The G20 finance meeting this weekend in Gyeongju, South Korea, failed to produce (FT) concrete measures to tame worsening trade and currency imbalances, as economic policymakers focus hopes on the G20's November meeting in Seoul for consensus on economic cooperation. The deal hammered out by finance ministers and central bank governors highlighted many (WSJ) of the G20's shortcomings in achieving meaningful collaboration among major industrialized and developing countries on reviving the global economy.
The meeting did yield some progress on IMF reform. European countries agreed to give up two of their seats on the IMF's twenty-four member executive board for emerging countries like China and Brazil. But decisions on reorganizing the board's quota system, which determines member countries' voting powers, were punted to 2012. Germany, Brazil, and Japan also staunchly opposed the U.S. and South Korea's push for numerical targets (Reuters) on countries' current account surpluses and deficits, aimed at staving off a looming global currency and trade war. The meeting's communiqué established that countries would maintain "sustainable" trade balances, which are closely tied to countries' exchange rates, but it waffled on the issue of determining what constituted sustainability and left the means of enforcement to future negotiations.
Recent moves by the United States and China remain the group's biggest concern. Both countries agreed at the meeting to "refrain from competitive devaluation" of their currencies. China also agreed to "move toward more market-determined exchange-rates systems that reflect underlying fundamentals."
But emerging economies worry both countries will continue to use unfair policies that undervalue their currencies to make trade gains while destabilizing global capital flows. Of particular concern to these countries is the U.S. central bank's expected announcement in November that it will begin a second round (WSJ) of so-called quantitative easing since the financial crisis, whereby the Fed buys assets like Treasury bonds to lower long-term interest rates and boost the economy. Emerging economies say this policy devalues the U.S. dollar, sending flows of hot money into countries with higher currency yields and driving up their currency values. Fears that China will continue to depress its currency value also persist, despite recent assurances by U.S. Treasury Secretary Timothy Geithner that China realizes yuan revaluation is in the country's best interests. China's trade surplus rose (Bloomberg) to $16.9 billion in September, marking the largest third-quarter trade gap since 2008, as exports rose 25 percent from a year earlier.
Whether these tensions would result in a full-fledged trade war remains unclear. In Foreign Policy, CFR's Evan Feigenbaum said that trade conflict is "fast becoming a 'new normal' in relations between Beijing and Washington," as old coalitions within the United States and China--which once stabilized U.S.-China relations--are breaking down. But rising U.S.-China trade tensions will not derail Beijing's overall strategic relationship with Washington, he says, since China is still bound to U.S. monetary policy because of its large trade surplus with the United States and large currency reserves.
The G20's ability to moderate these kinds of disputes is also in doubt. Proposals for the G20 to coordinate reductions in countries' external imbalances may not work, says CFR Senior Fellow Steven Dunaway, since current account balances can be a poor indicator of countries' domestic economic and structural policies. Many countries outside the G20 see the group as "a self-appointed and barely legitimate body that has no authority to assume its current role," said the London School of Economics' Robert Wade and the Danish Institute of International Studies' Jakob Vestergaard in a recent Financial Times op-ed. To increase its legitimacy, they argue the G20 needs to improve its criteria for selecting members according to regional representation, weight in the world economy, and proportion of the world population. A continued lack of solidarity on issues such as China's currency policy ultimately hurts the group's global image (FT), says CFR Senior Fellow Stewart Patrick. "If the G20 cannot rise to the occasion in the run-up to Seoul and get tangible progress from China on the currency front, it will show itself to be a toothless talk shop," he said.
This CFR Geo-Graphics blog argues that China's development plan should include yuan revaluation, because its reliance on fueling GDP growth through exports is unsustainable. When the renminbi appreciated significantly between 2005 and 2008, Chinese export growth slowed and household spending growth rose.
In the Financial Times, Martin Wolf says the United States will ultimately win the global currency battle.
On Roubini Global Economics, economist Nouriel Roubini says surplus countries will feel little pressure to adjust their interventions or current account surpluses, and the IMF has no leverage over these countries, because they do not need its financial support.
In the New York Times, economist Kenneth Rogoff says the United States has lost some of the standing it needs to shape global policy, since post-financial crisis, a number of countries are less willing to assume the United States "knows best on economic policy." Some countries fear that Fed policies are pushing down the dollar's value.