Studies and director of the Project on Chinese Businessand Political Economy at the Center for Strategic and International Studies inWashington, D.C.

Critical Questionsis produced by the Center for Strategic and International Studies(CSIS), a private, tax-exempt institution focusing on international publicpolicy issues. Its research is nonpartisan and nonproprietary. CSIS does nottake specific policy positions. Accordingly, all views, positions, andconclusions expressed in this publication should be understood to be solelythose of the author(s).

 



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