By Howard Schneider
Saturday, October 23, 2010; A5
Finance ministers from the world's major nations agreed to a U.S.-brokered plan for easing tensions over exchange rates and world trade patterns, saying that a "fragile and uneven" economic recovery was at risk if top powers pursued conflicting policies or used the value of their currencies to gain an edge for their exports.
Aiming to head off what some have dubbed a developing "currency war," the statement from the finance leaders of the Group of 20 nations was a carefully worded bargain across a range of issues. It put China on the record as seeking to bring down its massive trade surplus and let its exchange rate fluctuate more. It also hinted that any move by the U.S. Federal Reserve to further ease monetary policy would be measured so as not to disrupt currency values or capital flows in emerging market nations.
Although the core ideas are not new ones for the G-20 - previous statements from the group have promised similar commitments to flexible exchange rates, for example - the accord crafted over two days of talks in South Korea represents a tangible step. The group agreed as it has before that "excessive imbalances" in trade and other relationships should even out over time - requiring countries such as China and Germany to rely less on exports for their economic growth - and the members pledged for the first time to submit to an agreed-upon procedure for measuring progress.
The methods of measurement are still to be developed, but the language marks a potential turning point as the G-20 struggles to ensure its agreement over broad principles translates into action. U.S. officials say they intend to push for more detail, including possible time frames and numerical targets, as the work of the finance leaders is submitted for approval by the G-20 heads of state who gather in South Korea next month.
The plan envisions a greater role for the International Monetary Fund in overseeing whether exchange rates and trade balances are moving as intended. While the IMF has no power over any nation's individual policies, the expectation is that the combination of agreed-upon goals and peer pressure could influence how nations behave. Changes to the IMF's structure, including greater representation for emerging market nations, were also approved by the finance ministers in hopes of increasing the fund's authority.
"If the world is going to be able to grow at a strong, sustainable pace in the future . . . then we need to work to achieve more balance in the pattern of global growth as we recover from the crisis," U.S. Treasury Secretary Timothy F. Geithner said in a prepared statement after the finance ministers concluded marathon talks in the South Korean city of Gyeongju. "This requires a shift in growth strategies by countries that have traditionally run large trade and current account surpluses away from export dependence and toward stronger domestic demand-led growth."
The United States and other nations with chronic trade shortfalls and high levels of debt agreed to tackle those problems as well by saving more on a national level and curbing government deficits. In addition, countries with currencies like the dollar that are used widely around the world agreed to guard against "excess volatility" - a concession to concerns among emerging market nations such as Brazil that a move by the Fed to pump more money into the U.S. economy could force up their currency values and hurt their exporters and financial systems.
Though the agreement applies to 20 nations representing the vast bulk of the world economy, bilateral tension between the United States and China was at the center of Geithner's push to focus on exchange rates and the lack of progress toward redistributing global trade flows.
China manages the value of its currency carefully, keeping it at a level many economists consider to be below market value to make its exports cheaper on world markets. The issue has taken on heightened significance as the United States tries to boost its share of world trade amid lingering high unemployment.
Although China has argued that its exchange rates do not account for the country's large trade surplus with the United States, the new agreement casts the dispute in a broader context. Countries with "persistently large imbalances," the agreement states, would undergo closer IMF scrutiny to see if their exchange rates or other policies are preventing progress.
As part of the agreement, the finance ministers also agreed to overhaul how the IMF is run. More than 6 percent of the voting power within the agency will be shifted to emerging market powers such as China that are considered underrepresented. In addition, new rules for choosing the fund's 24-member executive board will shift two of the board seats from developed Western European nations to emerging markets.
IMF managing director Dominique Strauss-Kahn hailed what he called a "historic" shift in the fund's governance, and said it produced a "totally legitimate board" that would be able to speak more authoritatively on the issues the G-20 has asked it to monitor.