The Asia-Pacific Economic Cooperation (APEC) Summit, tomorrow and Thursday, will no doubt see its trade and regional integration agenda overshadowed by new global threats. At this week’s Group of Twenty (G20) summit, the economic agenda rightly took a backseat to the horrific attacks in Paris. Leaders reaffirmed their commitment to strong, sustainable, and balanced growth, and endorsed a range of initiatives underway from climate change to tax and financial reform. But few new economic initiatives were announced. A similar outcome is likely in Manila, though trade and investment deserve a central seat on the stage in the name of preserving global growth.
On balance, the weight of academic work (e.g., here and here) supports the intuitive judgment that terrorism is a drag on growth, particularly through its effects on trade, investment and tourism. At a time of slowing global activity, this raises the risk of a global downturn that G20 leaders may need to respond quickly to in the future. In this regard, with fiscal positions already stretched or constrained by politics, and interest rates near zero in major economies, there is less scope than in the past for macroeconomic policies to meet new threats. Ambitions in this area have been scaled down. I am pleased that the U.S. government did not default on its debt and eased spending caps slightly last month, but as an example of global fiscal policy coordination the recent bipartisan budget agreement and the very modest fiscal easing likely in Europe seem unlikely to be a breakthrough meaningful enough to reach G20 growth targets.
Terrorism also acts as a break on globalization by discouraging flows of workers and new cross-border investment. Increased trade can be a positive offset to these global headwinds, but here too the news is not all good. Trade has slowed sharply since the Great Recession. While macro drivers—growth, the end of a commodity boom, and rebalancing in China—explain much of the decline, it is also the case that increased protectionist measures in the industrial world are part of the problem.
At the APEC Summit, President Obama will need to make the case for the recently concluded Trans-Pacific Partnership (TPP). While far from a perfect agreement, TPP is an important step in establishing new rules and opening up trade, particularly in services where there is talk of a new initiative to expand trade in the sector. Passage looks uncertain in the Congress, and in any event may be a year or more away. Still, the TPP agreement remains a centerpiece of U.S. government efforts to rebalance its economic ties toward Asia and strengthen regional cooperation. Building regional acceptance for TPP as a centerpiece for regional economic relations remains at the center of U.S. strategy in the region.
Also on the economic agenda at APEC will be regional coordination of the multilateral financial institutions. While the United States and China appear to have healed wounds opened around the establishment of the Chinese-led Asian Infrastructure Investment Bank (AIIB) earlier this year, there are still questions to be addressed over the coordination of the new institution with the World Bank and Asian regional institutions. Further, the meetings will reveal more about China’s regional economic aspirations following the domestic economic turmoil this summer. Beyond that, there are a range of regional challenges that have a significant economic element, including cyber, climate change, maritime and the exploitation of common resources, and illicit financing. Maritime issues will of course hover over the summit, given recent disputes between China and its neighbors in the South China Sea, with the President likely to make the case for unimpeded lawful commerce and robust dispute settlement procedures. In all of these areas, expect serious discussion but little progress.
Last week, I wrote that the value of these meetings lies primarily in developing the relationships and mechanisms for leading countries to respond to global crisis, when it occurs. We may be closer to that moment this week.