G7 Summit 19 May 2023: O-Torii Gate at Itsukushima Shrine on Miyajima Island, Hiroshima, Japan: ... [+]
G7 summit communiques rarely make headlines. Much of the content of these documents, issued by the heads of state of the globe’s most advanced democracies—Canada, France, Germany, Italy, Japan, the United Kingdom and the United States—are typically a dull rehash of previously declared economic, foreign, and national security policy principles and objectives. But this year the G7 attempted to make news.
The communique from May’s G7 summit, which took place in Hiroshima, since Japan is the 2023 G7 chair, predictably focused on Russia’s year-plus-long military invasion into Ukraine. But G7 leaders sought to depart from the normal pablum with respect to China’s role in the world economy on two fronts.
First, their communique takes Beijing to task for engaging in “economic coercion” of nations that do not fall in line with China’s international trade, investment and other finance-related reform imperatives. Second, the G7 seeks to recast the objective of businesses’ practices of cross-border “decoupling” from China as pursuit of “de-risking.”
As novel as the substance of these arguments may be appear—and the many press stories about them seems to confirm that is the case—it is an open question if the logic underlying these two elements of the communique, if not their presentation, is compelling. By the same token, both suffer from inherent contradictions, including whether they are applicable to both China and the G7 countries themselves.
G7 Operations and Communiques
For the vast majority of the world’s population, the role, objectives and operations of the G7 and its annual summits are an enigma. One has to be a glutton for punishment to become fully conversant in them, let alone participate in their functioning. Having served in senior roles in the White House under two administrations—one led by the Democrats and the other by the Republicans—I plead guilty for having become intimately familiar with this institution.
The host of G7 summits rotates annually: in 2022, Germany served as chair, and in 2024 Italy will assume that role. While G7 summit agendas and the main themes articulated in their communiques published at the close of such meetings are crafted collectively, the country occupying the chair significantly influences both.
That the Hiroshima communique delved into Indo-Pacific issues—especially the role of China in the region—is thus hardly surprising, although since coming to the White House, President Biden and his team have developed a major initiative on this area.
An equally important element of the G7 process to understand both its workings and the shifts in focus of its annual summits beyond its rotating chair, is that there is no permanent professional staff secretariat to maintain thematic continuity and ensure establishment of a systematic institutional memory.
Both of these elements also apply to the G20, which comprises the G7 countries and a diverse set of thirteen other nations, including significant emerging market economies such as China, India and Russia. The G20 chair for 2023 is India (its first time serving in this role), which will host its summit in September in New Delhi.
Whatever one may think about the effectiveness of other multilateral institutions such as the Geneva-based World Trade Organization (WTO) or the Paris-based Organization of Economic Cooperation and Development (OECD), unlike the G7 (and the G20) both of these entities possess standing secretariats administered by professional staff.
Economic Coercion
In their 2023 communique, the G7 established a Coordination Platform on Economic Coercion:
“Building on our resolve in Elmau [the site of the 2022 G7 Summit chaired by Germany] to increase vigilance and enhance our cooperation to address risks that undermine global security and stability, we will enhance collaboration by launching the Coordination Platform on Economic Coercion to increase our collective assessment, preparedness, deterrence and response to economic coercion, and further promote cooperation with partners beyond the G7. We will deepen our strategic dialogue against malicious practices to protect global supply chains from illegitimate influence, espionage, illicit knowledge leakage, and sabotage in the digital sphere. We affirm our shared responsibility and determination to coordinate on preventing the cutting-edge technologies we develop from being used to further military capabilities that threaten international peace and security.”
It doesn’t take much to read between the lines in the above passage or elsewhere in the communique that the G7 is taking aim at China for engaging in economic coercion. But the text fails to define what is, and what is not, coercion. Moreover, it gives the impression that G7 countries themselves do not engage in economic coercion as they define it.
Most experts would hold that economic coercion implies pressuring a party to engage in activities—most commonly apply trade or investment measures—from which it either does not commercially benefit in some way; or worse that imposes net costs it is resolutely unwilling to bear in undertaking the specified action and fulfilling the stated objective.
This raises three important questions and requires careful distinctions to be made.
How does engaging in economic coercion under the G7’s rubric differ from reaching agreement among parties by articulating a persuasive logic for taking “collective action” that results in benefits accruing to the parties whose sum is greater than its constituent parts?
Is signing on to the WTO or entering into a bilateral free trade agreement where a party is required to lower tariffs on its imports—potentially exposing domestic firms to foreign competition—in exchange for other parties to make analogous concessions a form of economic coercion? Entering into such agreements are, of course, voluntary.
If the notion of engaging in economic coercion in the case of China is an (oblique) reference to China failing to live up to its 2001 WTO accession agreement—which some of us have not been shy about articulating—then one obvious conclusion is that the parties to the WTO who have not forcefully challenged China on this conduct are naïve, as I have argued elsewhere in this space.
If this is the argument, it’s hard to label this as economic coercion being undertaken by China. Rather the onus is on WTO members as to why they have not called China on its dereliction of duty.
To take a second example, was the Trump Administration’s unilateral imposition of tariffs on Chinese merchandise imports to the U.S.—ultimately encapsulated in the Phase I agreement—a form of economic coercion?
Even if one believed such tariffs would not instill any meaningful change in China’s trading conduct and indeed would engender costs on certain U.S. firms, workers and consumers—a proposition that has been articulated in this space—Mr. Trump was unsuccessful in bringing on board our allies to join his initiative.
Indeed, in this case it was largely our G7 trading partners who benefited from his policy of economic coercion inasmuch as the costs of their imports from China did not increase and thus, they enlarged their purchases from China at the cost of the U.S. This is a sterling example of how engaging in unilateral economic coercion may well impose more costs on the coercer than on both the coercer’s target and its trading partners.
Third, it might be argued that placement by some G7 countries, led in part by the U.S., of sanctions on imports from China originating in whole or in part from Xinjiang amounts to the U.S. engaging in economic coercion with respect to our allies.
This is a strawman argument on two grounds. First, with relatively few exceptions across the world’s democracies there is broad agreement that use of forced labor in economic activity should be prohibited. Second, the most effective way to realize this goal and effect improvement in human rights is through bona fide collectively imposed economic sanctions that impose strong financial costs on regimes that tolerate—if not encourage—such practices.
None of these arguments vitiate the proposition that China—among other select countries in the world economy—does not engage in political and military bullying or otherwise coercive behavior vis a vis other countries. Or that such conduct must be called out forcefully in the U.N. and in other arenas—as is done, regrettably, too frequently. But it is important to distinguish between such conduct from economic coercion.
De-Risking vs. Decoupling
The G7 communique’s call for distinguishing between a business strategy of “decoupling” from “de-risking” is a false dichotomy.
The fact is that businesses across the world—regardless of whether they are operating in emerging markets or in advanced industrialized nations—routinely enter into and exit out of all such environments across geographies from time to time. The very essence of decoupling is market entry and exit.
There are many reasons these decisions are taken—whether due to changes in market growth or decline; host or home government policy and political changes that have direct or indirect effects on firms’ bottom lines; the entry or exit of competitors, which occurs for a multitude of reasons; changes in the pace and nature of technological innovation; demographic changes; natural disasters; the prevalence or absence of disease; the onset of war and conflict and so on.
In short, changes in the pace and geographic pattern of market entry and exit by businesses and investors is hardly a phenomenon unique to the 21st, 20th or frankly any century.
Perhaps most important, a business or an investor engaging in decoupling is but one form of action it is undertaking to de-risk. In other words, it is simply one of the items on the overall menu of de-risking items business and investors can choose from.
Needless to say, each choice incurs a certain “price” or “cost”, including whether the firm is making such a decision on a permanent or a temporary basis. This point is critical insofar as businesses or investors who pullout of a market need to calculate ex ante not only what is the cost of exit but also the cost of re-entry should it seek to do so prospectively—the latter being a particularly complex exercise since successful re-entry must figure in who might or will be the new competitors in the market prospectively.
Finally, understanding the political dynamics driving any decision to decouple is no easy task. And how they unfold necessarily varies from country to country. One only to needs to recall former President Trump’s Tweet ordering all U.S. firms to withdraw from China, an initiative that famously fell on deaf ears.
