While past summits have focused on coordinated stimulus,
global financial regulation and reform of the major international financial institutions, this week's meeting is gearing up to be known as the "trade and currency summit." It is also likely to be
more tense and contentious than any of its predecessors, whether leaders admit it publicly or not. This is especially true when it comes to the ongoing economic prize-fight between the G-20's two juggernauts, the U.S. and China, which is likely to dominate Seoul, at least behind the scenes. Unlike previous summits, where China largely bit its tongue in the face of Washington's accusations, Beijing seems willing to go on the offensive this go-round.
At the heart of the conflict between the U.S. and China are the issues of slow growth rates, trade deficits and debt. As the memory of the financial crisis recedes, the U.S. and other industrialized economies are starting to focus on cutting their massive debts while jumpstarting economic growth. This combination of goals is not easy to achieve, as they are often in conflict with one another. For instance, countries can cut debt through domestic adjustment, such as reducing government spending, raising taxes and increasing interest rates, as some European countries like Greece and England are doing. But many argue that this course is counterproductive, as these moves tend to negatively affect overall economic growth.
However, domestic adjustment is not the only method for reducing debt: Countries can also pursue external policies that improve their trade positions, since it is much easier to reduce a debt load while running a trade surplus. For years, the U.S., as well the U.K., France and others, have been running large trade deficits. They are now looking to bring these deficits into balance, in order to export their way out of debt. But since trade restrictions, subsidies and tariffs are largely off the table due to trade agreements and international norms, they are turning to exchange rates as their primary policy weapon.
This explains the intense U.S. focus on the Chinese exchange rate. Americans have long believed that China's currency, the yuan, is undervalued, leading to significant trade imbalances between the two economies. An undervalued yuan is also harmful to other emerging-market economies, since they often compete directly with Chinese goods on the U.S. market. Last summer, China announced it would permit the yuan to appreciate, but it soon became apparent that China was not interested in a substantial revaluation. Washington has been less than impressed with the currency's slow climb, leading Congress to threaten trade sanctions.
Beijing has been unwilling to bend to this pressure.
Heading into Seoul, the U.S. is pushing for the G-20 to endorse a plan that would
limit current-account surpluses and deficits, which include the trade account, to 4 percent of gross domestic product (GDP). Currently, the U.S. current-account deficit is roughly 3 percent of GDP, while China is running
a surplus of nearly 5 percent of its GDP. Not surprisingly, China has bristled at the proposal -- one official went as far to say it harkens back "to the days of planned economies." The irony of this statement, coming from officially communist China and directed at the U.S., should not be lost.
China is proving unwilling to play the role of punching bag and appears to be adopting an offensive strategy in the run-up to the summit: Rather than defending its monetary policy, Beijing is attacking Washington's. This week, the Middle Kingdom has been firing away at
the Federal Reserve's decision to employ "quantitative easing" (QE) to pump $600 billion into the sluggish American economy by buying U.S. government debt. Essentially, this means that the Fed is printing money to loan to the U.S. financial system in the hopes of stimulating growth.
However, QE also acts to devalue a currency since, by definition, it increases the money supply. This has led some in China to charge hypocrisy, claiming that the U.S. is using QE as
a way to devalue the dollar and thus gain an advantage over its trading partners -- the same thing Washington is attacking China for.
China has also
vociferously argued that the Fed's move will lead to a flow of "hot money" to emerging markets around the world. One goal of QE is to drive interest rates down in order to stimulate the U.S. economy. But doing so could also increase the flow of capital to emerging-market economies where returns on investment are more attractive. As foreign money floods into an economy, buying up assets denominated in the national currency, it drives up the value of said currency, while also running the risk of creating asset bubbles of the sort that helped create the current crisis.
China's recent public statements are an obvious attempt to drive a wedge between the U.S. and the emerging-market members of the G-20. The U.S. is trying to soothe any potential tensions, as evidenced by
President Barack Obama's recent statement that India is "part of the solution and not part of the problem," citing the nearly balanced trade between the two countries. Nonetheless, the Fed's recent moves undermine U.S. moral authority on the currency issues, even if China represents the greater of the two evils.
In Seoul, American policymakers need to tread carefully in addressing these issues. Leaning too hard on China could drive other emerging-market countries into Beijing's corner, making even a modest consensus on trade balances impossible. If that happens, the meeting may come to be known as "the lost summit."
**Daniel McDowell is a Ph.D. candidate in International Relations at the University of Virginia, specializing in International Political Economy.
