Assessing the 42nd G7 Summit

Assessing the 42nd G7 Summit
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The 42nd G7 Summit has concluded. What are the key takeaways for investors?

On May 26th and 27th, the leaders of the US, Japan, Germany, the UK, France, Italy, and Canada met for the 42nd G7  Summit in Ise-Shima Japan. These leaders had plenty to discuss; the summit agenda included the global economy, international trade, the migrant crisis, Islamic terrorism, global health, and threats to the international order in Eastern Europe and maritime Asia. With this in mind, the outcome presents several critical takeaways for investors with regard to political risk.

The global economy: Neoliberal continuity

The meeting concluded that the global economy faces significant challenges. As the final declaration put it, “growth remains moderate and uneven” and “downside risks to the global outlook have increased.”

The solution, according to the G7, is the careful and coordinated use of the fiscal stimulus, monetary policy, and structural reform to bolster growth. Infrastructure investment, labor market reform, and expanded free trade deals were just some of the many measures advocated.

The leadership vowed to pursue free trade and oppose protectionism. This commitment to neoliberal trade policy is a positive sign for investors wary of recent displays of protectionist sentiment. In particular, the G7 lauded the Trans-Pacific Partnership and encouraged signatories to ratify and implement the deal, a move that should further encourage businesses looking to the deal for new opportunities across the Pacific.

The G7’s discussion of trade and finance also illuminated several emerging political risks. The declaration made it clear that the ongoing trade dispute between China and the US, European Union, and Japan over steel will continue to escalate. The summit tacitly condemned China’s steel subsidies which “distort the market and contribute to global excess capacity” and hinted that stronger retaliatory measures are in the works. “We are committed to moving quickly in taking steps to address this issue.” This dispute creates the risk of spiraling trade barriers between the G7 and China.

Beyond trade, the meeting also failed to reconcile growing disagreements between the US and Japan over Japan’s monetary policy.  Japan, worried about a strengthening yen, wants to devalue its currency.  The US is strongly opposed to this. This ongoing tension was reflected in the summit’s final statement, which cautioned against both competitive devaluation and excessive exchange rate movement at the same time.

The summit also weighed in on “Brexit.” The meeting strongly discouraged the UK from exiting the EU, claiming it would undermine economic integration to the detriment of all parties. Although the Brexit proposal is unlikely to succeed in the upcoming British referendum, the G7’s condemnation is still welcome news for investors concerned about the uncertainty surrounding the proposal and its implications.

Nontraditional security threats: Migration, terrorism, and refugees

The summit’s final declaration also highlighted the ongoing EU refugee and migrant crisis, concluding that the challenge will require coordinated action by the G7 to cope with the immediate humanitarian problem and its “root causes” in Syria and Iraq.  Substantively, this included a new pledge to give Iraq $4.03 billion to help improve domestic stability and security. The G7’s commitment is good news for investors concerned about the instability and uncertainty surrounding the migrant crisis.

With the recent attacks in Paris and Brussels fresh in the minds of participants, the G7 meeting identified terrorism as a critical threat to global security and the international economy. The meeting proposed stronger counter-terrorism cooperation among G7 members to cope with foreign fighter flows, homeland security, terrorist financing, capacity building in vulnerable countries, and other challenges. The G7’s renewed commitment should strengthen the security environment and reduce the risk of terrorism for businesses operating in member economies.

On global health, the G7 pledged to commit more resources to research and development to help curtail the spread of disease, a pressing transnational challenge. This substantive commitment will help reduce the risk of posed by global communicable diseases, a long-standing concern for an increasingly interconnected global economy.

Conventional threats: Upholding the international order

The G7 also considered more conventional security challenges.  The meeting denounced Russia’s annexation of Crimea and destabilization of Ukraine. The leaders also expressed concern over the East and South China Seas in a veiled criticism of China’s provocative maritime activity.

These developments are a mixed bag for investors.  On the one hand, they deepen ongoing tensions with Russia in Europe and China in the Asia-Pacific.  China has already denounced the G7’s discussion, stating that “China is resolutely opposed to individual countries hyping up the South China Sea for personal gain.” These growing tensions have the potential to undermine economic ties between the parties involved.

On the other hand, a firm stance by the G7 could contribute to greater stability in Europe and Asia by presenting a unified front against Chinese and Russian revisionism. If the G7 follows through on its commitment to oppose revisionism and maintain the rules-based order that undergirds European and Asian prosperity, it will create a more stable and secure international environment for investors.

Outlook: Challenges ahead following the summit

The G7 Summit’s final declaration contributes to a more positive economic outlook for investors in many ways. It promises to support liberal economic policies and free trade, a recipe for stronger economic growth, while identifying and pledging to mitigate key challenges like burgeoning migrant flows, terrorism, and territorial revisionism.

Nonetheless, investors should temper their optimism for several reasons.

First, the declaration itself is more talk than substance. Much of the document focuses on supporting existing policy and promising to do more. Investors should keep a close eye on whether more concrete measures follow from these pledges. Many of the issues identified by the G7 are troublesome collective action problems that incentivize free-riding. In the conflict in Syria and Iraq, for instance, the G7 agrees on the challenge posed by migrants and terrorism – but some members may be tempted to pass the buck either to the US or to Middle Eastern states to stabilize the situation.

Second, the leaders at the G7 Summit may be firmly committed to sound neoliberal principles and policies like free trade, but they face real difficulty in galvanizing support for these principles at home. Populism and nativism are on the rise in Europe and America. If G7 leaders cannot convince their publics to support a neoliberal agenda, the initiatives supported in the most recent summit may prove unsustainable.

Categories: International, Politics

About Author

Erik French

Erik French is a PhD Candidate at the Maxwell School of Citizenship and Public Affairs, a supervisor at Wikistrat Inc., and a former Sasakawa Peace Foundation fellow with Pacific Forum CSIS. His research focuses on security, politics, and economics in East Asia.