G7 can help create order from Trump levies
At a time when the G20 has become less effective, the G7 could assume new relevance and start setting the global economic agenda again
MANY uncertainties remain about the tariffs announced by US President Donald Trump on “Liberation Day” last Wednesday (Apr 2). However, there is a growing agreement that his actions may be one of the biggest inflexion points for the global economy since the so-called Nixon shock of 1971 when the dollar was delinked from gold.
It is in this context that the G7 – beyond the United States – could play a key international response, alongside major allies from the Asia Pacific to the Americas, including G20 and Commonwealth member Australia. The club of industrialised democracies was founded in the mid-1970s in the aftermath of geopolitical and economic shocks when Washington had pulled out of the Gold Standard. Back then, Richard Nixon had resigned from the US presidency, and there was a clear danger of currency wars.
However, the G7 – including the Nixon team – stepped up to the plate, playing a key role in the management of the most important exchange rates, and also bringing Japan into the Western policymaking community. A similar far-sighted, bold approach is needed today.
In 2025, Canada, Japan, the United Kingdom, Germany, France, Italy, plus the wider EU can play a key role in sustaining as much of the multilateral financial and trade order as possible, alongside allies such as Australia. The G7 – despite the inclusion of Trump’s US and the fact that it excludes world powers including China – could still be influential as other bodies such as the G20 are riven by geopolitical disputes, especially since the Ukraine war began.
The current G7 chair, Canada, which holds a general election on April 28, could be key to such an economic initiative. If polls are accurate, the Liberal Party led by Prime Minister Mark Carney looks increasingly likely to win the most seats. If so, Carney as a former UK and Canadian central bank chief, could play a pivotal role in this project.
Carney has declared that the “old relationship we had with the United States based on deepening integration of our economies and tight security and military cooperation is over”. He has said that Ottawa will respond “forcefully” and that nothing is “off the table” over Trump’s plan tariffs toward it and allies.
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Importantly, the plan being proposed is not anti-American. Instead, it seeks to preserve as much of the best of the post-war order that the United States helped create after 1945, which Washington could potentially help lead again under future presidencies.
Pivotal role
Aware of the possibility of such G7 coordination to his tariffs, Trump has warned that “if the EU works with Canada in order to do economic harm to the United States, large scale tariffs…will be placed on them both in order to protect the best friend that each of those two countries has ever had”.
However, the non-US G7 must look beyond Trump’s threats if he continues on his current course. Building from closer working relationships between the non-US G7 and wider industrialised economy allies such as Australia, deeper economic ties could be formed with Commonwealth emerging markets, including Nigeria, South Africa, India, plus wider nations such as Turkey.
Such an initiative does not only have to be limited to economics. In defence, there could soon be Trump-sized holes in collective Western security mechanisms, including Nato. So, especially if the US president fails in his plans to deliver a sustainable peace deal in Ukraine, wider Western initiatives to sustain the ability of Kyiv to maintain its battle to preserve the nation’s integrity will assume growing importance.
Yet, as potentially beneficial as such economic and defence initiatives could be, it would depend upon G7 members beyond the US finding sufficient, common mutual interests. This is far from inevitable.
For one, Trump is trying to pick off the opposition country by country, including with differential levels of so-called “reciprocal” tariffs. In this context, US National Economic Council director Kevin Hassett claimed on Sunday that more than 50 countries have reached out to the White House to begin trade bilateral talks.
Across the G7, reciprocal tariffs include the 10 per cent on the United Kingdom, 20 per cent on EU nations, and 24 per cent on Japan. While Canada is not on the list of countries slapped with the reciprocal measures, on Feb 1 Trump signed executive orders imposing 25 per cent tariffs on all goods imported from Canada, which were suspended for a month after negotiations.
In early March, Trump resurrected the tariffs, but on Mar 6 exempted goods that fall under the United States-Mexico-Canada Agreement (USMCA) from these tariffs. Non-USMCA-compliant energy and potash face a 10 per cent tariff, and all other non-USMCA-compliant products from Canada continue to face 25 per cent tariffs.
Competitive rivalry
The differential tariffs therefore potentially set up a landscape of competitive rivalry. For instance, for countries facing the lower 10 per cent baseline tariff, some exports will be hurt. However, opportunities may open up for domestic firms to better compete in the US market, as other countries, including some in Asia, face significantly higher tariffs.
Take the example of the United Kingdom, whose 10 per cent reciprocal tariff makes the country one of the biggest exporters of goods to have this baseline level. The Centre of Inclusive Trade Policy think tank estimates in research released on Friday that the US reciprocal tariffs will result in only relatively modest overall UK economic losses. Moreover, if London can strike a deal with Washington, the economy would make a smaller, marginal gain.
So while there is much uncertainty and potential damage in the immediate term, the UK may be able to secure some modest competitive advantage. This could be particularly likely if most other G7 countries retaliate, as Canada already has, but the UK does not.
So, much may depend now upon the wider (non-US) members of the G7 being able to find common positions in what is a hugely uncertain period. This may be possible on the basis that any nations that might secure a small competitive advantage from the Trump tariffs could see this eroded by a broader international slump caused by a big, wider trade shock and/or ongoing uncertainty.
If the non-US G7 can come together in these ways, the body could rejuvenate itself for the challenges of the second half of the 2020s. The club has previously been at its best in times of crisis like the mid-1970s, tackling the big issues of the day. At a time when the G20 has become less effective, the G7 could therefore assume new relevance and start setting the global economic agenda again.
The writer is an associate at LSE IDEAS at the London School of Economics
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