A G2 grouping with the US and China makes sense but it’s unlikely

The 2008 financial crisis exposed the G7’s economic and financial system as a “house of cards,” built on layers of government and consumer debt-to-GDP ratios at more than 100% and 80% respectively. Consumer debt to income is even higher at more than 100%.

While non-financial corporate debt may be less than 100% of GDP, financial liabilities accrued from the financial crisis remain “toxic.” The amounts are unknown but are likely high. Moreover, key interest rates are so low that there is no room to improve monetary policy.

The G7 lacks effective tools to climb out of the economic and financial holes that the crisis dug. Prohibitively high consumer debts coupled with marginal increases in wages handicap sufficient private consumption that would trigger economic growth. Insufficient private consumption stifles investment spending because G7 economies are largely demand-driven. Domestic demand is further stifled because internal politics force governments to impose austerity measures or prevent budget deficits during periods of economic stagnation or low growth.

The only policy tools available are “monetary easing” — central banks printing money to buy sovereign and corporate bonds at low or negative interest rates. Neither is working. The additional liquidity injected into the G7 economies are either hoarded, used to pay off liabilities or applied to improve innovation and automation. The latter (automation) reduces employment creation, exacerbating the G7’s economic woes which further erode the club’s global influence, and give rise to protectionism and populism.

In 2008, US President Barack Obama said the G20 would replace the G7 as the official platform for global economic and financial governance. The G20, made up of the world’s 19 largest economies plus the EU, respectively accounts for more than 85%, 65% and 80% of global GDP, population, and trade, respectively.

However, it is ineffective for several reasons. The membership is made up of a fragmented group of countries with different national interests which often conflict. There is little if any agreement on foreign investment. Emerging-economy members demand a time limit on intellectual property rights but the developed countries insist on perpetual rights.

Moreover, there is no permanent secretariat to support the G20 framework. Thus the G20, like the G7, remains a club whose leaders meet annually to discuss issues but end up making promises they cannot keep. The vow to alleviate poverty, for example, has never been seriously pursued, in that hundreds of millions of people remain hopelessly impoverished.

G2 could be modeled after the UN security council

A G2 made up of the US and China, first proposed by Zbigniew Brzezinski, the late geopolitical strategist and national security adviser to former US president Jimmy Carter, makes sense, albeit sounding elitist and exclusive. To avoid or minimize opposition, the G2 should be modeled on the United Nations Security Council, composed of permanent and non-permanent members but without veto power. The other 18 members would have a real voice in shaping the global geopolitical, economic and financial architectures. Soliciting or encouraging the other G20 members to participate would promote cooperation and trust.

With American and Chinese leadership and strong political will, everything seems possible as shown by the 2015 Paris Agreement on climate change, it would not have succeeded without the two countries’ diplomatic cooperation.

Another sign of an effective partnership is the Strategic and Security Economic Dialogue the US and China set up in 2009 to defuse potential flashpoints.

Another sign of an effective partnership is the Strategic and Security Economic Dialogue the US and China set up in 2009 to defuse potential flash points. So far, the mechanism has managed differences well and improved trust, although there is disagreement over matters such as freedom of navigation in the South China Sea, and trade deficits.

China and the US can work together for the common good if they want to. Indeed, the G20 and other countries may even applaud US-Chinese efforts to reform or improve the global economic, financial and geopolitical systems. A harmonious and stable US-China relationship would enhance long-term economic and geopolitical growth, benefiting every country on earth.

Ideology and narrow self-interest get in the way

But ideology and self-interest prevent the formation of a G2. President Donald Trump took the US out of the Paris Agreement on climate change because he claims it is bad for America, killing high-paying American jobs and costing taxpayers billions of dollars.

Further, a number of powerful US lawmakers such as Republican Senator John McCain characterize China as an enemy, labeling it a threat not only to the US but also the world. They accuse China of “militarizing” the South China Sea, stealing US jobs, manipulating the yuan to gain an export advantage, and other alleged transgressions. Some elements of the US media lend support and cheer anti-China politicians. Moreover, some US media — and think tanks — complain the US government is not doing enough to rein in China’s “imperial reach.”

The anti-China crowd claims that the Belt and Road Initiative (also known as One Belt One Road) and the Asia Infrastructure Investment Bank (AIIB) challenge the US-imposed post-Second World War economic order. But the leaders of the UN, IMF, World Bank and other organizations and countries disagree. Supporters argue that the BRI promotes international trade which is essential for economic development in a time of low domestic demand among developed economies. The AIIB provides funding to build infrastructures around the world.

There is also a wide difference in opinion whether China is “bullying” or “militarizing” its neighbors and challenging US “freedom of navigation” in the South and East China seas. The US says it is, but China disagrees, insisting that the country is only reclaiming the “inheritance” that colonial powers stole from previous governments.

Unlike the US, China has not threatened any country with its military might or engaged in regime change. While China is not a charity, its investment in Africa and Latin America is instrumental for economic and social development.

A G2 will not be formed any time soon and the G7 and G20 summits will continue to issue ambivalent promises about making the world a better place.