The leaders of the Group of 20 rich and developing economies — including the U.S. President Barack Obama and China’s Hu Jintao — issued a watered-down statement that only said they agreed to refrain from “competitive devaluation” of currencies.
At the end of their two-day G20 Seoul Summit, such a statement is of little consequence since countries usually only devalue their currencies in extreme situations like a severe financial crisis.
The real dispute is over Washington’s allegations that Beijing resorts to “competitive undervaluation” — artificially keeping its currency, the yuan, weak to gain a trade advantage. However, the US position itself has been undermined by its own recent policy of printing money to boost a sluggish economy, which is weakening the dollar.
The joint statement avoided the words “competitive undervaluation”, which was a reference to China’s currency policy that had been inserted into a draft of the statement by officials during pre-summit negotiations.
The dispute over whether China and the United States are manipulating their currencies is threatening to resurrect destructive protectionist policies like those that worsened the Great Depression in the 1930s.
The biggest fear is that trade barriers will send the global economy back into recession. A law the United States passed in 1930 that raised tariffs on imports is widely thought to have deepened the Great Depression by stifling trade.
Leaders agreed to come up with “indicative guidelines” to tackle trade imbalances affecting world growth and pledged to move toward more market-determined exchange rate systems and enhance exchange rate flexibility.
Although directed against China, the statement leaves significant room for interpretation since the language is vague and does not impose any timeframe for enforcing a market-determined exchange rate.
The US says a higher-valued yuan would make Chinese exports costlier abroad and make US imports cheaper for the Chinese to buy. It would shrink the US trade deficit with China, which is on track this year to match its 2008 record of $268 billion, and encourage Chinese companies to sell more to their own consumers rather than rely so much on the US and others to buy low-priced Chinese goods.
China and other countries are irate over the Federal Reserve’s plans to pump $600bn (£370bn) into the sluggish American economy. They see that move as a reckless and selfish scheme to flood markets with dollars, driving down the value of the US currency and giving American exporters an advantage.
Foreign economies have complained the Fed’s infusion of cash will devalue the dollar and hurt their exports to the United States. Those complaints come as the US pressed China to stop its policies of keeping its currency, the yuan, weak.
President Obama said the Fed’s action also addressed concerns about possible deflation — a condition caused by extremely low inflation. The president said the Fed’s move was not a central discussion point among members of the Group of 20 of the largest economies with whom he met.
Earlier, Obama said China’s currency was undervalued and an irritant to the U.S. and other trading partners. He said he raised the issue with Chinese President Hu Jintao, adding he expected progress.
Some critics warn that if US interest rates kept too low for too long it could inflate new bubbles in the prices of commodities, stocks and other assets.
Developing countries such as Thailand and Indonesia fear that falling yields on US government bonds will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.
Friday’s statement is unlikely to immediately resolve the most vexing problem facing the G-20 members: how to fix a global economy that’s long been nourished by huge US trade deficits with China, Germany and Japan.
Exports to the United States powered those countries’ economies for years, but they’ve also produced enormous trade gaps for the US because Americans consume far more in foreign goods and services than they sell abroad.
Tim Condon, head of research at ING Financial Markets in Singapore said it was “hard to disagree” with the vows of the leaders but they had fallen short of the progress hoped for going into the summit.
“They decided just to put down a lot of laudable objectives as the conclusion of the meeting and hope that they can do better, that more can be accomplished in future meetings,” he said.
The G20 has fragmented since a global recession gave way to a multi-speed recovery. Slow-growing advanced economies have kept interest rates at record lows to try to kickstart growth, while big emerging markets have come roaring back so fast that many are worried about overheating.
“G20 credibility does depend on showing results … we cannot get out of this with beggar-thy-neighbour policies,” Canadian Prime Minister Stephen Harper said. “We need instead to continue to coordinate our actions going forward. The recovery is fragile.”
“I don’t think the fact that we aren’t there yet, we haven’t resolved all these problems, means we will fall back.” [via The Telegraph (UK)]