G-20 meeting ends with U.S. failing to secure key support for trade plan
— Officials of the world’s major economic powers agreed Saturday to take steps to ease a brewing turmoil over currencies, but the Obama administration fell short of securing an agreement for specific targets to correct large trade gaps and imbalances threatening the global economy.
Concluding two days of talks in South Korea, Treasury Secretary Timothy F. Geithner and other finance ministers of the Group of 20 leading economies also moved to give emerging nations such as China and India a bigger voice in the International Monetary Fund, as well as strengthening the IMF’s hand in monitoring and helping implement G-20 commitments.
Geithner’s top priority at the talks, in advance of a summit of G-20 heads in Seoul next month, was to persuade his counterparts to accept a new set of economic policies and mechanisms aimed at reducing the large U.S. trade and investment deficits while curbing excess surpluses of China and other countries that have long relied on Americans as the consumers of last resort.
In the wake of the global financial crisis and devastating recession, U.S. officials have pressed harder for export-dependent countries to import more and grow their economies by boosting domestic demand. At the same time, the U.S. and other countries that have been running deficits would need to consume less while lifting savings and investments. The shift, officials argue, is necessary for strong, sustained growth of the global economy and to prevent a recurrence of the recent worldwide crisis.
While agreeing to the general principles of this framework, the U.S.-backed proposal to set global curbs on the current-account surpluses and deficits of major countries drew immediate opposition from some key American allies and trading partners, underscoring the difficulties ahead in restoring stability to the global economy.
At the meeting in South Korea’s southern city of Gyeongju, U.S. officials sought to set a cap for each country’s deficit or surplus at 4% of its economic output by 2015.
The idea drew support from Britain, Australia, Canada and France — all of which are running trade deficits — as well as South Korea, which is hosting the G-20 meetings and hoping for a compromise among the parties.
But the U.S. proposal got a cool reception from some export powerhouses such as China, which has a current-account surplus of 4.7% of its economy, and Germany, with an even higher surplus of 6.1% of gross domestic product, and Russia, with a surplus of 4.7%, according to IMF statistics.
In their joint declaration following the meeting, the G-20 finance ministers said, “We are all committed to play our part in achieving strong, sustainable and balanced growth in a collaborative and coordinated way.”
But there was no mention of a 4% limit of trade and investment imbalances of individual countries — not even in bracket notations. Instead, the declaration read: “Persistently large imbalances, assessed against indicative guidelines to be agreed, would warrant an assessment of their nature and the root causes...”
Geithner, in a statement Saturday, accentuated the progress made.
“The framework of cooperation we agreed to today recognizes that none of us can accomplish this alone,” he said. “First, we have agreed that it is important to limit the overall level of external imbalances across the global economy...The value of this framework to limit trade imbalances is that rights and responsibilities are aligned and balanced.”
But with countries still feeling the pain of the recession and reluctant to accept policies that might weaken their growth prospects, analysts weren’t surprised that the U.S. failed to come away from the talks with commitments to adopt specific targets.
“In practical terms this would mean that any attempt to target current account positions would force governments to target fiscal positions, [that is], the part of the current account deficit that the government can do something about,” said Paul Donovan, a global economist at UBS Investment Bank in London. “Will the U.S. Congress pass tax increases and spending cuts for immediate implementation because the international community is concerned that the U.S. is running too large a current account deficit position?”
“There is also the question about what an appropriate target should be,” he added. “A country with a rapidly aging population should run a current account surplus...because that means that the country is building up a stock of overseas assets, which it can live off of as its population retires. A country with a young population should run a deficit as it raises living standards. Should those surpluses be 4%? Or 5%? or 6%?”
U.S. officials met with greater success in its efforts to address the current upheaval over currency values. U.S. lawmakers and some businesses have accused the Chinese of devaluing the yuan to gain an advantage in trade, and Brazilian officials, who did not attend the G-20 finance meeting, have expressed concerns of an international currency war.
In their declaration, the G-20 finance ministers pledged to “move toward more market determined exchange rate systems...and refrain from competitive devaluation of currencies.”
“Together, we will reinvigorate our efforts to promote a stable and well-functioning international monetary system and call on the IMF to deepen its work in these areas,” the declaration read.
Yoon Jeung-hyun, South Korea’s finance minister, lauded the agreement on currency policies, declaring that it would “put an end to the controversy over foreign exchange rates.”
G-20 officials also highlighted their accomplishments in following through on a previous pledge a year ago to restructure the IMF’s voting quota system and governance to give emerging countries greater say, to reflect their increasingly important role in the global economy. On Saturday, the G-20 parties agreed to shift more than 6% of quota shares to emerging economies and underrepresented countries by the end of 2012. The hope is that this realignment would help make the IMF more credible and effective.
Chinese officials welcomed the change. “China, the biggest developing and low-quota country, should be promoted in terms of its quota and voting right in the IMF,” said Zhou Xiaochuan, China’s central bank governor.
But there was little comment from the Chinese side on the G-20’s other statements related to trade imbalances and currency policies. On Friday, the Chinese Embassy issued a statement saying that “China never pursues trade surplus, nor has it manipulated its currency to gain trade benefits.”
Despite the IMF’s enhanced profile and internal changes, economists were skeptical whether it could be that much more effective in settling increasingly complex global economic issues.
“In truth, the IMF has little power of sanction over large members that do not need its money,” said Raghuram Rajan, a University of Chicago finance professor and former chief economist at the IMF. “And countries like China or the U.S. are not likely to give it power over their policies.”
