Are the days of free trade over?

Financial leaders from the wealthiest nations haven’t committed to fight trade protectionism at the recently-held G20 summit. Is this a response to US President Donald Trump's plan to revive America's ailing manufacturing sector?

Photo by: Reuters
Photo by: Reuters

German Finance Minister Wolfgang Schaeuble couldn’t convince US Treasury Secretary Steve Mnuchin (R) to give assurance that the world’s biggest economy was against protectionism.

Is the open market being restricted? 

When finance ministers and central bankers from the world's 20 most powerful economies meet, they usually issue a communique reaffirming their commitment to free trade.

This year was different.

The statement released on Saturday, following a two-day G20 meeting in the German town of Baden-Baden, only made a passing reference to the importance of trade to the global economy.  

The tough words "resist all forms of protectionism" part of last year's statement were omitted. 

Trade protectionism occurs when countries make exchange of goods and services across borders difficult.

It may seem symbolic but the sentiments of G20 leaders are important. The G20 shapes international trade and defines how investors and businessmen operate.

The G20 financial leaders deviated from tradition by not endorsing a commitment to free trade. (Reuters)

How did it come to this?

Trump's policy to create more jobs and boost American companies played a major part.

It marks a shift in Washington's policy that has historically favoured open markets.

Trump said international trade agreements signed by his predecessors have left US-based companies uncompetitive and led to job losses.

Since he took office in January, Trump has pulled out of the Trans-Pacific Partnership (TPP), a key global trade pact, and threatened to undo another agreement, North American Free Trade Agreement (NAFTA), that is credited for increasing trade between Mexico, the US and Canada.

"We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs," Trump said in his inaugural address.

Even before the G20 summit, Trump accused China and Germany of deliberately undervaluing currencies to benefit their exports.

A cheaper currency means the exporters earn more than the competitor in rival trading country.

US President Donald Trump triggered the switch in America’s long standing support for open markets when he pulled his country out of the multilateral Trans Pacific Partnership Agreement. (Reuters)

The US administration seems satisfied with the G20 meeting’s outcome.

"I understand what the president's (Trump) desire is and his policies, and I negotiated them from here," US Treasury Secretary Steven Mnuchin said after the meeting.

"I couldn't be happier with the outcome."

Could Europe's strongest economy have done more? 

Experts said Germany failed to influence the wording of the communique that made a slight reference to free trade.

"The weak wording on trade is a defeat for the German G20 presidency,"  Ifo think tank economist Gabriel Felbermayr said.

"This is particularly true in the light of the fact that Germany is one of the world's strongest export nations and relies on open markets to maintain its prosperity like hardly any other country," he said.

As the G20 was underway, German chancellor Angela Merkel met Trump in the US.

"Right now I would say the negotiators for Germany have done a far better job than the negotiators for the US," Trump said on Friday, talking about trade pact benefits German manufacturers have over their American counterparts.

Only 24 hours later the G20 issued the communique.

The trade imbalance between the two countries favours Germany, and has been a source of tension for years.

Germany exported $148 billion in goods and services to the US last year, while US’s exports to Germany were $80.2 billion.

Some groups not happy with losing jobs to competition back Trump in his bid to do away with trade pacts. (Getty Images)

The US, unhappy with Germany's huge trade surplus, has threatened to tax imported German goods.

Merkel’s government said the taxation would be challenged at the World Trade Organization (WTO).

How would tighter trade controls affect the global economy?

It remains to be seen.

Some, including the German Finance Minister Wolfgang Schaeuble, downplayed the communique's language.

"It was totally undisputed that we are against protectionism. But it is not very clear what protectionism means to each minister."

Another G20 meeting takes place in July with heads of state, where a clear direction of global trade will emerge.

However, Washington’s move away from free trade will affect economies around the world.

Economists have warned that Washington's unilateral withdrawal from trade deals or taxes on imports could result in trade wars. 

This could negatively affect companies, such as Apple, that rely on global supply chains.

The G20 summit was also marred by protests against the austerity measures. Reuters

Trump says he would increase taxes on the import of goods that American companies manufacture in other countries but sell to American consumers.

International trade makes up half of the global economic output.

Barriers to trade, either in taxes or other policy measures, affect jobs and investments.

The G20 economies that include the United States, China, Germany, the European Union, India and others, have gained from free trade. 

TRTWorld and agencies