G20 to confront trade imbalances

The United States looked set to win G20 backing Saturday to tackle groaning trade imbalances as the world’s biggest industrial nations vowed to avoid tit-for-tat currency devaluations.

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But after all-night talks among senior officials in South Korea, amid fears of a global “currency war”, a draft G20 text reported by Dow Jones Newswires did not set specific targets on trade for the United States, China and others.

In the draft statement, Group of 20 finance ministers would agree to refrain from “competitive” currency devaluations, and aim for “market-determined exchange rates”, an official told Dow Jones.

The G20 would commit to “pursue a full range of policies conducive to reducing excessive imbalances” and “maintaining current-account imbalances at sustainable levels”, according to the reported statement.

The International Monetary Fund would win greater power to oversee G20 commitments, through reports that investigate how a country’s economic policies can damage major trading partners.

The draft had won widespread backing from advanced economies, while Chinese officials “left the room comfortable enough” with the language, the official told Dow Jones as the ministers prepared to end their meeting Saturday evening.

Two years after the start of the world’s worst financial crisis since the 1930s, fears are mounting that major debtors such as the United States and big exporters such as China could relapse into crippling trade protectionism.

South Korean Finance Minister Yoon Jeung-Hyun had urged his G20 guests to exploit their collective heft on currency disputes, IMF reform and ensuring mega-banks can no longer imperil the world economy.

History demanded that the group build “a new post-crisis international economic order”, he told the meeting Friday, looking ahead to a November 11-12 summit in Seoul of G20 leaders including the US and Chinese presidents.

At the weekend talks, US Treasury Secretary Timothy Geithner urged nations running big current-account surpluses to change their exchange-rate policies. He did not name the nations but China seemed the clear target.

He suggested that countries should aim to reduce surpluses or deficits to a targeted share of gross domestic product in the coming years. Officials said Geithner’s target would be four percent of GDP by 2015.

China’s current account surplus stood at 4.9 percent of GDP in the first half, and targeting the surplus would be an indirect way for Washington to cajole Beijing into letting its currency appreciate.

But other major exporters such as Germany would also be affected by the Geithner plan, and are already unhappy at being asked to remedy failings in the global financial system that were exposed by a US-generated crisis.

The draft text reportedly made no mention of numerical targets for the current account, which Japanese Finance Minister Yoshihiko Noda had said were “not realistic”.

The US suggestion for binding targets ran into broad opposition at the G20, delegates said, with Australian Treasurer Wayne Swan expressing wariness about a “one-size-fits-all” approach.

Germany insisted that its own current account surplus would be treated as part of the European Union’s overall balance, and not separately, a source said.

But the G20, which rose to summit-level prominence during the 2008-09 crisis, was under pressure from the financial markets not to leave South Korea empty-handed ahead of the leaders’ meeting in three weeks.

With a super-loose US monetary policy weakening the dollar, G20 economies including Japan, South Korea, Brazil and Indonesia have intervened in recent weeks to curb an alarming rise in their currencies.

But for the United States, which is in the throes of election season, China’s firm grip on the yuan’s value is the root of the problem. Critics say that policy gives China’s export machine an unfair edge.

“I think there’s a recognition that this currency issue has to be addressed,” Canadian Finance Minister Jim Flaherty said Friday.

“If it’s not, then we know from history the path that we end up going down, which is not good for any of us,” he said.