Obama Fails To Win Agreement on Chinese Currency or Trade Flows
What was agreed in Seoul, after two days of talks, was basically the G20 nations, composed of both industrial powers and developing countries, need to talk more. For example, the G20 will attempt to come up with indicative guidelines to help identify trade imbalances that require preventive and corrective action.
No Free Trade Agreement with South Korea
Going into the meeting, the U.S. had been seeking a firm 4% limit on trade surpluses."It was a big bust," says Gary C. Hufbauer, senior fellow at the Peterson Institute for International Economics. But Homi Kharas, senior fellow at the Brookings Institution, said the fact that the 20 nations reached an understanding of "what needs to be done in terms of outcomes," was a big step forward.
For its part, Korean farmers refused to budge on allowing more imports of U.S, beef from older cattle, which they limit for health reasons, though they are of dubious scientific basis.
"This was meant to be the passageway to opening up a whole new trade policy by this administration," Hufbauer says. "The lesson is if special interests can hold up this deal, where there is a big spotlight, how are you going to reach agreement in other cases where there are also special interests? Opponents of trade are quite joyful about this and I think this will harden their resistance and probably create more demands."
Still Working on Free Trade with Many Countries
The U.S. also has negotiated but not implemented free trade agreements with Colombia and Panama and is in the process of negotiating a deal with a Pacific Partnership that includes Vietnam, Singapore and Australia as well as Chile.
The G20 meeting was unusually acrimonious, largely because critics like Germany, Brazil and China attacked the U.S. for the Federal Reserve's decision to buy $600 billion of U.S. Treasury bonds in an effort to stimulate the economy, a process called quantitative easing.
Developing countries are concerned that investor funds -- known as "hot money" -- will flee the U.S. and rush into their economies, driving up inflation and creating instability. " I know the commentary tends to focus on the inevitable areas of disagreement," Obama said, "but the fact is the 20 major economies gathered here are in broad agreement on the way forward." He said there was an agreement on four areas: balanced trade, exchange rates must be economically realistic, financial regulatory reform and development as a key driver of growth.
The concluding communiqué, which originally contained wording condemning "competitive undervaluation", was changed at the last minute to "competitive devaluation" which was designed not to offend China, which does keep its currency undervalued.
The lack of agreement basically allows countries to continue to go their own way in setting their currency policy. In fact, the G20 endorsed "carefully designed macro-prudential measures."
Criticism Aimed at Bernanke
This is a veiled reference to currency controls that have been adopted by a number of countries, including Brazil, China and Taiwan, that are designed to limit the amount of foreign investment flowing into their countries. " I do think that since there was such a dust-up, that means the U.S. and the Fed will be quite circumspect and pay a lot of attention to foreign opinion and exchange rates as they implement quantitative easing," Hufbauer said.
Rather than debate Chinese currency policy, as the U.S. had hoped, the G20 ganged up on the U.S. over quantitative easing, with central bankers taking the unusual step of criticizing Fed chairman Ben S. Bernanke. In the past, central bankers have tended to be very clubby and didn't often speak ill of their brethren.
Adding spice to the drama was an unprecedented criticism of Bernanke's policies by former Fed chairman Alan Greenspan, who accused the Fed of intentionally weakening the dollar and driving up currencies elsewhere. That drew an unusual denial from Treasury Secretary Timothy Geithner. No former Fed chairman has attacked his successor publicly in decades.
Kharas says that while China was not pressed to allow its currency to appreciate as the U.S. has demanded, there was progress because Beijing indicated that it could live with wage and price inflation of nearly 4%. Kharas believes that will be just as effective in controlling Chinese exports to the U.S. as raising the exchange rate because it will make products more expensive to produce in China.