SEOUL, South Korea – Tensions over currencies and trade gaps are simmering ahead of a summit of global leaders this week as America's move to flood its sluggish economy with $600 billion of cash triggers alarm in capitals from Berlin to Beijing.
Major exporting countries such as China and Germany are complaining about the Federal Reserve's decision to buy more Treasury bonds to try to lower interest rates, spur growth and reduce high unemployment in the United States. They say the Fed's plans are driving down the dollar's value and giving U.S. goods an unfair competitive edge in world markets.
Other countries such as Thailand, Brazil and Indonesia fear the Fed's action will send cash into their markets in search of higher returns. That risks raising their currency values, squeezing their exporters and inflating bubbles in stocks or other assets that could destabilize their financial systems.
As the Group of 20 major rich and developing nations prepare to meet in Seoul, President Barack Obama defended the Fed. He said the central bank was following its mandate to "grow our economy." Obama also took a veiled shot at China for keeping its own currency, the yuan, low to benefit Chinese exporters.
"We can't continue to sustain a situation in which some countries are maintaining massive surpluses, others massive deficits, and there never is the kind of adjustments with respect to currency that would lead to a more balanced growth pattern," Obama told reporters in India.
The Group of 20 major rich and developing nations has taken on the role of reforming the world economy in the wake of the 2008 financial crisis. Its leaders first met two years ago and have set out an ambitious agenda to ensure stable economic growth, strengthen financial supervision to prevent another meltdown and give developing countries more of a voice.
But discussions on achieving those goals at the summit Thursday and Friday in Seoul are being complicated by the furor over the Fed's decision to buy $600 billion in Treasury bonds over the next eight months to try to energize the world's largest economy.
At the heart of the discussions is the recognition that a decades-long global economic order centered on the U.S. buying exports from the rest of the world and running huge trade deficits while countries such as China, Germany and Japan accumulate vast surpluses is no longer tenable in the aftermath of the crisis.
The fissures in the global economy were underlined Wednesday with the release of China's trade figures for October which showed its surplus for the month swelling to $27 billion. The surge will add to pressure on Beijing at the G-20 meeting to ease currency controls that Washington and other trading partners say are costing jobs.
"The present world economy is unbalanced," Paul Volcker, a top economic adviser to President Barack Obama and a former Fed chief, said in Seoul last week. "It's unbalanced in a way that can't persist if we are going to have a thriving global economy."
The attempt to give the world economy an extreme makeover has gotten some of its momentum from the rise of countries such as India, China and Brazil to become economic and political giants in their own right. The G-20 meetings themselves are a sign of how much things have changed since the crisis. They symbolize the end of a system in place since the 1940s in which the world economy was managed largely by a handful of rich nations led by the United States, Europe and later Japan.
The forum, established in 1999, is a disparate combination of rich nations, developing economies, rising powers and consumers and producers of natural resources. The European Union is also a member. It took the financial crisis, however, to thrust the G-20 into a position of global leadership, supplanting the Group of Seven club of advanced nations.
Besides discussing currencies and reducing trade gaps, G-20 leaders are also likely to endorse proposals for beefing up supervision of large banks and other financial institutions. They are also widely expected to express support for a proposal to give developing countries more voting power at the International Monetary Fund and more seats on the board of the key global lender.
There is broad agreement within the G-20 on the need for countries such as China to consume more, save less and let their currencies strengthen to become less reliant on exports for growth. But the questions of how fast, how to go about it and the role of U.S. policies have caused divisions.
Recent debate centered on a U.S. proposal unveiled at a G-20 meeting of finance officials last month to set guidelines for when surpluses and deficits in the current account — a broad measure of trade and investment — become potentially destabilizing.
Those officials agreed that G-20 members will not use their currencies as trade weapons and will also work to come up with guidelines for current account gaps, calming fears of a trade war.
But tensions re-emerged when the Fed announced its bond buying plan last Wednesday. Aside from concerns about exports, the massive increase in the supply of dollars is a potential threat to the wealth of many nations because the bulk of their foreign currency reserves are stored in dollar-denominated assets.
In Beijing, Vice Finance Minister Zhu Guangyao said Monday that China would have a "candid" exchange of views with the U.S. and called the bond-buying plan "a shock to the stability of global financial markets."
His criticism followed that of other G-20 capitals. German Finance Minister Wolfgang Schaeuble said he didn't think the plan would work and that the Americans are "creating extra problems for the world." Guido Mantega, Brazil's finance minister, said the move would devalue the dollar and hurt Brazil and other exporters.
Despite the heated debate, it is widely agreed the G-20 gatherings are positive and provide, in Volcker's words, a reminder that the leaders "have a common problem."
Yet the challenges are also seen as enormous.
"The problem is that we let the imbalances grow so large that there's no easy fix now," said Bill Belchere, chief global economist for Mirae Asset Securities in Hong Kong. "The adjustments necessary are politically palatable to no one."
AP Business Writers Erika Kinetz in Mumbai, India, Joe McDonald in Beijing and Paul Wiseman in Washington contributed to this report.
SEOUL, South Korea – Leaders of 20 major economies on Friday refused to endorse a U.S. push to get China to let its currency rise, keeping alive a dispute that has raised the specter of a global trade war.
At the end of their two-day summit, the leaders of the Group of 20 rich and developing economies -- including President Barack Obama and China's Hu Jintao -- issued a watered-down statement that only said they agreed to refrain from "competitive devaluation" of currencies.
Such a statement is of little consequence since countries usually only devalue their currencies in extreme situations like a severe financial crisis. Using a slightly different wording favored by the U.S. -- "competitive undervaluation" -- would have shown the G-20 taking a stronger stance on China's currency policy.
The crux of the dispute is Washington's allegations that Beijing is artificially keeping its currency, the yuan, weak to gain a trade advantage. But the U.S. position has been undermined by its own recent policy of printing money to boost a sluggish economy, which is weakening the dollar.
The G-20's failure to adopt the U.S. stand has also underlined Washington's reduced influence on the international stage, especially on economic matters. Obama also failed to conclude a free trade agreement this week with South Korea.
Obama told a news conference that China's currency is an "irritant" not just for the United States but for many of its other trading partners.
"China spends enormous amounts of money intervening in the market to keep it undervalued so what we have said is it is important for China" to follow a market-based system, Obama said. "We have to understand that this is not solved overnight. But it needs to be dealt with and I am confident it can be."
The joint statement avoided the words "competitive undervaluation," which was a reference to China's currency policy that had been inserted into a draft of the statement by officials during pre-summit negotiations.
The dispute over whether China and the United States are manipulating their currencies is threatening to resurrect destructive protectionist policies like those that worsened the Great Depression in the 1930s.
The biggest fear is that trade barriers will send the global economy back into recession. A law the United States passed in 1930 that raised tariffs on imports is widely thought to have deepened the Great Depression by stifling trade.
The G-20 leaders pledged to move toward more market-determined exchange rate systems and enhance exchange rate flexibility. Although directed against China, the statement leaves significant room for interpretation since the language is vague and does not impose any timeframe for enforcing a market-determined exchange rate.
The U.S. says a higher-valued yuan would make Chinese exports costlier abroad and make U.S. imports cheaper for the Chinese to buy. It would shrink the U.S. trade deficit with China, which is on track this year to match its 2008 record of $268 billion, and encourage Chinese companies to sell more to their own consumers rather than rely so much on the U.S. and others to buy low-priced Chinese goods.
Other countries are irate over the Federal Reserve's plans to pump $600 billion into the sluggish American economy. They see that move as a reckless and selfish scheme to flood markets with dollars, driving down the value of the U.S. currency and giving American exporters an advantage.
Some critics warn that U.S. interest rates kept too low for too long could inflate new bubbles in the prices of commodities, stocks and other assets. Developing countries like Thailand and Indonesia fear that falling yields on U.S. government bonds will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.
Friday's statement is unlikely to immediately resolve the most vexing problem facing the G-20 members: how to fix a global economy that's long been nourished by huge U.S. trade deficits with China, Germany and Japan.
Exports to the United States powered those countries' economies for years. But they've also produced enormous trade gaps for the U.S. because Americans consume far more in foreign goods and services than they sell abroad.
Still, the leaders vowed to fight protectionism.
"Recognizing the importance of free trade and investment for global recovery, we are committed to keeping markets open and liberalizing trade and investment," the joint statement said.
The G-20 leaders also said they will pursue policies to reduce the gaps between nations running large trade surpluses and those running deficits.
The "persistently large imbalances" in current accounts -- a broad measure of a nation's trade and investment with the rest of the world -- would be measured by what they called "indicative guidelines" to be determined later.
The leaders called for the guidelines to be developed by the G-20, along with help from the International Monetary Fund and other global organizations, and for finance ministers and central bank governors to meet in the first half of next year to discuss progress.
"We don't have an agreement on what the criteria are, but we agree that there must be criteria," French President Nicolas Sarkozy, who will host the next G-20 summit in November 2011 in Cannes.
The language in the statement was broadly similar to what G-20 finance ministers and central bank governors agreed to last month, though with the new twist of a timeframe for progress.
"There's no simple solution to solve the problem of current account imbalances," Sarkozy said.
Associated Press writers Erica Werner, Kelly Olsen, Jean H. Lee, Greg Keller and Kim Hyung-jin in Seoul contributed to this report.
New York -- President Obama hoped to leave the Group of 20 trade summit boasting a free-trade agreement with South Korea and a host of accords with other countries, but he looks to leave Seoul empty-handed. A trade pact between the U.S. and South Korea, first negotiated by the Bush administration, failed to materialize after Obama and South Korean President Lee Myung-bak couldn’t agree on protections for American workers. Major disputes erupted between the U.S., China, Britain, Germany and Brazil, as each country rejected Obama’s strategy to focus on economic growth before deficit reduction. The international community, joined by former U.S. Fed Chief Alan Greenspan, accused the U.S. of intentionally devaluing its currency to give an edge to American exports. The tone of the summit was a stark departure from recent meetings on the global economy, in which leaders largely came to agreement on economic policy.
The Daily Beast's Zachary Karabell reports on Obama's mistake going into the summit.
With the leaders of the world gathering for two days of economic points and counterpoints under the aegis of the G-20, Seoul has become the scene of a showdown between a testy set of European and Asian powers and a rather flummoxed and flat-footed America represented by President Obama in all his post-Nov. 2 glory and malaise.
The agenda of the meeting has long been telegraphed by multiple mini-summits over the past few months, but with the announcement by the U.S. Federal Reserve this month of $600 billion in further “quantitative easing” (read: printing more money), the tenor has shifted. Two years after the uncorking of the global financial crisis, the United States faces a cohort of other wealthy nations that have had it with being told what to do by Americans, regardless of the merits. They are in a mood to lecture and berate, and recent statements by Obama and Treasury Secretary Tim Geithner, and Fed Chief Ben Bernanke’s actions, have given them ample fodder.
German and Chinese officials have been especially critical of U.S. economic policy. China’s Deputy Finance Minister Zhu Guangyao lectured that the United States should “realize its responsibility and obligation as a major currency issuing country, and take responsible macroeconomic policies.” Germany’s Angela Merkel has been equally dismissive of recent ideas floated by Geithner that there should be global limits on how much surplus or deficit countries can run.
Obama sought to defuse the tension with a letter he released as he landed in Seoul yesterday. In it, he repeats much of what has become established wisdom over the past 12 to 18 months: that the United States has over-consumed and under-saved and is now doing the hard work to reverse that, and that other countries have over-saved and under-consumed and must work to change that as well. The tone of the letter is reasonable and measured, taking full responsibility for America’s contribution to the crisis and urging joint action “to avoid the kind of imbalances that weakened the global economy on the eve of the crisis” two years ago.
But whatever Obama’s personal stature, this isn’t an argument that other countries are buying. The problem isn’t a looming currency war or any imminent backlash—global currencies are so linked that no one can retaliate without doing themselves great harm. The problem is that in the search for common frameworks to create a more stable future, the United States government is advocating policies that treat the world as a 20th-century collection of nations rather than a 21st-century mishmash of competing and intertwined state and non-state actors.
The hostile reaction to the United States and to Obama is the result of decades of being lectured to about the “right way” to manage economically.
• Currency Showdown in Seoul The U.S. is hardly alone in clinging to this anachronism. One could argue that all governments see the world through the lens of national sovereignty. But the steadfast mantra, coming from the United States and urged on the leading nations of the world, that global imbalances caused the recent crisis is a bigger problem than if a similar perspective were coming from, say, Argentina.
For all Obama’s creativity and nimbleness, his international economic team embraces an orthodox economic view of the global system that treats trade deficits or surpluses, current account deficits or surpluses, and differing patterns of consumption and production as imbalances in need of correcting. But just because that thesis has been repeated endlessly doesn’t make it true. In a world where trillions of dollars in public and private capital flows unimpeded daily, where every major company in the world has constructed global supply chains extending through dozens if not hundreds of countries, where any individual good may be manufactured in five or 10 countries, what is the point of holding each country to some theoretical notion of “balance”?
Take the ubiquitous BlackBerry, made by a Canadian company whose shares trade on the New York Stock Exchange; whose devices may be produced with rubber from Malaysia, chip sets from Korea or Taiwan, assembled in a plant in Mexico, Hungary or China, with intellectual property from the United States; shipped on Greek container ships to Long Beach, California, over CSX rails to a German T-Mobile store in New York. Is that an import from Mexico, or from Canada, or from anywhere?
Or take current accounts. If China has a $2.6 trillion surplus, over half of which is then invested in U.S. Treasury bonds, how is that purely a current account deficit, when the money is pumped directly into the U.S. economy?
The problem here is not just the Obama administration; it’s archaic statistics and an economics profession that treats the questions above as answered and any questioning of them as foolish. The Chinese, meanwhile, know that there is much they don’t know, but they do know that the orthodox economic answers dictated for decades by the West would never have led to the economic miracle of China in the past 20 years. And those who believe that China’s emergence can be explained by currency manipulation must be wondering why Zimbabwe isn’t booming.
The hostile reaction to the United States and to Obama is the result of decades of being lectured to about the “right way” to manage economically. As long as the United States was the economic primus inter pares, those arguments were hard to gainsay. Now they are hard to stomach. Obama’s calls for global coordination of economic policy and governance are absolutely imperative, as are continued measures to weave together what is now a chaotic and erratic global system. To do that will require new thinking and not old orthodoxies. That is something Obama himself seems uniquely capable of, but creativity seems to have deserted him as he plunges into the fray in Seoul. That is more than a problem for his presidency; it is a problem for the world.
SEOUL (Reuters) – G20 leaders will agree to set vague "indicative guidelines" measuring economic imbalances at Friday's summit but leave details to be hammered out in 2011, effectively calling a timeout after heated debate over currencies.
Negotiators labored until the wee hours of the morning to thrash out an agreement their leaders could all endorse, despite deep divisions that were on public display in the run-up to the Group of 20 summit concluding later in the day.
"We're very confident now we're going to see the leaders endorse the basic elements of the framework," a senior administration official said, speaking on condition of anonymity.
G20 sources said the final statement was not expected to venture much beyond what was already agreed at a finance ministers' meeting last month, but will call on the International Monetary Fund to develop a range of indicators to identify when global imbalances pose a threat to economic stability.
Finance ministers will consider the findings at a meeting in early 2011, according to a draft statement obtained by Reuters.
An earlier version of the document showed negotiators debating over whether those indicators ought to be "measurable" or "quantitative and qualitative." In the end, neither phrase was included, suggesting the G20 failed to agree on the wording.
The G20 has fragmented as a synchronized global recession gives way to a multispeed recovery. Slow-growing advanced economies have kept interest rates at record lows to try to kickstart growth, while big emerging markets have come roaring back so fast that many are worried about overheating.
G20 leaders had high hopes for the Seoul summit, billing it as a chance to move toward "Shared Growth Beyond Crisis." But tempers have flared over the U.S. Federal Reserve's latest bond-buying program aimed at strengthening a shaky recovery, and Ireland's worsening debt troubles served as a reminder that the financial system is far from fully healed.
A German government spokesman said finance ministers from Germany, Britain and France discussed the Irish debt situation, and will probably make a statement about it later on Friday.
"EMPTY WORDS"
U.S. President Barack Obama and Treasury Secretary Timothy Geithner found themselves repeatedly defending the Fed's easy-money policy at the summit, pointing out that a healthy U.S. economy was essential to global growth.
They sought to refocus G20 attention on building a more stable world economy, less vulnerable to the boom-and-bust cycles that have marred the past two decades.
Central to that effort is smoothing out imbalances between cash-rich exporters such as China, which has amassed more than $2 trillion in reserves, and debt-burdened importers.
Although the United States drew the loudest criticism, China's yuan policy remained a hot-button issue. Beijing allowed the yuan to rise this week, following a pattern of modest appreciation around big international events.
The U.S. administration official struck a conciliatory note on Friday, saying China was trying to take steps to address U.S. concerns about global economic imbalances.
"I think that if you look past some of the heat you've seen recently and you look at what's happening in our very important relationship with China, I'm very encouraged by the progress we've seen," he said.
Donald Straszheim, senior managing director at China Research ISI Group in Los Angeles, said he saw "no chance" that this summit could come up with any real substantive decisions on currencies or imbalances because no sovereign nation would take domestic policy instructions from abroad.
"China I think would be willing to sign on to the empty words of a standard communique -- no to protectionism, yes to exchange rate reform, no to competitive devaluations," he said. "This is easy but does not get one very far."
However, Chinese President Hu Jintao, in thinly veiled criticism of Washington, called in a speech to the summit for countries that issue reserve currencies to adopt responsible policies and maintain relatively stable exchange rates.
Despite the acrimony, G20 leaders were eager to show they remained united and capable of cooperating to build a more stable global economy.
Dimitri Soudas, chief spokesman for Canadian Prime Minister Stephen Harper, said when leaders sit down together they invariably make progress and Seoul should be no different.
"It was concerted action by the G20 that averted economic catastrophe and this obviously needs to continue, especially in this context of weakened and uncertain growth prospects," he said.
(Additional reporting by David Ljunggren, Gernot Heller, David Lawder and Alister Bull; Writing by Emily Kaiser and John Chalmers; Editing by Nick Macfie)
YOKOHAMA, Japan – Intensifying friction over currencies and trade loomed Wednesday as leaders of major economies converged on Asia for back-to-back summits aimed at safeguarding the still fragile global recovery.
President Barack Obama and other top leaders were arriving in Seoul, South Korea, for a two-day Group of 20 summit with the ambitious agenda of remaking the world economy to nurture stable growth and prevent a repeat of the financial meltdown in 2008.
But that gathering, and a weekend summit of Pacific Rim leaders in the Japanese port city of Yokohama, are taking place as those nations struggle to reconcile conflicting strategies for achieving those aims.
G-20 officials — whose countries comprise 85 percent of all economic activity — have pledged not to use their currencies as trade weapons. But tensions reignited last week when the U.S. Federal Reserve announced a $600 billion bond buying plan that angered many trading partners.
Obama, wrapping up a brief visit to Indonesia after touring India, defended the Fed's move as a way to hasten a narrowing of huge gaps in trade and investment by engineering a weaker U.S. dollar — thus putting pressure on countries with large trade and foreign exchange surpluses.
In a letter he sent to other G-20 members, Obama defended moves to help the U.S. economy because he said its strong recovery would be the country's most important contribution to a global recovery.
Other countries complain excess cash may flood into their markets seeking higher returns, pushing their currency values higher, squeezing their exporters and inflating bubbles in stocks or other assets that could destabilize their financial systems.
G-20 financial officials made little headway Wednesday in resolving the currency standoff, a summit spokesman, Kim Yoon-kyung, told reporters in Seoul.
"Critical agendas, such as establishing a clear guideline on limiting current account surpluses and deficits to sustainable levels and recent moves by Washington to print more money, were put on the table, but only highlighted differences between member countries," Kim said.
Such issues were left unresolved to allow work on other issues that must be included in a declaration at the summit's end, he said.
The G-20 first convened a leaders summit two years ago and has since supplanted the Group of Seven advanced nations as countries like China and India gained economic and political stature.
The aim is to craft a new global economic order to replace one powered by the U.S. running huge trade deficits while countries like China, Germany and Japan accumulate vast surpluses. One U.S. proposal, for example, calls for setting guidelines for when such imbalances might become potentially destabilizing.
China announced Wednesday that its trade surplus surged to its second-highest level this year in October, raising pressure on Beijing over its currency, which the U.S. and other trading partners say is kept artificially weak, making its exports more competitive overseas.
Beijing maintains that the focus on its currency policies is misplaced.
If either side "chooses a confrontational approach, I think everybody will come out as losers," said Vice Foreign Minister Cui Tiankai, an envoy to the Seoul talks.
On somewhat less confrontational issues, the G-20 leaders are expected to endorse greater supervision of financial institutions and support giving developing countries more say in the International Monetary Fund.
In Yokohama, trade and foreign ministers of the Asia-Pacific Economic Cooperation forum were mulling moves toward a Pacific-wide free trade zone that would encompass more than half the world's economic output.
"We are quite committed to that. We believe that open trade is indispensable to overcome the financial crisis and the economic crisis," Mexican foreign minister Patricia Espinosa said on the sidelines of the meetings.
A failure to cooperate, rather than renewed financial woes, is the biggest threat, warned a report issued Wednesday by the Pacific Economic Cooperation Council, an APEC advisory group.
Debt troubles in Europe, weak U.S. growth and tensions over trade are clouding the global outlook and contributing to an "unprecedented crisis atmosphere," the report said, citing a survey of 422 regional opinion leaders.
The report urged APEC to carry though with reforms needed to ensure more balanced, sustainable and equitable growth as the group reviews its progress toward the still unfulfilled goal, set in 1994, of achieving free trade and investment among developed members by 2010.
A regionwide arrangement, dubbed the Free Trade Area of the Asia-Pacific, could help untangle a slew of bilateral and regional agreements, and by lowering trade barriers, could boost growth.
A building block of that plan is a U.S.-backed free trade agreement called the Trans-Pacific Partnership. It now includes only four small economies — Brunei, Chile, New Zealand and Singapore — but the U.S., Australia, Malaysia, Vietnam and Peru are in talks to join.
Though such moves could hurt farmers in South Korea and Japan who are outraged at the prospect of losing protective high tariffs, host Tokyo says it favors moving toward freer trade.
"In many ways, Japan has fallen behind the wave of creating freer economies," Japanese Prime Minister Naoto Kan said Tuesday. "I think it's time to steer once again toward opening the country."
Associated Press writers Kelly Olsen and Foster Klug in Seoul, Malcolm Foster, Jim Gomez and Tomoko Hosaka in Yokohama and Mari Yamaguchi in Tokyo contributed to this report.
As leaders from the world’s 20 major economies prepare to meet in Seoul this week, tensions continue to flare over trade imbalances and currency rates, particularly when it comes to China. Some analysts even say a trade war is underway. In the meantime, Germany and Britain are creating a group of experts to promote trade liberalization across the globe. Co-heading this group will be Jagdish Bhagwati, 76, a Columbia University economist. In the lead-up to the G20, NEWSWEEK’s Joel Schectman spoke to Bhagwati about the meeting’s prospects for success.
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Do you think that the U.S. and China should use this meeting to hash out an agreement on how the yuan is valued?
No. I think it’s a mistake. The issue is overstated. What you should really be worrying about are the underlyingmechanics, the policies, the fundamentals. The situation is going to be corrected by China’s own self-interest point of view. Let’s be a little more relaxed.
So what fundamentals should the U.S. and Europe focus on?
Let’s do a mental experiment. Pretend that Greece had changed their exchange rate during their crisis. They couldn’t because it’s part of the euro zone, but pretend. As long as there was massive excess spending, no amount of devaluation would have made the slightest bit of difference, because the internal system will adjust to it. The focus really ought to be on excess spending in the U.S., because that is what causes a trade deficit.
So you believe that the U.S. should cut spending now? Even with the economy still sluggish?
No, in the short term we need to spend more, which will make the trade imbalance worse rather than better. On that I am very Keynesian. But in a few years the U.S. will have to get its own house in order if we are worried about the trade deficit. It’s going to be tough.
The Fed recently went back to printing money. Is it fair for China to say that America is pushing down its currency, too?
If we are attacking their internal fundamentals, then there is a parallel to someone attacking our own internal fundamentals. But for the Chinese to complain that we are revising our economy through a combination of fiscal and monetary policy seems to be not kosher.
But they are complaining about us because we are complaining about them, right?
We are telling people to do this and do that. It’s overbearing. And it creates a hostile atmosphere. Different countries have different internal fundamentals. It’s like Germany: we tell them that they ought to be spending more. But they don’t want to spend more. The Germans have a tremendous fear of hyperinflation because of the history of the Weimar Republic. You can’t change that attitude. Politicians and even some economists are talking about a trade war. That would be very damaging.
The Korean free-trade agreement with the U.S. has been stalled for years. Do you think there is some chance of progress on that at Seoul?
The president is going to get it pushed through. I think he will make some gesture to that effect in Seoul. And now that the House has changed, it’s going to be easier for him to do it. What was holding it up had been Detroit. Now Detroit has gotten these bailouts—in a way, they have been bribed. It’s a security issue. South Korea is small potatoes, frankly, or midsize potatoes, in terms of international trade. But you have North Korea above it, you have China to the left of it, and Japan to the right of it. We have the history of solidarity [with South Korea]. We have troops there. Korea wants to see us back them.
What would be the best thing that could come out of this meeting?
For everyone to just cool it down. There is good cooperation going on with things that do matter, like capital requirements. We have learned something. There is more cooperation than before the crisis on managing the financial system. So we need to stop the atmosphere from worsening because of all this noise being made by writers and politicians. And then we can focus on the one thing that has really worked in the postwar period: trade. We need to pull back and reaffirm the tremendous benefits of an open world economy.
The idea of "rebalancing" the world economy is simple. Before the financial crisis, some advanced countries (led by the United States) were overspending, and some poorer countries (led by China) were oversaving. The two offset each other. The big spenders ran large trade deficits, and the big savers ran large trade surpluses. Now the financial crisis has dampened the overspending. If the big savers don't increase their spending, the world economy faces prolonged slow growth. Countries may battle each other for shares of that weak demand by managing exchange rates, subsidies, or tariffs.
This is a formula for economic strife, whether called "currency wars," protectionism, or economic nationalism. As wealthy countries wrestle with stubborn unemployment (9.6 percent in the United States, 10.1 percent in France, 20.5 percent in Spain), it will become harder to resist policies that favor local businesses and workers, especially if other countries are doing the same. Avoiding this future is the central issue facing leaders of the Group of 20 economies when they meet this week in Seoul.
In practice, it may boil down to this: will China change?
The world's second-largest economy has run blatantly mercantilist (that is, discriminatory) economic policies for years. The resulting huge trade surpluses boosted job growth and, while much of the world boomed, they were tolerated. In 2007, China's current account surplus (mainly trade) reached 11 percent of its economy (gross domestic product). But as China has moved up the value chain—from toys to telecommunications equipment—and as the world economy weakened, its surpluses have become more threatening to more countries.
Like Japan before it, China embraced an investment-led and export-led economic model, explains economist Eswar Prasad of Cornell University. Manufacturers receive subsidized land and energy; the exchange rate of the renminbi is controlled and kept depressed, making Chinese exports more competitive on world markets and making imports into China more expensive. Bank lending rates, regulated by government, are also kept low so that companies can borrow cheaply.
The result has been rapid, though lopsided, industrialization. Economic growth has averaged about 10 percent annually for several decades. In modernizing, China shut down or streamlined many inefficient state-owned enterprises; the job loss was substantial, 43 million from 1997 to 2004, says the World Bank. One appeal of new export-oriented companies was to replace those jobs.
In many ways, China's sophisticated economic management is admirable. Periodic warnings that a popped real-estate "bubble" would trigger a broad slump have (so far) proved hollow. When housing prices get too high, notes economist Nicholas Lardy of the Peterson Institute, the government raises interest rates, down-payment requirements, and taxes on speculators (buyers of second, third, or more properties). "These let the air out of bubble," he says. Housing prices moderate or fall. Similarly, China alters its exchange rate to sustain rapid economic growth by regulating demand for its exports.
But now this model is encountering political and economic limits. It's not just Americans who resent the unfair export advantage of an undervalued currency; Europeans, Japanese, Mexicans and others are also unhappy. Although no one has imposed tough import restrictions, these are no longer unthinkable. Meanwhile, China's high savings rate frustrates domestic spending. In the United States, gross national saving is about 15 percent of GDP; in China, it's about 50 percent. Savings normally go toward new factories, machinery and offices. But China's domestic needs for these aren't large enough to absorb all that saving.
That's why it needs more consumer spending, lest it export more to compensate for lack of domestic demand. Economists Lardy and Prasad have long advocated measures to increase Chinese household income and spending: a more generous safety net to limit saving for health emergencies and old age; higher bank-deposit interest rates so that consumers would earn more on their accounts; and requirements for companies to pay dividends and not reinvest most retained profits.
The Chinese know this. They even embrace the goal of stimulating consumer spending and are trying to do so. But until they succeed, they won't relinquish the crutch of an undervalued exchange rate. "Do not work to pressurize us on the renminbi rate," Prime Minister Wen Jiabao recently warned. Exporters would close; workers would lose their jobs. "If China saw social and economic turbulence, then it would be a disaster for the world." Jobless workers elsewhere may find this argument unpersuasive.
If China resists global rebalancing, it won't happen regardless of what this week's communiqué from Seoul pledges. The omens seem unpromising. The United States has let the dollar depreciate to cut its trade deficit. Because the renminbi is pegged to the dollar, the depreciation actually improves China's export competitiveness against some countries. All this looks less like rebalancing than a dogfight —among China, the United States and others—for competitive advantage.
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