U.S. plan for trade targets hits G20 headwinds

By Abhijit Neogy and Luciana Lopez

GYEONGJU, South Korea (BestGrowthStock) – The United States struggled on Friday to win backing for a proposal to set limits on external imbalances as a way of pressing countries with surpluses such as China to let their exchange rates rise.

In a letter to fellow finance ministers of the Group of 20 leading economies, U.S. Treasury Secretary Timothy Geithner said countries should implement policies to reduce their current account imbalances below a specified share of national output.

Japanese Finance Minister Yoshihiko Noda said Geithner, backed by host South Korea, proposed limiting surpluses and deficits on the current account — the broadest measure of trade in goods and services — to 4 percent of gross domestic product.

But the plan met with a cool reception on the first day of a two-day meeting meant to smooth the path for a G20 summit in Seoul on November 11-12.

Big exporting countries that habitually run chunky trade surpluses led the opposition.

A G20 source said China was against any limits on imbalances, German Economy Minister Rainer Bruederle warned of a throwback to “planned economy thinking,” and Russian Deputy Finance Minister Dmitry Pankin said a draft communique to be issued on Saturday would steer clear of numerical targets.

“The communique is very politically correct. There’s nothing sharp in it,” Pankin said. “In the long term the focus should be on the exchange rates reflecting market conditions. Excessive state interference in currencies should be avoided.”

Noda also voiced skepticism. “We doubt whether rigid numerical targets should be set. But when checking the progress in rectifying imbalances, that might be an idea,” he told reporters.

DOUBTS ABOUND

The criticism underscored the difficulties facing the G20 as it strives to put the world economy on a more stable footing and defuse currency tensions that economists fear could trigger trade wars.

While the G20 won praise for coordination of stimulus packages during the global financial crisis, its unity has been tested by low growth in rich countries and attempts by some emerging market economies to preserve export competitiveness by holding down their exchange rates.

Saudi Arabia, Germany and Russia are the G20 members with the biggest current account surpluses, but China is the chief culprit in Washington’s eyes — and the unspoken target of Geithner’s letter — because of massive currency market intervention to keep a lid on the yuan.

Beijing has amassed $2.65 trillion in official currency reserves as a consequence, and prompted the U.S. House of Representatives to pass a bill threatening retaliation unless China lets its currency off the leash to reduce its huge trade surplus with the United States.

G20 countries, Geithner said, “should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing the appreciation of an undervalued currency.”

Chinese officials made no public comment, but a G20 source said Beijing was opposed to any communique that explicitly bound countries to limits on current account balances or any other form of rules on currency policy.

The source, with direct knowledge of the talks, said the group of rich and emerging economies was split not only on the question of currencies but also on how to give poorer countries more voting power at the International Monetary Fund.

“Positions are still very much divided. It’s a rift down the middle on both issues,” the source said, predicting “bland” language in the closing communique to paper over the cracks.

LOOKING FOR CONSENSUS

Not everyone rejected the U.S. gambit out of hand.

“At a time when people are talking about currency wars, the merit of Geithner’s proposal is that it shifts the discussion back to the macroeconomic framework,” a French official said.

Jim Flaherty, Canada’s finance minister, said setting numerical targets was a step in the right direction.

“There’s a desire to reach consensus, to be collaborative, to move in the direction of an action plan that we can present to our leaders so that they can adopt it when they meet here in a couple of weeks,” he said.

But many emerging market policymakers blame lax U.S. policies for the global financial crisis. They also fear Washington is prepared to debase the dollar by flooding the banking system with cash to try to breathe life into the stuttering U.S. economy.

Expectations that the Federal Reserve will crank up the dollar printing presses has sent a tide of money pouring into emerging markets, boosting their currencies and asset prices and complicating the conduct of fiscal and monetary policy.

Brazil and Thailand have responded by introducing controls on capital inflows, while other central banks have stepped up currency interventions.

“We must demonstrate that we can, in the immediate term, cooperate to avert what many are now terming a currency war. We must find a solution to this by the Seoul summit,” Indian Finance Minister Pranab Mukherjee said.

(Additional reporting by Louis Egan, Daniel Flynn, Yoo Choonsik, Gernot Heller and Tetsushi Kajimoto; Writing by Alan Wheatley; Editing by Tomasz Janowski, John Stonestreet)

U.S. plan for trade targets hits G20 headwinds