SEOUL, South Korea — Facing the risk of an economically damaging trade war, top finance officials from the world’s leading rich and developing nations looked each other in the eye and vowed they wouldn’t use their currencies as economic weapons to boost exports.
On Monday, the agreement members of the Group of 20 reached over the weekend in South Korea, though vague on enforcement and long on promises, was said by officials and analysts to be a step forward in defusing tensions.
Still, it could turn out to be nothing more than a symbolic handshake unless the disparate forum that has become the board of directors for the global economy after the 2008 financial crisis can act on its words and build a viable enforcement mechanism.
Some of the pressures that have caused global currency tensions showed no signs of easing. The dollar remained under pressure and was near a record low against the Japanese yen amid expectations the Federal Reserve will loosen its already super-easy monetary policy further next week in a bid to boost the anemic U.S. economy.
G-20 finance ministers and central-bank governors promised Saturday that they will not artificially devalue their currencies. They also vowed to take steps to correct imbalances in the global economy, such as surpluses and deficits in the current account - a broad measure of trade and investment that currently favors the developing world.
The deal was reached after the direct intervention of South Korean President Lee Myung-bak, who traveled to the southern city of Gyeongju to address G-20 officials and urged a compromise for the sake of the global economy. Lee, a staunch free trade advocate, hosts his G-20 counterparts for a summit next month in Seoul.
U.S. Treasury Secretary Timothy Geithner said in an interview he expects Chinawill allow the yuan to appreciate more because officials there understand it’s in the long-term interest of domestic growth and global economic stability.
U.S. Federal Reserve Chairman Ben Bernanke received “criticism” in Gyeongju after his move toward easier monetary policy pushed the dollar down, German Economy Minister Rainer Bruederle said.
“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle said. “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”
Before the meeting, some countries were seen intervening in markets to sell their own currencies and buy dollars in a bid to stem gains spurred by the in flow of foreign capital in search of better returns. Japan sold its own currency last month for the first time in more than six years to give its exporters a break.
Despite the lack of an enforcement mechanism other than a promise to agree to guidelines and giving a supervisory role to the International Monetary Fund, analysts expressed some optimism that the G-20 agreement at least marked a step back from potentially dangerous territory.
“I felt that the risk of an outright currency war is probably lower now,” Yiping Huang, a professor of economics at the Economic Research Center of Peking University and a former chief Asia economist for Citigroup, said Monday of his initial reading of the communique.
Still, the vagueness of the document, which lacks any numerical targets for bringing surpluses and deficits more into line, drew skepticism from some quarters.
“The agreement reached must be described as lacking in transparency in its possible effectiveness,” Japan’s conservative Sankei newspaper said in an editorial urging the United States and China - the world’s two biggest economies - to take the initiative in avoiding protectionist moves that could hurt economic growth.
Despite a push by the U.S. for stronger language, the G-20 said that large imbalances - such as China’s vast trade surplus with the rest of the world - would be “assessed against indicative guidelines to be agreed,” vague terminology that highlights the difficulty of forging a measurable enforcement regime.
World Bank President Robert Zoellick, who attended the G-20 meeting, said Monday that while it succeeded in coming closer together, the temptation to engage in selfish policies needs to be monitored.
“Countries are still preserving what they consider to be their own national interests and we have to keep pushing them to cooperate together in avoiding things like protectionism that could undermine the fragile financial markets,” he said.
The G-20, which accounts for about 85 percent of the global economy, is made up of a wide range of countries at various stages of development. Besides the U.S., it includes the other members of the Group of Seven advanced nations, the traditional driver of the global economy. Fastrising China, India and Brazil, as well as traditional global political heavyweight Russia are also members as are major commodity producers Saudi Arabia and Australia.
Information for this article was contributed by Shino Yuasa, Tomoko A. Hosaka, Joe McDonald, Yuri Kageyama and Jerry Harmer of The Associated Press and by Simon Kennedy and Shamim Adam of Bloomberg News.
Business, Pages 23 on 10/26/2010