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Jaded G7 passes parcel to G20 on crisis

ROME (Reuters) - The G7 economies are struggling to produce a collective response to the worst downturn in decades, raising the danger that an upcoming G20 meeting could in turn hit trouble over the looming issue of trade protectionism.

In Rome, finance ministers of the G7 free-market democracies issued a statement on Saturday where they pledged to do all they could to restore economic stability and respect a commitment to free trade -- and to work as a team in doing so.

That was predictable to the extent few suspected the meeting would hatch novel remedies for the recession engulfing them all.

What was striking was that the G7 ministers’ call for free trade sat so uneasily with some of the policies being adopted on their own turf, most noticeably in the United States at the very moment they were meeting.

The U.S. Congress adopted an economic stimulus plan with a “buy America” clause that prescribes the use of U.S.-made iron, steel and other materials in infrastructure building projects that will get billions of dollars of public funding.

“Protectionism is quickly becoming a very serious threat to both the timing of the economic recovery and the post-crisis growth potential of the world economy,” said Marco Annunziata, London-based chief economist at UniCredit bank.

He feels equally strongly about other government responses to recession, such as the French government’s rescue plan for the car industry.

“The (G7) statement leaves me with the uncomfortable impression that domestic political pressures dominate, preventing policymakers from undertaking a stronger and more concrete commitment to free trade,” said Annunziata.

NEXT STEP A STUMBLE?

Such a shortfall within what is supposed to be a relatively like-minded group of G7 governments augurs poorly for the next phase, where the search for a response to the worst crisis since the Great Depression moves to the G20 and a summit on April 2.

China, a key part of that G20 process, already took a swipe at the “Buy America” clause when vice commerce minister Jiang Zengwei noted last week that his country’s economic stimulus plans would not contain a “Buy China” clause.

The official Chinese news agency, Xinhua, followed on Sunday with a commentary article that slammed the Buy America clause and denounced protectionism as a “poison” that hurts poor countries.

U.S. Treasury Secretary Tim Geithner, making his G7 debut in the job, told a Rome news conference that President Barack Obama had insisted the Buy America clause be accompanied by a proviso that America would respect its obligations under the free trade rules of the World Trade Organization.

That said, he did not say how the two things squared.

Russia, which has been faulted itself for failing to respect a G20 promise to avoid imposing new trade tariffs this year, offered an explanation of sorts, but not one that the G7 countries were in a hurry to confirm.

“The G20 declaration and even today’s G7 communique mentioned protectionism but it does not impede countries, including the ones which signed up, from raising new barriers,” Andrei Bokarev, a Russian official present in Rome, told Reuters in an interview.

Russia, a G20 member, attends G7 finance meetings in part but has long been refused full membership status by the others in the group -- the United States, Japan, Germany, Britain, France, Italy and Canada.

The G20 summit in London is being billed as the moment when leaders will deliver on promises made last November to combat the global economic crisis and beef up the regulation and supervision of banks and financial markets to prevent a repeat.

The G7 was not the place dealing with the sensitive reforms of bank regulation and international market supervision, much of which will be coming to a head in coming weeks, including when finance ministers of all the G20 countries meet on March 14 to prepare for the April summit.

UniCredit economist Annunziata believes that the G20, which has risen in importance as the balance of economic power shifts away from the G7 economies, is now the only hope, all the more so after the weekend meeting in his native Italy.

“This really should be the last G7,” he said. “It is time for the G7 to leave the stage and retire, and hope the G20 will do a better job.”

with input from the G7 reporting team

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