As the G20 Summit wraps up today in Hangzhou, China, we turn our thoughts to the challenges facing global trade in the year ahead.
We know for a fact that there will be repercussions resulting from these talks. What these consequences will be, however, is unclear. And it won’t be any clearer for a time yet.
The reason for this is that we only have a vague idea as to what actually goes on behind closed doors at these summits. This partly explains why any non-broad based bilateral decisions will only become clearer in hindsight. Yet it is these decisions that will play a far bigger role in shaping the future of global trade.
Of course, the ‘front’ the G20 Summit presents in public tends to follow a similar pattern every year. Typically, there’s a show of goodwill and solidarity among members and their delegates in meeting the challenges facing the global economy. There are promises to maintain and build on strong global trade links, often laced with calls for more integration.
But all this public-fronted hoopla is just that…a front. Backroom deals will matter far more than any unilateral resolve to address concerns over the future of global trade. Yet the public won’t be privy to these matters, not least because they would make a farce of a summit which is supposed to be all-inclusive.
So we have little insight into what discussions are taking place, and what conclusions are being drawn from them.
Nonetheless, the summit has arrived at a critical juncture for both international trade and the global economy. Not only is growth stalling, especially in the developed world, but there is fear that trade protectionism and isolationism are starting to take root across the world.
These accusations were levied by Prime Minister Malcolm Turnbull in the direction of the US and the EU. Turnbull is against both protectionism and isolationism, as he believes such policies hinder global growth.
Mr Turnbull isn’t wrong. He has good reason for believing that, not least because of what such a development would mean for Australia.
International trade, and unfettered access to it, is paramount to national wealth and prosperity.
As a relatively limited naval force, Australia cannot ensure the safety of its own sea lanes. In other words, it needs the protection of bigger trading partners to partake in global trade.
For as long as any of us can remember, Australia’s guarantor has been the US. As the world’s premier naval sea power, the US has safeguarded Australia’s access to international trade since the end of the Second World War.
Yet there are now fears the US is at the start of a gradual ‘retreat’ from its role as guarantor of international trade. A withdrawal that, in time, could prove incredibly disruptive for the entire world, threatening global security in turn.
For instance, such a scenario would give rise to more regional-based trade links. And it would likely hasten the return to a more traditional, 19th-century based global order, where trade primarily took place between empires and their colonies. In today’s world, that would most likely come in the form of a re-emergence in trade based on cultural ties.
Such a development would be quite an about turn on the oft-criticised TTIP and TPP agreements that have been in the offing for some time. These mega deals free trade blocs, however, also have elements of isolationism about them. Only that, in both cases, it’s not so much a retreat from a particular nation, but a means to isolate other major economies, namely China, from new trading blocs.
You could, then, think of such deals in the same terms as economic warfare. But protectionism, too, is akin to economic warfare in a world that relies and depends on open trade.
As Mr Turnbull rightly identifies, a breakdown in the existing global order would lead to a kind of poverty — especially in Australia, which benefits from the status quo.
As Mr Turnbull warned, ‘Protectionism, trying to turn back the clock of economic reform, that is the road to poverty. It would be a mistake of historic proportions for the G20 to stand by while scare campaigns not based on facts or evidence foster protectionism, or indeed isolationism.’
Yet while Mr Turnbull understands the threats protectionism poses to Australia’s immediate and long term prosperity, the bigger issue is that it would lead to a rupture in the global order. Such a rift would be a recipe for broader, and bloodier, conflict.
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An Australia-Britain free trade deal on the cards?
Before the G20 Summit wraps up today, Mr Turnbull will meet with Britain’s new Prime Minister, Theresa May. As the ABC reports:
‘Ahead of his first meeting with Ms May, Mr Turnbull said he was keen for Australia to clinch Britain’s first post-EU trade deal, and would raise the prospect when he met Ms May.
‘While G20 leaders meeting in Hangzhou have expressed concerns about the economic fallout of the UK’s decision to leave the EU, Mr Turnbull said he saw it as an opportunity.
‘He said Australia could be well placed to clinch the first trade deal once the UK formally leaves.’
The potential of a free trade deal with Britain provides a glimpse into the potential future of global trade, where cultural ties once again take on greater importance.
But it’s a road that Australia will find difficult to traverse, as its inevitable integration into Asia continues apace.
Australia, then, walks a fine line in trying to balance its ties to traditional partners, while integrating with its immediate neighbourhood in Asia.
We’ve seen this recently in the case of the Ausgrid tender, which intentionally left China out of the bidding process.
While it’s inevitable that Sino-Australian relations will become more one-sided in the future, at present there are limits to what Australia is willing to accept — not least because it has US interests to consider. And as the guarantor of Australia’s security, that’s no small consideration.
Whatever reasons the Australian government had in blocking Chinese bidders from sales of Australian infrastructure, the decision has clearly rankled authorities in the Middle Kingdom.
At the G20 Summit, Chinese President Xi Jinping urged Australia to take a fairer and more predictable approach to investment. The Chinese clearly view the Ausgrid decision as one motivated by political — not economic — reasons.
Regardless of how valid Australia’s fears are over the Ausgrid sale, it suggests a certain level of caution against the expansion of Chinese influence in Australia. Will that concern Mr Turnbull’s government? Not at all.
Australia’s ties with China are strengthening, as evidenced by the free trade deal signed earlier this year.
Not only that, but China understands that Australia’s ties to the US put it in a difficult spot.
Yet if China is to realise its ambition of dominating the Asia-Pacific region, it is in its interests to build up extensive investment portfolios in Australia. Judging by the response to the Ausgrid tender, China will hope that such decisions don’t become commonplace.
Where to from here?
The problem for Australia is that, in a future where both isolationism and protectionism prevail, it will have to make some difficult choices. There will be no one size fits all policy that will govern global trade, as we’ve become accustomed to. It’ll be every nation for itself.
As we’re already seeing, Australia will find itself in a tug of war between competing powers. Managing these relations will become trickier if the existing order falls apart. But the outcome for Australia from such a development is unclear. Where once cultural ties bound nations of similarity across the globe, tomorrow economic realities may push Australia into China’s sphere of influence. Or they may not.
Either way, if China extends its naval power well into Southeast Asia and the Pacific — a highly probable scenario during this century — it would spell trouble for Australia’s access to sea lanes and trade. (Unless Australia falls in line with China’s foreign policy demands, that is.)
So Mr Turnbull is correct in believing that a breakdown of the existing order is dangerous. It will, in no uncertain terms, damage Australia’s long-held position as a beneficiary of the existing system.
Time will tell just what the implications of this year’s G20 Summit will be. The front being served to the public is one of commonality and determination to steady the ship. But the rumours of creeping isolationism could very well be true. Where there’s smoke, there’s fire… Were it to become a billowing cloud of smoke, it would suggest that the 70-year old global economic order, founded on principles of free trade, could give way to both protectionism and isolationism.
Should the US ever shirk from the role it plays in global trade, as the rumours suggest, it would not only be bad news for Australia. It would also be the biggest risk to global security since the Cold War.
Contributor, Markets and Money
PS: A breakdown in the international trade order could be the catalyst that ignites the next great crisis of our time.
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Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the next crisis is already in motion.
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