Very Preliminary Draft – I look forward to your comments

Addressing Global Macroeconomic Imbalances:Burden-Sharing under Plaza and Now

Gregory Chin1

This paper starts from the premise that some degree of international collective action, involving coordinated burden-sharing is needed in order to bring about a sustained reversal of the global macroimbalances that currently afflict the world economy. The normative assumption is that we ought to seek such a reversal in the interests of securing stable and sustainable global growth over the longer-term – that ongoing imbalances will only fuel further inter-state tensions and instability in the global order.

The paper asks what combination of political factors appears to precondition ‘successful’ negotiations on coordinated burden-sharing measures that are aimed at correcting global macroeconomic imbalances? Success is defined here merely as the ability to reach a new international consensus between the principal actors on 1) the nature and source of the (global imbalances) problem and 2) the plan of collective action that is to be taken in trying to reverse the problem. The definition of ‘successful’ does not extend to the actual outcomes of the measures taken. The bar is set low in gauging successful negotiations – that new international consensus can be reached on problem definition and a plan of coordinated action. The working hypothesis (assumption to be tested) is that there is currently a wide gap separating the principal actors in the global system in terms of how they conceive of the source of the problem, and on the steps to be taken in order to reverse the imbalances. There may also be major differences of view on how much the imbalances actually need to be reduced (or should be reduced) in order for the world economy to be set on ‘proper footing’, i.e. to be functioning in an efficient and stable manner, such as to allow for sustainable world growth and development.

The paper takes a comparative and global analytical approach, comparing the current approach of the predominant powers to dealing with the global imbalances to that of the Plaza Accord (1985). It refers to the strategy of the Geithner/Summers team as the driving force of the current approach between the great powers. Plaza – seen as a case of ‘successful’ international consensus building for coordinated action on tackling global imbalances – is useful for comparison in two senses: first, to develop a better sense of the current Geithner/Summers strategy, both its main components, and its potential limitations; and second, to develop a preliminary understanding of the key international political interests, institutional and diplomatic factors that lay behind or underpinned the international consensus that was built for Plaza. An understanding of the factors of ‘success’ behind Plaza, are useful for drawing comparisons between the world context then and the current (or emerging) global context now, in which a broader-based global 1 The ideas in this paper were developed through ongoing discussions in the Chatham House-CIGI Global Governance Study Group. I especially thank Thomas Bernes, Paul Jenkins, Daniel Schwanen, Paola Subacchi and Wang Yong for their comments and suggestions. I thank Robert Fauver for sharing his insight on the Plaza Accord.

multilateralism has arisen at the apex of the international system has come to the fore – namely the G20 process. An awareness of the differences between the present global context, and the previous scenario of the Plaza period allows for the determination of the relevant policy lessons to the drawn.

The two main policy goals of the comparisons drawn here are to identify the factors that may be constraining the current approach, or the preconditioning factors that may be missing in the current international political and diplomatic strategy; and to outline some proposed means for bridging across the ideational and institutional gaps that currently inhibit collective action on reversing global imbalances, including the alternative institutional measures (currently not being used) that are perceived as necessary for supporting the international collective action on global imbalances.

The paper has less to offer in terms of the technical economic policy adjustments that should be taken in the current context. I leave to my qualified colleagues in economics the daunting task of determining what is the optimal global exchange rate regime, and international monetary system, for the future. I am not here arguing for a “Plaza II”, which would imply a preference for the exchange rate system that resulted from Plaza. Such an argument may not show the necessary appreciation for how the broader global context of international governance may have changed, nor of shifts in the international norm in terms of exchange rate regimes.

The main argument here is that a managed reversal of global macroimbalances will require a significant degree of international collective action, specifically, coordinated macroeconomic policy adjustments and exchange rate movements, and possibly also microeconomic policy adjustments. In the current context, this will require building the supporting institutional arrangements, which includes both organizational or architectural arrangements, as well as the necessary shared ideational basis for collective action, which would include some basic agreement on the nature of current problem that we face with respect to global imbalances, and on the range of actions that should be taken to address the problem. Currently such a shared vision or view does not appear to exist between the great powers or with the other principals in a broader Group of 20. The paper ends by discussing whether, and how, such a broader collective vision may be fostered.

The Plaza Accord2

Current efforts to tackle global macroimbalances remind us of previous efforts to reverse similar imbalances, although the magnitude of the current imbalances may be unprecedented.

One approach to dealing with global imbalances was World War II. The upside of that approach was that it resulted in Bretton Woods. The creation of the Bretton Woods institutional arrangements was motivated not only by technical economic efficiency or 2 The understanding of The Plaza Accord presented here is based on interviews with the former deputy secretary of the US Treasury Robert Fauver, who attended the deputies meetings for the negotiation of Plaza, including the final meetings, when he was appointed the lead pen in drafting the joint communiqué for the Plaza Accord.

optimal growth calculations. The birth of Bretton Woods were intimately tied with what was still then an effort to get out of the great depression, and a desire to create the institutional arrangements that would enable the world or inter-national community to never again end up in a situation of all-out world war again, two great wars, driven in no small part by major economic tensions between traditional and rising powers.3 Despite the positive institutional outcomes of WWI and II, which includes both the UN and Bretton Woods, we likely do not want to revisit those political preconditions.

Another case study, a more recent case is the Plaza Accord of September 1985. The Plaza hotel meeting of the G5 on 22 September 1985 has been hailed as a major initiative in international economic policy coordination in dealing with global macroimbalances. Much has been made of its role for exchange rate realignments. However, what was unique about the Plaza Accord, what made the Accord unique, according to a former senior US policy insider was that its strategy for dealing with macroimbalances was based on a combination of exchange rate movement and macroeconomic policy adjustments. The two were negotiated together, simultaneously, and understood as having to go together, announced together, implemented together. The view at the time was that “the former without the latter would not work. Would not work in terms of actually bringing a sustained reversal of the imbalances. Would not in terms of convincing currency markets that we [US/G5] were serious about our intentions.” The statements show that the strategists behind Plaza gave serious consideration not only to politics but also what Funabashi called the “hidden protagonist” – the one hidden from the meeting room, the currency market. Specifically, the dynamics between political-led economic adjustments and (currency) markets.4

Randall Henning has portrayed James Baker, his appointment as Treasury Secretary, and his Treasury team as the key factor behind America’s shift from a unilateral to an interventionist approach on addressing macroimbalances during the early to mid 1980s. Baker’s role no doubt was important, especially in appreciating the political imperatives behind why the Reagan administration had to take the shift to Plaza-type adjustments. As former chief of staff for Reagan, Baker would have been well attuned to the concerns of the numerous lobbyists who were coming to pressure the presidential administration for policy changes. However it was David Mulford, Assistant Secretary of the Treasury for International Affairs who is identified as having formulated the basic plan behind Plaza.

The most authoritative study of Plaza identifies Richard Darman, Baker’s deputy secretary, along with Baker as key to the reformulation of US economic policy that preceded Plaza, especially on non-intervention in currency markets.5 But it also notes that Mulford also recognized the need for policy change “to deal with the current exchange market situation”. Mulford wrote the confidential memo to Baker in early June 1985 that outlined a package of economic and financial measures designed to strengthen the nondollar currencies without committing the US to full intervention. He further proposed using a high-level meeting such as the Group of Ten meeting scheduled for

3 Eric Helleiner, “A New Bretton Woods?”, International Affairs, May 2010. 4 Y. Funabashi, .p.3.5 Ibid,p.10.

June 22, 1985 to build the necessary “agreement on major policy changes among the ‘three essential countries’”.6

According to a former senior US policy insider, the two aforementioned points were part of Mulford’s plan, and especially key to Plaza: “First, that we didn’t negotiate exchange rate adjustments, and then leave the accompanying macroeconomic policy adjustment till later. To figure them out as we go later, after first introducing the exchange rate adjustments. We recognized that the only way that macroimbalances would really be addressed in a sustained way – would really be addressed – was if the accompanying macroeconomic policy adjustments were also worked out simultaneously, and introduced at the same time. This was also key to convincing or assuring the markets that we were serious about the adjustments, and had a real and sustained plan for making it happen.

The former senior policy insider stressed that “intervention on exchange rates only buys you a bit of time. But you need to macroeconomic policy adjustments to sustain the changes in the currency markets.” The Williamsburg Report of the G7 1983/84 makes note of an “Intervention Study”, which showed that exchange rate interventions only buy you a certain amount of time.

Thus the macroeconomic policy changes that accompanied the exchange rate changes are embedded in the Communique of the Plaza Accord, in the Annexes. “We worked out both sets of adjustments at the same time, and issued them together for everyone to see.”

The Geithner/Summers StrategyAre Geithner and Summers taking a similar approach to Plaza? There are some significant differences in terms of overall context. One clear difference is that it was the other members of the G5 that were concerned with an overvalued US dollar in 1985, and they had to convince the US to take interventionary action on the exchange rate of the dollar, whereas now it is the US that is pushing the idea that its currency is overvalued and the other major trading states (namely China, Germany and Japan) are not raising concerns about overvaluation (Canada is the exception). Another difference is that it was Japan and Germany that were pushing the US to intervene in currency markets and on exchange rate adjustments in 1984-85, and it was the US that was insisting on accompanying macroeconomic policy adjustment measures. This is not the case now between China and the US. It is role reversal. After the Obama administration assumed office, they initially pressed Beijing on the exchange rate. However, they soon settled on working with Chinese authorities on coordinated macroeconomic policy measures. Third, there is a major difference in terms of which exchange rate models are now accepted as the norm, and which are now seen as the exceptions or ‘problem’. Flexible exchange rate regimes have become not only increasingly acceptable in the four decades since the Jamaica Accord, but are leading contenders for the status of the norm.7

6 Ibid, p.11.7 I thank Paul Jenkins for highlighting this point.

Where there appears to be some shared experience is that Geithner/Summers have come to settle on an approach that combines exchange rate movements and accompanying macroeconomic policy adjustments, simultaneously. In Geithner’s September 2010 testimony to Congress8, he clearly notes the correlation between exchange rate changes and related macro-policy changes. To cite Geithner’s testimony, he states that: “Clearly, China's exchange rate must play an important role in [preventing a return to pre-crisis global imbalances].” However, Geithner adds: “…exchange rate appreciation also needs to be complemented with structural reforms to reduce the gap between saving and investment in China in order to bring about a durable rebalancing.”

Giving more details, the Treasury Secretary goes on to say:

China responded to the financial crisis with several steps that, if sustained, would help to reduce its reliance on exports and stimulate domestic demand, including a large increase in spending on health care, education, and pensions that should reduce the need for Chinese households to save for precautionary reasons. Top priorities for further structural reform include liberalizing interest rates, lifting energy price subsidies, and removing barriers to investment in the service sector. Each of these measures would reduce the current bias in China's economy towards heavy manufacturing and exports and away from services and household consumption.9

The Treasury Secretary then continues by hammering on the exchange rate in more elaborate fashion, perhaps to demonstrate responsiveness to political pressures from Congress on the trade imbalances. In this respect, Geithner/Summers pitch may reflect a similar objective (short-term goal) with the Baker Treasury of trying to stave-off protectionism from the US Congress. Geithner states:

It is the judgment of the IMF that, in view of the very limited movement in the Chinese currency, the rapid pace of productivity and income growth in China relative to its trading partners, the size of its current account surplus, and the substantial level of ongoing intervention in exchange markets to limit the appreciation of the Chinese currency, the renminbi is significantly undervalued.

We share that assessment…

We will take China’s actions into account as we prepare the next Foreign Exchange Report, and we are examining the important question of what mix of tools, those available to the United States as well as multilateral approaches, might help encourage the Chinese authorities to move more quickly.

Geithner lays out, in general terms, what the US wants China to do:

8 http://www.theglobeandmail.com/report-on-business/geithners-testimony/article1710083/9 Ibid.

China needs to allow significant, sustained appreciation over time to correct this undervaluation and allow the exchange rate to fully reflect market forces.

Specifically, in evaluating progress two key factors should be the pace and extent of appreciation and the level of ongoing intervention required to slow the rate of appreciation.

As the exchange rate gets closer to a level that reflects underlying economic fundamentals, the level of intervention should decline. Continued heavy intervention, in contrast, would support the judgment that the currency remains undervalued.

China and other surplus countries like Germany and Japan will have to increase domestic demand as the United States and other deficit countries save more and consume less. By continuing to maintain a rigid exchange rate, China is impeding the adjustments needed to secure the strong, sustainable global growth we all need.

He emphasizes that:

We are pursuing these important economic objectives at the highest levels of the U.S. government, with a carefully coordinated assessment of priorities, led by the White House, and using all available tools, consistent with our WTO obligations.

Geithner notes that the administration is pursuing these goals at the bilateral level through the US-China Strategic and Economic Dialogue. He also notes that the administration is following up further via multilateral or plurilateral platforms:

…including the G-20, APEC, and the IMF to press China to achieve balanced, sustainable growth, particularly by allowing prompt, meaningful, and continuing appreciation of the renminbi… In the G-20, we expect China's commitment to rebalancing to be a key part of the agenda at the Leaders Summit in Seoul later this year.

From the points above, we see some similarities with the approach taken for Plaza. However the testimony is much heavier on the need to see exchange rate movements, and light on the details of accompanying macroeconomic policy adjustments. Unlike Plaza, there is explicit reference in the testimony to accompanying microeconomic policy adjustments that are also needed, at the level of incentives or factors that affect the behaviour of firms, although these comments are short on detail. Perhaps the intention is to work these out in the closed door bargaining that is still to come.

The Geithner/Summers approach also appears to differ from Plaza in terms of medium and longer-term objectives. Funabashi suggests that the medium-term objective of Plaza was “to maintain world economic growth by stimulating domestic demand in Japan and West Germany, and the long-term objective as “to ease the burden of debt service of the

United States.10 In the current context, the medium-term goal of the US appears to be to ‘stimulate domestic demand in China and other major surplus countries in order to help restore US economic growth and to ease its debt servicing’, and the longer-term goal is ‘maintaining world economic growth by stimulating demand in China and other major surplus countries.’ This difference may say something about the relative strength of the US economy in the world economy at this stage in world history, and how it must now prioritize helping itself ahead of helping others, or suggest that helping the US is at the same time ‘helping the world economy.’

Behind PlazaThe leading study on Plaza states that “the details of the behind-the-scenes maneuvering before and during the Plaza meeting have never been fully disclosed. The participants often worked from secret documents, many of which had been negotiated during the preceding months both at the G5 deputy level and at the bilateral level, mostly between the United States and Japan, and to a lesser extent between the United States and West Germany.”11

Funabashi writes that “the process that culminated in the Plaza Agreement originated from exploratory talks between the United States and Japan to address the huge trade imbalances between them.”12 The author’s interview suggests an even more precise source. A senior US policy official states that what became the Plaza Accord, started with bilateral negotiations, specifically the negotiations to open Japanese financial markets that the US undertook with the Japanese authorities. The negotiations started with the 1984 negotiations over Yen internationalization and financial market opening. These negotiations resulted in the Yen-Dollar Reports of 1984 and 1985.13 It was in the course of these yen internationalization and financial markets negotiations that US officials came to realize that Japanese authorities were open to discussing exchange rate adjustments; that “we could work with Japan on exchange rate negotiations. The negotiations started bilateral first, with the Japanese first, and then the Germans. And then, after reaching agreement on the bilateral level, then going to the rest of the G7.”

According to the senior US official:

The negotiations involved us outlining what we wanted the Japanese to do; and then what we wanted the Germans to do. And, for each issue, what they wanted us to do. And after we reached agreement, we then brought it to the rest. First we started with the 3; and then to 5.

It was a secret deal initially between the 3. Then between the 5. The point here is that the key bargaining was actually, or firstly, bilateral. And then supplemental

10 Y. Funabashi, p.4. 11 Ibid, p.10.12 Ibid.13 The results of these negotiations became the basis for the US-Canada financial sector negotiations that led to the US-Canada Free Trade Agreement.

commitments were worked out, arguably mainly to reduce free-riding on the bilateral deal.14

One cannot but help noticing that the process started with intensive bilateral negotiations on a related issue-areas, where the trading partner to the US has a high level of interest in making a gain that helps reduce their currency vulnerability (i.e. yen internationalization),and then on a related issue that is of strong interest to the US (opening Japanese financial markets). And then the US turned to the next key trading partner and worked out similar trade-offs on the related issue-areas. And then it turned to what was still a small group of two others (the UK and France) - likely to work out the arrangements to ensure that free-riding was avoided or contained.

It should not be forgotten that another important enabling factor for the bilateral breakthroughs that led to Plaza was that Japanese Prime Minister Yasuhiro Nakasone made the important decision to direct his finance minister and the vice minister of finance for international affairs to explore the possibility for a comprehensive strategy, including realignment, to cope with the imbalance problem that he believed would threaten the US-Japan “special relationship”.15

The situation between the great powers today, their approach now, and the broader world context seems quite different. From a ‘Plaza II’ type perspective, there is the US-China S&ED. But one wonders how intense or committed the two principals are in making some serious breakthroughs. Is China bringing-up RMB internationalization? Are senior party and government leaders in Beijing interested in comprehensive strategy, including exchange rate realignment, to cope with the imbalances. The Chinese policy and scholarly discussion on the Plaza Accord, which tends to be highly critical of the Plaza agreements, would seem to suggest that Beijing would be very hesitant about entering into such comprehensive negotiations with the US. Japanese officials have also not been shy in their criticism of Plaza, as the cause of their decade longer recession in the 1990s. For China, there appears to be serious caution about discussing a comprehensive strategy for dealing with the imbalances, including realignment without also adding the future of the dollar order, i.e. a gradual downsizing of the dollar’s position in a transition to a multi-reserve currency or a multi-polar global monetary system.

Is the US engaging seriously either on RMB internationalization or a gradual transition beyond the dollar order? What are the prospects of these two making a secret deal. Is Beijing offering any deals to Geithner to bring home to help in his efforts to fend off

14 This line of thought builds on analysis on the limited degree of multilateralized agreements in the G summits. George von Furstenberg has noted that many of the key bilateral deals that were worked out at the G summits did not need to be fully “sold” to the rest. That the so-called “multilateral deal making” often represented an attempt to get closer to the joint optimum by preventing, or reducing, free riding. One of the often cited ‘successful’ summits in terms of international coordination outcomes, the 1978 Bonn summit, actually had a strong bilateral component, in which the basic deal was negotiated between the United States and Germany, with each country making concessions to the other. The other countries were net beneficiaries of this deal as free riders. This early success story set the G summits on a certain path in terms of group bargaining dynamics.15 Y.Funabashi, p.11.

protectionism in the US Congress? Beside China, which other major surplus country does the US need to broker a deal with? Japan? Does Japan appear in a position economically to give on revaluation. It is currently fixated on interventions that aim at devaluation of the yen.

Is it even feasible to think of the US, China and Japan brokering secret deals and then moving to sell it to a larger Group of 20? The new global context is one where a broader based multilateralism seems to be the preferred approach. The sustainability of a G20 Leaders approach is still to be proven, and will likely be determined by its effectiveness, or ability to deliver the needed results. However, suffice it is to note for now that China, Brazil, India and a number of the other emerging countries seem to support the move toward this broader-based approach to international governance.

What does the shift toward a G20 mean for the feasibility of an approach that would start instead with a smaller group of ‘essential nations’? The existence of a G20 Leaders grouping implicitly highlights the representational legitimacy problems of starting instead with a smaller group of core ‘essential’ dealmakers? Even if the proponents of the smaller group approach could figure out how many from the G7, how many major emerging exporters, and who are the biggest concerns for free-riding, and how to incorporate their participation, the smaller group would still have to face the challenge of ‘managing’ the rising expectations for participation of the ‘others’ from the broader group of 20?

Then, and Now

One of the factors that the G3/G5/G7 had working in its favour was a certain degree of shared view or intellectual starting points. The rest of the G5 had were already onside regarding the need for the US to intervene to affect the overvalued dollar in the early to mid 1980s. Once the US came around, the 5 as a group were able to move fairly rapidly.

Today, we are dealing with a much more complex scenario in terms of differences of policy attitudes and beliefs. These differences in policy attitudes may not be determined simply by interests. Differences in ‘views’ on, for example, the preferred monetary order, or on the source of global macro imbalances are now a major source of disagreements about desirable international coordination strategies. Different assumptions about the ‘true state’ of individual economies and the global economy writ large, and about which economic model of growth and development is ‘correct’ is complicating the international coordination process and may also reduce its potential gains. As Cohen has noted, such differences in beliefs on the correct development model underpin the different approaches to exchange rates in key parts of the world economy, for example, the link between a preference for state-led market development in East Asia and its preference for strongly managed exchange rates, and the preference for less regulated economy and more flexible exchange rate regimes in other parts of the world.

Putnam and Bayne have written of the political functional role of the Trilateral Commission, and the importance of transnational and transgovernmental coalitions – espistemic communities – in instigating and sustaining coordination. Such coalitions formed around shared policy beliefs and goals served to mitigate opposed national positions. Some have observed that it also played a very important role in reinforcing shared geo-strategic beliefs, which implicitly underpinned the shared economic beliefs. However, this role would arguably be even more important now, since the end of the Cold War between the US and USSR, but when it still has a hang-over effect on the US-China relationship.

Into the period of Plaza, the IMF also played a key role in providing shared beliefs and policy goals, due to the residual institutional inheritances of the G3/G5’s three decades of intimate participation in the Bretton Woods system. The Fund’s role in the provision of information about members’ policies through the Article IV bilateral consultations and multilateral surveillance provided both important data for policy coordination but also fostered and reinforced shared beliefs on economic policy. Moreover, the active role of the Managing Director of the Fund in negotiations over model-building, and helping to overcome disagreements between the negotiating parties about their models, and trying to put forth equilibria or focal points to seal a policy bargain also put the Managing Director in a position to foster and reinforce shared views or beliefs.

The Bretton Woods system itself was underpinned by inherent geopolitical and geoeconomic understandings coming out of two world wars. It is now easy to forget that the ‘leap of faith’ behind investing in a rules-based Bretton Woods institutional order was explicit understandings of geostrategy: the desire never to return a world where geoeconomic rivalry could be allowed to feed into geopolitical contestation and inter-state war. The pact of embedded liberalism was to allow for not returning again to such a world scenario. The G3/5/7 could work off the implicit security pact that emerged from the Cold War scenario. This is not the case for the G20.

The G3/G5 had the combination of ideational and geostrategic variables working in their favour when they worked out Plaza. In contrast, now, not only China, but Brazil and a number of other major emerging countries hold strongly that the rules need to be re-written. Brazilian authorities under the Lula da Silva administration have a different approach to a managed floating exchange rate, and there is more flexibility in the Brazil’s exchange rate regime than in China’s, however, both have held similar views on the source of the problems of the global macroeconomic situation in the sense that they both believe that the US has been the problem in running its massive current account and trade deficits.

Brazil has been in the forefront of calling for fundamental reorientation of the IMF’s surveillance and other policy coordination functions, and the reform of its governance and operational structure. Marcel Biato, a Brazilian senior foreign policy insider16 has

16 Since 2003, Marcel Biato has been special assistant to the President of Brazil’s chief foreign policy advisor.

suggested that: “a battle is now being waged for the “heart and soul” of the Bretton Woods institutions, as developing countries demand better access to adequate funding for infrastructure and other national developmental investments that will allow for long-term growth and job creation.17

Brazil has also championed a number of operational reforms for the Fund. In the run-up to the global crisis, Brazilian authorities had argued that an “important test” of the resolve of the traditional powers would be their reaction to two ‘long-standing’ Brazilian proposals on IMF accountancy rules and lending procedures – proposals for changed to IMF rules that were initiated proposed by the preceding Cardoso administration.18 The Brazilian government proposed that productive public sector investments should not be designated on national accounts as “expenditure”. This procedure was said to restrict the ‘already meager’ resources available for growth stimulus even for countries such as Brazil, which have made the turn to sound economic management. Secondly, Brazil proposed that the IMF make available an emergency credit line to fiscally responsible developing countries that could be drawn upon at short notice.

Beyond new consensus on new rules for the international monetary system, the rising states are also calling for new rules for the global financial regulatory regime. For example, on the issue of bank levies, in responding to a draft of the G20 communique that was leaked to Reuters which stated that countries “have the option to pursue a bank levy” to fund future rescue deals, Beijing has held the same stance that there is “no one-size-fits-all policy” on this issue. According to Zheng Xiaosong, director-general of the international department of China’s Ministry of Finance: “A bank levy is not the only effective way to reduce the risks of financial institutions and contain a financial crisis. The best way to prevent a repeat of any financial crisis in the years to come is to raise the regulatory standard and further improve the regulatory system.” Zheng added that ‘China is not opposed to any discussion of the basic principles of a bank levy in the context of the G20 summit, however it should be up to each individual country to decide whether or how to introduce the policy.’19

There are strong indications from key new stakeholders in the world economy, namely members of the BRIC, and even Japan, Korea, ASEAN states, and other seeking greater regional monetary cooperation, that they would prefer a gradual shift to a more “multi-centered and multi-layered global monetary system”. Multi-centered is euphemistically referred to as “multi-polar”. One could suggest that such a system already exists. But what is new, especially since the 2007-08 global financial crisis, is the interest in a more multi-layered global monetary system, with SDRs and regional monetary cooperation mechanisms backing-stopping or supplementing the dollar system. China has been one of the most explicit powers calling for such change to the global monetary system. Wang Yong and I have studied some of the Chinese ideas. The Russians present another set of issues (perhaps concerns), both on the currency and international monetary front, and on financial reforms.17 Marcel Fortuna Biato, “Shaping Global Governance: A Brazilian Perspective”, Studia Diplomatica, LXI: 2, 2008, p.69.18 Ibid.19 http://www.chinadaily.com.cn/china/2010g20canada/2010-06/28/content_10026260.htm

On the security front, a senior US policy insider for Plaza remarked: “Before, we [the US] spoke with a louder voice than now. We could take certain things for granted. These don’t exist now. Part of this is shared views. The other part is security underpinnings.” Despite the gains in the US-China security dialogue and common military exercises over the past two decades, the continuing lack of trust in the area of security is fairly obvious.

For the US and not only China, but also a number of other major emerging countries, there is an underlying issue of trust. This can be seen across a number of institutional settings. The WTO, the bog-down of the Doha Round is in large part due to the lack of trust between the US and the major emerging economies. How to build trust? It will likely emerge from intensive negotiations and bargaining in the writing of new rules for the governance of their economic relations, and potentially for the world economy – and likely through the cumulative effect of bilateral and multilateral bargaining processes, which may also include some innovations from new regional cooperation efforts. This dimension of new rule making is actually the easier part. The most difficult, but related requirement is how to build the enabling security environment. The security dynamic can no longer be taken for granted as the necessary underpinnings for new economic agreements.

It is hard to tell without being on the inside meetings and discussions of the US-China S&ED. What are the specific trade-offs that are under negotiation, especially accompanying macroeconomic or sector policy adjustments? Whether the US is offering up trade, market access, investment, credit or other inducements as trade-offs to ease exchange rate adjustments that China would have to undertake? One sticking point has been expanded access to the US financial sector or investment opportunities in key sectors of the US economy. Giving greater access to China’s SWFs to invest in the US. Another sticking point has been granting China access to importing technology that is currently deemed as state sensitive by the US. One way to deal with imbalances is to broaden tradable sectors for Chinese imports, and access to US assets for Chinese investors. The above points allude to the more complicated security dynamics that frame the now paramount US-China relationship, than the previous fulcrums of the world economy, the US-Japan or US-Germany relations. The residual Cold War security factors are further complicating the effort of reaching consensus on collective action for reversing the current imbalances.

Summary

In a world where there has been a shift toward a more inclusive model of discretionary bargaining and ever more reliance on discretionary bargaining to set strategic agendas, it would be imperative for any bilateral trust building efforts – even between the two paramount powers – to make direct efforts to coordinate their decision-making and intended actions with the broader plurilateral grouping.

An alternative is to consider the G20 a useful platform for building the new trust. I would suggest that the efforts of the G20 would need to anticipate developments and breakthroughs at the bilateral level, and be able to make the coordination linkages to the policy bargains that may be struck at the bilateral level between the preeminent powers.

In either case, it would be in the interest of the proponents of the G20 to consider how best to identify and foster a conception of systemic interdependencies and to determine the most effective and legitimate institutional mode of international coordination that can take account of collective interests.

Future research along these lines would include analyzing: 1. Conditions that can be expected to alter politicians’ policy ideas, and how cognitive shifts can help produce changes in international negotiating positioning

2. The potential role of international institutions in shaping government positions

3. Differentiating between different institutional modes of policy coordination (rules based vs discretionary bargaining) and identifying conditions favourable for success under each;

Identifying when and how to combine the rules based and discretionary bargaining based international coordination, depending on particular environmental conditions

What rules and practices will best capture opportunities to realize mutual gains through cooperation, given intellectual divergences between countries and within countries

4. What type of economic research is most needed to reduce technical disagreements

5. What type of political research is most needed to reduce strategic disagreements

6. Identifying the domestic political and intellectual conditions that are conducive to the adoption and operation of the desired proposals