The Hangzhou G20 Summit: The Ambiguous Gap between Aspiration & Action

By Scott Kennedy —

The G20 leaders gather for a group photo in Hangzhou, China on September 4, 2016. Source: Wikimedia, used under a creative commons license.

The G20 leaders gather for a group photo in Hangzhou, China on September 4, 2016. Source: Wikimedia, used under a creative commons license.

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

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

A1: Although the G20 is widely recognized as “the premier forum for international economic cooperation,” 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 at least 27 countries, the European Union, and seven international economic organizations all in attendance, making the event feel closer to a general assembly meant to be broadly representative rather than a small grouping meant to deliver results.

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

Several areas of potential progress stand 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 biggest disappointments of the summit?

A2: The area of least progress was on cutting overcapacity, a symptom of extensive distortions and a major obstacle to renewed faster growth. Reports suggest that China 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 statements earlier this year by the G20 finance and trade ministers. But China was able to explicitly avoid being blamed for the imbalance in supply and demand in the final communique: “We recognize that excess capacity in steel and other industries is a global issue which requires collective responses.” This lets China maintain its view that the problem is caused, or at least exacerbated, by insufficient demand elsewhere. The G20 agreed to create a “Global Forum,” facilitated by the Organization for Economic Cooperation and Development, to carry 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, and it is hard to imagine this effort achieving more.

The second (and related) area that ought to raise skepticism, or even hackles, is the pledge against protectionism: “We reiterate our opposition to protectionism on trade and investment in all its forms.” That blanket statement affirms an admirable norm, but it is divorced from reality given the extent of trade and investment barriers that every G20 member maintains, the collapse of the Doha Round, and the rise of regional preferential arrangements that expand openness for some but necessarily reduce it for others. Moreover, the WTO condones limited steps toward protectionism as legitimate for reasons of public health, environment, national security, and to protect domestic industry from sudden external shocks. Grand claims are less effective than more pragmatic and feasible statements. In this vein, it is highly welcomed that the G20 leaders offered strong endorsements for the WTO’s Trade Facilitation Agreement and Environmental Goods Agreement.

Q3: What does China’s hosting of the G20 say about China’s place in global economic governance?

A3: In the span of less than two decades China has gone from being a rule taker to a rule maker. China originally was a passive observer, then turned its focus on integrating into the existing system according to the current rules and norms. Recently, it has pursued having a greater voice and influencing the evolution of 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 and other advanced economies of trying to contain China or limit its international influence, the United States, Europe, and other advanced economies encouraged the expansion of the G20’s role in 2009 and welcomed China’s role as host this past year. There were plenty of areas of disagreement, but the world’s leading economies actively engaged with China at every step of the way.

China did invite several developing countries 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 a country that benefits immensely from the existing global order yet seeks incremental changes that would allow it to continue to carry out industrial policy, carefully calibrate the degree of openness of its economy, and promote stability of the international financial system.

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

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

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

A4: This was the eighth meeting between Presidents Obama and Xi, and certainly the United States has focused on expanding the depth, breadth, and frequency of engagement as a way to foster cooperation where possible, while limiting the potential damage of various areas of conflict (such as the South China Sea, cyber, and North Korea) to the rest of the relationship.

The bilateral meeting outcomes, as reported by the White House, covered much of the same ground as the broader G20 but went further in several areas. The top outcome was the joint announcement that China and the United States both have formally joined the Paris Agreement. The two sides also went more deeply into the issue of China’s overcapacity problem. It was 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 expand domestic consumption. In each area, the two sides affirmed that abiding by market norms and openness was critical to success. The United States was also able to persuade China to state that bankruptcies should be part of the equation of reducing overcapacity, not just mergers and acquisitions and restructuring of SOEs. In addition, China pledged that its technology policies would not be discriminatory or rely on subsidies. Achieving meaningful results in the 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 from President Obama regarding governance of the U.S. economy. The United States pledged to pursue a more “predictable” budget process, to “put governance finances on a sustainable path over the medium term,” and pursue “strong, sustainable, and more balanced growth.” Surprisingly, no mention was made of U.S. interest rate policies. China has sought greater information about how the Federal Reserve sets interest rates, and it clearly would like the United States to take into consideration how raising interest rates would affect China’s economy. It is possible the topic was discussed, but no language could be agreed upon.

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

A5: In a word, no, at least not any time soon. The two sides announced that they have made substantial progress and exchanged “the third revised and significantly improved negative list offers” and would “further intensify the negotiation with a view to concluding a mutually beneficial and high-standard treaty.” That does sound positive, but rumors circulated prior to Hangzhou that the two sides might announce a date by which they would aim to complete negotiations. No time frame was included in the statement.

If the United States is being genuine in saying that nothing short of a high-value agreement that substantially opens up China to greater foreign investment and reduces other barriers is the true standard, then it is hard to see an agreement being achieved soon given China’s heavy dependence on government intervention and the rise in trade and investment 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 Obama administration’s prioritization of the Trans-Pacific Partnership (TPP) means that anything that might weaken support for TPP will be kept on the back burner for the time being. And it is hard to imagine that Donald Trump or Hillary Clinton 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 could conceivably use the prospect of a BIT to tackle investment problems in China rather than walking away from the negotiations altogether.

Dr. Scott Kennedy is deputy director of the Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy at CSIS. Follow him on twitter @KennedyCSIS. This post first appeared as a CSIS Critical Questions here.

Scott Kennedy

Scott Kennedy

Dr. Scott Kennedy is Deputy Director of the Freeman Chair in China Studies and Director, Program on Chinese Business and Political Economy at CSIS.

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