G-20 meeting ends with U.S. failing to secure key support for trade plan

A proposal to set a cap for each country's deficit or surplus is opposed by some American allies and trading partners.

From left, European Central Bank President Jean-Claude Trichet, EU economic chief Olli Rehn and Belgian Finance Minister Didier Reynders. (Kim Hee-chul / European Pressphoto Agency / October 23, 2010)

Reporting from Washington —

Officials of the world's major economic powers agreed Saturday to take steps to head off what one nation has warned could become a currency war, but the Obama administration fell short of securing an agreement to correct large trade imbalances threatening the global economy.

Concluding two days of talks in South Korea, Treasury Secretary Timothy F. Geithner and other finance ministers of the Group of 20 leading economies also moved to give emerging nations such as China and India a bigger voice in the International Monetary Fund.

Geithner's top priority at the talks, before a summit of G-20 leaders next month in Seoul, was to persuade his counterparts to accept a new set of policies and mechanisms aimed at reducing the large U.S. trade and investment deficits while curbing surpluses of China and other countries that have long relied on Americans as the consumers of last resort.

In the wake of the global financial crisis and devastating recession, U.S. officials have pressed harder for export-dependent countries to import more and expand their economies by boosting domestic demand. At the same time, the United States and other nations that have been running deficits would need to consume less while boosting savings and investments.

The shift, officials contend, is necessary for sustained growth of the global economy and to prevent a recurrence of the worldwide crisis.

While agreeing to the general principles of this framework, some key American allies and trading partners opposed the U.S.-backed proposal to set global curbs on the current account surpluses and deficits of major nations, underscoring the difficulties ahead in restoring stability to the global economy.

At the meeting in South Korea's southern city of Gyeongju, U.S. officials sought to set a cap for each country's deficit or surplus at 4% of its economic output by 2015.

The idea drew support from Britain, Australia, Canada and France, all of which are running trade deficits, as well as South Korea, which is hosting the G-20 meetings and hoping for a compromise among the parties.

But the proposal got a cool reception from export powerhouses such as China, which has a current account surplus of 4.7% of its gross domestic product; Germany, with a surplus of 6.1%; and Russia, with a surplus of 4.7%, according to IMF statistics.

Geithner accentuated the progress made.

"The framework of cooperation we agreed to today recognizes that none of us can accomplish this alone," he said in a statement. "First, we have agreed that it is important to limit the overall level of external imbalances across the global economy.... The value of this framework to limit trade imbalances is that rights and responsibilities are aligned and balanced."

But with countries still feeling the pain of the recession and reluctant to accept policies that might weaken their growth prospects, analysts weren't surprised that the U.S. failed to come away from the talks with commitments to adopt specific targets.

"Will the U.S. Congress pass tax increases and spending cuts for immediate implementation because the international community is concerned that the U.S. is running too large a current account deficit position?" asked Paul Donovan, a global economist at UBS Investment Bank in London.

U.S. officials met with greater success in their efforts to address the upheaval over currency values.

American lawmakers and some businesses have accused the Chinese of devaluing the yuan to gain an advantage in trade, and Brazilian officials, who did not attend the G-20 meeting, have expressed concern about a currency war.

The G-20 finance ministers pledged in their declaration to "move toward more market-determined exchange rate systems … and refrain from competitive devaluation of currencies."

Yoon Jeung-hyun, South Korea's finance minister, lauded the agreement on currency policies, saying that it would "put an end to the controversy over foreign exchange rates."

G-20 officials also highlighted their accomplishments in following through on a pledge a year ago to restructure the IMF's voting quota system and governance to give emerging nations greater say. The G-20 parties agreed Saturday to shift more than 6% of quota shares to emerging economies and underrepresented countries by the end of 2012. The hope is that this realignment will help make the IMF more credible and effective.

Chinese officials welcomed the change.

"China, the biggest developing and low-quota country, should be promoted in terms of its quota and voting right in the IMF," said Zhou Xiaochuan, China's central bank governor.

But there was little comment from the Chinese side on the G-20's other statements related to trade imbalances and currency policies. On Friday, the Chinese Embassy in Washington issued a statement saying, "China never pursues trade surplus, nor has it manipulated its currency to gain trade benefits."