Global rifts deep as economies sag

G8 nations meet as risk of a world slump coincides with tensions over trade and dollar.

More than hurt feelings are at stake when leaders of the Group of Eight industrial nations gather this weekend in Évian, France.

Economies worldwide are at risk. Germany and Japan are in or near recession. A recovery in the United States is dragging its feet. Some other G8 members - Britain, Canada, and Russia - are doing better, but the economies of Italy and France are sluggish.

With the threat of a global slowdown and possible deflation as a backdrop, the economic summit starting Sunday will highlight another stubborn challenge: major economic powers are more at odds than they have been in years. Lingering diplomatic tensions from the Iraq war are just part of the story.

As nations struggle to retain jobs in a difficult economic climate, trade disputes have cropped up over everything from steel prices to whether cheese can be labeled "Parmesan" if it wasn't produced near Parma, Italy.

The recent decline of the US dollar has also become fodder for dissension. Many Europeans fret that the dollar's slide - tolerated so far by US policymakers - will cause their exports to fall as US exports rise.

"It's hard to think of a G8 meeting where relations between G8 members were more strained," says Loel Brainard, a "sherpa" - or organizer - of summits for the US during the Clinton administration.

Against this backdrop, business interests are pressing their leaders to smooth over their differences and find common ground on economic growth, including new free-trade deals.

"The global economy is in trouble," says Frank Vargo, an economist at the National Association of Manufacturers in Washington. "They should agree to get these global trade negotiations moving forward."

Most often, G8 meetings yield few concrete results - other than a carefully polished communiqué. Nonetheless, analysts say there is value for the summiteers in merely getting to understand each other better. It's "usually a good thing" when they "press the flesh and look each other in the eye," says Clyde Prestowitz of the Economic Strategy Institute in Washington.

And in recent days, some officials have signaled a desire to shake off the aura of Iraq-war rifts.

Trade's growing importance

One reason for reconciliation is economic realities. Most economists see the trend of globalization, including trade and investment flows, as a key booster of economic growth. For US companies, international investment is actually three times larger than their official trade in goods.

"US firms prefer to sell goods and services abroad through their foreign affiliates rather than export them from the US," notes economist Joseph Quinlan of Johns Hopkins University, in a recent paper.

In the 1990s, US firms invested more capital abroad - $750 billion - than in four prior decades combined.

In Europe, the target of half that investment, US affiliates churned out some $333 billion in goods and services in 2000. That amount is greater than the total gross domestic output of most nations. And the pattern works the other way around: European affiliates in the US produced $301 billion of goods and services.

But for all the importance of global commerce, transatlantic trade relations have become increasingly troubled over disputes concerning US countervailing duties on steel, European restrictions on genetically modified farm products, and US subsidies to manufactured exports.

Businesses are keen to see geopolitical divisions heal before they damage corporate and consumer confidence. Already, various boycotts have caused minor damage on both sides of the Atlantic.

So the chairman of six of the world's most influential business associations, all CEO's of major corporations, last week signed a letter to the G8 heads of state and their governments, calling on them "to demonstrate leadership by making a strong commitment to the success of the multilateral negotiations in the World Trade Organization."

A key meeting of the Doha-round negotiators meets in Cancun, Mexico, in September. Progress has been stalled. They are "a little belated" in "taking the politicians to task," comments Mr. Quinlan.

Key to a successful trade round will cutting farm subsidies in the European Union and the US. This is being demanded by developing nations. So far, France, with its powerful farm lobby, has resisted such change. But reports from Brussels suggest it may ease its stance.

Any progress on the Doha round or on US-Europe trade relations may not be visible in a G8 communiqué, experts say. But quiet promises could be made.

As for giving the world economy a boost, there is not much the G8 leaders can do beyond words. They don't control their central banks or their legislatures.

Nonetheless, a group of experts that calls itself the "Shadow G8" calls for its real counterpart to develop "a coordinated global growth strategy."

More money for Iraq?

Also on the agenda will be Iraq. The Bush administration may be finding that the task of turning Iraq into a functioning democracy is much more difficult and expensive than expected. So the US may seek financial help from Europe and Japan. In return, they may insist on more engagement in Iraq, perhaps through the UN.

Bush has a strong hand at Évian. "Very few Americans are going to punish him for not being friendly with leaders of France and Germany," notes Ms. Brainard.

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