Improving China-US relations boost prospects for Canadian summits

OTTAWA — Repositioning by China and the United States over the past few days has vastly improved Canada's chances of holding a successful G20 summit in Toronto at the end of June.

The moves suggest the two powers are taking concrete steps to defuse tensions and instead hash out their significant economic-policy differences under the auspices of the Group of 20 - raising the stakes for the summit in Toronto.

"It's recognizing that countries in the G20 are going to have to move together," said Tom Bernes, acting executive director of the Centre for International Governance Innovation, based in Waterloo, Ont.

"It's not a question of any one country doing one thing. It absolutely increases the stakes of the G20. This is the big issue that's going to dominate everything."

Just two weeks ago, relations between the two countries had deteriorated so much that insiders wondered if the G20 - which brings together emerging and advanced countries to make decisions on the global economy - had much of a future.

Canada would have been presiding over a stumbling summit that was struggling to be significant.

But now the two superpowers have given each other some breathing room.

In signalling that that it is ready to work with the West in cracking down on Iran's nuclear ambitions, China lends its much-needed heft to the G8 agreement last week to pressure the Middle Eastern country.

And by announcing it would delay a report on China's currency regime for three months, the United States is giving China the space it needs to direct its own domestic reforms without meddling from the West.

At the same time, they've handed the fledgling G20 the daunting task of producing a meaningful package that would set the world economy on a stable track.

"I think it's a very wise move," said Wendy Dobson, co-director of the Institute for International Business at the University of Toronto.

The bare bones of such a package are already in place. G20 leaders agreed last fall to a "framework" that would have the International Monetary Fund assess all the G20 members for fiscal and economic stability.

But the job for Canada's G20 summit is to add flesh to the bones, and have countries commit to making the domestic changes necessary so that the entire world can claim fiscal and economic health.

The changes required go far beyond a tweak in policy here or there. An appreciation of China's currency is at the top of a long list of deep reforms that Canadian officials, as well as experts around the world, believe crucial.

In a recent speech, Bank of Canada Governor Mark Carney outlined three likely scenarios, two of which produce scary results for the state of the world.

In the first scenario, no one does anything to rectify the burgeoning debt in the West and the growing surpluses in the East. The result is low growth and possibly another crisis.

In the second scenario, the United States and the West develop a plan to control their deficits, but China and Asia refuse to adjust their exchange rates or stimulate domestic demand. The result is a long, global recession that could lead to a global trade war.

In the third scenario, the G20 takes its "framework" into action. The West increases savings and controls its deficits. Asia encourages domestic demand. China and other countries with fixed exchange rates allow for an appreciation. The result, Carney says, is stability and growth.

"If it works, it could potentially be very big," said Bernes, who previously represented Canada at the International Monetary Fund. "If it fails it has huge implications for the economic performance of the world."

Similarly, new research by Dobson and colleagues at the Pacific Economic Cooperation Council's taskforce on the global crisis found that a full recovery and stable global growth requires a range of countries to take action - not just currency appreciation in China.

The United States needs to curtail its consumption and spending, even as China and emerging Asia increase their consumption and stop subsidizing their currencies.

"That's why the shouting is so counterproductive," said Dobson. "Both countries know what they have to do."

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