As Obama arrives in Seoul, Fed decision clouds G-20 debate

By Howard Schneider and William Branigin
Washington Post Staff Writers
Wednesday, November 10, 2010; 11:22 AM

SEOUL - President Obama urged other world leaders Wednesday to reduce their reliance on exports to the United States to drive their economic growth, stressing a need to resolve global imbalances such as China's huge trade surplus.

In a letter released shortly after he arrived in the South Korean capital for a Group of 20 summit meeting, Obama defended his administration's actions to boost the U.S. economy and argued that strong growth and job creation would be the most important U.S. contribution to global economic recovery.

"The United States will do its part to restore strong growth, reduce economic imbalances and calm markets," Obama wrote. "A strong recovery that creates jobs, income and spending is the most important contribution the United States can make to the global recovery." He said the strength of the U.S. dollar "ultimately rests on the fundamental strength of the U.S. economy."

The letter implicitly defended the Federal Reserve's move last week to pump billions of dollars into the U.S. economy, which provoked an international backlash that threatened to undercut Obama's goals for the summit. The decision to spend another $600 billion buying government bonds triggered criticism that the policy weakens the dollar, helping U.S. exports while making imports from other nations more expensive.

"Just as the United States must change, so too must those economies that have previously relied on exports to offset weaknesses in their own demand," Obama wrote in a veiled reference to nations such as China.

"A rebalancing of the sources of global demand, along with market determination of exchange rates that reverses significant undervaluation, are the best base for the shifts needed to bring about the vigorous and well-balanced recovery that we all want," he said. "When all nations do their part - emerging no less than advanced, surplus no less than deficit - we all benefit from higher growth."

Heading into the G-20 summit, U.S. officials have pushed for agreement on detailed guidelines for curbing the trade surpluses of export giants like China and Germany and averting a currency war among countries looking for a trade advantage.

Obama landed in the South Korean capital at 6:40 p.m. Wednesday local time (4:40 a.m. in Washington), after visiting Indonesia and India as part of a 10-day Asia trip.

World leaders share Obama's overall aims of bringing trade flows into better balance and curtailing recent clashes over currency values. U.S. officials had hoped, in particular, that the summit would prompt China to allow its currency, the yuan, to rise in value on world markets, leading the Chinese to import more and export less.

But the effort to reach an international consensus is running into last-minute difficulties because of what critics say is a unilateral move by the Fed to boost the flagging U.S. economy.

The Fed's decision, in essence, to print $600 billion and pump it into the economy through Treasury bond purchases has drawn fire from foreign leaders, notably German Finance Minister Wolfgang Schaeuble, who say it amounts to currency manipulation. The action seeks to lift the U.S. economy in several ways, including by lowering interest rates, boosting the stock market and weakening the dollar, which would make U.S. exports more attractive.

Coming into the meeting, hopes have dimmed that the G-20 will go beyond general principles on trade and currency and add what U.S. officials have characterized as "meat on the bones."

"We were not able to come up with the specifics," South Korean President Lee Myung-bak, the meeting's host, said in an interview. "That will be left to a working group. It will take some time."

Discussions among the leaders are scheduled for Thursday and Friday, with preliminary G-20 sessions to begin Wednesday.

The Obama administration proposal, endorsed by G-20 finance ministers last month, calls for the International Monetary Fund to evaluate how each nation's policies help or hurt others. Even if the details of this program were agreed upon by world leaders, it remains unclear how nations could be forced to revise their policies if they run afoul of the IMF because there is no enforcement mechanism.

"The critical question is when the G-20 will move beyond platitudes . . . and on to something concrete, something that might prompt some member of the G-20 to deviate" from the decisions it would otherwise make, said Phil Levy, an analyst at the American Enterprise Institute.

The world leaders also face a challenge in determining what exactly balanced trade would look like.

While China's currency exchange rate has been a focus of discussion, various G-20 countries see the issue their own way. From a U.S. perspective, the matter is clear-cut: China intervenes steadily in currency markets to hold down the value of its yuan and keep its exports competitive, adding to the mammoth U.S. trade deficit with the country.

But seven G-20 nations have trade surpluses with China - countries such as South Korea that sell half-finished manufactured goods for assembly in China, and exporters of raw materials such as Australia and Saudi Arabia that supply China's oil, minerals and other commodities. Those nations agree on the need for more balanced global trade but also benefit from China's export power.

There's also a confluence of interests between Germany and China. They both have economies that generate large trade surpluses and hope to keep it that way.

After the onset of the global economic crisis major nations agreed to open their checkbooks and jointly stimulate the world economy. As concerns about debt have mounted, however, some countries have resisted additional measures to energize the recovery.

President Obama has pressed for more cooperation to put the world economy on sounder footing. And the IMF has produced research saying that coordinated economic policy could add trillions of dollars to global economic output. Meanwhile, the world is stepping up cooperation on financial regulation with the expected endorsement by G-20 leaders this week of new banking rules proposed this year by an international panel of central bankers meeting in Switzerland.

But the dispute over the Fed's action last week highlights the unresolved tension between U.S. domestic priorities and the push for greater international cooperation. The announcement came, for example, shortly after U.S. Treasury Secretary Timothy F. Geithner pledged, along with other G-20 finance chiefs at a meeting in South Korea last month, that countries would avoid moves that would unsettle other countries' currency values and capital markets.

Some developing countries took aim at the Fed move in part because it could weaken the dollar, making their own currencies relatively more expensive, hurting their exports and fueling inflation. Other foreign critics said the action contradicted U.S. promises to adopt greater economic discipline and be mindful, as the manager of the world's premier currency, of how domestic policy decisions affect other countries.

"We hope there won't be any backsliding," Indonesian Trade Minister Mari Pangestu said in an interview. "The approach should not be unilateral or bilateral. You need to address underlying structural imbalances." She said these include large levels of debt owned by the U.S. government and other developed countries.

Despite the public criticism, South Korean Strategy and Finance Minister Jeun-Hyung Yoon said that the Fed's move was not unexpected and the amount of money involved is not necessarily disruptive. Federal Reserve Chairman Ben S. Bernanke had previously briefed the G-20 finance ministers on the Fed's general approach so the massive bond purchases would not take them by surprise, and the group understood the importance of keeping U.S. growth on track, Yoon said.

"If you look at conditions in the U.S., it is a difficult situation," he said. Yoon cited the tepid U.S. recovery and weak labor market as considerations that could offset concerns about the impact of the Fed action beyond U.S. borders.

Branigin reported from Washington.

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