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Financial Post, Weekly edition, June 2, 1984

Editorial

What the summit could achieve

Next week's economic summit meeting in London hasn't had the buildup of some of the previous gatherings of the big seven industrial nations. That's probably just as well because there's no point in expecting the seven leaders to issue instant cures for the world's economic ills.

Nonetheless, we should expect them to face up to some realities and indicate they have the resolve to co-operate more closely in the future. Here are some of the decisions and policy directions we would like to see taken at the summit:

It would be refreshing to see the other six countries not blame all their woes - and those of the developing world - on the Americans. The great irony in this attitude is that the summit participants all agree that the U.S. economy is the lynchpin of any global economic recovery. Yet, the U.S. recovery is viewed as flawed because interest rates there are rising. High U.S. rates, the criticism goes, are draining funds out of other countries into the U.S. Countries that want to keep money at home are forced to raise their own rates, thereby hurting their domestic growth. Reduce your deficit to get your interest rates down, the Americans are told.
There is, indeed, legitimate worry about higher U.S. rates and their harmful spillover effect. But the Americans can hardly be expected to apologize because the rest of the world views their economy as inherently sound and their country as a good place to invest. Along with interest-rate levels, long-term investors do take those factors into consideration. In the past, countries such as Switzerland and West Germany have attracted big flows of capital with relatively low interest rates because, with their relatively low inflation and other attributes, they have been considered good places to invest.
Furthermore, the U.S. recovery is pumping lots of money into other economies in the form of import purchases, as the American trade deficit dramatically shows.
Of course, the U.S. deficit is alarming, as we have said before. But an effort is being made to work it down. For fiscal 1984 it may be $40 billion less than the $200 billion originally forecast.
In expressing their alarm about the strength of the US$, the other summiteers could also consider the fact that there has been a drop in demand by U.S. investors for foreign currencies (along with keen interest in holding the US$ by those outside the U.S.). The after-tax rate of return for investors in the U.S. has helped keep funds from going abroad. Perhaps some of the summit countries could look at their own investment tax incentives as a means of keeping more funds at home.

Welcome signs
In one respect the U.S. recovery has not had an intended effect. It has not boosted imports from Third-World countries anything like enough to offset the burden of their added debt charges, which was the expectation of the Reagan administration. As the article on this page says, there are welcome signs that the U.S. may be willing to consider a new approach to helping the debtor nations cope with rising interest rates.
Similarly, there's a chance that the summit may give its blessing to a new round of trade liberalization talks under the General Agreement on Tariffs & Trade at Geneva. The importance of such a move is underscored by the unanimous view of those at last week's meeting of the Pacific Basin Economic Council that there must be a moratorium on new trade barriers for developing nations if they are to have any hope of increasing their export earnings to help service their foreign debt.

Although the last summit condemned protectionism, it has grown worse. U.S. President Ronald Reagan may push for this new trade initiative, despite the strong protectionist sentiment among many U.S. Congressmen. Canada and Japan, along with Britain and West Germany, will no doubt support the U.S. on this - certainly an antiprotectionist stance will be Prime Minister Pierre Trudeau's position.

It's true that the Gatt rules sometimes receive only lip service from the major industrial countries. But a strong endorsement for a new round of trade liberalization talks at Geneva would help counter protectionist pressures, and would be a solid achievement for the London summit - one that's very much in our long-term trading interests.

	This information is provided by the Financial Post.
	Please send comments to: g8@utoronto.ca Revised: June 3, 1995