June 24, 2002
|Contact:||C. Fred Bergsten||(202) 328-9000|
Washington, DCA high-level "Shadow G-8" of private experts from the major industrial democracies, including former Secretary of State Henry Kissinger and former Federal Reserve Chairman Paul Volcker, recommends that the G-8 Summit in Canada on June 26-27 declare a standstill on the creation of all new trade barriers. Such a moratorium should continue until the agreed conclusion date of 2005 for the Doha round of trade negotiations in the World Trade Organization. The risk of trade wars among the G-8 countries themselves, especially the United States and the European Union, represents a grave threat to the world economic outlook and requires urgent preventative action by the Heads of State and Government.
In addition, the "Shadow G-8" urges the Summit to press Japan on two fronts. First, that country must take decisive action to resolve the structural weakness of its banking system in order to prevent a financial crisis that could have severe global effects. Second, it must stop trying to export its problems to other countries by promoting a weaker exchange rate for the yen. The G-8 should in fact welcome the gradual and orderly decline in the exchange rate of the dollar during the past five months, which over time will help reduce the huge deficit in the external trade position of the United States and thus counter the other significant threat to the global economy identified by the "Shadow G-8."
The private experts commend the priority that the upcoming Summit will place on alleviating poverty in the world's poorest countries, especially in Africa. They note, however, that one key aspect of the G-8 strategy to help these countries, debt relief, has not yet had much impact. Hence the "Shadow G-8" recommends that the debt relief strategy be extended to additional countries, broadened to protect the debtors against changes in circumstances over which they have no control (e.g., natural disasters and world prices for their commodities) and funded by mobilizing up to $10 billion of additional gold now held by the International Monetary Fund.
The "Shadow G-8" observes that all these issues were reportedly discussed at the recent meeting of G-7 Finance Ministers (excluding Russia) at Halifax on June 15. The Ministers, however, failed to address any of them adequately. It is thus up to the Leaders to act decisively when they meet in Kananaskis on June 26-27.
Detailed explanations of these proposals, along with a number of others, can be found in the attached report of the G-8 Preparatory Conference or "Shadow G-8." The group includes 22 leading independent experts, including former EU trade negotiator Leon Brittan and former Vice Minister of Finance of Japan Toyoo Gyohten as well as Kissinger and Volcker, which is in its third year of operation (list attached). Three members of the original group subsequently joined the governments of their countries: Robert Zoellick, now the United States Trade Representative; Heizo Takenaka, the current Minister of Economic and Fiscal Policy of Japan; and Renato Ruggiero, Minister of Foreign Affairs of Italy during 2001. The group met on April 5 to develop its recommendations for 2002 and has discussed them with the leadership of the host Canadian government and other G-8 leaders. It is organized by the Institute for International Economics (and co-chaired by its Director, C. Fred Bergsten) and was co-hosted this year by the Canadian Institute of International Affairs in Toronto.
The Global Economy
The "Shadow G-8" shares the view of the G-7 Finance Ministers, as announced at Halifax, that the global economic outlook is promising. However, the group believes that it faces three significant risks: world trade policy and important elements of the Japanese and American economies.
The most pressing aspect of Japan's "lost decade" of stagnation since the early 1990s is the structural weakness of its banking system. Respected analysts estimate that at least half of Japan's banking system is insolvent and that its inevitable recapitalization will cost 20-25 percent of GDP. Nonperforming loans continue to grow faster than the banks can provision for them. A major financial crisis, embracing runs on individual banks and capital flight from Japan, could erupt at almost any time. Hence it is critical that Japan take decisive measures to resolve its banking problems. The G-8 Leaders should press Japan to do so promptly.
In addition, they must remind Japan not to try to export its problems to the rest of the world by depreciating the yen. Such a strategy would, in any event, be ineffective in restoring sustainable growth in Japan. It would also place further pressure on the fragile global trading system.
The second structural issue of significance to the world economy is the large and growing trade deficit of the United States. That deficit will approach $500 billion (5 percent of GDP) in 2002 and, along with America's own investment abroad, requires the United States to attract over $4 billion of foreign financing every working day. The situation is clearly unsustainable and will at some point require a substantial decline in the exchange rate of the dollar, which could be very sharp and very rapid and thus cause considerable dislocation to both the US and world economies.
The G-8 should thus endorse the gradual and orderly decline in the dollar that has been occurring since early 2002, which has begun the necessary correction. To promote an orderly completion of the process, they should instruct their Ministers of Finance to develop a plan of action that would limit any adverse effects from the currency changes and support their continuation until sustainable positions have been established.
Led by the G-8 countries, the membership of the World Trade Organization agreed at Doha last November to launch a new round of international negotiations to further reduce barriers to global commerce and to strengthen the rules-based trading system. However, new trade-restricting actions by major countries threaten the prospects for the new round and even the stability of the current trade regime. Such actions notably include the recent increases in steel tariffs and agricultural subsidies by the United States, and the emulation of the US steel actions by other countries including the European Union. In addition, there are several major sectors in which retaliation or threats of retaliation have already occurred in disputes being addressed in the WTO. Taken together, these developments pose a serious risk of trade conflict among the major countries. Such conflict could jeopardize the global economic outlook and have substantial adverse effects on the development prospects of the poorer countries.
Hence the G-8 Summit needs to take decisive action to get the world trading system back on track. The "Shadow G-8" recommends that the leaders declare a standstill on any new trade barriers for the next two-and-a-half years, to avoid intensifying the risks of trade war and to permit successful completion of the Doha round by its target date of early 2005. In addition, the G-8 should extend until that time the "peace clause" on agriculture, under which they agreed at the end of the Uruguay Round to avoid bringing any new cases against each other in that sector until 2003, and apply that clause to the remainder of their trade relations.
Africa and Development
We applaud the G-8 initiative, and especially the leadership of Canada, in launching a meaningful dialogue with Africa to improve the prospect for its peoples through the New Partnership for Africa's Development (NEPAD). NEPAD is off to a shaky start, however, because of the apparent absence of effective peer pressure among the Africans themselves in some key cases (such as the recent election in Zimbabwe) and the faltering of economic reform in some major African countries (notably Nigeria). Hence the G-8 leaders must ask the Africans some tough questions about their commitment to the NEPAD process and decide whether it represents a solid foundation for proceeding together.
The G-8 countries should also, however, commit themselves to full support for NEPAD if these questions are answered satisfactorily. They should eliminate all their barriers to exports from the poorest countries and exempt those countries from application of the normal trade safeguard measures (mainly antidumping and countervailing duties). They should provide the amounts of foreign assistance needed to meet the agreed Millennium Development Goals-building on the pledges made by Canada, the European Union, and the United States at the recent United Nations Financing for Development conference in Mexico. They should also agree to provide additional debt relief for Heavily Indebted Poor Countries (HIPCs), most of which are in Africa, by agreeing to:
Finally, the G-8 Summit should take a number of steps to further strengthen the campaign against terrorism. The measures recommended above are extremely important in this respect because they will help deny the terrorists a victory in the economic dimension of their attacks and reduce the underlying sources of despair, such as poverty, that aid their cause. In addition, the G-8 Leaders should reaffirm their commitment to the essential multilateral approach to the problem and adopt several new initiatives:
The G-8 Summit in Canada will take place in a very different context from the Genoa Summit of 2001. Most important of course is the terrorist attack of September 11 and its far-reaching implications for the world economy as well as global security. In addition, the world economy is clearly recovering from the recession of a year ago. The membership of the World Trade Organization has agreed to launch a new round of comprehensive negotiations. Most of the major countries have pledged substantial increases in foreign assistance and launched the NEPAD process. Hence much progress has been made despite the shock of 9/11.
But new problems now cloud the outlook. New G-8 actions are required to sustain the economic recovery and to minimize the risk of future crises. The "Shadow G-8" urges the Leaders at Kananaskis to adopt measures along the lines suggested in its report to maintain the progress of the past year and continue their cooperation in winning the battle against international terrorism.
About the Institute
The Institute for International Economics is a private nonprofit research institution for the study and discussion of international economic policy. The Institute, directed by C. Fred Bergsten, provides fresh analyses of key economic, monetary, trade and investment issues and recommends practical policy approaches for strengthening public policy toward these important topics. The Institute receives funding from a large number of private foundations and corporations.