G-20 fallout: Trade barriers, tensions could rise By PAUL WISEMAN,
AP Economics Writer | Fri Nov 12, 5:06 pm ET
WASHINGTON – The world's most important
economies are going home to look after themselves. They
left their summit without any meaningful agreement, finding
it ever harder to cooperate and more likely to erect trade
barriers to protect their own interests.
The Group of 20 meeting of leading rich
and developing nations ended Friday in South Korea with
no solutions to longstanding tensions over trade and currency,
and with the cooperation of the 2008 financial crisis now
a distant memory.
The U.S. couldn't persuade other countries
to pressure China to stop manipulating its currency or limit
their own trade surpluses and deficits. The Americans faced
charges of doing some currency manipulation of their own
by pumping $600 billion into their economy.
The stalemate in Seoul means that trade
disputes could intensify, warns Eswar Prasad, professor
of trade policy at Cornell University. He's worried that
there "may be more open conflicts on currency matters.
This has the potential to feed into more explicit forms
of protectionism, which could set back the global recovery."
The summit was a diplomatic setback for
the United States.
China was supposed to be the villain of
the G-20 meeting. The U.S. and other countries have accused
Beijing of keeping its currency, the yuan, artificially
low to give its exporters an unfair advantage. The currency
manipulation helps Chinese exporters by making their goods
less expensive around the world, leading to charges that
cheap Chinese products cost America jobs at a time when
U.S. unemployment is stuck at 9.6 percent.
The U.S. wanted to rally other G-20 delegates
to strong-arm China over the yuan. A stronger yuan would
reduce the U.S. trade deficit with China, which is on track
to match the 2008 record of $268 billion. But the U.S. argument
was undercut by accusations that the Federal Reserve was
rigging the currency market itself.
Last week, the Fed said it would essentially
print $600 billion to jolt the U.S. economy back to life.
The Fed says its plan to buy Treasury bonds was designed
to lower long-term interest rates, spur economic growth
and create jobs. Since the Fed hinted at the policy in late
August, the Dow Jones industrials have risen 13 percent
, and interest rates on 30-year fixed-rate mortgages have
hit a record low of 4.17 percent.
But foreigners saw a more sinister intent:
to flood world markets with dollars, driving down the value
of the U.S. currency and giving U.S. exporters a price edge.
"Basically, what happened was a diplomatic
coup for China," says William Cline, senior fellow
with the Peterson Institute for International Economics.
A few months ago, countries from Brazil to Germany were
criticizing Chinese trade policies. "Fast-forward,
and now China and Germany and Brazil are blaming the United
States for causing currency problems."
Emerging economies also complained that
the Fed's bond purchases would push Treasury yields so low
that investors seeking higher returns will overwhelm their
fragile markets. The fear: Investors would sink money into
emerging market assets — currencies, stocks and other
investments. That would push up their currencies, hurt their
exporters, trigger inflation, create bubbles in stocks and
other assets and leave them vulnerable to a crash when investors
withdraw their money.
The final G-20 statement Friday endorsed
the idea that emerging markets can protect themselves from
the threat of such "hot money" by imposing controls
on the flow of capital — a measure that used to be
considered "a big no-no" and a violation of free-trade
principles, says Homi Kharas, a senior fellow at the Brookings
Institution. The trend is already starting. China and Taiwan
this week announced new capital controls.
The fear is that countries will take even
stronger steps to give themselves an advantage, creating
the risk of a currency or trade war. The U.S. House has
already passed legislation that would let the U.S. government
impose punitive tariffs on Chinese imports in retaliation
for the weak yuan, though the Senate has not followed.
Cornell's Prasad expects to see China and
other countries impose tariffs and duties, subsidize their
exporters with cheap bank financing or tax credits, bring
cases against each in the World Trade Organization and use
bogus health concerns to block some imports.
In a sign of the United States' diminished
clout at the summit, the U.S. could not even close a long-awaited
free-trade agreement with close ally and summit host South
Korea. The trade pact would slash tariffs and other trade
barriers between the two countries.
As the G-20 meeting closed, President Barack
Obama and many other leaders flew to Japan for the Asia-Pacific
Economic Cooperation summit in Yokohama, Japan, on Saturday
and Sunday.
At the height of the financial crisis in
2008 and 2009, the G-20 nations tried to present a united
front, agreeing to take steps to boost their economies,
to reform their financial systems and to reject protectionist
policies. But now that the world economy is growing again
— and China and other emerging markets are booming
— "that unity has begun to dissolve," Prasad
says. "The group is now splintering with competitive
policies taking the place of coordinated policy actions."
The result: "a situation ripe for conflict."
The G-20 itself acknowledged the problem
in its final statement: "Uneven growth and widening
imbalances are fueling the temptation to diverge from global
solutions into uncoordinated actions." But the go-it-alone
approach, the statement concluded, "will only lead
to worse outcomes for all."