Hokkaido Hot Air

Wall Street Journal
Tuesday, July 8, 2008

Japanese Prime Minister Yasuo Fukuda tried to set the stage for this week's Group of Eight summit in January by claiming, "Global environmental issues have now gone beyond the discussion stage to become real problems with significant effects on our day-to-day lives and economic activities." Well, it turns out $145 oil is a bigger problem.

The inflationary pain in the major economies is now clear. U.S. consumer price inflation in May stood at 4.2% year-on-year. The Eurozone has seen 4% inflation in the first six months of this year. The OECD reports that average year-on-year inflation among its members in April reached a seven-year high of 3.9%. This, a credit crunch and a slackening global economy are now topping the G-8 agenda.

Most of this tumult comes courtesy of the Federal Reserve's easy money policies, which are flowing through the rest of the dollar bloc nations, especially in Asia. The G-8 can't do much about this directly, though it could help with a clear statement that the leaders are concerned about inflation and want a stronger U.S. dollar. This would require U.S. leadership, however, and the Bush Treasury has too often seemed to favor a weak dollar in the name of pushing exports. One result has been the commodity price explosion that has accompanied the dollar's decline.

The G-8 can also help by breaking down trade barriers and allowing all this extra capital to flow to more productive uses. And maybe, just maybe, the leaders of the rich economies will resist calls to raise global prices even further in the name of averting climate change.

President Bush reiterated his commitment to the Doha Round of global trade negotiations before leaving Washington, promising to "work to tear down barriers to trade and investment around the world." His problem in Hokkaido will be the unwillingness of some of his G-8 peers, and others, to do the heavy lifting required to turn talk into action. Brazil and India are reluctant to come to the table in global trade talks until the European Union and the U.S. cut their agricultural subsidies and improve market access. G-8 host Japan is one of the worst offenders.

Instead, this week's summit is likely to fall back on grandiose rhetoric and handouts. The 2005 huddle in Gleneagles delivered a pledge to double development aid by 2010, to $50 billion. Most of that aid has yet to be delivered. Before today's meeting, the U.S. committed almost $1 billion for "global food security." The Asian Development Bank has promised some $500 million for food aid for poor countries. If history is any guide, most of that money won't be well spent.

As for climate change, Mr. Bush insists that any plan for tackling carbon emissions must include the developing world's big emitters, China and India. Given their longstanding and understandable unwillingness to subject themselves to costly, economy-crippling carbon constraints, we can only hope Mr. Bush's statement amounts to scuppering any major new emissions initiatives this week. In a world preoccupied with inflation, Mr. Fukuda's plan to halve global carbon emissions by 2050 -- dubbed "Cool Earth 50" -- makes little sense.

Already "environmentalism" is contributing to higher food prices. The quest for a more atmosphere-friendly fuel has provided political cover for agricultural interests peddling ethanol as a solution. The result: diversion of agricultural land to corn at the expense of other crops, and diversion of corn to fuel at the expense of food. Corn futures have soared in the last year, closing at $7.70 a bushel in Chicago on Thursday compared with nearer to $4 less than a year ago.

Still, the G-8 summit offers some pluses. A rhetorical bow to the importance of free trade is welcome in a world where politicians like America's Barack Obama are increasingly willing to ignore the evidence of trade's economic benefits. And Hokkaido is a convenient forum for discussions on pressing non-economic issues, especially nuclear proliferation. Mr. Bush met Monday with Dmitry Medvedev, their first meeting since the new Russian President took office. He will interact this week with Mr. Fukuda, South Korean President Lee Myung-bak, and Chinese President Hu Jintao. Such face-to-face diplomacy has its uses.

But given the serious economic problems facing the world, it's hard not to think this conclave could do more than it probably will. Only a year ago, the G-8 released a statement calling the global economy "in good condition." We'll take the helpful bits of rhetoric for now, but true action on issues like trade may have to wait until the global economic outlook takes a turn for the worse.