Deal or no deal? Risks of deepening trade war loom at G20 talks

Osaka, Japan – They represent most of humanity, and as leaders of the Group of 20 nations gather in Japan for their annual summit on Friday and Saturday, rarely have the economic stakes been higher for them and their people.

The trade war between the United States and China, rising tensions between the US and Iran that could threaten global oil supplies, and strained diplomatic ties between Saudi Arabia and Turkey could all surface during the summit in the southern city of Osaka.

But many analysts say trade will dominate the talks.

One of the most highly anticipated events of the summit will happen on its sidelines – a meeting between US President Donald Trump and Chinese President Xi Jinping.

“The US-China trade war will be the defining issue of the forthcoming G20 Summit in Osaka,” Simone Tagliapietra, research fellow at Bruegel, a Brussels-based economic think-tank told Al Jazeera. “The Japanese presidency seeks to steer the world’s most powerful economies away from confrontation, but only the scheduled meeting between President Trump and President Xi Jinping will provide more clarity on what’s next for the global trading system,” he said.

Trade talks between the two sides stalled last month after Trump and his negotiators accused China of going back on promises to make structural economic changes. The US wants China to stop forcing foreign companies to transfer technology in key areas such as artificial intelligence and telecommunications. It also wants it to curb subsidies to state-owned firms and grant foreign companies better access to Chinese markets.

Meanwhile, China accused the US of “naked economic terrorism” and “bullying” after the talks broke down.

Trump more than doubled import tariffs on $200bn worth of Chinese goods to 25 percent in May. He has also threatened to impose tariffs on another $325bn of goods, covering nearly all the remaining Chinese imports into the US, including consumer products such as mobile phones, computers and clothing.

Beijing retaliated with increased tariffs on $60bn worth of US goods, and state media have raised the possibility that China could start holding back exports of so-called rare earth elements, crucial for a variety of electronic components.

‘Absolutely possible’

There’s been plenty of jockeying by both sides in the run-up to the Trump-Xi meeting.

Chinese Vice Commerce Minister Wang Shouwen said on Monday that China and the US should be willing to make compromises in the trade talks and not insist only on what each side wants.

And on Wednesday, Trump said it is “absolutely possible” that he and Xi will emerge from their meeting with a deal. But he added, “I’m also very happy where we are now”. He reiterated his threat to impose additional tariffs if the two leaders fail to make progress.

Also caught up in the dispute is Chinese telecommunications giant Huawei. The US has barred American firms from selling it key components, saying it’s a threat to US national security.

The G20 is an international leaders’ forum consisting of 19 countries and the European Union. Collectively, this grouping represents more than 80 percent of the world’s economic output and two-thirds of its people. Its primary aim is to promote international financial stability, something which appears to be in short supply at the moment.

Several high-profile economists have warned of the risks to the global economy if the trade war drags on or escalates.

In April, the International Monetary Fund’s (IMF) Managing Director Christine Lagarde said the world’s economy was at a “delicate moment” and added: “Global growth has been slowing, largely because of rising trade tensions and financial tightening in the second half of 2018.”

And earlier this month, the IMF said current and threatened US-China tariffs could cut 2020 global gross domestic product (GDP) by 0.5 percent, or about $455bn – a loss larger than G20 member South Africa’s annual economic output.

Others say the potential impact could be even higher. The Organisation for Economic Cooperation and Development estimates a 0.6 percent drop in global GDP over two to three years if the trade wars continue. It called for “urgent cooperative action” and described the state of the world’s economy as “fragile.”

But as the summit kicks off, it’s hard to see either side heeding that call.

“The G20 meeting in Osaka struggles to align widely differing interests. Meaningful agreements are therefore unlikely,” Martin Schulz, a senior research fellow at the Fujitsu Research Institute, told Al Jazeera.

Trade war impact

But just how “delicate” or “fragile” is the world economy? The existing trade barriers appear to be having noticeable effects even before any further escalation.

The US economy added 75,000 new jobs in May. That was below analysts’ forecasts, lower than the 100,000 needed to absorb new entrants into the job market, and far smaller than the 185,000 new hires in April.

“The lack of meaningful jobs growth in manufacturing, and lower-than-average wage growth in manufacturing, gives another indication that Trump’s trade war is hurting workers and the economy,” Seth Harris, a distinguished scholar at Cornell University’s School of Industrial and Labor Relations and former acting Secretary of Labor under former President Barack Obama, told Al Jazeera.

In China and across Asia, factory activity is slowing down. China’s official Purchasing Managers’ Index (PMI) for May came in at 49.2, below the 50 mark that separates growth from contraction. 

Similar guages in Japan, South Korea, Malaysia and Taiwan also showed a slowdown in manufacturing, a key driver of economic activity and jobs in the region.

Though PMI figures are regarded as anecdotal evidence of the state of a country’s economy, hard data pointing to a slowdown is now starting to emerge.

Singapore’s annual economic growth rate slipped to its lowest in nearly a decade in the first quarter of this year. The Southeast Asian country has one of the most trade-dependent economies in the world. According to the World Bank, Singapore’s exports amounted to more than 173 percent of its GDP in 2017, behind only Luxembourg and Hong Kong.

High energy

Meanwhile, other risks to the health of emerging economies are also mounting.

Tensions between the US and Iran have been on the rise since May 2018 when Trump pulled the US out of an international deal with Tehran giving it economic incentives to shut down its nuclear programme.

Crude oil prices surged last week after Iran shot down a US military drone. That followed attacks in recent weeks on oil tankers in the Strait of Hormuz, a crucial choke point for global oil shipments. And ratcheting up the stakes even further, Trump imposed sanctions on Iran’s Supreme Leader Ali Khamanei and other top officials on Monday.

Iranian Foreign Minister Mohammad Javad Zarif has publicly accused senior US officials, such as National Security Advisor John Bolton, of harbouring a “thirst for war.”

The price of a barrel of Brent crude has risen more than 23 percent since the start of the year for a variety of reasons including, most recently, worries that a shooting war between Iran and the US could reduce global oil supplies.

That price increase is putting pressure on several economies that are highly dependent on oil imports, including G20 member India. The rise in its fuel bill is happening as it tries to deal with chronic joblessness. Its unemploymentrate hit a 45-year high last year, and the government’s large budget deficit is hampering its ability to stimulate the economy.

And India is facing its own trade dispute with the US.

In a tweet on Thursday, Trump said Indian tariffs on US products including walnuts were “unacceptable.” Earlier this month, India imposed higher retaliatory tariffs on 28 US goods such as walnuts, almonds and apples. That was in retaliation for Trump’s move to scrap trade privileges under the Generalized System of Preferences (GSP) for India, the biggest beneficiary of a scheme that allowed duty-free exports of up to $5.6bn a year. Trump said he’s looking forward to meeting Indian Prime Minister Narendra Modi at the summit.

Another G20 member country facing problems with higher oil prices is Turkey. It has grown closer to Iran and Russia – and further away from the West – in recent years as its energy demand has risen. Lacking significant hydrocarbon reserves, Turkey gets more than 90 percent of its energy needs from abroad, spending $43bn on energy imports last year.

So an expected bilateral meeting between Trump and Turkish President Recep Tayyip Erdogan will also be keenly watched for progress over disagreements between them, especially Turkey’s decision to base Russian-made missiles on its soil.

And Turkey’s big regional rival, Saudi Arabia, is also expected to be in Osaka, represented by Crown Prince Mohammed bin Salman. Relations between the two countries have been strained since the murder of Saudi journalist Jamal Khashoggi in Saudi Arabia’s consulate in Istanbul last year.

The Japanese government is nevertheless expected to do all that it can to make the summit a success, pushing a number of issues where progress might indeed be made, such as establishing an international framework for the reduction of marine plastic litter.