G-20 Pledges Cooperation on Reducing Trade Imbalances, But Offers Few Specifics
Officials from the world's leading economies, meeting in South Korea, agreed over the weekend to cooperate on reducing global trade imbalances and calming exchange-rate tensions, but stopped short of establishing numerical targets for countries' current account surpluses and deficits. They instead pledged to work towards an agreement on "indicative guidelines" for identifying "persistently large imbalances" and their causes, as well as to "refrain from competitive devaluation of currencies."
Finance ministers and central bankers from the Group of 20 large industrialised and developing nations also agreed on a set of reforms aimed at shifting the balance of power and influence within the International Monetary Fund away from Europe and towards fast-growing developing countries, particularly China. The changes accompany an enhanced role for the IMF in monitoring government policies affecting exchange rate policies and trade balances.
The senior policymakers met in Gyeongju on 22-23 October against the backdrop of months of increasingly sharp exchanges among the world's major economies over currency policy and export competitiveness (see Bridges Weekly, 29 September 2010). The US and the EU have been urging China to let its currency, the yuan, rise, and lawmakers in Washington are threatening Beijing with sanctions for alleged currency manipulation. Several developing countries have argued that rich countries' ultra-loose monetary policy is tantamount to devaluation, and is distorting global capital flows. Concerns have grown that the war of words could accidentally escalate into a hard-to-control spiral of tit-for-tat commercial retaliation. WTO Director-General Pascal Lamy recently warned that "uncooperative currency behaviour" - specifically, policies seen to seek "an exchange-rate-induced comparative advantage" - could spur protectionism and threaten the fragile global economic recovery (see Bridges Weekly, 20 October 2010.
At the start of the meeting, Timothy Geithner, the US treasury secretary, presented his counterparts with a written proposal calling for limits on current account balances. This sidestepped a potentially explosive confrontation over currency manipulation allegations. Geithner has long argued that stable growth over the long run will require surplus economies (like China) to shift from export dependence towards domestic demand, while deficit countries (like the US) move to increase savings and shift growth from consumption to investment and exports. While a stronger currency is one of a number of policies that could help China achieve those goals, the absence of a swift rebuke from Beijing suggests that invoking macroeconomic harmony is more palatable to Chinese policymakers than criticising the value of the yuan.
Although Geithner's letter contained no specific targets, news reports from Gyeongju quoted officials as saying that the US, backed by host South Korea, wanted members of the bloc to run current account surpluses or deficits no larger than 4 percent of annual GDP (with an exception for major commodity exporters, which tend to run outsized surpluses). The current account is a broad measure of the trade balance, including exports minus imports of goods and services, along with net income from foreign investments and transfers (such as aid and remittances).
Countries running surpluses above the 4 percent level include China (4.7 percent of GDP) and Germany (6.1 percent), according to current IMF projections for this year. (Russia and Saudi Arabia also clear the threshold, but resource exports make up a large part of both of their economies.) On the deficit side, Turkey (5.2 percent) and South Africa (4.3 percent) exceed the threshold. The US is projected to run a current account deficit of 3.2 percent this year. India and Brazil are forecast to run current account deficits of 3.1 and 2.6 percent respectively.
The notion of establishing a hard cap on surpluses and deficits met with opposition from countries including Japan and Germany - German economy minister Rainer Bruederle suggested the idea smacked of "planned economy" thinking - and the statement ultimately adopted in Gyeongju included no numbers. Instead, it called for G-20 members to "strengthen multilateral cooperation to promote external sustainability and pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels."
Past G-20 communiqués, such as the leaders' declaration issued in Toronto in June, have included similar pledges for deficit countries to boost national savings and restore fiscal order over the medium-term, while surplus economies increase domestic demand. The Gyeongju statement went further in setting out a role for the IMF in identifying the existence and cause of "persistently large imbalances," which are to be "assessed against indicative guidelines to be agreed."
Even if G-20 members had agreed to a numerical target, the group, which operates through consensus, mutual surveillance and peer pressure, would have had no mechanism for enforcing it.
In a clear reference to ultra-loose monetary policies in the US and, to some extent, the UK, the communiqué committed "advanced economies, including those with reserve currencies," to "be vigilant against excess volatility and disorderly movements in exchange rates," in order to stem unpredictable flows of speculative capital to emerging economies.
It remains to be seen what, if any, "indicative guidelines" for evaluating trade imbalances G-20 members will come up with before the 11-12 November leaders' summit in Seoul. But there are signs that concentrating on current account surpluses might find more takers in Beijing than a single-minded focus on the yuan. A post on the Wall Street Journal's China blog earlier this month suggested that Chinese officials keen to stave off trade tensions were aiming to rein in the country's trade surpluses. The report quoted Yi Gang, the deputy central bank governor, telling a Washington seminar that Beijing would try to reduce the current account surplus to less than 4 percent of GDP, as part of a broader policy of reducing export reliance and boosting domestic consumption. This would entail a significant departure from existing trends: IMF economists currently project that China's current account surplus will rise to 7.8 percent by 2015.
The meeting in Korea reached agreement on changes to the IMF's quota and governance systems that ministers and central bankers said would "help deliver a more effective, credible and legitimate IMF and enable the IMF to play its role in supporting the operation of the international monetary and financial system." Notably, quota shares are to be shifted to fast-growing and underrepresented developing countries by 2012, with a re-evaluation of the voting weight formula to follow. Two chairs currently occupied by European countries on the IMF's executive board will be transferred to emerging market and developing countries.
Speaking after the meeting, US Treasury Secretary Geithner said "The most important thing we achieved is agreement on a framework for curbing excess trade imbalances in the future." In Gyeongju, he said, G-20 members agreed on the importance of limiting overall level of external imbalances across the global economy, on cooperating more closely on exchange rate policy, and on giving a greater role to the IMF in making sure they implement these commitments.
In the past, IMF surveillance of current account imbalances has done little to effect policy changes by large creditors or debtors, Eswar Prasad, a former senior IMF official who is now a professor of trade policy at Cornell University, told the Financial Times.
Geithner - himself a former IMF official - acknowledged this, blaming "the reluctance of its members to expose themselves to a candid, independent, external assessment of the effects of their policies on the global economy as a whole, and to allow the IMF staff and management to offer broad judgments on exchange rate misalignments."
John Cochrane, a professor at the University of Chicago's business school, argues that it is impossible for IMF or any other economists to make such assessments with any accuracy. It is a "pipe dream that that busybodies at the IMF can find ‘imbalances,' properly diagnose "overvalued" exchange rates, then ‘coordinate' structural, fiscal and exchange rate policies to ‘facilitate an orderly rebalancing of global demand,'" he wrote in the Wall Street Journal. Instead, he called for the US government to bring its own deficit under control, and for China to abandon capital and exchange controls.
The central role of the IMF in efforts to address global trade imbalances may strike some as ironic. Joseph Stiglitz, the Nobel Prize-winning economist, has argued that it was heavy-handed, counterproductive interventions by the US treasury department and the then-firmly Northern-dominated IMF during the 1997 Asian financial crisis that motivated East Asian countries to amass enormous foreign exchange reserves - trillions of dollars that could have been more productively used - to ensure that they would never have to go back, cap in hand, to the IMF. One of the ways they accomplished this was to run large current account surpluses.
ICTSD reporting; "Geithner's Global Central Planning," WALL STREET JOURNAL, 26 October 2010; "Targets on trade imbalances elude G20," FINANCIAL TIMES, 25 October 2010; "Germany says U.S. monetary easing policy is wrong," REUTERS, 23 October 2010.