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G20 leaders scramble to reach currency compromise

Text by News Wires

Latest update : 2010-11-12

On the second day of talks at the G20 summit in South Korea on Friday, leaders of the world’s major economies struggled to resolve a currency dispute between the US and China amid mounting tensions.

AP - Leaders of the world's 20 biggest economies scrambled to reach a last-minute compromise Friday to resolve a U.S.-China currency dispute that has raised the specter of a global trade war.

A draft of the joint statement to be issued at the end of the Group of 20 summit - obtained by The Associated Press - indicated that huge differences remain. The main sticking point is how to deal with U.S. accusations that China deliberately undervalues its currency to gain a trade advantage while similar charges are being leveled against Washington.

After overnight negotiations by aides that lasted until daybreak, President Barack Obama, China's Hu Jintao and the other 18 leaders filed somberly into closed-door talks being held in a conference center in Seoul.

The leaders are still trying to make a "last-minute compromise'' on the joint statement, the South Korean president's press secretary, Hong Sang-pyo, told reporters.

The situation will remain "fluid until the last minute because many countries have gathered here and are trying to resolve their differences,'' Hong said.

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 dim prospect for a substantive agreement "is very dangerous for the world economy,'' said Richard Portes, president of the Center for Economic Policy Research in London.

Hopes that the G-20, which includes wealthy nations like Germany and the U.S. and rising giants like China, could be a forum to forge a lasting global economic recovery have taken a knock. After three days of negotiations, the G-20 countries have been unable to reach a consensus on some of the wording in their final statement.

A senior Obama administration official sought to counter perceptions of discord.

The official said leaders had agreed on a basic framework that aims to rebalance the world economy by establishing a set of indicators of future risk. If these indicators sound the alarm, countries would commit to take action to address the concerns. The official spoke on condition of anonymity because the results of the leaders' meetings had not been publicly announced.

According to the draft statement obtained by the AP, the leaders agreed to "move towards more market determined exchange rate systems and enhance exchange rate flexibility to reflect underlying economic fundamentals.''

But a sticking point is the statement's next line which would have the countries pledge not to undertake "competitive undervaluation'' of currencies. The wording is a reference to China, which is accused by the United States of deliberately keeping its currency, the yuan, undervalued so that its exports remain cheap.

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.

The summit "is now largely an exercise in damage limitation and papering over the huge cracks that exist between the positions of the deficit and surplus countries,'' the U.S. and China in particular, said Julian Jessop, an economist with consultancy Capital Economics in London.

"We do not therefore expect anything of much substance to emerge, but there is plenty of scope for continued frictions,'' Jessop said in a report written for clients.

For now, the G-20 countries are expected to agree on uncontroversial issues like an anti-corruption initiative, reaffirming support for free trade, stricter standards for large financial institutions and reforms of the International Monetary Fund to give developing nations more say.

Yet even if the leaders agree on the statement's wording, it is not going to immediately resolve their most vexing problem: 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. Obama told fellow leaders that the U.S. cannot just keep borrowing lavishly and sending its money overseas. It needs other countries to buy more exports from the United States and elsewhere so Americans can afford to buy other countries' goods, he said.

"The most important thing that the United States can do for the world economy is to grow, because we continue to be the world's largest market and a huge engine for all other countries to grow,'' Obama said at a news conference in Seoul on Thursday.

But Brazil's president, Luiz Inacio Lula da Silva, warned that the world would go "bankrupt'' if rich countries reduced their consumption and tried to export their way to prosperity.

"There would be no one to buy,'' he told reporters.

Obama suggested the global economy will function best when countries let the markets set the value of their currencies, rather than trying to rig them. His message was aimed mainly at China, whose trade surplus with the U.S. exceeds that of any other country it trades with.

President Hu Jintao assured Obama on Thursday that China has an unswerving commitment to pressing ahead with currency reform, said Ma Zhaoxu, spokesman for the Chinese delegation.

But China doesn't want to discuss its trade or currency conflicts with the U.S. in an international forum like the G-20, said Yu Jianhua, director general of the Department of International Trade and Economic Affairs in the Commerce Ministry.

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.


Date created : 2010-11-12

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