Incoterms_® and Commercial Contracts

The breadth of the G20 agenda reflects the adaptive and potentially limitless scope of its mandate as the premier forum for international economic cooperation. While the G20 initially focused on measures to repair the financial system and restore confidence in the world economy, it is now tackling a much wider work programme ranging from addressing global systemic issues – such as the need to reduce global macroeconomic imbalances – to advancing international cooperation in areas like climate change, fighting corruption and development.

The section below provides an overview of key substantive areas covered by the G20 process. It describes, for each one of them, the major decisions taken by the G20 and specific issues that have emerged in the course of G20 deliberations. While this chapter does not cover the complete range of topics embraced by the G20 process, such as efforts to increase the voice and representation of dynamic developing countries in global governance institutions, it highlights some of the most relevant dimensions of the G20 agenda from the standpoint of international business. The areas covered include:

1. Restoring global economic growth and stability
2. Promoting open trade and investment
3. Reforming the financial sector
4. Building a greener, cleaner and more inclusive global economy

I. RESTORING GLOBAL ECONOMIC GROWTH AND STABILITY

The success of the G20 in dealing with the financial crisis and pulling the world economy out of widespread recession highlighted the value of international cooperation and globally concerted action. As G20 action now focuses on securing a durable recovery and building a stronger, healthier basis for the global economy, the challenge for G20 governments is to maintain their spirit of cooperation as they seek to reconcile their national economic priorities with their long-term collective interests.

At the September 2009 Pittsburgh Summit, G20 leaders agreed to strengthen the coordination of their macroeconomic policies in order to achieve a mutually beneficial growth path and to avoid future economic crises. They called their agreement the Framework for Strong, Sustainable and Balanced Growth.
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The backbone of the Framework is a peer review mechanism, the Mutual Assessment Process, which is led by the G20 with the technical assistance of the IMF and other relevant intergovernmental institutions.

As part of the first stage of the Mutual Assessment Process, all G20 members shared information about their policy plans and their expected economic performance over the next three to five years. Drawing on input from the OECD on structural reforms, the ILO on labour market policies, the WTO on trade policies, and the World Bank on issues relating to development and poverty reduction, the IMF developed alternative scenarios to assess the potential benefits of joint collaborative action relative to a continuation of current policies.

Under an “upside scenario”, in which G20 countries simultaneously embrace a number of policy actions to address weaknesses in their economies, the IMF and the World Bank estimated that the G20 could contribute to raise global output by an additional 2.5% over five years, create 30 million jobs, and lift 33 million people out of poverty.

Such a positive scenario may never materialize, however, unless the G20 starts tackling a major threat: the re-emergence of large imbalances in the patterns of growth and demand across the world’s major economies. Many observers believe that global imbalances, which had reached record heights in 2008, represented one of the root causes of the global financial crisis by generating excess liquidity in US financial markets.
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While global macroeconomic imbalances narrowed during the period of economic contraction which followed the financial crisis, the IMF estimates that current dynamics in the world economy mean that they will rise again over the next five years, placing the sustainability of the recovery further at risk.

At the June 2010 Toronto Summit, the G20 agreed that efforts from both sides were required to rebalance global demand and create a more stable basis for world economic growth.

• Emerging surplus economies (Argentina, China, Indonesia, Saudi Arabia, Russia) pledged to increase their domestic demand by strengthening social safety nets (e.g., pension and health insurance), developing their financial markets, spending more on infrastructure, and allowing for greater exchange rate flexibility when required.
• Advanced deficit economies (such as the United States, the United Kingdom and many eurozone economies) pledged to reduce their fiscal deficits and debts over the medium term, to stimulate private savings, and to increase their growth potential by reforming their product, services, and labour markets.
• Advanced surplus economies (Canada, France, Germany, Japan, Korea) agreed to undertake structural reforms to support increased domestic consumption.
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• Emerging deficit economies (Brazil, India, Mexico, South Africa, Turkey) agreed to take measures aimed at increasing their public and private savings rates and preventing the emergence of asset bubbles.

In Seoul, the G20 decided to make the reduction of excessive imbalances a central objective of the Mutual Assessment Process. At the request of G20 leaders, the G20 finance ministers developed in February 2011 a set of indicators to assess the sustainability of national economic policies. The G20 finance ministers later developed guidelines for measuring those indicators and identifying countries with potentially excessive imbalances.

The indicators cover:

1. The state of public finances: i.e., the levels of public debt and the fiscal deficit;
2. The health of the private sector: i.e., the private savings rate and the level of private (household and corporate) debt;
3. The current account balance: i.e., the joint valuation of the trade balance and the net flows of cross-border investment incomes and transfers.

Seven G20 nations were identified as countries whose fiscal and financial imbalances pose a threat to the global economy. These include five advanced economies (France, Germany, Japan, the UK and the US) and two emerging economies (China and India). These countries will be subjected to an in-depth assessment to determine the nature and root causes of their imbalances.

The Cannes Action Plan for Growth and Jobs, adopted at the 2011 Cannes Summit, listed a series of measures which G20 committed themselves to implement at individual country level with a view to strengthen the foundations for medium-term growth and contribute to reduce excessive imbalances. However, as discussions in Cannes were largely dominated by the eurozone debt crisis, no specific commitments to new measures by individual countries were announced at the summit.

With key decisions postponed to the next G20 summit in Mexico, the coming phase could represent a “make-or-break” moment for the G20’s efforts to increase international economic coordination under the Mutual Assessment Process. While all G20 countries agree on the objective of rebalancing global demand, their views tend to diverge on the root causes of imbalances and the policy measures needed to correct them. In addition, many observers remain
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sceptical about the effectiveness of peer pressure induced by the G20 process when it comes to influencing national policy choices, which remain largely determined by domestic political realities.

As a complementary approach to their current efforts to identify and reverse global imbalances, the G20 leaders have agreed to start exploring ways to improve the international monetary system, i.e., the mechanisms and institutions that organize and regulate international capital flows and foreign exchange relationships. G20 discussions focus on two distinct but interconnected areas. The first area deals with adapting the international monetary system to the growing weight of currencies from major emerging economies. The aim is to support their internationalization and to move towards a more cooperative management of currency reserves and exchange rate regimes. An underlying objective is to unwind large and persistent deviations of currency rates from economic fundamentals, since these can result in significant systemic distortions in global trade and capital flows.

The second area relates to the establishment of mechanisms to help developing countries cope with sudden inflows and outflows of capital. The G20 is working to strengthen and improve “global financial safety nets”, an expression used to describe the set of tools (such as international credit lines and bilateral arrangements) which countries can use to reduce the economic disruption from massive swings in capital flows. Improving global financial safety nets could also serve to reduce the need for excessive accumulation of foreign exchange reserves, which many developing countries use as a form of self-insurance to deal with disorderly movements in exchange rates. Foreign exchange reserves held by emerging and developing economies currently amount to 15% of global GDP and represent a major source of macroeconomic imbalances in the global economy.

II. PROMOTING OPEN TRADE AND INVESTMENT

Trade and investment issues hold a naturally prominent position on the G20 agenda. While the G20 process has been fairly successful in resisting protectionist tendencies and restoring the availability of trade finance, it has been less effective in its endeavors to reinforce and update a central pillar of international economic cooperation: the multilateral trading system. Decisive leadership from G20 heads of state and government is still needed to unlock the WTO’s Doha Round of multilateral trade negotiations.

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At the 2008 Washington Summit, G20 countries announced their commitment to refrain from raising new barriers to trade and investment for a period of one year. Over time, they extended their pledge until the end of 2010, and then for another three years, i.e., until the end of 2013.

In practice, G20 countries pledged to refrain from imposing new tariff and nontariff barriers on imported goods and services, from creating new obstacles to foreign investment, from imposing new export restrictions, and from stimulating exports through measures that would be in contradiction with WTO rules.

The collective resolve of G20 leaders to keep markets open in the face of global economic turmoil reflected their shared determination to avoid a replay of the beggar-thy-neighbour policies which were a major precipitating factor in the Great Depression of the early-1930s.

To monitor their adherence to the pledge, G20 leaders asked the WTO, UNCTAD and OECD to publicly report on their countries’ latest trade and investment measures. By and large, G20 countries have honoured their undertaking and avoided a widespread resort to economic nationalism as a reaction to the global economic crisis. After experiencing a 12% contraction in 2009, its sharpest decline in 70 years, world trade rebounded strongly in 2010.

A closer look at the five reports published by the WTO, UNCTAD and OECD over a period of two years provides a more mixed picture: while the majority of new investment measures taken by G20 countries eliminated restrictions on foreign investment, G20 governments managed to introduce a total of 407 trade-restricting measures between April 2009 and April 2011.

During the first two periods under review, from April 2009 to February 2010, the WTO reported a wave of measures aimed at protecting domestic production in certain sectors, such as steel and motor vehicles. After an initial downward trend in 2010, the WTO found a new surge in trade protectionism in the period between October 2010 and April 2011. More trade-restrictive policies were implemented during this period of time than in any previously reported six-month period since the outbreak of the crisis. The use of export restrictions on food, metals and minerals has particularly increased in response to rising prices and concerns about domestic supplies.

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To measure and compare G20 countries’ level of trade protectionism, the Peterson Institute for International Economics developed a composite index based on the number of trade-restricting policies that G20 members implemented (or planned to implement) and the number of products and countries adversely affected. According to the index, which was published in 2010²⁸, the top five protectionist countries were Russia, the United States, India, Argentina, and Brazil. The least protectionist countries were Mexico, Turkey, Australia, Korea, South Africa, and Saudi Arabia.

Looking ahead, the G20 will be expected to demonstrate increased vigilance to prevent protectionism from gaining ground. In a joint statement accompanying their fifth report on G20 trade and investment measures, the heads of the WTO, OECD and UNCTAD warned that “the persistence of high levels of unemployment, macroeconomic imbalances, rising food prices and geopolitical tensions created conditions that were favourable to growing protectionist sentiment”. Highlighting the role of the multilateral trading system in helping governments resist intense protectionist pressures during the crisis, they reminded G20 leaders of the crucial need to “preserve and strengthen this system in order to be able to face future crises”.

Explicit calls for the successful completion of the Doha Round of multilateral trade negotiations under the aegis of the WTO have featured in every declaration of successive G20 summits. Despite their recognition that concluding the Doha
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Round “could boost the global economy by at least USD 150 billion per annum”, G20 leaders have not yet been able to deliver any innovative approach or mechanism to achieve this objective.

In Pittsburgh in 2009, the G20 stressed the need to “evaluate and close the remaining gaps” as quickly as possible “in order to conclude the negotiation in 2010”. In Toronto in June 2010, G20 leaders directed their trade ministers to pursue this objective “using all negotiating avenues” but dropped any reference to a conclusion date. The statement from the Seoul Summit in November 2010 showed a mild improvement by saying that 2011 was a “critical window of opportunity” and reaffirmed their commitment to “promptly bring the Doha Development Round to a successful, ambitious, comprehensive, and balanced conclusion”.

The Cannes Declaration injected a dose of realism by acknowledging that “we will not complete the Doha Development Agenda if we conduct negotiations as we have in the past”. The G20 recognized the need to “pursue in 2012 fresh credible approaches to furthering negotiations”. It also encouraged trade ministers to “engage into discussions on the challenges and opportunities to the multilateral trading system in a globalized economy” and to report back at the next G20 summit in June 2012 in Los Cabos, Mexico.

A worrying aspect of the G20’s incapacity to force progress in the Doha Round is that negotiations are stalled precisely because of long-standing divides among core G20 members. Most of the technical work has been done and what remains to be negotiated requires re-engaging on a few politically sensitive matters in the areas of industrial tariffs and agricultural support. As observers have pointed out, the failure of the G20 to effectively address and resolve stalemate issues in the Doha Round negotiations could seriously undermine the group’s credibility as the premier forum for international economic cooperation.

In the current context of rising protectionist pressures, completing the Doha Round would provide a valuable insurance policy against trade protectionism by locking in new multilateral trade liberalization commitments and strengthening WTO rules. As governments worry about budget deficits, a final Doha agreement would also constitute a debt-free stimulus package by injecting much needed trade growth into the global economy, and in turn boosting business confidence and fueling increased private investment and job creation.

To help narrow differences of views among G20 members on the tough issues blocking the Doha Round, a report prepared by the Peterson Institute for International Economics for the ICC Research Foundation recently advocated
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the idea of holding G20 trade ministers’ meetings alongside G20 summits. Dedicated G20 trade meetings would help bring trade issues more directly into the G20 process and encourage G20 leaders to devote the political attention and energy that the Doha Round requires to reach a successful conclusion.

The G20 decision at the April 2009 London Summit to allocate USD 250 billion of support for trade finance over two years proved a major step forward towards alleviating the shocks to trade resulting from the financial crisis. Within a year of implementation, USD 130 billion of additional trade credit was injected through the mobilization of export credit agencies and multilateral development banks.

As world trade picked up in 2010, the cost of trade finance started falling and the volume of transactions increased. But recovery has been uneven across countries. Small- and medium-sized enterprises from developing countries which rely on smaller banks and traders from low-income countries in Africa, Asia and Latin America continue to suffer from a lack of access to trade finance at affordable prices, particularly import finance.

At the November 2010 Seoul Summit, the G20 recognized the difficulties facing countries at the margin of the main routes of trade. G20 leaders asked the G20 Trade Finance Expert Group, with the support of the WTO and the OECD, to come up with new measures to increase the availability of trade finance in developing countries.

The G20 also said it would evaluate the impact of regulatory regimes on trade finance. The banking industry has repeatedly expressed concerns over the implications of new regulatory initiatives, in particular the requirements introduced by the Basel Committee on Banking Supervision (the new “Basel III” rules), for the supply of trade finance. In particular, banks warned against the risk of lumping together low-risk trade instruments, such as trade finance products, with longer-term, higher-risk forms of corporate lending, without appreciation of the unintended consequences on global trade. Under the new rules, banks would be required to hold more capital reserves in order to provide trade finance, thus reducing the overall availability of trade credit to business.

III. REFORMING THE FINANCIAL SECTOR

The G20 has established an ambitious programme for reforming the global financial system and strengthening financial regulation. Three objectives lie at the heart of the G20’s reform agenda: curbing excessive risk-taking by the financial
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industry; addressing systemic risks posed by “too-big-to-fail” institutions; and ensuring that all financial markets, actors and products are subject to appropriate regulation and oversight.

The G20 played a decisive role in prompting a complete overhaul of the global regime for bank capital and liquidity requirements. The global financial crisis revealed the weaknesses of previous standards, which were either too lax or incompletely implemented. During the crisis, many banks found themselves with insufficient capital and liquidity to absorb losses, triggering a widespread fall of confidence in the banking system. At the Seoul Summit, the G20 reached agreement on a new set of rules (Basel III) which require banks to raise their minimum core capital from 2% to 7% of their assets. The new rules, developed by the Basel Committee on Banking Supervision, provide a stricter definition of what counts as core capital and requires banks to build capital buffers to cushion them in times of stress. The objective of the reform is to discourage excessive leverage by banks and to strengthen their capacity to withstand financial shocks.

The G20’s priority is now to secure a uniform application of Basel III rules across countries. A progressive implementation phase is due to start in 2013, with a view to reaching full application by 2019. Meanwhile, investors are already starting to hold banks to the new standards. Observers have been divided, however, on the impact and effectiveness of the reform. Some argue that new capital requirements should have been stricter, or phased in more rapidly, while others say that imposing too tight limits too quickly will restrict the availability of credit and threaten global economic recovery.

A critical aspect of the G20-led reform of bank capital and liquidity requirements is how to deal with so-called “systemically important financial institutions” (SIFI), i.e., “too-big-to-fail” or “too-interconnected-to-fail” banks and other financial institutions. The crisis showed that, when these institutions collapse or threaten to collapse, the costs to economies are enormous and unfairly shared between the financial sector and taxpayers. The bulk of G20 efforts have focused on developing common tools to reduce the probability and impact of their failure. These include additional capital requirements, more intensive supervision, and the elaboration of resolution plans to make it less costly to save banks or to let them slide into bankruptcy in case of severe difficulties. At the 2011 Cannes Summit, the Financial Stability Board published an initial list of 29 global SIFIs (G-SIFIs) who will be requested to hold more capital in view of their size and
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the global reach of their operations. A framework applicable to all nationally systemic banks and other financial institutions (e.g., insurers, clearing houses, hedge funds) is now being developed.

The G20 has made significant progress to strengthen the regulation and oversight of those financial institutions and activities that had almost escaped from any form of supervision prior to the crisis. It is now widely agreed that the lack of adequate rules and controls had led to opaque concentrations of risk in the financial system and were a major cause of the breakdown of financial markets. With the support of the Financial Stability Board, the G20 led a global push to increase regulation of non-bank financial companies, including hedge funds, which must now be registered and share certain data with their national financial authorities. Another area of G20 focus was on improving the over-the-counter (OTC) derivatives markets. The G20 agreed that OTC derivatives contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties so that financial authorities can assess the build-up of potential vulnerabilities.

The next objective for the G20 is to ensure that the policies that have been agreed at global level are implemented swiftly and consistently across jurisdictions. While recognizing that regulation remains the prerogative of the G20 states, G20 leaders mandated the Financial Stability Board to monitor the implementation efforts of each state as a way to ensure that national regulatory frameworks remain internationally consistent. In a highly globalized financial system, the G20 has to be particularly attentive to the risk that uneven regulations across countries, or significant variance in the implementation of globally agreed policies, may lead to regulatory arbitrage, with financial institutions taking advantages of loopholes in national regulatory systems in order to circumvent international rules.

IV. BUILDING A GREENER, CLEANER AND MORE INCLUSIVE GLOBAL ECONOMY

In addition to the core objectives of restoring growth, keeping markets open, and reforming the financial system, G20 leaders are starting to throw their weight behind a number of “new agenda” issues which could benefit immensely from a higher degree of globally concerted action. As part of its broader goal to secure a healthy and durable recovery, the G20 is devoting growing attention to shaping common strategies for making the global economy greener (addressing the threat of climate change), more honest (fighting corruption) and more inclusive (closing the development gap).
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The G20, which collectively accounts for 75% of global greenhouse gas emissions, was initially seen as a possible alternative forum to the UN for breaking the stalemate in climate change negotiations. The reluctance of certain emerging economies to bring climate negotiations to the G20 table and the unexpected success of the 2010 UN climate change conference in Cancún have now put the UN process back on track, albeit at a pace and scale which leave many parties and observers frustrated. There is much that the G20 can do, however, to foster action-oriented measures in a number of critical areas for the climate change agenda: reducing emissions, deploying clean energy technology, and mobilizing public and private resources for mitigation and adaptation efforts.

The first collective decision of the G20 was an agreement to phase out and rationalize inefficient fossil fuel subsidies, whose elimination would reduce carbon dioxide emissions by 6.9% in 2020 according the International Energy Agency. Differences of views remain, however, among G20 members on the definition and measurement of these subsidies. Another area of increased G20 focus is the mobilization of financial resources to fight climate change. At the 2011 Cannes Summit, the G20 explored the role that innovative ideas and mechanisms - like carbon taxes, carbon markets, and a proposed tax on international financial transactions - could play in financing the transition towards a low-carbon economy.

At the 2010 Seoul Summit, the G20 unveiled a nine-point action plan entitled Agenda for Action on Combating Corruption, Promoting Market Integrity, and Supporting a Clean Business Environment. G20 leaders undertook to strengthen the global anti-corruption regime by taking a number of core measures: securing the adoption and implementation of the UN convention against corruption by all G20 countries; preventing corrupt officials from accessing the global financial system; facilitating the return of stolen assets to their country of origin; protecting whistleblowers; and strengthening the capacity of national enforcement authorities to investigate and prosecute corruption cases.

Recognizing the pivotal role that business plays in the fight against corruption, the G20 action plan placed strong emphasis on public-private partnerships for jointly developing and implementing initiatives in support of a clean business environment. In April 2011, the French chairmanship of the G20 and the OECD organized a conference on Joining Forces against Corruption: G20 Business and Government which provided a platform for company executives and
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government officials of G20 countries to identify ways to strengthen corporate efforts and to combat corruption in specific sectors.

A first monitoring report of the G20 Anti-Corruption Action Plan was published by the Working Group on Anti-Corruption for the 2011 Cannes Summit. The report highlights specific examples of individual country progress since the Seoul Summit, such as India’s ratification of the UN Convention against Corruption, China’s criminalization of foreign bribery, and the introduction of new mandatory disclosure requirements in the US for payments to governments by companies from the extractive industries. The report also lays out specific recommendations for further progress across the nine points of the Anti- Corruption Action Plan, including a call for continuous engagement between G20 governments and the private sector

The Seoul Development Consensus for Shared Growth, which the G20 adopted in Seoul, laid out nine areas where G20 action could make a significant contribution to resolve the most significant bottlenecks to inclusive and resilient growth in developing countries. A key focus of the G20 is promoting the development infrastructure in low-income countries, particularly in the fields of energy and transport. At the 2011 Cannes Summit, the G20 endorsed new measures to mobilize increased investment from public and private sources for infrastructure and highlighted 11 projects which had the potential to make a transformational impact through increased access to regional and global markets.

The G20 is also discussing ways to improve food security in the world’s poorest regions. G20 agriculture ministers have already mapped out a series of measures to better manage the risks associated with food price volatility and prevent food crises. These include improving agricultural production and productivity to meet the growing global demand for food commodities, increasing market information through a newly introduced Agricultural Market Information System, and improving the functioning of derivatives markets for agricultural commodities.

The G20’s approach to development derives from the conviction that high levels of inclusive growth in developing and least-developed economies are critically necessary, while not sufficient, to eradicate extreme poverty. This vision also fits in with the G20’s broader efforts to generate strong, sustainable and balanced growth. From the G20’s perspective, higher growth in developing markets spurs multi-polar growth and contributes to rebalancing global demand. G20 leaders have made clear, however, that their action will focus on areas where the G20 has
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a comparative advantage and can add value to the existing efforts of aid donors, the UN system, multilateral development banks (MDBs), and other agencies that support development. The Seoul Development Consensus also recognizes that there is no one-size-fits-all formula for development success and that developing countries should retain ownership of their development strategies.

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