From G8 to G20 to G-Zero

| Friday June 14, 2013 00:00

As G8 leaders prepare to gather in Northern Ireland on June 17 and 18, we are reminded of days when American, western European and Japanese officials could credibly claim to set an international agenda. Then came the financial meltdown of 2008, a catastrophe that made unavoidably obvious that most 'problems without borders' can no longer be addressed without support from China, India, Brazil, Saudi Arabia and other emerging powers.Members of the G20 gathered in Washington in November 2008 and London in April 2009 to claim their seats at the world's most important bargaining table.

Yet, despite positive early results - the product of a crisis that appeared to threaten all the major powers at the same time - the G20 has not produced much value. Without the urgency that only a crisis can create, it soon becomes obvious that it's difficult to build agreements that impose costs and risks on 20 negotiators than those that demand compromise from seven or eight.This is especially true for a group that does not share a common set of assumptions about the proper role of the state in an economy, or about the value of the rule of law, transparency and freedoms of speech, press and assembly.

Further undermining these institutions is the problem that voters in countries like US, Britain, Germany, France and Japan expect their elected leaders to focus on domestic challenges rather than problems abroad. The US will remain the world's most powerful country for the foreseeable future, but Washington is now fully occupied with battles over budgets, debt, immigration reform and how to create jobs. European leaders are locked in a struggle to bolster the eurozone. Japan's government has launched an experiment to reawaken the animal spirits trapped inside its once-dynamic economy. Meanwhile, China, India and Brazil are too busy managing the fallout from recent economic slowdowns and edging towards the next stage of their respective domestic development plans to welcome the burdens that come with new international responsibilities.

The result is a lack of global leadership, one that has developed just as growing numbers of transnational problems -Middle East turmoil, intensified territorial disputes in Asia, climate change, conflicts in cyberspace and poorly regulated cross-border financial flows - are gathering momentum. The world needs leaders, those with the power to keep the peace, to persuade other governments to take actions they wouldn't otherwise take, to pay for projects that others cannot afford and to provide services no one else will pay for. There are many countries now strong enough to block international action, but none is both willing and able to bring about lasting positive change.This is not a G7, G8 or a G20 world. This is the era of G-Zero.Because of the expanding global leadership vacuum, the world is becoming more volatile. Fights over commercial and investment rules and the clash between the statedriven and free-market varieties of capitalism are generating frictions between America and China, as hostile exchanges in the undergoverned expanse of cyberspace are making matters worse. In years to come, no ties will be more important for global peace and prosperity than those that bind these two countries, the world's most powerful states, and no issue would exacerbate the G-Zero dilemma more quickly than a dramatic worsening in their relations.

In addition, the risk of confrontation in Asia has grown - between China and Japan in the East China Sea, and between China and several south-east Asian countries in the South China Sea. In the Middle East, Syria's civil war grinds on as Turkey, Russia, Iran, Saudi Arabia and Qatar stoke the fire with arms and money and as US, European and Chinese leaders resist pressure for more direct involvement. Spillover from Syria has triggered another surge in sectarian violence in Iraq. Despite a brief French intervention in Mali, Islamist militants are on the offensive from Libya to Nigeria. This is another region in which rivalries among local heavyweights and a lack of leadership ensure that the pain will get worse before tangible progress can be made.

Finally, if a wobbly US economic recovery and a war-weary American public weren't enough to discourage a more ambitious US foreign policy, changes in the US energy sector will add their own effect. Hydraulic fracturing, or 'fracking', is opening access to liquid energy deposits locked inside onceimpenetrable rock formations, and breakthroughs in horizontal drilling methods are making the technology much more profitable. As a result, US oil imports from Opec producers have fallen by more than 20 percent in three years and natural gas prices inside the US have fallen 75 percent over the past five. The US Energy Information Administration estimates that, by the end of this decade, 80 percent of the crude oil consumed in the US will come from North and South America. The International Energy Agency forecasts that by 2020 the US could become the world's largest oil producer, and that by 2035 the country could be energy-self-sufficient.

This development will exacerbate what I call the G-Zero problem by encouraging Washington to continue to shun deeper involvement in Middle East hot spots. This trend will also shift the balance of power between energy exporters and consumers and help undermine political and economic stability among energy producers with poorly diversified economies. In countries such as Russia, Saudi Arabia and Venezuela, higher prices in recent years and a resulting spike in revenue have allowed governments to protect their domestic popularity with subsidies and other social spending projects. However, as a surge in US supply lowers demand for more expensive Russian natural gas, which earns well over half its government revenue from energy exports, Russia will find itself in a tight spot. In 2007, Russia needed an oil price of $34 per barrel to balance its federal budget. By 2012, the target climbed to $117. Easing demand in Europe will erode Russia's finances in years to come. In addition, though neighbours such as Ukraine and Poland remain dependent on Russia for affordable supplies of natural gas, each appears to have enough shale deposits to eventually kick this habit.

Washington is ready to help. In 2010, the US government created a programme to transfer unconventional gas technologies to countries such as Poland and Ukraine in part to reduce Russia's power over them. That's good news for the US but the destabilising effects of a shift in the balance of market power between energy producers and consumers can also generate shocks from unexpected sources as some of the world's most potentially volatile countries struggle to adapt.Some governments will adapt more effectively than others to the G-Zero and the instability that it creates. Because global leadership is lacking and international co-operation has become all but impossible to co-ordinate, some governments are turning to regional solutions that are more likely to produce results.

China has completed more than a dozen major deals in recent years and hopes to form a commercial bloc that includes the 10 members of the Association of South-East Asian Nations (Asean), plus South Korea, Japan, India, Australia and New Zealand. The US has responded with a push to finalise and expand the Trans-Pacific Partnership (TPP), a free-trade agreement that includes a dozen countries in Asia and the Americas. The Obama administration also plans to begin work on a transatlantic trade deal that will open new areas of commercial exchange with the EU.

This is good news for trade generally. By establishing new and more comprehensive rules for trade and investment, the TPP and transatlantic agreements will set new standards for future global trade talks. Trade agreements of this sort are also likely to undermine less ambitious deals. TPP, in particular, is exacerbating trends visible in Latin America. Chile and Peru are original members of TPP, Mexico formally joined last year, and Colombia and Panama have opened talks to join the club. Most TPP members in Latin America have already signed free-trade agreements with the United States, the EU and even China. As TPP moves towards completion, it will draw these countries (which are already more business-friendly and open to trade than the Mercosur members - Argentina, Brazil, Paraguay, Uruguay and Venezuela) more fully into its orbit. As a result, frictions within Mercosur, particularly between Brazil and Argentina, will both deepen and become more visible.

Diversification has always been an essential tool for managing risk, but in a world lacking clear leadership, one in which shocks have become all too common, governments must avoid over-reliance not simply on one export product, but also on security and commercial relations with a single dominant ally. Growth is good, but resilient growth is better, and the best way to build resilience is to diversify one's friends and partners. Some countries are better positioned to manage this than others.

Though its economy has slowed over the past year, Brazil enjoys an expanding middle class, a broadly diversified economy, ample energy reserves and growing national selfconfidence. Crucially, it also has an increasingly diverse portfolio of trade and investment partners. Trade with the US remains robust, yet Brazil's imports from China have risen more than twelvefold since 2000, and its exports to China have grown even faster. Four years ago, China became Brazil's largest trading partner, helping Brazil absorb the shock of the financial crisis and US recession.Thanks to still-expanding ties with the US, China and a growing list of other partners, it has become a 'pivot state'.

Asia is home to a number of pivot states, in part because many of China's neighbours want to avoid too deep a dependence on China and its markets by reaching out to US companies and investors. Indonesia, home to more than 240 million people and a well diversified economy, maintains strong trade ties with China, the US, Japan and Singapore. Vietnam draws most of its machinery from China, its aid from Japan, its arms from Russia and its biggest export market from the US. Singapore has 18 free-trade agreements with 24 separate partners.

Africa, home to the world's fastest-growing middle class, has become a pivot continent. For years, African governments were forced to turn almost exclusively to western institutions such as the IMF and the World Bank when they needed financial help. China has become Africa's largest trading partner, though it still accounts for just 25 percent of foreign direct investment in the continent, and the Gulf monarchies and other Asian states are deepening their interest. Multinational and state-owned companies from developed and developing states now compete for access to African consumers and the most favourable investment terms.Beyond a general diversification of relationships, we have seen the emergence in recent years of a new set of (sometimes unlikely) strategic alliances. Henry Kissinger is reported to have asked, 'Who do I call when I want to call Europe?' China's leaders have an answer: when they want to engage Europe, they call Berlin. In fact, China and Germany have the makings of at least a mutually profitable partnership, if not a beautiful friendship. They have a few important things in common. They are export-driven and have the world's two most favourable trade balances, and each champions a 'responsible' approach to debt and deficit that sometimes leads them to criticise the profligacy of other powers - particularly the Americans and the Japanese. Each presents itself as a model of efficient governance.

More importantly, both governments have ample incentive to deepen their commercial relations. Germany represents an important destination for outward-bound investment by Chinese firms and the safest debt in Europe. Berlin also has considerable influence over eurozone decision-making and EU foreign policy, and is more willing than London or Paris to avoid direct criticism of China's human rights record. For Germany, China represents an inviting economic opportunity, particularly given the bleak prospects of many of its historical European trading partners. German exports to China grew at an average annual rate of nearly 16 percent between 1995 and 2012.

Next, while US dependence on imported oil and gas is easing, China's is intensifying, forcing Beijing to build new partnerships in the Middle East, as well. The primary beneficiary of this trend will be Iraq. The country's increasingly unstable security environment have given many a multinational oil company pause, but China's stateowned behemoths, which ultimately answer to a single, energy-starved shareholder back in Beijing, are moving in. The Iraqi prime minister, Nouri al-Maliki, welcomes the investment. Given present trends, Iraqi oil will account for more than half of China's imports by 2030 .

Elsewhere in the region, Qatar, a Persian Gulf emirate with a population of fewer than two million people, is using its considerable wealth and growing influence to punch above its weight in Middle Eastern politics. No country has provided more material support for the Syrian rebels, or has proven a more reliable foreign ally for Egypt's government. Qatar has also become much more involved in the politics of other North African countries, such as Tunisia and Morocco. Though technically the Doha-based al-Jazeera, the Middle East's most influential satellite television network, is no longer a state-run company, it remains a willing instrument of Qatari foreign policy.

Finally, there is another emerging power extending its influence in sub-Saharan Africa. Brazil's drive to expand its diplomatic and economic relations on the continent - especially with the resource-rich, Portuguesespeaking Angola, Mozambique, Cape Verde and S‹o Tom e Pr’ncipe - began to intensify a decade ago under the former president Luiz In‡cio Lula da Silva. Brazil's trade with Africa has expanded by more than 500 percent in the past decade. The country's growth and the active promotion of its own national champion firms has deepened the relationship, as the state-owned oil company Petrobras becomes a critical player in Angola's oil sector and the Brazilian mining champion Vale invests in a world-class coal project in Mozambique. President Dilma Rousseff announced in May, that Brazil would cancel or restructure $900m worth of debt from 12 African countries. The votes of African countries can help Brazil gain influence and may help provide the country with a permanent seat on the UN Security Council.For some countries, making new friends, even in a G-Zero environment, is not so easy.

There are three big unfolding stories in international politics and the global economy: China's rise, Middle East turmoil and the redesign of Europe. The three countries with most to lose from these trends are Japan, Israel and Britain. These three also happen to be America's most reliable allies in the world's three most important regions, yet self-involved Washington can't protect them from the worst effects of these sweeping changes.

China's rise leaves Japan in a tight spot. Access to China's expanding consumer market is critical for Japanese companies, yet Beijing's new foreign policy assertiveness, particularly in territorial disputes involving Japan, is fuelling patriotic fury inside both countries. China and Japan are not sliding towards war, but the growing antagonism between them is reversing progress in their commercial relationship - a problem that will hurt Japan much worse than China. In response, Japanese policymakers want to diversify, to hedge bets on China by strengthening trade and investment ties elsewhere in Asia. Unfortunately, while South Korea has already signed free-trade agreements with the US, the European Union and Asean and has launched talks with Canada, Indonesia and Vietnam, Japan has been slower to diversify its trade ties and remains dangerously exposed to overreliance on Chinese markets.

Japan's decision to join talks on the Trans-Pacific Partnership may eventually pay enormous dividends, but that is a long-term project and the country still has near-term economic problems to address. As for its security, while Washington can help defend Japan's territorial claims in the East China Sea, it cannot protect Japanese companies operating in China from the cost of doing business in a sometimes hostile environment. That is the greatest immediate threat to Japan's economic stability.

Israel's anxieties bear more directly on its national security. Syria's civil war has spilled over into Iraq, Turkey and Lebanon. The risk is also rising that Iran, the object of biting sanctions and intense international pressure over its nuclear programme, will lash out in unpredictable ways, including at Israel, using proxies such as Lebanon's Hezbollah, which is fighting in support of the Assad regime in Syria. In addition, Arab states, those that have new governments following the region's recent upheavals and those that resisted demand for change, are eager to safeguard their popularity at home and will try to satisfy public demand for a harder line on Israel. And although Washington will continue to act as the ultimate guarantor of Israel's security, an Obama administration focused on domestic priorities and on expanding its presence in Asia will have fewer resources to spend on helping to resolve the various conflicts taking shape along Israel's borders.

Then there is Britain, where, according to a poll conducted in May by ICM Research, just 30 percent favour continued membership of the EU. If the UK eventually lands outside the EU, it will pay a heavier price than many Britons realise. Shedding many of Europe's rules and regulations and its Common Agricultural Policy would pay early dividends, but waving goodbye to a club whose members buy half of Britain's exports would damage the country's core economic strength, and dozens of bilateral trade deals would have to be renegotiated. Outside Europe, Britain would lose much of its political clout. Even if Britain remains a member, its unwillingness to help shape the eurozone redesign and fully engage on new financial regulations will leave London as a taker rather than a maker of the new rules of the European game. And as Washington eyes new opportunities in Asia and begins work on trade deals with the EU, the relationship with a Britain outside Europe will be less attractive to future American presidents.

Summits can be useful in a crisis. But the G-Zero era of instability has only just begun and the new global order will take shape off camera, the result of decisions made and relationships formed among the leaders of individual states who are doing their best to absorb new shocks and make new friends.

*Ian Bremmer is the founder of Eurasia Group.