There’s a certain logic to Japan holding this weekend’s meeting of Group of 20 finance officials in the western trading city of Fukuoka.
Among Japan’s big cities, it’s the most equidistant from China and South Korea at exactly the right moment – just as Northeast Asia is attempting to find common ground with the United States.
Fukuoka is also the closest thing Japan has to a Silicon Valley: It boasts the highest new-business rate thanks to light regulations, simpler visa processes and pro-startup taxes.
All this indicates that every challenge on the G20’s docket can be found in Japan’s fourth-largest regional economy.
That makes the city a promising backdrop as US Treasury Secretary Steven Mnuchin gets down to business with his Chinese and Japanese counterparts on Saturday and Sunday, for rarely has any moment been more fraught in global economic circles.
Still, it’s best to stay clear-eyed about any prospects for détente.
Presidents fight, ministers watch
Mnuchin may be the finance czar of the world’s biggest economy, but Donald Trump calls the shots – and his calls tend to oscillate. Chinese Finance Minister Liu Kun may manage the No. 2 economy, but the same rule applies: This is Xi Jinping’s trade war to fight.
Whether Mnuchin and Liu will even have a proper one-on-one remains up in the air. Although Mnuchin will have a tête-à-tête with People’s Bank of China Governor Yi Gang, he is, for now, only scheduled to participate in a panel discussion a with Liu.
And that session isn’t even on trade; its on tax policy.
Yet Asian officials would be wise to use this weekend to play the role of honest broker to encourage Washington and Beijing to tamp down tensions.
The Trump White House doesn’t really do facts or nuance. But this is Japanese Finance Minister Taro Aso’s best chance to explain how Trump’s tariffs are killing his economy’s best expansion since the 1980s. It’s an ideal opportunity to speak to his American peer in the language not of grievance but of falling exports, widening credit spreads and lost opportunities for workers seeking wages increases.
The same goes for Hong Nam-ki, who runs a South Korean economy that’s taking incoming from Trump’s tariffs. Exports from Asia’s No. 4 trading power shrank a sobering 9.4% in May. That raised big questions about Seoul’s ability to keep growth north of 2% this year. What’s more, core inflation in May slowed to a near 20-year low.
China’s downshift is spooking world markets, too. Data so far for May point to slowing output, sliding factory prices and the worst business confidence since at least April 2012. Its latest reading on the Caixin/Markit Manufacturing Purchasing Managers’ Index is 50.2 – just barely above the level that denotes contraction.
Of course, President Xi could tamp things down immediately if he desired.
One can argue with the fairness of Trump’s 25% taxes on $200 billion worth of Chinese goods, or effectively banning Huawei Technologies in the United States. But as Xi digs in and retaliates, Trump is upping the ante in return and increasing collateral damage risks for Japan, South Korea and other G20 members India, Indonesia and Australia.
The rising damage
Just this week, both India and Australia slashed interest rates to shield their economies from the trade war. Bank Indonesia is edging in that direction. In 2018, Jakarta’s central bank hiked interest rates six times, to 6%. Now Governor Perry Warjiyo has “room for accommodative monetary policy.”
Other topics on the weekend’s agenda include taxation treaties, cybersecurity and the rather sudden shift in monetary polices from Washington to Beijing. Mnuchin’s addition of Malaysia, Singapore and Vietnam to the Treasury’s currency-manipulation watchlist is sure to come up.
Clearly, though, the Trump-Xi ruckus will dominate the proceedings: Only Trump and Xi can end the trade war.
Still, in Fukuoka, Mnuchin and his Chinese counterparts can help ensure growth doesn’t get derailed. At the moment, economist Michael Feroli of JPMorgan Chase speaks for many when warning that “we could be in a permanent state of trade conflict.”
This, in Trump-adjusted terms, could be the whole idea. Just as with his border wall along the Mexican border, Trump often seems to relish a fight more than the actual result he battles for. This means the trade war itself could be the prize, rather than a means to an end.
Time for coffee-break diplomacy?
Yet, here’s Asia’s chance to get Mnuchin alone and explain not just how much pain Trump is inflicting, but the many ways it could boomerang back and hurt US growth.
Aso, Hong and others could try to the bridge the widening gulf between Mnuchin’s economy and Liu’s.
Even during coffee breaks they could try to work our what might be a face-saving concession that brings Trump and Xi together when they’re both in Osaka at the end of this month for the G20 leader’s summit.
None of this may be possible – or do much good. After all, it s often the case that such a pow-wow ends with a vague, non-binding paper statement (if that).
But this weekend, Asian policymakers have a chance to speak directly to the policymakers whose policies are imperiling their nations’ economies. Such an opportunity is rare in the Trump-Xi era.
Let’s hope it is not wasted.