By Howard Schneider
Washington Post Staff Writer
Friday, October 22, 2010; 5:14 PM
Treasury Secretary Timothy F. Geithner has asked the world's largest economies to commit to specific trade and currency targets in an effort to secure a global economic recovery.
In a letter Wednesday to the finance ministers of the G-20 nations obtained by The Washington Post, Geithner outlined a three-point plan that warned countries against artificially undervaluing their currency to prop up exports. The proposal, rooted in the United States' ongoing trade dispute with China, did not mention China by name. But the letter said that countries should refrain from adopting "exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of undervalued currency."
Geithner and the other Group of 20 finance chiefs are attending a two-day meeting this weekend in Geyongju, South Korea, for a round of preliminary talks ahead of a summit among the heads of state next month in Seoul.
In the letter, Geithner said the plan would require nations to trim their trade surpluses, while countries such as the United States would have to curb chronic deficits and commit to saving more on a national level. Finally, Geithner called on the International Monetary Fund to expand its role to monitor progress on these fronts.
The proposal drew split reaction from some G-20 members in Korea, Bloomberg news reported on Friday.
"Setting numerical targets would be unrealistic," said Japanese Finance Minister Yoshihiko Noda. He said the United States recommended trade deficits or surpluses of no more than 4 percent of a country's current account, which is a measure of a nation's trading relationships with the rest of the world. A persistent, high current account surplus is a sign of an undervalued currency, as is the case with China.
German Economy Minister Rainer Bruederle rejected a "command economy" approach. And Indian Finance Minister Pranab Mukherjee said caps would be hard to quantify.
In interviews with Bloomberg Television, however, Canadian Finance Minister Jim Flaherty said the idea was a "step in the right direction," and Australian Treasurer Wayne Swan called it "constructive."
The Obama administration is pushing major nations for a broad new agreement on fundamental economic issues such as exchange rates and trade surpluses. To succeed, however, the effort must breach a deep divide between developed and developing countries on how best to secure global economic growth. And it is poised to become a defining battle for the G-20 major economic powers.
At Obama's urging last year, the G-20 assumed a central role in coordinating world economic policy, a change that captured both the president's commitment to multilateralism and the urgent need for action to pull the global economy out of a deep recession. The result was a coordinated move by governments from Beijing to Brasilia to unleash huge amounts of spending to restart economic growth.
But a year later, national self-interest and bilateral feuds have reemerged amid concern that major countries risk a debilitating battle for jobs and trade. That, in turn, has prompted doubts about whether the disparate group of nations represented at the G-20 can remain on common ground outside of a global economic crisis.
"Among the G-20, we are looking for the least common denominator - it requires consensus - and the least common denominator is too low" to address some of the problems being faced, said Ali Babacan, Turkey's deputy prime minister and liaison to the group. "Short-term national interests are overwhelming."
Top Indian and British officials said in separate interviews this week in the European press that they were worried about a fracturing of international cooperation over key issues such as currency and were concerned the G-20 itself might prove a short-lived, if ambitious, experiment in global coordination.
On Wednesday, a senior U.S. official said the administration had set aggressive goals, including agreement on a new "framework" that would measure whether an individual country's trade flows or exchange rates were out of balance with underlying economic forces and would judge whether national policies were helping or hurting.
"It is very clear right now that individual nations acting with national policy tools alone are not either effectively addressing their own challenges or contributing to a better overall outcome," said the official, who spoke on condition of anonymity because the talks had not begun. The official referred repeatedly to the need for "large economies with undervalued exchange rates" to change their practices - a reference to China. "There will be quite direct conversations, and it is important for the G-20 to be effective."
The official said the United States wants the G-20 nations to commit to flexible exchange rates and agree on how to measure a country's progress on reducing oversized deficits or surpluses in its current account.
China pegs its renminbi to the dollar at a rate considered well below its true value, a policy that boosts its exports and arguably gives the country a global trade advantage. Chinese officials have resisted outside pressure to change their currency policy but have agreed in presentations to the International Monetary Fund and elsewhere that their current account surplus should decline.
The issue is at the center of efforts to ensure that global economic growth continues at a moderate and sustainable pace. Some analysts argue that the trade imbalance between the United States and China helped lay the seeds of the recent crisis. As China steadily invested its trade proceeds in U.S. Treasury bonds, it fueled the low interest rates and loose credit that helped lead to the U.S. financial meltdown, they say.
"We will be having conversations about reducing imbalances to sustainable levels and conversations about what 'sustainable levels' will mean," the U.S. official said.
But wresting a meaningful agreement from the group is no easy task. The organization's predecessor - the smaller Group of Seven industrialized nations - had the advantage of deep cultural or geopolitical affiliations, as well as a similar view of how the world economy worked. When its four key members clashed over currency values in the 1980s, they hammered out a pact that smoothed things over.
But as tension over currency and other issues began rising in recent weeks, it became clear that major nations disagreed not just over solutions but also over the nature of the problem. Beyond the United States and China - the world's biggest and second-biggest economies - the G-20 includes oil giants such as Saudi Arabia, large emerging-market democracies such as India and Indonesia, and a bevy of other nations, such as South Africa and Argentina, that bring their own perspectives and histories to the table.
U.S. officials, for example, have pointed to Brazil as a casualty of China's currency policies. Brazil's floating exchange rate has led to a sharply higher real, which has harmed the country's exporters. But Brazilian officials said they were just as concerned that loose U.S. monetary policy was encouraging investors to funnel money to Brazil and other emerging markets, feeding fears of inflation and asset bubbles.
Other developing nations, while agreeing that exchange rates should float, say the trade surpluses in the developing world are of less concern than the historic levels of government debt accumulating among developed nations - which they feel should get more attention.
And within the developed world, some G-20 watchers expect Germany - a major exporter that has its own persistent surpluses - to resist any firm commitments that could affect its export competitiveness.
The United States is hoping it can rely on Turkey, an ally and NATO member, to support the upcoming discussion, but Babacan said there are national interests to consider.
His country is nurturing a trade relationship with China, which he praised in a recent interview for its "long-term vision," compared with the shorter-term interests he feels are driving policy in the developed world.
In the argument over exchange rates and trade, he said that "if you say to a country, 'Give me some of your money,' that doesn't work." He argued that the major developed countries were not acting forcefully enough on their own debt and other budget issues that will ultimately affect Turkey and other nations that depend on consumer markets in Europe and the United States.
"In the major developed economies, there are weak governments. . . . We don't know if decisions can be made," Babacan said. "If I was in charge of the U.S. economy, I'd talk more about deficits and debt."