© 2016 Prof. Farok J. Contractor, Rutgers Business School
Note: A version of this article was also published on The Conversation as How the G20 can ensure the marvelous gains from globalization aren’t lost.
What do summits such as the G20 accomplish?
Posing for pictures after their summit, the leaders of the G20, a mixed bag of 20 countries—Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States of America—along with the European Union (EU)—often prompt people to ask, What exactly do they achieve? What is the purpose of such summits? (An even more dubious assemblage is the G77—a horde of leaders from originally 77 developing countries, now swollen to 134 emerging nations.)
The world is a very uneven and unequal place, made up of193 nations, each with its own language, culture, laws, institutions, and average income, ranging from a paltry $221 per person per year in South Sudan to $101,994 in Luxembourg. (See my October 7, 2014 post, Global Management in a Still-Fragmented World.) Yes, there are the United Nations, the EU, and trade agreements between countries. But really, no world government or judiciary exists that can enforce its will on a sovereign nation. National sovereignty is still very much the norm.
The G20 nations may be a mixed bag (whose governments range from democracies to monarchies to autocracies), but they cover 85 percent of world economic output and include the four most populous nations: China, India, the US, and Indonesia, which contain 3.26 billion individuals, or roughly 43 percent of humankind. The US and China alone make up 38 percent of the world gross domestic product (GDP) and 44 percent of global CO2 emissions. (See Figure 1.) And India and China together account for 39 percent of all humans. The G20 can potentially indeed be an impactful organization.
Figure 1. CO2 Emissions by Country, 2011
Source: Union of Concerned Scientists. Each Country’s Share of CO2 Emissions.
But what can the G20 leaders accomplish when they get together, other than develop personal relationships? Actually, a lot. Humankind is on the road to building a global civilization and an interconnected economy. This cannot continue without closer coordination and cooperation, especially with emerging threats and concerns.
China’s Coming Transformation and Implications for the Rest of the World
President XI Jinping, in his 47-minute inaugural G20 speech, summarized those threats and concerns. He also outlined the progress China had made since reforms began 38 years ago under Deng Xiaoping—how allowing markets to operate in China had unleashed the potential of Chinese commerce and lifted 700 million of his citizens out of poverty and into a middle-class status, especially by making China the export factory for the world.
However, in 2016, that economic model has gone as far as it can go, with neglect of the environment, polluted skies and waters, and a tightening labor market that has seen wages rising at between 10 and 18 percent per annum. China is no longer as competitive as it used to be in low-end, semi-skilled assembly work. The value captured by Chinese companies doing such work is tiny: for an Apple iPad retailing for $600, Apple, Inc. pays its Chinese assembly factory only around $10.
View my video interview for Xinhua. (I appear at times 0:00 and 1:00.)
To capture a greater share of the selling price, a company needs to do its own research and development (R&D), develop its own designs, and patiently invest in making its brand recognized worldwide. China aspires to follow the example of Samsung in the 2000s and Japanese firms in the 1980s. Fifteen years ago, few Europeans or Americans had heard of Samsung. A generation ago, Americans looked down on Japanese products as cheap and not so well designed. Today, Korean and Japanese companies do cutting-edge research, and their brands command premium prices.
Chinese firms hope to similarly capture more value through their in-house R&D and global brand recognition, as opposed to being mere assemblers for somebody else’s designs and brands. At least two Chinese companies are on the brink of achieving global recognition: Haier, the appliance or white goods manufacturer, and Huawei, the electronics and semiconductor giant.
Aspiring to higher value-added parts of the research>development>production>distribution>brand-value chain—particularly, research, marketing, and brand value—not only captures more profits, but is also less polluting and utilizes the rising scientific and business talents of the Chinese middle class (variously estimated as 400 to 650 million strong, depending on the income criteria chosen). “Quality instead of quantity,” and “A green mountain is better than a mountain of gold,” were a couple of the slogans used by Xi Jinping in charting the future course of the Chinese economy.
The G20 as a Forum for Immediate Concerns and Building a Global Economy and Civilization
Collectively, the G20 provides a forum to discuss a series of immediate concerns, but it could also potentially set long-term goals and norms for a global civilization. (See Table 1.)
Table 1. 2016 G20 Summit Concerns & Objectives
In 2016, the world economy faces significant concerns. Despite strong and healthy growth in India, China, and the US, overall planetary growth is sluggish in Europe and other emerging nations. World exports have flattened. From Donald Trump to Brexit to the rise of nationalist parties in Europe, Turkey, and elsewhere, xenophobia and protectionist sentiment are on the rise. The reaction against globalization can be salutary only to the extent that it spurs local companies to become more competitive. Otherwise, xenophobic and excessive protectionism are recidivist in threatening to take us backward to a more fragmented, “raise the drawbridge” world where greater self-sufficiency means an effectively lower standard of living for all.
The G20 needs to jointly defend and articulate to its populations the net benefits of trade and foreign direct investment (FDI). It should commission a study that quantifies the benefits of globalization, as well as its inevitable costs, to show that, on average, the former greatly outweighs the latter. For instance, if each of the 124.6 million American households annually saves $800 per year because of cheaper imports, the total benefit, or saving, comes to around $100 billion per year. (Average Walmart shoppers subliminally recognize this, but cannot quantify the benefit they enjoy.)
Overcapacity in Chinese companies is a bone of contention. Several industries in Europe and the US (particularly in steel, metals, and construction materials) have been severely hurt in 2015–2016 by Chinese imports that competitors allege are being “dumped.” But what is dumping? Predatory dumping is when a firm sells at “below cost” in order to drive competitors into bankruptcy. And what is “below cost”? Firms have two categories of cost: fixed costs (those that must be incurred even if the firm is producing nothing) and variable costs (those directly associated with production, such as labor and materials, incurred only if and when the item is produced).
To stimulate continued investment-led growth after the global slowdown in 2008, many Chinese enterprises, some aided by government support under their five-year-plan targets, overinvested in large factories with high fixed costs. When a Chinese factory’s total production capacity exceeds the demand it faces, or the domestic orders it receives, that threatens to drive its profits into the red. As a partial solution, the Chinese factory then exports at a low price, which, as long as it at least covers variable costs, contributes toward sustaining the large fixed costs.
When many Chinese producers collectively (for example, in the world steel market) did this simultaneously, they competitively pushed prices down even further to the point where companies such as Tata Steel in the UK, US Steel, and ArcelorMittal—whose variable-cost floor is much higher than their Chinese counterparts—were driven close to bankruptcy in 2015. The EU, UK, and US were forced to levy additional anti-dumping tariffs. Even so, Chinese overcapacity in a range of products continues to threaten western firms. The Xi administration at the G20 summit committed itself to reduce overcapacity by either shutting down older mills and/or not heedlessly investing in new factories in the name of forcing investment-led growth.
Other immediate issues at the G20 summit involved: fears of competitive devaluations (with the Chinese leadership indicating it would not unduly devalue the renminbi [RMB], or yuan); alleged discrimination against foreign direct investors and foreign companies’ intellectual property (with President Xi seeking to soothe concerns by emolliently stating that the same rules would apply to all companies); continued concerns about cybersecurity (see my September 28, 2015 post, Chinese Cyber-Espionage on US Companies: The Asymmetry in the Analogy of the “Pot Calling the Kettle Black”); climate change; and the world oil glut.
The G20 Role as a Formulator of Long-Term Strategy for a Global Civilization
Rather than being an annual “talking shop” or forum for immediate international concerns, the G20 should develop a far more important role as an articulator and formulator of strategy for long-term progress in the world economy. We are building a global civilization, yet there is no organizational “architecture” for intergovernmental coordination and consensus. An annual meeting is insufficient. The UN, with 193 member states, is too large, too amorphous, and too unstructured. A smaller group of 20 nations can achieve better coordination and accomplish much more. While there is no formal world government—and many would say that is a good thing—what we already have is an emerging global consciousness.
it is not just Pokémon characters or cat videos that circulate, but also ideas about governance, corruption, injustice, inequality, and discrimination—as well as a convergence of dress, lifestyles, and identity—that are making the world more homogeneous. This global convergence also distresses others whose traditional identities and self-image are threatened. Britain’s exit from the EU (see my June 29, 2016 post, Globalization’s Angst and the “Brexit” Vote), the rise of Donald Trump, the spread of extreme conservatism in Islam, ultraorthodoxy in Judaism, and the unnecessarily defensive attitudes of the Hindu right in India are all manifestations of the reaction to globalization and the psychological threat it poses to traditionalists around the world.
The G20 as an Espouser of Global Values, Norms, and Rules and as a Proponent of International Business
But besides the threat to cultural identity, a far more serious economic threat could result from the reaction to international business. What is needed is a coordinated defense of globalization articulated and espoused by the G20 countries. Over the last 15 years, globalization has lifted one-and-a-quarter-billion persons out of extreme poverty and another 1–2 billion from low-income status to a relatively comfortable middle-class way of life. The numbers in Table 2 and Figure 2 below are drawn from the World Bank, which uses $1.90 per person per day as its index for an absolute poverty line.
This reduction in poverty over the past quarter century is not only in percentage terms, but also in absolute numbers. In 1981, when the world population was only 4.5 billion, 44 percent or 1.98 billion humans lived in abject poverty. In 2015, even though the world population nearly doubled to 7.4 billion individuals, the abject poverty rate fell to 9.6 percent, which means that only 710 million today live in extreme poverty.
Table 2. World Population in Poverty, 1981 and 2015
Figure 2. World Poverty
Source: Max Roser (2016). “World Poverty.” OurWorldInData.org. Accessed September 5, 2016.
This marvelous reduction in absolute poverty, as well as the emergence of additional billions into a comfortable middle-class status, is primarily because of the spread of FDI, trade, domestic and international deregulation, and the (tentative and shaky) emergence of a rules-based world economic order. It is a stunning but fragile accomplishment, unprecedented in human history—which is full of sudden blockages and U-turns.
The glories of Rome, Chang-An, and Pataliputra (capitals of the Roman, Chinese Han, and Indian Mauryan empires, interconnected by the “silk road”) were followed by centuries of “dark ages” in Europe and fragmentation in India and China. The forces of protectionism, recidivism, excessive nationalism, and tribalism again lap at the shores of our fragile global economy. Who is there to defend it and continue to build a global civilization? Even the largest countries (the US, China, and India), acting alone, are inadequate to play such a role. The G20 nations, which collectively account for more than 80 percent of the global economy, nevertheless make up a small-enough group that they can hope to achieve consensus.
The coming decades of the 21st century call for an even greater degree of coordination, communication, and joint action in coordinating fiscal policies and monetary systems, fostering innovation, balancing growth with ecological needs, tackling global warming, and continuing poverty reduction.
The theme of the 2016 G20 Summit in China was “innovation,” which is another area where global, rather than national, approaches would yield better fruit in many technical areas. The sheer technical complexity of several products where innovation needs to draw from diverse disciplines, the frightfully large R&D outlays needed, and the diversity of end applications and markets mean that even giant companies, acting alone, may be inadequate. Joint R&D undertaken by intercorporate and international alliances (whether privately organized or public, such as the CERN Hadron Collider Project) are increasingly needed to drive large-scale innovation.
This writer is not necessarily a fan of government, let alone large government. But the G20 could become a logical international institution that fulfills a coordinating and articulating mission as an espouser of global values, norms, and rules and as a proponent of international business.
 Keynote Speech by H.E. Xi Jinping, President of the People’s Republic of China, at the Opening Ceremony of the G20 Summit. Full Transcript (Translated from Chinese.) Courtesy of People’s Daily. Accessed September 5, 2016. Also see Xi urges G20 Hangzhou summit to prescribe remedies for world economic growth. Xinhua | 2016-09-03. Accessed September 5, 2016. Video: President Xi Jinping delivers keynote speech at B20 summit. New China TV. Accessed September 5, 2016. (View my reaction to Xi Jinping’s speech as recorded by Xinhua.)
 The assembly factories are owned by Hon Hai / Foxconn Technology Group, a Taiwan-based firm, but with most of its operations in mainland China.
 U.S. industry injured by cold-rolled steel from China, Japan: ITC. Reuters Business News; June 22, 2016. Accessed September 5, 2016.
 List of countries by number of mobile phones in use. Wikipedia. Accessed September 5, 2016.
 World Bank Forecasts Global Poverty to Fall Below 10% for First Time; Major Hurdles Remain in Goal to End Poverty by 2030. World Bank Press Release, October 4, 2015. Accessed September 5, 2016.