As global finance chiefs return from their first collectiveengagement with the Trump administration, they're bringing home aload of unfinished business.

While the weekend meeting of the Group of 20 in the German spatown of Baden-Baden kept up its tradition of a communique topresent a veneer of agreement, it only did so by papering over newcracks in the order underpinning the world economy. Barelyhinting at the merits of free trade, the statement's omissions showhow global economic diplomacy is now beset with a fault line thatcould overshadow it for months, if not years.

As recently as last July, the G-20 had promised to “resist allforms of protectionism,” a pledge now absent as the previousconsensus on commerce is challenged by the recent election of U.S.President Donald Trump. Before he and the rest of the group'sleaders meet in Hamburg in July, his counterparts have little morethan 100 days to gauge if the removal of those words represents thebeginning or the end of his administration's attempt to resetglobal terms of trade that it abhors as economically unfair.

“Saying that the G-20 wishes to avoid protectionism does notnecessarily make it so — arguably protectionism has risen in thepast few years in spite of public pronouncements,” Paul Donovan,global chief economist at UBS Wealth Management in London, said byemail. “However, the deliberate change in tone reinforces the ideathat on trade, the Trump administration will implement at leastsome of the campaign rhetoric.”

That shift followed hours of wrangling that kept officials insuspense on whether the G-20 would even mention trade, withoccasional doubts that a communique might be produced at all.

The U.S. delegation, led by Treasury Secretary Steven Mnuchin,wanted a reference on the need for trade to be “fair” while China,a previously unlikely champion in such matters, led a defense ofthe existing rules-based regime under the World TradeOrganisation.

In the end, ministers agreed that “we are working to strengthenthe contribution of trade to our economies,” a compromise tosalvage what remained of the foundations of an understanding thatthe G-20 had long largely taken for granted.

Participants such as Pierre Moscovici, the European Union'scommissioner for economic and financial affairs, are now holdingout for the Hamburg summit to repair the damage.

'No Rollback'

“The single most important decision which helped to fend off atype of depression like in the 1930s in the wake of the LehmanBrothers collapse was that we avoided a fallback into protectionismand that we kept the global economy open,” Moscovici told reportersin Baden-Baden. “I cannot overstate the importance of avoiding anyrollback on this.”

Speaking in Hanover on Sunday, German Chancellor Angela Merkeland Japanese Prime Minister Shinzo Abe called for a concertedeffort to defend free trade, saying global markets can be both openand fair. “Of course we want fair markets, but we don't want to putup barriers,” Merkel said.

Despite the change in G-20 wording, observers including IsabelleMateos y Lago, a strategist at the BlackRock Investment Institute,remain sanguine about the Baden-Baden outcome. She told BloombergTelevision that there's still a “glass half full” view.

“The U.S. secretary of the Treasury engaged in the G-20 meetingvery meaningfully and very actively at a time when other signalsfrom the U.S. administration were pointing to less interest inglobal cooperation,” she said. “What matters the most is notwhat they say — it's what they actually do.”

One area of contention that remained relatively untouched at theG-20 meeting was currencies.

Despite Trump administration criticism of Germany's tradesurplus, U.S. officials signed up to the group's prior comments,“including that we will refrain from competitive devaluations andwe will not target our exchange rates for competitive purposes.”That lack of formal discord doesn't exclude it also becominganother battleground in due course, not least as part of the widertrade discussion.

“The G-20 communique danced around the key topic ofprotectionism and currency manipulation but bears the imprint ofthe White House trade concerns,” said Neil Mackinnon, an economistat VTB Capital in London and a former U.K. Treasury official. “Anincrease in trade protectionism is a key downside risk for theglobal economy.”

However the discourse evolves, Donovan of UBS observes that sucharguments over trade risk being a quarter of a century out of date,because they focus on physical commerce and ignore thechanging nature of the economy. Looked at through that prism, thecontours of global trade are different: Trump's complaints aboutthe U.S. deficit overlook a surplus in services that amounts to$248 billion, encompassing exports from education to software.

Donovan predicts that physical commerce will decline in relativeimportance because of the virtual economy and the use of roboticsto localize production.

“Supply chains are starting to shrink, and that process islikely to continue,” he says. “The question is whether it happensnaturally or in a disruptive manner.”

From: Bloomberg News

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