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August 21, 2019

What to Expect – and Not Expect – at the Upcoming G7 Summit in Biarritz

French President Emmanuel Macron hosts the 45th G7 summit in Biarritz on August 24-26, 2019. The “Group of 7” is an important informal meeting of seven large industrial countries, including France, the United States, Canada, Germany, the United Kingdom, Italy, and Japan. The forum addresses global challenges such as trade, foreign policy, and climate change. Claudia Schmucker explains why the issues of climate and trade may hamper a joint final communiqué.

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1. Has the G20 replaced the G7?

The G7 lost some of its influence with the creation of the G20 in 2008, at the height of the financial crisis. Many global governance issues can no longer be addressed or solved without the large emerging market economies such as China, Brazil, or India.

Nonetheless, G7 member states still have enough political, economic, and financial power to influence the international agenda and start new global initiatives. As such, they can still function as a global agenda-setter and steering committee. Compared to the G20, the G7 has the advantage of being a smaller, more informal, and mostly more effective forum.

2. Under these circumstances, what role can the G7 play in restoring global trade governance, fighting protectionism, easing US-China trade tensions, and promoting the reform of the World Trade Organization (WTO)?

The G7 will likely not make any progress on trade issues. The problem is that the dividing lines no longer run between developed and developing countries. Instead, the rift in most trade issues runs mainly between the United States and almost all other G7 partners and G20 countries: The US is imposing tariffs against all major trading partners. US President Trump is escalating the trade war with China, and the US administration refuses to appoint new judges to the Appellate Body of the WTO – threatening the functioning of the entire WTO dispute settlement system. In addition, as we saw at the previous G7 summit in Canada in June 2018, Trump is happy to break up the G7 consensus based on his America First politics.

As the G7 relies on consensus communiqués, the best outcome will be vague G7 language on trade, including broad language that mentions the fight against protectionism and the right to establish fair trade at the same time. The reference to “fair trade” is a problem as there is no definition of the word “fair,” and it is mainly used to justify protectionism. Due to US opposition, the G7 will also likely refrain from supporting the WTO as the central guardian of a rules-based international trading system. The worst – but still possible – option in Biarritz would be a non-consensus on the role of trade.

Without the presence of China, the G7 lacks the power to address the US-China conflict. However, there might be consensus on new initiatives to address non-market policies, such as subsidies and state-owned enterprises, inadequate protection of intellectual property rights, and forced technology transfer.

3. Can the G7 address governance challenges posed by the digital economy and efforts to tackle tax havens?

In contrast to trade and climate issues, G7 member states do agree on reforming the international tax regime. Two questions will be addressed, the first related to the taxation of multinational companies in order to prevent the diversion of profits to tax havens. In this context, France suggested a minimum corporate tax rate of 13–15 percent for all multinational companies. If a foreign country charges a lower tax, the company would then have to pay the additional tax in its home country to reach the minimum tax rate. The OECD is developing new rules, but a compromise in the framework of the G7 could accelerate the process. This would be an essential step forward for the G7, which lacks tangible outcomes at the moment.

There is a second tax issue on the agenda. France recently imposed a new digital tax – a 3 percent tax on the total annual revenues of the largest technology firms (with a global revenue of 750 million Euros, and 25 million Euros in France). The tax is informally known as the GAFA tax – standing for Google, Apple, Facebook, and Amazon.Over the past two years, France has tried in vain to find a compromise at the EU level. Because of the lack of progress, Paris decided to move ahead at the national level but promised to withdraw the new digital tax as soon as an international alternative is negotiated through the OECD. However, this is not expected to happen before 2021. Other European countries such as Spain, the UK, and Italy are considering imposing a similar tax.

The US administration, supported by members of the US Congress, opposes the tax, which in their minds unfairly discriminates against US companies. Trump is threatening to impose trade tariffs and has launched an investigation under Section 301 of the Trade Act against Paris.

French Finance Minister Bruno Le Maire said France wants to reach a deal with Washington on a digital services tax by the time of the G7 summit. Reaching an agreement would be vital to showing that the G7 still works and is able to find compromises on critical financial issues. But the two sides are still nowhere close to an agreement.

4.  How will Germany position itself?

The most important topics for Germany at the summit relate to (1) international trade and WTO reform, (2) a renewed commitment to the Paris Agreement, and (3) the question of how opportunities created by digitization and artificial intelligence can benefit all people.

In trade, the German government – in cooperation with the other EU member states – will push for strong wording on the benefits of international trade, the importance of the WTO, and the fight against protectionism. But Germany will likely compromise for the benefit of a consensual G7 communiqué.

The German government always puts a strong focus on the issue of climate change. At the German G7 summit in Elmau in 2015, German Chancellor Angela Merkel described the G7 as a “community of responsibility.” In her view, the G7 is responsible for taking concrete action to tackle climate change. This includes a strong commitment to implement the Paris Agreement. According to the German government (and other EU member states), support by the G7 is non-negotiable. Therefore, the likely outcome of Biarritz will once again be the G6 against the US.

The third focus of the German government is on the question of how digitization and artificial intelligence can be used for the benefit of people, as well as for opening up new sources of economic growth. In Biarritz, the German government wants to focus on the question of how to achieve transparency, legal certainty, and a fair framework for competition on the internet. Other issues include data sovereignty and the promotion of digital education. It is expected that progress is possible in this area.

5. How much progress is the G7 summit expected to make?

Compared to the G20, the G7 is seen as a smaller and more effective forum that can more easily find compromise among like-minded countries. The G7 Foreign Ministers’ reaffirmed this in Saint Malo in April 2019, by stating that “the G7 is united by its shared values and commitment to a rules-based international order.”

But the reality looks very different. On the issues of trade and climate change (Paris Agreement) in particular, the United States and the other G6 countries are divided. The US has withdrawn twice from the G7 consensus on climate change: at the G7 summit in Italy in 2017 and at the meeting in Canada in 2018. This will likely repeat itself in Biarritz.

Progress is possible on other issues relevant for Germany. Questions of how to deal with digital technology and artificial intelligence will be high on the agenda. The French G7 presidency wants to create an International Group of Experts on Artificial Intelligence. This group would tackle the issue of how artificial intelligence can help the fight against inequality. Paris also wants to establish a Charter for an Open, Free, and Safe Internet and raise the accountability and transparency of online platforms.

Regarding work on health issues, during the French presidency, the G7 wants to continue to raise at least $14 billion to fight AIDS, tuberculosis, and malaria. The goal is to eliminate these pandemics by 2030, in line with the UN sustainable development goals (SDGs).

Apart from trade and climate change, progress is possible on a range of issues. Even if no final solution will be found in Biarritz, it is crucial to influence the international agenda through the G7 summit. However, if G7 members cannot achieve a real outcome and the open conflicts among them continue, the group will sooner or later fade into insignificance.
 

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Fünf Fragen, 21. August 2019

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