The key point is that free trade enables lower prices and increased choice for consumers, and higher export revenue to be earned. Growth is propelled by efficiency benefits from economies of scale and the realisation of comparative advantage.
The 11th G20 summit will be held this year in Beijing from September 4 to 5 following several preparatory meetings and bilateral discussions between China and other key trading partners.
The motivation of the world's 20 largest economies is to pursue policies that will prove supportive to global growth and more effectively see the benefits of trade shared across the planet's population.
The prelude to the G20 gathering has been coloured by the recent decision of the UK to vote for Brexit, i.e. leaving the European Union as well as the rising rhetoric around the world that has questioned free trade agreements and increased fears of rising protectionism.
The last two days have seen one such preparatory gathering in the finance ministers and central bank governors meeting in Chengdu.
Speaking at this gathering, Philip Hammond, the new UK chancellor of the exchequer, suggested that the uncertainty surrounding the Brexit vote would fade when the UK maps out its vision for a future relationship with the EU. This should be clearer later this year in advance of the UK triggering the exit clause or “Article 50”.
The full impact of the Brexit vote has perhaps not yet been felt. Photo: iStock
The chancellor did acknowledge that the financial and capital markets may still suffer some degree of volatility even as Article 50 negotiations got underway. The exit negotiations would be time-consuming and subject to different interpretations. As we all know, markets abhor a vacuum and any snippet of news or opinion that can fill the void, even if only temporally has the power to generation asset price gyrations.
"...What will start to reduce uncertainty is when we are able to set out more clearly the kind of arrangement we envisage going forward with the European Union, ... If our European Union partners respond to such a vision positively ... obviously it will be subject to negotiation ... so that there is a sense perhaps later this year that we are all on the same page in terms of where we expect to be going. I think that will send a reassuring signal to the business community and to markets. ..."
Of course, after such a powerful meeting there is always a communique and the message released at the end of the two-day meeting in Chengdu said Brexit had dominated discussions as it had added to uncertainty in the global economy where growth was " ...weaker than desirable...". It added that members, however, were "...well positioned to proactively address the potential economic and financial consequences...".
All policy tools to be deployed
The communique added:
"...In light of recent developments, we reiterate our determination to use all policy tools – monetary, fiscal and structural – individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth. ..."
Such language was to have been expected as last week the International Monetary Fund (IMF) reduced its global growth forecasts following the Brexit vote.
One might argue that following approximately eight years of zero or even negative interest rates, plus a welter of quantitative easing the playbook for modern monetary policy has been exhausted. Indeed, at previous G20 summits the global finance ministers and central bankers have vigorously discussed monetary policy. Over the past weekend, however, the governor of the Banque de France said there was minimal monetary policy debate as the discussions focused on growth.
Source: IMF, World Economic Outlook
This comment was supported by US treasury secretary Jack Lew and Chinese finance minister Lou Jiwei. They both echoed that sentiment adding that this time a consensus was easier to strike given that the global recovery remained weak.
The chart above illustrates precisely why such a consensus could be established between 20 nations. This time their agendas would appear to all be astrologically aligned. China’s contribution to global growth has not budged from 1% since 2011. The US contribution has slightly shrunk whereas that from the Eurozone has faded and Japan’s is next to invisible.
Cooperation, not protectionism
When the global economy is feeling insecure too many politicians will succumb to the general fear within the population. Such talk of pulling out of trade agreements is economically ridiculous. If domestic industries cannot face up to the intense completion of overseas providers (with the exception of dumping) then the uncompetitive industry should be shut down and a new line of activity has to be followed.
Now I know that causes regional hardships, however, the short-term pain is better than years of industrial decay under the practice of state control and nationalisation.
The solution for this century is greater cooperation at a global level as is outlined in the chart below, adapted from Peter Dicken's "Global Shift: Reshaping the Global Economic Map in the 21st Century":
Source: Adapted by Spotlight Ideas from Peter Dicken