G-20 Gives Markets a Short-Term Win
(Bloomberg Opinion) -- The G-20 Summit in Argentina ended without fireworks involving the U.S., which was appropriate in a way, given the pall cast by the death of President George H.W. Bush.
The U.S. went along with a watered-down communique rather than stand in the way of a consensus, as it recently did at the APEC summit and the G-7. And rather than ending the meeting with a dramatic breakthrough or a loud breakdown, America reached an agreement to freeze trade tariffs with China that went somewhat beyond the one it reached with the Europe Union in July. Both deals require steadfast and detailed follow-through if the gains are to prove more than just temporary.
The expectations for the G-20 summit were muted, with a balance of risk tilted to the downside.
There were few prospects for an action-oriented, cooperative approach for dealing effectively with the mounting list of challenges, including threats to global political stability (Ukraine and Syria), social cohesion (refugee flows), high and inclusive growth, and financial well-being, as well as the danger presented by the growing weaponization of economic instruments. And there were fears that past differences of views among the main G-20 members -- particularly on trade, climate and rule-based multilateralism and related institutions -- could even preclude a concluding statement.
After lengthy negotiations, an agreement was reached on a 31-paragraph communique that covers a comprehensive list of topics. But it also was quite watered down when it came to substance, details and ambition. The diluted, compromise language was particularly evident in the sections on international trade, the functioning of the global system and multilateral institutions, and migration and climate change. Many topics weren't mentioned, such as fighting protectionism and unfair trading practices, an omission that also reflected efforts to get each of China, Europe and the U.S. to sign on.
Expectations for another, more eagerly anticipated event at the G-20 -- the bilateral meeting between Presidents Donald Trump and Xi Jinping -- involved a decidedly more two-sided distribution of potential outcomes.
Few anticipated that the meeting would simply leave as is the recent war of attrition involving the slow and steady escalation of actual and threatened tariffs. Among the possibilities: relations could deteriorate into the real and present danger of a devastating global trade war or the U.S. and China could reach a breakthrough deal resembling those the Trump Administration has signed with South Korea, Mexico, and Canada recently.
For the economic reasons discussed here, the most likely outcome was in the middle of that range: a cease-fire with a pathway to a more decisive de-escalation of tensions – or, to use a recent historical parallel, an agreement similar to the one that followed the White House visit of EU President Jean-Claude Juncker in July. And that is what materialized, with the important addition of a three-month deadline for progress.
At the end of almost three hours of what the White House called “highly successful” discussions, the U.S. agreed to refrain for 90 days from implementing additional tariffs on $200 billion of imports from China. In return, China promised to use the time to make progress in three areas of concern to the U.S. and other countries: relaxing an array of nontariff barriers, including joint-venture requirements, that result in forced transfers of technology, operational models and other proprietary information and business practices; combatting intellectual property theft and other cyber interferences; and reducing the bilateral trade surplus by importing “very substantial” quantities of certain goods from the U.S.
This outcome is a short-term win for both sides, as well as the global economy:
China avoids additional tariffs that would further undermine its growth prospects and place even greater pressure on its financial markets. The U.S. defines a time-specific way forward to counter practices that place it at a competitive disadvantage in its bilateral economic relationship with China. And the world economy is in a better place, for now, to avoid a stagflationary trade war.
It is also a short-term win for investors and markets:
The talks didn't break down, which would have pulled the rug out from under from already weakening and more divergent global growth. Instead, the significantly less threatening immediate outlook for corporate revenues and profitability is likely to lead to a relief rally in risk assets when trading resumes on Monday.
Still, the jury is out on whether these short-term wins will convert to longer-term gains. A successful outcome would require cooperative follow-through by both countries, and within a three-month deadline that withstands potentially destabilizing pressures from domestic politics in both countries. Adding to the uncertainty, this process doesn’t rest on the common front and values that have historically joined the EU and U.S., as weakened as these have become.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. His books include “The Only Game in Town” and “When Markets Collide.”
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