There is dwindling hope that the meeting of G20 leaders underway in Seoul, South Korea, will bear fruit on coordinating policies that ease economic imbalances and revive global growth. U.S. President Barack Obama's plea for global leaders to overcome differences on exchange rate policies and trade imbalances in a letter on the eve of the G20 meetings received scant support. Other leaders continue to fret over (WSJ) the Federal Reserve's plan to buy $600 billion in U.S. Treasury securities.
Deputy Governor of the People's Bank of China Ma Delun said this week (ChinaDaily) that the Fed plan "may add risks to the global economic imbalance," while German Finance Minister Wolfgang Schauble said in a Spiegel interview he saw no "economic argument for this move." China's case was not helped by Wednesday's announcement (Xinhua) that its trade surplus jumped in October to $27.1 billion from $16.9 billion the previous month, buttressing international calls for a stronger yuan. Germany, a leading surplus country, was expected to reinforce its policy prudence at the G20 meeting with a government report (DeutscheWelle) showing its domestic consumption is catching up with its exports.
The impact of U.S. economic policy on international financial markets remains a major sticking point. Emerging economies cite the Fed's quantitative easing (QE) plans as proof Washington will unfairly devalue the dollar to increase its export competitiveness. But many U.S. economists insist a weaker dollar is a temporary byproduct of QE, and that it would not exacerbate countries' trade imbalances long term. "There is a spillover effect, because these other countries peg [their exchange rates] to the dollar. They import U.S. monetary policy even though they're somewhere else on the growth cycle," former undersecretary of Treasury for international affairs Timothy Adams told CFR.org. But in the long run, a cheaper dollar that boosts U.S. exports and spurs consumer demand would help foreign exporters, he says.
Still, there is scant agreement among economists about whether QE2 would even work. Even the Fed's Open Market Committee disagreed on the policy before enacting it. After voting for the measure, Fed governor Kevin Warsh issued a warning in the Wall Street Journal that "additional monetary policy measures are poor substitutes for more powerful pro-growth policies."
Emerging economies' ire about the Fed's stoking of asset bubbles and currency spikes abroad also undermines the U.S. credibility in international forums like the G20, says CFR's Sebastian Mallaby, since these countries draw parallels between the U.S. behavior on QE2 and China's behavior on its exchange rate peg. "If the benefit is uncertain but the risk of destabilizing exchange rates is larger, maybe that's not a good risk to take," he told CFR.org.
The Economist's Ryan Avent argues emerging economies heavily reliant on exports would benefit from currency appreciation resulting from the Fed's policy, since these countries already need to reorient their economies toward more domestic demand. These countries can use capital controls if the appreciation happens too fast, he adds. CFR's Steven Dunaway disagrees. Capital controls "have an immediate impact in limiting capital inflows," he told CFR.org, "but their effectiveness will diminish over time as investors find ways around them." The best way for emerging economies to limit foreign inflows, Dunaway says, is to allow their exchange rates to move with market pressures, while using bilateral and multilateral pressure to force countries like China to do the same. Without that pressure, these countries will continue to "feel compelled to introduce similar distortionary policies [to China's exchange rate peg] to limit their loss in competitiveness vis-à-vis China," he argues in this Expert Brief.
In the Financial Times, former Fed chair Alan Greenspan says the United States is "pursuing a policy of currency weakening. The suppression of the renminbi and the recent weakening of the dollar are, of necessity, producing firming exchange rates in the rest of the world to, as they see it, the rest of the world's competitive disadvantage."
In the Daily Star, Dani Rodrik says calls for greater global governance through the G20, IMF, and WTO are "bound to remain incomplete."
This Backgrounder examines the roots of the U.S.-China economic imbalance.