G20 urged to use carrots for China rebalance
An Atlantic Council fellow argues the G20 must use positive economic tools like favorable tariffs and export credits, alongside punitive measures, to
The United States and its G7 allies are pursuing initiatives to diversify global supply chains away from China. According to a report from the Atlantic Council's GeoEconomics Center, success requires using positive economic tools, or 'carrots,' in addition to punitive tariffs and sanctions.
Geoeconomic tensions are rising as G20 finance ministers prepare to meet. One major agenda challenge is addressing global imbalances stemming predominantly from China. Unwinding these imbalances without triggering broader economic destabilization will not be easy.
Favorable tariff rates, export credits, and regulatory exemptions are tools that promise mutually beneficial growth among trade partners. Bilateral and plurilateral trade deals have proliferated as fast as punitive tariffs over the last year. They point toward a more constructive path for diversifying supply chains.
How to derisk without destabilizing
How the United States and its partners de-risk from China, and how Beijing reacts, could shape the century's geopolitical balance. Beijing already perceives coordinated supply chain diversification as a threat to its export-led growth model.
The priority must be to align the economic interests of the world's largest economies. The G20, as a premier plurilateral forum, has an important role to play. Its members must focus on strategic priorities that outlast individual electoral mandates.
Distinguish structural differences from trade wars
Not every trade conflict is a trade war. The spiraling US-Canada tariff conflict is a bilateral trade war. Strategic economic policy differences with China, by contrast, are structural and affect the global economy.
China's state-sponsored growth model is inconsistent with current global economic underpinnings. Decades of industrial policy have contributed to overcapacity and export dependence. These structural differences explain why many policymakers agree the Bretton Woods system is no longer fit for purpose.
Describing the China challenge as a trade war needlessly increases geostrategic tensions. It creates a false impression that tariffs or export restrictions can deliver a swift solution.
Align interests and articulate benefits
A disorderly unwinding of China's global imbalances would create risks for both China and its partners. Broad-based agreement exists within the G7 on the need to diversify supply chains from pharmaceuticals to critical minerals. Policymakers have taken plurilateral action for nearly a year.
Three significant success stories stand out. The Turnberry Agreement delivers greater certainty to the transatlantic economic relationship. The US-led Pax Silica promises to counter Beijing's dominance in critical minerals by providing fifty-four partners with accelerated technology access and export credits. The EU, Canada, and Japan have also turned to bilateral economic partnerships.
Reducing concentration risk in supply chains may not initially be welcomed in China. Policymakers in Beijing recognize vulnerabilities from their export-led model. Yet supply chain diversification need not create an existential threat to China.
Ironically, it could align with other Chinese strategic goals. Beijing promotes accelerated growth across developing nations, many in the Global South. Countries there have a unique opportunity to accelerate advances in domestic production, financed by G7 export credits. Plurilateral agreements like Pax Silica could propel dramatic economic growth in these countries.
The G20's opportunity
The G20's informal structure was designed to discuss global imbalances and financial fragility. It is one of the few forums that brings together the world's largest economies for difficult geoeconomic conversations. The G20 is thus the best forum for deploying positive tools of economic statecraft.
Pax Silica provides a good template for promoting the 'carrots' in the toolkit. It promises different but complementary benefits to supply chain partners, such as supply-chain access or increased investment. The positive case for enhanced cooperation in this field remains compelling even if China were not the dominant supplier.
The report, authored by former US Treasury official Barbara C. Matthews, concludes that the G20 must use its unique position to support diversification away from Beijing without scuttling China's economy.
