The Long View – G7 Needs to Find New Partners as Trump Blunders on
In one amazing week, President Trump went from confrontation with traditional allies at the G7 meeting in Canada to friendly handshakes with an enemy North Korean dictator in Singapore.
The G7 meeting should have been inconsequential, but it turned into a fiasco for global trade sentiment.
Investors don’t seem to care.
Stock markets barely reacted to the Canada meetings and were soon boosted by optimism from the Singapore summit.
Perhaps investors are too young to remember the pain from a trade war.
Maybe they view trade as low-ranking among factors in the current FAANG-led stock markets.
Or they might agree with Trump that international trade needs a shake-up.
Trade rifts will hurt stocks
Investors should care.
A trade war would hurt US industry and agriculture and would certainly impact the stock market.
This is not what President Trump wants, as he identifies much of his glory with the performance of the stock market.
Some sectors, like the auto industry, would be caught in the middle and perhaps severely affected.
Some of the world’s biggest automakers produce vehicles in the EU and ship them to the US, while also exporting from their own US plants.
In a recent Bloomberg article, researcher LMC Automotive estimated a 25% tariff on imported vehicles could cost the US auto industry 1 million annual vehicle sales.
Unity in opposing Trump
President Trump is brazenly defiant against US allies on many important issues.
He has pulled the US out from the Trans-Pacific Partnership, Paris climate treaty, and the Iran nuclear deal. He openly attacks the UN and threatens to dismantle NAFTA.
These extreme actions may end up unifying the US allies in opposition to Trump. But they need to agree on the proper way to respond.
The G6 (ex-US) must hold firm to the concept of a rules-based system when it comes to environmental issues, trade and geopolitical conflict resolution.
There are a couple of positive factors to consider.
First, as we have seen in his recent China trade confrontations, President Trump’s early aggressive stance can be softened as he wins small concessions.
Second, while China’s importance is rapidly growing, it does not appear set on disrupting the global system.
Is the G7 obsolete?
The G7 was created to counteract the emerging power of OPEC in the early 1970s.
Back then, Europe had more leverage in western alliances because of its critical importance to the US in the cold war.
The G7’s share of world GDP has dropped significantly in the past 40 years. Once large and influential, the G7 is smaller and now more divided.
Recent G7 meetings had become more symbolic and useful only for toothless communiques and glamorous photo opportunities.
Even the G7 protestors of old can’t be bothered to show up now.
The G7’s significance has decreased to such an extent that expectations heading into the Quebec meeting were quite minimal.
Heading into the meeting, Trump was seen to have a friendly relationship particularly with France’s Macron and Canada’s Trudeau.
On his departure from Canada, Trump’s allied friendships appeared to be tarnished. In contrast, the Shanghai Cooperation Organisation conference in Asia (which included China’s Xi and Russia’s Putin) was publicly shown to be a much more pleasant meeting for all attendees.
SCO not yet ready to dominate G7
The Eastern Bloc’s SCO, with eight members, was founded as a security group but has increasingly focused on economic partnerships and trade.
While the US is battling its G7 allies on trade, the SCO is working beyond security to increase cooperation on investment, trade, energy and agriculture.
Though its recent summit went well, the SCO does have its own internal tensions, including between two of the newest entrants, India and Pakistan.
More tension may arise from China’s dominance and aggressive pursuit of the Belt and Road Initiative, which runs through areas strategically important to Russia, India and Pakistan.
How do the EU and Canada maintain relevance?
President Trump wants his trade opponents to acquiesce to his demands, but the EU and Canada could take a proactive approach and look beyond the traditional western partners to make deals with countries in Latin America, Asia-Pacific and Africa.
They can also do better to address the divide between winners and losers in the current era of technological change.
While stock markets have been strong globally, social inequality has increased and combined with large-scale migration to create a wave of populism and nationalism.
Perspective can bring calm
Investors should be cognisant of the harsh impact that a trade war can have on markets, but we should also not read too much into one disappointing meeting.
After all, this is not the first diplomatic rift between a Republican US President and the EU.
In 2003, just as the US was about to attack Iraq, President Bush’s leadership team derisively referred to France and Germany as “Old Europe”.
The long-time friendship certainly survived that disagreement.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
