Japan’s opportunity at the Osaka Summit
Naoki Tanaka, president of the Centre for International Public Policy Studies, explains how challenges posed by recent events and political dynamics, will shape this year’s G20 leaders’ meeting
The financial crisis of 2008–09 gave the G20 momentum for two reasons: the simultaneous disappearance of final demand in G7 economies and the lack of liquidity faced by most private firms in G7 countries. Firms responded by postponing payments, stopping building inventory, selling products at reduced prices and delaying investment. This financial crisis, which came from the freezing of securitised financial products, hit all the economies in the G7.
At that time, large government expenditures by major emerging economies, led by China, were applauded by G7 economists.
To cooperate with China, the G20 framework became a top priority for US president Barack Obama’s administration. In the G20, there were two camps: market economies, which were over-financed by securitised financial products, and state-directed economies, which were not always better than the market economies. However, after the financial crisis, those state-directed economies took the initiative to maintain global demand. Consequently, it became government-owned enterprises in progress, privately owned enterprises in retreat. That meant an inefficient allocation of resources in China.
China acquired the dominant position within the G20, but at a very high cost.
The dynamics in the G20 changed in 2014, due to the conflict between Russia and Ukraine, and China’s military assertiveness in the South China Sea.
Cyberattacks by the Internet Research Agency in Russia have been implicated in the 2016 Brexit referendum and US presidential elections. In 2017, there were also incidents of fake news and cyberattacks in France. In 2018, Cambridge Analytica was implicated in a scandal involving large amounts of data collected by Facebook and used to influence voters. The Internet Research Agency appeared to intervene in the European parliamentary elections to negatively influence Europe’s political centre. G20 efforts have not stopped such cyberattacks.
China’s military assertiveness towards the South China Sea and theft of intellectual property rights through cyberspace have contributed to economic conflict with the United States. Their trade war does not merely reflect protectionist policies. In 2018, the G20 could not discuss these problems openly. Once again, that trade war will not be discussed openly at the Osaka Summit. The summit will not revitalise the G20’s work on trade.
A new kind of economic adjustment
The new high tariffs on Chinese exports into the United States may continue for a long time. The Chinese economy will adjust. China is the factory of the world, manufacturing a quarter of the world’s goods and accounting for about half of its manufacturing capabilities for industrial materials such as iron, steel, cement and petrochemical products. To expand,
Chinese businesses in these sectors have borrowed heavily. If their earnings drop, their financial position will deteriorate.
To survive, they will want to increase liquidity to repay their debts, and will thus reduce their selling price.
As to prices for basic industrial materials, producers of these goods are concerned about overproduction in China. If China adjusts production levels, the price of crude oil, copper and shipping freight would be severely affected.
The G20’s role
In this situation, there is the possibility of a systemic risk within and beyond China. In such financial distress, intermediation among financial institutions may diminish. It has been said that such a systemic risk would not arise under the Chinese system of government control. However, this optimistic view should be rejected in this new situation. The G20 can play a useful role in containing the new economic adjustments emerging in China. Japan especially can present the characteristics of such challenges and try to coordinate the efforts that will be needed at the G20 level. Japan has much knowledge of the economic adjustments of its Chinese neighbour. East Asia has had experience in exchanging opinions and solutions in similar situations since 1997.
