GYEONGJU, South Korea — The U.S. is pressing emerging nations to set targets to reduce their trade surpluses with the West, a plan that could see their currencies rise, as global finance summit attendees looked for ways to reduce tensions that threaten to escalate into a trade war.
U.S. Treasury Secretary Timothy Geithner’s proposals, outlined in a letter to the Group of 20 major developed and emerging nations, met with resistance on the opening day of a two-day meeting of top finance officials. Japan’s Finance Minister Yoshihiko Noda on Friday called the idea of targets “unrealistic.”
The gathering of G-20 finance ministers and central bank governors in the South Korean city of Gyeongju comes two weeks after their meeting in Washington failed to iron out currency differences that have led to fears of a trade war that could trigger another economic downturn.
In such a scenario, countries devalue their currenciesto gain a competitive advantage in a world economy that has yet to fully recover from the global financial meltdown two years ago. Trade barriers are erected in response, hitting international commerce and reversing the economic recovery.
Nations in Asia and other regions have been trying to stem strength in their currencies amid sustained weakness in the U.S. dollar out of fear their exports will become less competitive in world markets. At the same time, China’s currency has been effectively pegged to the dollar, provoking complaints that the yuan is being kept artificially low and giving China’s exporters an unfair advantage.
According to officials at the summit, Geithner’s idea is to establish numerical targets for current account balances, be they surpluses or deficits - aiming to reduce conflicts over exchange rates by allowing the currencies of trade surplus countries to rise in concert. The current account is a broad measure of a country’s total trade and investment with the outside world.
Striving to meet such targets could limit Asia’s large trade surplus with most advanced economies over time, but it’s uncertain whether specific goals will garner broad support within the G-20.
Asia becoming less reliant on exports for growth is seen as one of the adjustments the world economy should make in the wake of last year’s recession to ensure more stability in the global economy and markets. Stronger currencies, meanwhile, would make imported goods cheaper and boost local spending as a contributor to economic growth.
Canadian Finance Minister Jim Flaherty said the currency issue must be addressed and that no one in the G-20 wants to end the meeting without an action plan.
“If it’s not, then we know from history the path that we end up going down, which is not good for any of us whetherwe’re an emerging economy or a developed economy,” he said.
Flaherty said he supported Geithner’s ideas in the letter, which was written to G-20 member nations ahead of the meeting. He said the letter also urges the group to refrain from competitive currency manipulation.
The letter “sets out a possible way forward that has been discussed among participants here and previously,” Flaherty said. “We need to develop an action plan for leaders, who will be meeting in a couple of weeks in Seoul.”
South Korean President Lee Myung-bak, chairman of the forthcoming G-20 leaders summit, hinted at the challenges facing members as they delved into discussions.
Countries have diverse economic situations so they may turn to different policy strategies on current accounts and foreign exchange, he said. But nations “must find a way for a mutual win-win,” Lee said.
The Group of Seven industrialized nations, composed of the U.S., Japan, U.K., France, Germany, Italy and Canada, met for informal talks ahead of the full G-20 gathering later Friday. Noda, Japan’s finance minister, said there was no set agenda for the G7 meeting.
The talks will help set the agenda for a Nov. 11-12 summit of G-20 leaders. U.S. President Barack Obama and the other heads of state will attend.
Separately, Brazil, Russia, India and China were holding a meeting ahead of the G-20 gathering to discuss issues of mutual interest including overhaul of the International Monetary Fund and increasing trade and investment among themselves, according to D.S. Malik, an official with India’s Ministry of Finance.
China, the world’s No. 2 economy, is under renewed pressure over its management of the yuan.
Canada’s Flaherty said he met with his Chinese counterpart, Xie Xuren, on Friday. “I think there’s a willingness to open the door to more flexibility over time,” he said of Beijing.
The broad weakening ofthe dollar and the outlook for possible further monetary easing by the Federal Reserve is another factor adding to the strain over currencies. So-called hot money flowing into emerging countries in search of higher yields than can be fetched in the developed world have turned up the heat on those currencies, particularly in Asian nations such as South Korea.
Some governments as a result have tried to stem currency appreciation through measures including direct intervention in markets or by imposing controls on capital or taxes on foreign investment.
South Korea’s Finance Minister Yoon Jeung-hyun, who spoke with Geithner in a bilateral meeting Friday, said in a statement that U.S. cooperation is essential toward reaching an agreement on reducing the imbalances in global trade.
Information for this article was contributed by Kelly Olsen and Kwang-Tae Kim of The Associated Press.
Business, Pages 33 on 10/23/2010