G-20 divided over Geithner plan
Saturday, October 23, 2010; 12:07 AM
The Obama administration has offered what it hopes is an elegant solution to the thorny problem of conflicting global currency and trade policies that keep the world economy unstable.
But the proposal - to cap the amount of mismatch between what any nation produces and invests and how much it consumes - is drawing fire as countries that run steady trade surpluses make it clear they want to hang onto their advantage.
Presented in a letter from Treasury Secretary Timothy F. Geithner at a meeting in South Korea of finance ministers from 20 major world powers, the proposal aims to ease tensions that arise as each nation tries to make its currency less valuable to strengthen exports and boost its own economy.
This approach is a contrast with some of the hard-fought trade battles of the past, such as those between the United States and Japan in the 1980s, which led to specific limits on goods such as U.S. imports of Japanese automobiles. Rather, the U.S. proposal aims to set overall restrictions on global financial imbalances and leave it to each nation to figure out the best way to get there.
Geithner's proposal, made at a meeting of the Group of 20 finance ministers in Gyeongju, South Korea, would effectively put a cap on how wide a trade deficit or surplus a country can run relative to the size of its economy.
Geithner's letter did not specify proposed targets for current account surpluses and deficits, but discussion has centered on a goal of 4 percent of gross domestic product by 2015.
The United States would agree to spend less while exporting and saving more, and China and Germany would effectively agree to guide their economies toward higher levels of consumption and imports. Those countries showed the most resistance, worried that cutting back on their powerful export engines would cost jobs in an already weak economy.
Another element of Geithner's proposal was that nations "should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency," which is an effort to short-circuit any so-called "currency war," or series of escalating devaluations. And the proposal would give the International Monetary Fund new powers to monitor and enforce that agreement.
Geithner's proposal is designed to offer a pathway to resolving some of the most fraught issues in international economic diplomacy, namely debates over what the proper relative values of different currencies ought to be. Instead of having continued tension between the U.S. and China over China's large-scale intervention in financial markets to keep its currency artificially cheap and the dollar artificially high, it would be left to the Chinese to figure out what mix of policies would reduce their current account surplus.
In other words, they could use a mix of monetary policy, fiscal policy and trade policy as well as changes to their currency policy to achieve the same result in terms of a more balanced world economy, employing whichever tools they view as least painful domestically.
"The idea is, let's get away from an obsessive focus on what exchange rate is correct, and look at the whole set of policies that countries are undertaking," said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics. "The idea is to change the focus to something less politically sensitive."
The negotiations at the G-20, a group that includes both traditional long-standing world powers like Britain, Germany, and Japan and emerging nations like China, India, and Brazil, concluded early Saturday morning local time, with plans to resume later Saturday. The meeting is a prelude to a meeting of the 20 nations' heads of state in Seoul in two weeks.
Resistance to Geithner's proposal came from countries with current account surpluses, which would be required to take steps that could reduce exports. "Setting numerical targets would be unrealistic," said Japanese Finance Minister Yoshihiko Noda, according to Bloomberg News.
China and Germany have expressed particular reluctance to adopt any agreement that would force them to reduce their trade surpluses, though a U.S. official said that broad consensus seemed to be developing that the basic approach Geithner proposed could be agreed to in some form.
Even if an agreement is reached around Geithner's approach, some of the specifics are problematic. For example, there will surely be debates around how trade balances should be calculated. China estimates it has a much lower current account deficit than the International Monetary Fund or most private Western economists believe.
A more fundamental challenge is that even once targets are agreed to, countries must find ways to achieve them, presenting knotty political and economic challenges. For example, the United States could reduce its current account deficit in part by reducing its budget deficit. But no matter what Geithner and President Obama agree to in South Korea, hemming in U.S. budget deficits will ultimately require action by Congress.