Why the G7 matters

TRADE FINANCE, Macro and Markets

Why the G7 matters

September 2019

With the UK no closer to reaching a deal in the run-up to leaving the European Union at the end of October 2019, trade economist Rebecca Harding notes that while G7 members discuss trade tensions and the wildfires of the Amazon in France, the ability to talk a common language when cooperation is need more than ever remains elusive

The G7 has historically been a gathering of like-minded leaders from allied countries who gather together to agree violently about the importance of economic growth and globalisation. Until 2018, the summits were barely newsworthy in themselves and served principally to reinforce the commitment of the largest capitalist economies in the world to globalisation and free trade. However, by the time they gathered in Biarritz at the end of August 2019, the discussions had become anything but routine.

 

Populism and economic nationalism

According to Coriolis Technologies data, the G7 economies between them accounted for just under 40% of world exports in 2018 which compares to over 45% in 2007 just before the Global Financial Crisis.1 The reason why the proportion has fallen is, of course, because of China whose share of world exports over the same time period has grown from 14% to nearly 20%. In theory, at least, this should not present a challenge to the G7. The past 30 years have been characterised by free flowing capital, labour, ideas and technologies with the result that South Korea and China have also benefited from the growth that previously had been the preserve of the more advanced nations. The multilateralism that went with globalisation should have ensured that the interests of the world were aligned around a central and mutually reinforcing belief in the benefits of economic growth and free trade.

This model has become stale. Inequality across the world, but particularly in the developed nations, has triggered populism. With this has come economic nationalism; the 2019 G7 meeting had as its backdrop a trade war between China and the US and Brexit. This sets them directly in conflict with the institutions of the state, or even the institutions of multilateralism that the G7 represents. It is riven apart by trade at present.

Take the UK as an example. The G7 group is important but the US is its largest trading partner with exports that were some US$16bn more than the next largest partner, Germany at more than US$61bn in 2018.2 There has been a decline over the last five years in its exports to the US at an annualised rate of over 1% a year and shrinking export markets are potentially a big incentive for wanting to develop robust trade relations outside of a multilateral framework with its main export partner.

Dr Rebecca Harding

Dr Rebecca Harding

Independent economist | CEO of Coriolis Technologies

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US$477bn

The UK’s goods exports to the world in 2018

This has to be seen in perspective, however. The UK’s goods exports to the world in 2018 were around US$477bn while export trade with the G7 as a whole in 2018 was worth 35% of that, at US$166bn. The US accounts for nearly 13% of all the UK’s exports, but added together, Germany, France and Italy account for just over 19% while the EU as a whole accounts for nearly 43%. Exports to most of the UK’s partners have slowed over the past five years, with Germany (2.7%) and Canada (6%) slowing the most severe decline, although exports to France have grown slightly. Just in terms of size, the EU is more important than the whole of the G7 put together as an export destination.

This serves to illustrate that, at a time when the G7 should be pulling together to support the challenge that all its members face from an ever-more strategic competitive landscape, the G7 members are arguing with themselves. The situation brought about by Brexit is characteristic of this broader malaise: does the UK look to its European partners or to the US for its export markets and the lead on global trade relations? This is no less a challenged faced by the EU: as the US starts to impose tighter restrictions on businesses, and governments, trading with Chinese technology businesses, the choice over which direction to face is just as important for the EU. In this context, Brexit is a sideshow.

 

Waning influence

This time the material differences between the participants were glossed over in a fragile truce. Much as in the past, the Summit concluded with a communique that supported free trade and WTO reform, suggested mild progress on Iran’s nuclear programme and supported diplomatic solutions to the crises in Libya and Ukraine.3 Some US$20m was also offered to Brazil to help with extinguishing the fires in the Amazon. This was dismissed as, to paraphrase, “treating Brazil like a colony.”

This rejection was the most important outcome from the event. The power and influence of the G7 is waning, not because it no longer has hard power. It does. It is waning because China increasingly has the same hard power economically and politically and can leverage it to gain influence. In a world where western consensus is being replaced by bilateralism, any attempt at unity is just putting out fires.

Dr Rebecca Harding is an independent trade economist and CEO of Coriolis Technologies

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Sources

1.www.coriolistechnologies.com
2.www.coriolistechnologies.com
3.https://www.consilium.europa.eu/en/meetings/international-summit/2019/08/24-26/

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