World leaders this week sought to downplay expectations their meeting in the South Korean capital would ease tensions over foreign exchange and monetary policies.
A draft communiqué released Wednesday suggested the G20 will likely rehash existing commitments to rebalance global growth by closing the trade gap between surplus and deficit countries. The group is also expected to reiterate the need for countries to move to market-determined foreign exchange regimes.
US Treasury Secretary Timothy Geithner’s proposal last month for a 4% voluntary current account deficit target for non-commodity producing nations has been dropped, following sharp opposition from China and Germany.
Emerging nations are expected to voice their criticism of the US Federal Reserve’s decision last week to embark on a further round of quantitative easing (QE2) – a move that is exacerbating inflows of hot money and upward pressure on emerging currencies.
More positive outcomes are expected from the summit on financial regulatory reform, governance and international development.
Canadian finance minister Jim Flaherty said this week the G20 would ask the IMF to report on progress towards resolving global current account imbalances when G20 finance ministers next meet in February, when France chairs the group.
Tensions over currency devaluation boiled over last month following comments by Brazil’s finance minister Guido Mantega that the world faced a “currency war”. The US subsequently stepped up its attack on China’s exchange rate policy, which it says is artificially depressing the value of its currency, the yuan.
Reeling from a 9.5% national unemployment rate, the US wants China to appreciate the yuan to boost domestic consumption and, thereby, US exports to Asia’s largest economy.
But China – which has capped the yuan’s gains to 3% since the two-year dollar peg was broken in June – argues disorderly appreciation of its currency will trigger domestic and global instability. It also accuses the US of seeking to devalue the dollar through the backdoor, via the Fed’s quantitative easing policy.
US president Barack Obama – who has made a national pledge to double US exports within five years – has sought to link the currency debate with a focus on current account imbalances.
As countries embark on unilateral monetary and exchange rate policies, analysts fear a bout of trade protectionism will sweep global markets.
Julian Jessop, chief international economist at London-based Capital Economics , said: “The more likely outcome is an inconclusive and fractious G20 summit that takes the world a step closer to a global trade war.”
“This could increase volatility and curb the renewed enthusiasm for risk in financial markets.”
Li Daokui, economist at Beijing’s Tsinghua University and an adviser to China’s central bank, told Emerging Markets: “Regardless of the outcome of the G20 meeting, intractable economic and social problems in the US and Europe do not create a conducive environment for free trade.
“I am concerned that unemployed citizens in the west may choose to vent their anger at globalization and this is not globally economically beneficial.”
China on Thursday reported a larger-than-expected $27.1 billion trade surplus in October as exports grew 23% from a year earlier.