G-7 Summit Ended without Outcome

Last week, heads of seven largest industrialist countries had gathered in France to attend the G-7 summit, drawing much attention from the global leaders. US President Donald Trump attended the summit with his priority agenda of a massive US trade deficit so that he could directly discuss it with his counterparts there. In fact, there was scope for discussion about global imbalances, which are considered the result of the huge US current account deficit with corresponding surpluses of China and, to some extent, the European Union (EU) countries and Japan. Deficits and surpluses in global trade and commerce are very common phenomena. However, enormous trade imbalances may pose severe threats to the global economy.

As reported in the media, the managing director of the International Monetary Fund (IMF) has said in one panel discussion that we have been concerned about excessive imbalances in global trade. According to the IMF, deficits and surpluses reached 3.7% of global GDP last year after falling steadily since around the time of the global financial crisis. Before that, trade imbalances have varied between 1% and 3% of global GDP. While expressing concern over global trade imbalances, the IMF referred to some previous economic volatility resultant from rising trade imbalances. The current account deficit is blamed for resulting in economic crises that swept over Latin America in the early 1980s, East and Southeast Asia in the late 1990s, the USA in 2007-09 and Europe in 2009. However, the present world’s trade imbalance is viewed with a different perspective by the experts, as annual deficits are narrower than what they were 15 years ago, and these are more persistent and more entrenched in the domestic economy.

The USA is the only country in the world with the highest deficits, which have already surpassed $1.1 trillion. No other country is near to the USA in terms of trade deficit. Because of this enormous trade deficit, President Trump has been trying to use higher tariffs as an economic instrument to reduce the pressure of high trade imbalance, which has not worked out but rather has backfired in many cases. Regarding applying higher tariffs, the IMF opines that tariffs are a form of “microeconomic” industrial policy whose impact on the current account is very minimal because of offsetting movements in investments, consumption, savings and exchange rates. The main factor that immensely contributes to the excessive trade imbalance of the US is significant budget deficits, which sustain excessive US spending and inadequate savings. The USA is not, however, solely held responsible for such a massive trade deficit; what is also responsible is the cumulative adverse impact of other countries' surpluses, including China, whose surplus is enormous and the largest in the world.

The G7 summit has unanimously conceded that a persistently rising trade imbalance is a global problem and, as such, needs to be resolved. The member countries have also discussed the probable solution towards reducing global trade imbalance. French President Emmanuel Macron stressed the need for coordination and has said, “Without coordination, these imbalances risk unwinding in a disorderly manner." Another solution was also discussed as a model on the Plaza Accord of 1985, under which the G-5 (initial group members) countries had agreed to allow depreciating dollars sharply against Germany’s Deutsche Mark and Japan's yen. As a result, imbalances started improving from the following year. This solution came in the discussion because today’s dollar is considered overvalued in many measures, while China’s “yuan” is considered undervalued. Many experts have opined that the unusually over- and undervalued currencies of the two largest economies are the root cause of the massive trade imbalance in the global economy.

Probable solutions as discussed in the summit seem good but are found impractical because China is not part of the G-7. The USA always blames these problems on others, particularly China, which never thinks of changing its policy because it thinks the fiscal measures are working well. The IMF, which is officially responsible for reducing the global trade imbalance and maintaining trade stabilisation, has no instrument to effectively work in this area. 

The summit had discussed the global trade imbalances, identified the problems and talked about probable solutions but failed to reach consensus on action. While there was no decision on resolving the trade imbalance, the focus shifted to artificial intelligence (AI) because an unexpected incident occurred with the US administration’s ban on foreign access to two Anthropic AI models. Following the ban imposed by the US administration, the company shut off access to their two models for all foreign users last week, which has created serious concern among the US partners, particularly the major EU members. 

As media reported, the US administration’s ban on Anthropic models has raised concern among industry executives and foreign countries, who opined that unilateral action by the US administration could dictate who can use leading AI models. In this connection France's president, Macron, has said that the US made a strong decision that reflects growing awareness that AI can be dangerous. He reportedly said, “The bad thing is that the reaction is, in a way, strictly nationalist”, adding that “democracies need to cooperate on these issues”. He also said, “We won’t buy any models made by these companies if, overnight, you can just flip the switch.” Macron’s open remark on the sudden ban on foreign users’ access to Anthropic models reveals how furious the member states of the G-7 have been. Focus in the G7 summit shifted from global trade imbalance to AI conflict, which also ended without any amicable solutions. So, this time the G-7 summit was not only held in silent mode but also concluded without any tangible outcome.