The 'G-2,' U.S. and China, will be the center of the G-20 debates in Seoul

By Howard Schneider and Scott Wilson
Washington Post Staff Writers
Wednesday, November 10, 2010; 8:44 PM

SEOUL - A pending agreement among world leaders in Seoul will mark what U.S. officials hope is a turning point in efforts to better balance trade and capital flows, and in particular come to terms with China over core principles of global economic policy.

The accord is not expected to go as far as U.S. officials had hoped in defining the specific commitments countries will make to keep their surpluses or deficits with the rest of the world from getting out of line. That technical work will be deferred - a make-or-break discussion that will determine how meaningful the broader agreement becomes in practice.

But U.S. officials say they will regard it as a success if they leave the Group of 20 summit with an endorsement of the principles and will consider it a victory if China signs on.

"It's not going to happen all at once," President Obama said in Indonesia on Tuesday as he prepared for the summit.

The accord reflects a core dynamic at the meeting: There may be many seats at the table, but the central debate revolves around the "G-2" - the United States and China - and the struggle between those two top economies.

Both sides kept the relationship front and center as the sessions approached. Chinese officials pledged a "candid" conversation about U.S. economic leadership at the summit. And Obama released a letter Wednesday defending recent U.S. decisions and saying China's exchange-rate policy is hurting the economic recovery.

"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 wrote.

Obama administration officials are aiming to broaden their criticism of Beijing - including concerns about practices that boost China's exports by keeping its currency relatively weak compared with the dollar - into a discussion involving other countries.

With the accord, they have succeeded in part.

But it remains unclear whether the meeting will make progress on the top U.S. priority of addressing how China manages its currency, the yuan, and reshapes its economy to generate more demand for imported goods and services. Underscoring China's outsize emphasis on exports, the country's monthly trade surplus jumped to $27 billion in October, more than economic analysts had expected.

With Obama and Chinese President Hu Jintao scheduled to meet Thursday, the two sides have been saying they concur on general concepts, including their dependence on each other's economic success. Officials from both sides have said they agree that China should do more to develop its domestic markets so its consumers can spend more, and that the United States should borrow less.

But frustration has grown on both sides over how to translate the principles into action.

This week, China's Dagong Global Credit Rating agency cut the U.S. government's rating and criticized the "hollowing out" of the U.S. economy as manufacturing has moved overseas.

"The serious defects in the United States economic development and management model will lead to the long-term recession of its national economy, fundamentally lowering the national solvency," the firm wrote, saying that to spur growth, the Federal Reserve "has to resort to the banknote printing machine."

Senior officials from China and elsewhere have criticized the Fed's decision last week to pump $600 billion into the economy by buying Treasury bonds. If the Fed's move stimulates U.S. growth, it could benefit the global economy. But concerns about the Fed's action, which could weaken the dollar, have clouded discussions before the G-20 meeting.

U.S. officials, meanwhile, are increasing pressure on China, pushing the G-20 to adopt standards that would be used to highlight when one country's economic policies - such as China's currency management - damage another.

"You're seeing some countries run up very big surpluses and intervening significantly in the currency markets to maintain their advantage," and the focus at the G-20 will be developing ways to change that, Obama said Tuesday. ". . . It's not going to happen all at once."

With U.S. and Chinese officials at odds over their economic relationship, South Korean finance minister Yoon Jeung-hyun said it was like two freight trains heading for a collision, with the rest of the world hoping it can be avoided.

Yoon said U.S. criticism of China's currency practices makes sense, but added: "From the Chinese perspective, in developing their economy, appreciation [of the currency] could hurt. Coming up with a sustainable compromise is something they are trying to do."

Some G-20 economies are under pressure from both directions. By keeping the yuan weak, China makes its exports more competitive at the expense of those from other emerging markets.

At the same time, the Fed's policies can also harm exports from developing countries. That's because steps to lower U.S. interest rates and put money into the economy have the effect of making other countries' currencies more expensive.

Even an economic powerhouse such as Germany feels squeezed. Leaders such as French President Nicolas Sarkozy and World Bank President Robert B. Zoellick have called for more explicit talks on new rules for managing currencies.

Zoellick said the current system, based on major economies allowing exchange rates to fluctuate with relative freedom, is struggling. Speaking in Singapore en route to Seoul, he said: "It's better for the key governments involved to recognize it and start to figure out how they want to change the rules."

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