MEXICO CITY, Feb. 23 (UPI) -- We now know two important and useful items of good news about the forthcoming summit of the Group of 20 nations in London in April. This meeting is likely to be critical for the prospects of economic recovery in the future.
The first reason for this is that President Barack Obama's attendance is now confirmed, and the second reason, almost as important, is that China has made it publicly clear that it will be on the side of the free traders against the protectionists.
Unlike the last G20 summit in November, which he avoided rather than cause confusion with sitting President George W. Bush, Obama is determined to attend the London event. And he is going to be the most pivotal person in the room.
There are three reasons for this. The first is that the United States, however stricken by the economic recession, remains the economic, military and political superpower. Not much can be achieved without its support and participation, which is why the rest of the world's leaders were so troubled by that brief threat of "buy American" provisions in Obama's stimulus package. If the United States backs away from free trade, then protectionism will follow, and the recession will last a very long time.
The second reason is that Obama is not just the new president on the block, but he also has developed an extraordinary constituency of support in other countries around the world, from Russia to China to the Middle East. The leaders from Beijing and Riyadh, from Moscow and Paris, from Brasilia and Pretoria all know that Obama has become a global symbol of hope and change. Nobody will want to be seen to be opposing him.
The third reason is that under Obama's guidance, the United States is leading again and bidding to save the world economy by its actions and by its example. Within a month of taking office, he has launched three massive and separate measures to tackle the American recession and its global metastasis.
His $787 billion stimulus package may or may not work as planned, but it is a very big and bold effort and it should stop the recession getting very much worse.
Treasury Secretary Tim Geithner's plan to stabilize the financial system initially received a poor reception, particularly from Wall Street, which marked down financial shares. But Wall Street has its own agenda. Had Geithner shoveled more taxpayer money at the banks without asking for much in return (as the Bush administration did), then Wall Street might for selfish reasons have rejoiced.
The longer that serious economists have studied the plan, the better their comments have been. The plan is open-ended in time and in financial commitment, but the goal is to use between $300 billion and $1 trillion of federal funds and credit to generate another $1 trillion from private investments.
The purpose is to stabilize the existing banks (if they pass a "stress test"), to protect them from further threats of defaulting loans from car buyers, students and credit card holders, and finally to leverage private capital to buy the toxic assets that still weigh down the banks. All this is to be done without using the emotive word "nationalization" and without being seen to reward the bankers and shareholders who led the way into this crisis.
Its vagueness, given the uncertainty of the real value of the toxic assets and the still unknown way the U.S. economy will react to the stimulus package, is no bad thing. Flexibility will be important. And the third element of Obama's first month in office, the $75 billion mortgage relief plan, should fend off the political pressure of mass foreclosures and give the banks and mortgage holders important assurance of future cash flow.
Overall, Obama's triple package carries a convincing price tag that could go as high as $1.85 trillion, which is close to the GDP of Italy, the world's seventh-largest economy. And it tackles the right targets: the banks, the mortgage system and the U.S. economy as a whole.
So Obama will walk into the London summit as the man with the plan, and the money and the political will to use it. That alone gives the G20 meeting a better chance of success.
But the other country with the biggest stimulus package is also poised to help. China, which is deploying $586 billion in public investment and infrastructure spending, is sticking with the strategic decision it made last year to be a supportive and responsible partner in sustaining the health of the global economy.
Last October China joined in the coordinated interest rate cuts of the Group of Seven finance ministers. Then it announced its big stimulus plan. Now it is stressing its commitment to free trade, with a stirring statement Friday from Commerce Minister Chen Deming that "the fundamental interest of every country is to step up consultation and cooperation and keep international trade smoothly flowing. Healthy international trade can help revive the world economy."
Let us not be naive. Chen's concern is that the United States does not go dangerously far down the "buy American" path because the big victim would be China, whose exports fell last month by 17 percent. But when he says that "global trade is now in dire straits" and that "protectionist policies would make things even worse, and the consequences would be hard to predict," most economists and most governments around the world would agree with him.
There is an implicit bargain here that China will continue to hold and buy U.S. Treasury bonds and thus sustain the dollar, so long as the United States avoids the protectionist temptation. If this bargain holds, and domestic politics in the East and the West are not allowed to crush the liberal trading order, then Beijing and Obama between them could turn the G20 summit into the springboard that starts the world back to recovery.
