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US-Japan trade deal is bright spot at chaotic G-7 summit

World seems no closer to avoiding ugly economic shocks in 2020

| North America
The G-7 seemed out of its depth on Trump's trade war.   © Reuters

About the best that can be said of the Group of Seven standoff over the weekend is that markets were not open to get caught in the crossfire.

The disarray on display in Biarritz, France, at the meeting of leading economies made one thing clear: Asia has new reasons to worry that the global trade war will intensify heading into 2020.

Sure, U.S. President Donald Trump hinted that he regretted starting a trade war with China. Though his spin-doctors tried to walk back his "second thoughts" mea culpa, one of Trump's advisers suggested the President had shelved his "I hereby order" decree that U.S. companies leave China.

The surprise arrival of Iranian Foreign Minister Mohammad Javad Zarif could lead to progress on U.S.-Iran tensions. Trump and Japanese Prime Minister Shinzo Abe agreeing in principle on a trade deal focused on agriculture is a clear bright spot. Though modest and rushed, it is a welcome development for peace among G-7 powers.

But a lasting peace this is not. When markets opened on Monday, investors registered their dismay with powerful sell-offs.

Trump is becoming more unmoored by the day. In Washington, the momentum behind impeaching him is growing at the same time polls suggest his odds of reelection are waning. Those concerns are colliding with something else: Chinese President Xi Jinping's resolve not to bow to Trump's import taxes.

The timing of Xi's latest pushback, on August 23, was as calculated as they come. Beijing announced that it was imposing tariffs of between 5% and 10% on $75 billion of U.S. goods just as Trump was heading to Biarritz. It blew up Trump's plan to reassure G-7 peers that the U.S. has the Chinese on the run.

Instead, Xi is reminding Trump that only one of them faces voters next year. And, perhaps, that China would rather take its chances on Americans electing a new leader come November 2020 than bow to Trump's bullying.

Xi is reminding Trump that the American leader faces voters next year.   © Reuters

China's curbs on agriculture and car imports will hit Trump-friendly states. This blows up Trump's hopes of selling Americans on his success in punishing China.

This could be a huge problem for Asia. As his reelection chances dwindle, Trump is almost certain to double down on import curbs. In fact, making China suffer is becoming the signature Trump 2020 strategy, as opposed to exerting pain to extract concessions.

Count the ways this would upend 2020 from Japan to South Korea to Singapore. China grew at the slowest pace in 27 years in the second quarter -- an annualized 6.2%. This slowdown is reverberating around Asia. Japan's exports to China fell 9.3% in July. Korea's China-bound shipments dropped 16.3%.

Things will get uglier. That goes, too, for Asia's developing economies facing market turbulence and the loss of their biggest customer. So far in August, central banks have cut interest rates in Hong Kong, India, Indonesia, the Philippines and Thailand. Expect more easing moves, including China.

All of this turmoil makes the U.S.-Japan partial trade deal a welcome step. The idea of Trump and Abe brawling would have roiled markets.

Still, there are more questions than answers. While the deal might cover agriculture, industrial tariffs and digital trade, taxes on autos -- a major Trump obsession -- would remain unchanged. Also, how Abe plans to compel private-sector companies to buy more U.S. good remains a mystery.

Over the weekend, the G-7 seemed woefully out of its depth on Trump's trade war, the Brexit mess and mounting recessions from Germany to Singapore. The recent inversion of the U.S. yield curve -- when 10-year rates fall below 2-year ones -- has Twitter buzzing about a #TrumpRecession.

Even Boris Johnson, the pro-Brexit prime minister sometimes called "Britain's Trump," jabbed at Washington's trade war. Johnson said: "We are in favor of trade peace on the whole, and dialing it down if we can."

As tensions swirl, the G-7 "is weaker and more divided than any point since its creation in 1975," says Ian Bremmer of Eurasia Group. "China is stronger and building competitive international structures. Russia is in decline, blames the West and acts accordingly. This would be a very bad time for a recession."

It is not just that Trump has surrounded himself with a third-rate economic team. Or that the biggest threats -- including climate change -- remain largely undiscussed at the top levels of the G-7. It is that the number-one economic and military power is in the hands of a leader who seems keen to watch the world burn.

The Amazon is doing just that, of course. Global markets could be next as Trump tosses more lighter fluid into Asian supply chains.

Once upon a time, G-7 summits were reassuring moments. World leaders acknowledged the threats to growth and stability and joined hands to address them. The disarray in Biarritz seems the calm before the chaos to come.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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