G-20 Talks Drag as U.S. Runs Into Resistance on Trade Language

(Bloomberg) -- Group of 20 finance chiefs remained at odds as they met in Germany, with China leading a defense of the existing rules-based system and the U.S. calling for a recognition that trade must be fair.

Chinese Finance Minister Xiao Jie said in a statement on Saturday that the G-20 should be “adamantly against” protectionism. That reflects talks in Baden-Baden that started Friday over a planned communique by the world’s biggest economies, where officials with knowledge of the matter say China has been the most insistent on a commitment to the current system that the World Trade Organization represents.

Negotiations were bogged down on Saturday with the U.S. rejecting the latest German compromise on wording over trade, according to people familiar with the matter, asking not to be identified as the talks are private. An earlier German suggestion that accommodated some U.S. concerns was rejected by delegations including France, the U.K., Italy, Brazil and the European Union.

The standoff is over how to deal with trade pledges from previous G-20 meetings, such as a commitment to “resist all forms of protectionism,” people familiar with the negotiations said.

Trump Words

Readings so far suggest that the U.S. delegation under Treasury Secretary Steven Mnuchin is engaged in the process, despite being sent by a young administration that has criticized multilateralism and which is still building its policy agenda. Even so, the impasse reflects the atmosphere the previous day at the White House, where U.S. President Donald Trump met German Chancellor Angela Merkel and repeated his complaints that his country has been treated “very, very unfairly” in trade arrangements.

“It’s an administration, the fruit of American democracy, that needs to be respected, but also with a lot of resolve on the French position, which is shared by a lot, if not to say all the members of the G-20 except for this country,” French Finance Minister Michel Sapin told reporters on Friday. “We don’t want a rollback on what was said before by the G-20.”

If Trump sees Germany -- which has a $68 billion trade surplus with the U.S. -- as having gotten the better of trading arrangements, China falls into the same category. Its newly found stance as the prime defender of the status quo reflects its economic gains under the rules-based system since it joined the WTO in 2001.

U.S. officials have criticized that setup, with the director of the National Trade Council, Peter Navarro, saying China’s accession was to blame for much of a 15-year American slowdown.

“China has been able to do well based on the multilateral system; it has been able to leverage the gray areas,” said Dominico Lombardi, director of global economy at the Centre for International Governance Innovation in Waterloo, Ontario. “The Trump administration is for a level trading field. In the case of China, there are complaints of subsidies so ‘fair’ trade is what Washington wants to push for.”

‘Dark Room’

Mnuchin and Xiao held a bilateral meeting in Baden-Baden on Saturday, a G-20 official said.

While Trump started his presidency by shooting down regional trade deals and floating measures such as a border tax, his Chinese counterpart Xi Jinping laid out his position at the World Economic Forum in Davos this year when he said protectionism was like “locking oneself in a dark room.”

That his sentiment is shared by many in Baden-Baden was shown when delegations knocked back a proposal by Germany, which holds the rotating G-20 presidency this year, to compromise by referring to “fairness, openness and inclusiveness” in trade.

“We’ve been having these G-20 summits for quite some time and there is an appropriate wording there” on trade, Turkish Deputy Prime Minister Mehmet Simsek said in Bloomberg Television interview on Saturday. “Openness to trade is key. There is no evidence that trade is destroying jobs.”

‘Some Sensitivities’

Germany’s intent was to accommodate some U.S. concerns to keep it involved in the multilateral process, rather than to isolate and antagonize the delegation, giving the Trump administration an excuse to turn its back, people familiar with the matter said.

“It’s about the right way to formulate the openness of world trade in the communique,” German Finance Minister Wolfgang Schaeuble said at a briefing with reporters on Friday. “There are some sensitivities here.”

For his part, Mnuchin stressed that trade is only fair if it’s balanced, and although he argued that the U.S. is unfairly treated, he didn’t elaborate on what that meant in detail, according to a G-20 official familiar with the discussions.

Finance ministers and central bankers aren’t usually the key officials for trade talks, but their statements normally reflect a consensus. This time, if they can’t agree, the topic could be pushed to a leaders’ summit in July, Sapin said.

Washington Meeting

That could play in China’s favor. In a phone call on Thursday, German Chancellor Angela Merkel and Xi reaffirmed their common support for free trade and open markets.

In the meantime, delegates are making a final push to reach an agreement before they head out of the German spa town.

Japan, whose Prime Minister Shinzo Abe has been keen to foster relations with the Trump administration, isn’t opposed to mentioning fairness, according to a G-20 official who asked not to be named.

Canadian Finance Minister William Morneau referred to “fair trade” in a Frankfurt speech one day before the G-20. Canada may be tempted to avoid conflict as it prepares for potential North American Free Trade Agreement talks, while also carrying on exploratory talks with China and pushing for ratification of its EU trade deal.

Morneau is pushing for pro-trade language in the final communique, a Canadian government official said on Friday, adding that the inclusion of such a reference is more important than the precise wording.

Protectionism Line

Other language in the communique is also under review. A pledge to refrain from currency manipulation is expected to remain largely unchanged from last year, one G-20 official said. Little time is being devoted to global banking regulations, with major developments not expected, and a whole section on climate change is set to be dropped. But the focus remains trade.

“The U.S. has been pushing a more protectionist agenda -- the high uncertainty at the moment is what that will exactly look like,” said Torsten Slok, chief international economist at Deutsche Bank in New York. “It makes sense that in this case the Chinese, who benefit from a rules-based trade system, are trying to preserve it. We just don’t have any firm ideas about what the alternative will be.”

--With assistance from Michael McKee Matthew Miller Alessandro Speciale Saleha Mohsin Josh Wingrove Alexander Weber Raymond Colitt Catherine Bosley Olga Tanas Svenja O'Donnell Birgit Jennen and Xiaoqing Pi

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net, Toru Fujioka in Tokyo at tfujioka1@bloomberg.net, Weixin Zha in Frankfurt at wzha2@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Richard Bravo