China is leading a stiff defense of the existing system of global trade at Group of 20 talks, pushing back against U.S. demands to move away from multilateral agreements.

In meetings in Germany on Friday to discuss the G-20 communique -- a kind of mission statement for the global economy -- Chinese officials were the most insistent on a commitment to the rules-based system that the World Trade Organization represents, said officials with knowledge of the discussions. The people asked not to be named as the discussions aren’t public. A spokesman for the Chinese delegation couldn’t be reached for comment.

Readings so far from Baden-Baden highlight two things. 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; and China continues to position itself as a newly declared defender of the global trading system under the WTO.

“This is the room to have those discussions,” Robert Kimmitt, a former deputy U.S. Treasury secretary under George W. Bush, said on Bloomberg Television. “I think it will be a communique that provides assurances to the markets because, at the end of the day, the U.S. succeeds only as part of a successful global economy.”

Fair Trade

By Friday evening, delegates were trying to rescue the pledges on trade from previous G-20 meetings, and the effort to include commitment to “resist all forms of protectionism” was ongoing in the face of U.S. resistance, according to people familiar with the discussions. That debate will continue late Friday and into Saturday in an effort to find agreement before the end of the meeting, the people said.

China’s focus on the status quo reflects the nation’s 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 that China’s accession was to blame for much of a 15-year American slowdown. They want the G-20 to pledge that trade will be fair and equitable.

 “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.”

Mnuchin and Chinese Finance Minister Xiao Jie are due to hold a bilateral meeting in Baden-Baden, one of the G-20 officials said.

‘Dark Room’

While Donald Trump started his U.S. presidency by shooting down regional trade deals and floating measures such as a border tax, Chinese President 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 sentiment is shared by many in Baden-Baden. A compromise proposal by Germany, which holds the rotating G-20 presidency this year, sought to meet U.S. demands by referring to “fairness, openness and inclusiveness” in trade. It was knocked back by delegations including France, the U.K., Italy, Brazil and the European Union.

“We at the G-20, the rest of the world, aren’t in favor of protectionism,” French Finance Minister Michel Sapin told reporters on Friday. “We are for free, regulated international trade, with rules respected by everyone.”

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.

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,” Schaeuble said at a briefing with reporters on Friday. “There are some sensitivities here.”

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.

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. Merkel and Trump met in Washington on Friday.

Still, Mnuchin used his first appearance on the international stage at a press conference with his German counterpart Wolfgang Schaeuble in Berlin on Thursday to downplay the rhetoric from his colleagues, giving some reassurance to his counterparts.

He acknowledged the complexity underlying Germany’s $68 billion dollar trade surplus with the U.S. and said the administration wants to avoid trade wars. That’s a valuable clarification after Trump and his advisers claimed Germany is gaming foreign-exchange markets.

Rules Concern

But beyond Germany, the fault line in the global discussion over trade policy now centers around the U.S.’s desire to insert a concept of fairness. Japan, whose Prime Minister Shinzo Abe has been keen to foster relations with the Trump administration, isn’t opposed to using that terminology, according to a G-20 official who asked not to be named.

Canada has advocated for expanded trade to drive growth, but 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. A whole section on climate change is set to be dropped. Little time is being devoted to global banking regulations, with major developments not expected.

But the focus remains trade. Germany’s compromise attempts could indeed see the commitment on protectionism -- that was seen as critical at last year’s G-20 meeting -- the dropped. That might be just wording, or it could be the signal of a new era.

“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.”

Source:
courtesy of BLOOMBERG

by Birgit Jennen , Svenja O'Donnell , and Jeff Black

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