G20 struggles to find common ground on currency war, triggers US push for trade caps

Finance ministers from the Group of 20 nations struggled to agree on how to prevent a currency war on Friday, with the United States switching tack to focus on a way to rebalance global trade.

G20 Finance Meeting - EPA Photo

Malcom Moore
Telegraph

With China resolutely refusing to allow the yuan to rise more quickly, the US shifted the debate on the first day of the G20 summit to address trade imbalances, the root issue behind exchange rate clashes.

Timothy Geithner, the US Treasury secretary, told G20 members they should commit to specific trade caps, allowing surpluses and deficits on their current account, the broadest measure of trade in goods and services, to be no more than 4pc of gross domestic product.


China's current account surplus was 5.9pc in 2009, having almost halved from its peak of 10.6pc in 2007. The US, by contrast, had a current account deficit of 3pc last year.  In a letter to the G20, Mr Geithner called for a "co-operative effort" on the issue, but said there would have to be "some exceptions" for countries that imported large quantities of raw materials.

The US plan, a way of side-stepping a direct spat over currencies, was backed by Korea, Australia and Canada, but immediately opposed by large exporters such as Japan and Germany.

Rainer Bruederle, the German finance minister, rejected a "command economy" approach, while Yoshihiko Noda of Japan said "setting numerical targets would be unrealistic".

India also said the trade caps would be hard to work out, while Russia said there would be no numerical limits set in the summit's final statement.

Mr Geithner also called for G20 countries to refrain from "either weakening their currency or preventing the appreciation of an undervalued currency". Mr Geithner, who also called for the IMF to monitor the G20's commitments, added: "G20 advanced countries will work to ensure against excessive volatility and disorderly movement in exchange rates."

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The currency war is phoney

At the US recession's core is a collapse in investment. America should sort out its own economic policy, not attack China's

John Ross
Guardian

The core of the "currency wars" – in which China has been accused, primarily by the US, of undervaluing the renminbi to boost its exports – is a simple piece of arithmetic. The US has only a quarter of China or India's population.

America can remain the world's largest economy only if average Chinese or Indian living standards never exceed 25% of its own. As – rightly – China and India will never accept this, a peaceful global outcome therefore requires the US to abandon its undesirable and impossible goal.

The immediate political background is September's vote by America's House of Representatives threatening China with tariffs unless it increases the exchange rate of its currency. Speaker Nancy Pelosi claimed the legislation was a "key part of our Make It in America agenda", arguing that forcing China to revalue the renminbi, thereby increasing the price of its imports, "could create a million US manufacturing jobs". The dollar's exchange rate then slid as the Federal Reserve accepted quantitative easing – that is, printing dollars – and central banks, including that of Japan, intervened to try to drive down their currencies against the dollar.


Pelosi does not seem to appreciate, however, that the US cannot profitably produce the goods it imports from China. If tariffs were imposed, similar low-price products would be imported from India or Mexico. No American jobs would be created. Indeed, a trade war would lead to a net loss of American jobs. Any country hit by tariffs invariably reciprocates, and China would act against competitive US industries such as farm products and hi-tech.

American politicians are to some degree seeking a scapegoat for domestic problems – the equivalent of Nicolas Sarkozy's anti-Roma campaign. But if the long-term goal of the US to remain the world's largest economy is neither just nor achievable, it can engage with a perfectly legitimate concern – ensuring its population has the highest possible living standards.

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