What the World Needs Now is Inclusive Growth

Results from this blogpost in short:

• It is too early yet to fully realize the impact of Brexit but the UK’s and EU’s choice of how to organize an exit will be key.
• China is the largest outward investor among the emerging economies, yet the potential involvement of the Chinese government in such deals increasingly raises suspicion in Europe.
• A protectionist “race to the bottom” though, should not be the answer.
• The G20 process will play a decisive role in the creation of more inclusive world trade.

Global Macroeconomic Policy Coordination in the New Era. This was the title of the 13^th Asia Europe Economic Forum (AEEF), which took place in Beijing from September 21-22, 2016. This event also marked the 10^th anniversary of the AEEF. Established in 2006 under the leadership of Bruegel, namely then director Jean Pisani-Ferry, this conference brings together scholars, experts and policy-makers from Asia and Europe in order to discuss different perspectives on current macroeconomic topics and look for solutions to pressing economic policy issues. Bertelsmann Stiftung has been part of the network of think tanks organizing the AEEF since 2013.

The Beijing event focused on global economic and financial governance, trade and investment policy, inequality and macroeconomic policy coordination with a focus on the G20. Given recent developments, the future of Europe and the state of the Chinese economy were topics of individual session.

The GED team was involved in three panels, giving input on Brexit and Chinese foreign direct investment and chairing the session on inequality. Moreover, the GED team invited Viviane Reding, MEP and former vice-president of the European Commission, on behalf of Bertelsmann Stiftung to join the AEEF as a key note speaker.

The consequences of Brexit and foreign direct investment will shape Europe’s future

In the session on the Future of Europe, Andreas Esche gave the audience his view on how severe the economic consequences of the Brexit might be for the UK itself, but also for the rest of Europe in the long run. He also pointed to key indicators to watch in the next several months, such as house prices, car registrations or business investments, which would be helpful to assess short-term economic impacts. An important conclusion of the session was that it is still too early to tell the exact economic implications of Brexit. However, the question of how the UK’s exit will be organized and under which conditions will be the key to Europe’s future.

The trade and investment panel had a strong focus on the slowdown of world trade and the challenge of how to integrate emerging megaregional trade deals such as TPP or RCEP into the multilateral world trade system under the roof of the WTO. Regarding global investment issues, Cora Jungbluth brought up the political dimension of surging investment flows from China, which has become the largest outward investor among the emerging economies. Chinese M&A deals in Europe’s strategic industries, such as Midea’s acquisition of Kuka, increasingly raise suspicion about state-backed financing of such deals. The EU-China Bilateral Investment Treaty may serve as platform to address these issues. More generally, the panelists emphasized that global trade must be revived and international investment flows should not be hampered by protectionist measures. However, a level playing field between countries is an important premise to achieve these.

China’s growing part in trade and governance and the role of protectionism

Prior to the AEEF, the G20 summit took place in Hangzhou, China. The AEEF therefore included a public session on China, G20 and global economic governance. In her Keynote, Viviane Reding emphasized China’s economic achievements in the past 20 years and referred to the G20 summit in China as a success story from the beginning to the end. She pointed out that the global focus is shifting from west to east, not only economically, but also geopolitically. As China is gaining more weight in multilateral organizations, the EU and US should cope with this challenge by focusing on cooperation instead of confrontation. Ms. Reding made clear, that cooperation has to be bilateral and that the EU could as well take steps such as closing procurement markets vis-a-vis countries that keep their own market closed. Also, on the national level, states may keep an eye on foreign direct investment and defend themselves against state-backed capital inflows, especially given the fact that European companies are facing manifold barriers when investing in China. In comparison to the EU, the US does much more to protect itself, e.g. through the “Buy American” act and the Committee on Foreign Investment in the United States (CFIUS), which monitors foreign acquisitions. Ms. Reding pointed out that still, there should be no protectionist race to the bottom, since trade and investment in general are important sources of growth and stability. Barriers harm first and for all the economy of the country that has put them up. She concluded that China needs to be given a fair place in the global framework, but China also has to do their homework and implement urgent structural reforms. Above all, the world needs global governance, which is resilient and prevails above regional and factional interests.

Replying to Ms. Reding’s remarks, China’s deputy minister of finance, Zhu Guangyao, opened his keynote by emphasizing that China, while playing a special role in international processes, still was a developing country. This status always has to be taken into account by the international community. Subsequently, Mr. Zhu focused on the outcome of the G20 summit: In Hangzhou, macroeconomic coordination was defined for the first time, which makes this summit the most important one for macroeconomic coordination. The G20 summit will play a decisive role for a healthy recovery of the world economy, since its Communiqué is supposed to be an important impetus for global economic growth. Mr. Zhu emphasized that it is not enough to achieve growth per se: what the world needs now is inclusive growth. Fostering inclusive growth is one of the promises of the G20 summit in Hangzhou. Some countries, however, have started to engage more and more in protectionist measures related to trade and investment. Against this development, it is of utmost importance to implement inclusive economic development. Free trade and investment flows are important drivers of growth. Protectionism therefore has to be kept at bay and multilateral negotiations have to be revived. This, Zhu concluded, does not only reflect China’s preference but also that of all G20 members.