Macro and Markets

The Asia-Pacific Economic Cooperation (APEC) Summit, tomorrow and Thursday, will no doubt see its trade and regional integration agenda overshadowed by new global threats. At this week’s Group of Twenty (G20) summit, the economic agenda rightly took a backseat to the horrific attacks in Paris. Leaders reaffirmed their commitment to strong, sustainable, and balanced growth, and endorsed a range of initiatives underway from climate change to tax and financial reform. But few new economic initiatives were announced. A similar outcome is likely in Manila, though trade and investment deserve a central seat on the stage in the name of preserving global growth. On balance, the weight of academic work (e.g., here and here) supports the intuitive judgment that terrorism is a drag on growth, particularly through its effects on trade, investment and tourism. At a time of slowing global activity, this raises the risk of a global downturn that G20 leaders may need to respond quickly to in the future. In this regard, with fiscal positions already stretched or constrained by politics, and interest rates near zero in major economies, there is less scope than in the past for macroeconomic policies to meet new threats. Ambitions in this area have been scaled down. I am pleased that the U.S. government did not default on its debt and eased spending caps slightly last month, but as an example of global fiscal policy coordination the recent bipartisan budget agreement and the very modest fiscal easing likely in Europe seem unlikely to be a breakthrough meaningful enough to reach G20 growth targets. Terrorism also acts as a break on globalization by discouraging flows of workers and new cross-border investment. Increased trade can be a positive offset to these global headwinds, but here too the news is not all good. Trade has slowed sharply since the Great Recession. While macro drivers—growth, the end of a commodity boom, and rebalancing in China—explain much of the decline, it is also the case that increased protectionist measures in the industrial world are part of the problem. At the APEC Summit, President Obama will need to make the case for the recently concluded Trans-Pacific Partnership (TPP). While far from a perfect agreement, TPP is an important step in establishing new rules and opening up trade, particularly in services where there is talk of a new initiative to expand trade in the sector. Passage looks uncertain in the Congress, and in any event may be a year or more away.  Still, the TPP agreement remains a centerpiece of U.S. government efforts to rebalance its economic ties toward Asia and strengthen regional cooperation. Building regional acceptance for TPP as a centerpiece for regional economic relations remains at the center of U.S. strategy in the region. Also on the economic agenda at APEC will be regional coordination of the multilateral financial institutions. While the United States and China appear to have healed wounds opened around the establishment of the Chinese-led Asian Infrastructure Investment Bank (AIIB) earlier this year, there are still questions to be addressed over the coordination of the new institution with the World Bank and Asian regional institutions.  Further, the meetings will reveal more about China’s regional economic aspirations following the domestic economic turmoil this summer.  Beyond that, there are a range of regional challenges that have a significant economic element, including cyber, climate change, maritime and the exploitation of common resources, and illicit financing. Maritime issues will of course hover over the summit, given recent disputes between China and its neighbors in the South China Sea, with the President likely to make the case for unimpeded lawful commerce and robust dispute settlement procedures. In all of these areas, expect serious discussion but little progress. Last week, I wrote that the value of these meetings lies primarily in developing the relationships and mechanisms for leading countries to respond to global crisis, when it occurs.  We may be closer to that moment this week.

The leaders of Group of Twenty (G20) meet this weekend in Antalya, Turkey. The agenda is long, the ambitions are modest, and it is easy to be cynical that the group has outlived its usefulness. Still, the meeting matters in a number of respects: strengthening relationships among leaders of the most important economies, providing momentum to ongoing reform initiatives, and pushing forward work on issues as diverse as climate change and tax avoidance. The most important task for the group though will be preparing for future crises, because it is at those times that G20 leadership is most critical. The G20 will have some satisfaction that serious economic shocks were weathered in 2015. In 2016, when China leads the G20, the story could be different. The headline for this year’s G20 summit is support for robust and inclusive growth, reflecting both frustration with the tepid pace of global activity and a rising global concern with income inequality. The question though is whether there is a collective will to find a solution that goes beyond what these countries are choosing to do already. That would involve countries with fiscal and current account surpluses stimulating demand at a time when deficit countries are tightening their belt.  This is an argument the U.S. government has made for a number of years, presumably aimed at China and Germany in particular. The odds of success on this count always were small, but with China focused on its own economic challenges and Germany (and its European partners) strained by the migration crisis, hope for any meaningful agreement on growth seems even more distant. The reform “deliverables” for the summit are similarly unambitious. The economic agenda includes a focus on expanding infrastructure, strengthening trade (through implementing a trade facilitation agreement stalled after objections from India) and pursuing development goals in low-income countries.  But little is expected to be achieved in these areas at this summit.  As noted by Matthew Goodman and Daniel Remler, the summit should deliver a Base Erosion and Profit Shifting (BEPS) action plan, aimed at curbing tax avoidance by multinational corporations, and the group will give a strong push to the United Nations Climate Change Conference that begins later this month in Paris. Ongoing work on financial sector reform will be endorsed and encouraged.  But, at a time when the agenda of the G20 is becoming overloaded with a rapidly growing wish list of reforms, progress in this area is likely to disappoint all but the most dedicated G20 watchers. These summits, given the presence of world leaders, always provide an opportunity to discuss the political security issue of the moment, and this time is no exception.  Turkey’s President Tayyip Erdogan has signaled that he wants leaders to discuss the crises in Syria and Iraq, and that his government stands ready to take stronger steps in the region to resolve the current crisis. Following on earlier talks in Vienna, and with Turkey struggling to deal with the fallout from the continuing Syria crisis, this issue may well capture the headlines. When Chinese markets came under pressure in August, there was broad concern that we might be on the verge of a global crisis.  Those concerns have receded, based on signs of temporary stability in China and a belief that emerging markets are better prepared than in the past to weather a shock.  I am not so sure, and in any event the question for policymakers this week is how to respond to a crisis that begins in the emerging markets. In my monthly, I argue that we are not as well prepared as we need to be. If a crisis does emerge, the G20 will be looked to lead again, as they did in 2008-09.  From this perspective, the value of this week’s summit is in strengthening the relationships between leaders that will allow for a prompt and efficient response should the downside risks materialize.