Decoding the G-20 Drama
There was a big brouhaha at the G-20 summit this week over what they’re dryly calling “global trade imbalances.”
In the simplest terms, what this boils down to is this: Americans buy too much stuff from China. The Chinese stuff is artificially cheap because of currency manipulation, but also because of labor repression that keeps wages down. And because wages are so low, Chinese people don’t buy very much stuff, so the money from exports piles up.
China is expected to have a trade surplus of $270 billion this year, while the United States is expected to have a trade deficit of $466 billion. Other countries have trade imbalances too, but these are the biggies.
The trade deficit hurts the U.S. economy because money spent on imports is money not spent on U.S. products that support jobs in this country. Also, to fund this deficit, the United States has to borrow money from abroad. And if the deficit keeps growing, the day may come when foreign investors are no longer willing to lend.
Last month, Treasury Secretary Timothy Geithner tried to get the other G-20 governments to agree to limit their trade imbalances to no more than 4% of GDP. How did he pick 4% as the target? Well, it’s probably no mere coincidence that China’s surplus is expected to exceed that mark this year (4.7%), while the U.S. deficit is expected to fall below it (3.2 %). Geithner was basically told to take a hike.
So what’s a U.S. policymaker facing a nearly 10% unemployment rate to do? One option would be to reinvigorate U.S. manufacturing through targeted public investment. You could pay for it by increasing taxes on the ultra-rich or by taxing financial speculation. Sadly, the outcome of the mid-term election likely put the kibosh on that kind of stimulus spending, at least for the next two years.
Instead, the Fed, which doesn’t have to worry about Tea Party opposition, did what’s called “quantitative easing” – another unnecessarily abstract term that basically means they’re printing money, to the tune of $600 billion. Their idea was that all this cash will lubricate the wheels of the American economy, get credit flowing again, and create jobs.
This is largely based on faith. As Brazilian Finance Minister Guido Mantega put it, “It doesn’t help things to be throwing dollars from a helicopter.” Brazil and other fast-growing emerging markets are worried that the Fed-created cash, instead of financing U.S. job creation, will slosh into their economies, where interest rates are higher. This would drive up the value of their currencies, making their exports less competitive. Wolfgang Schaeuble, the finance minister of Germany, which is a trade surplus country like China, declared the Fed’s action “clueless.”
Such tough jabs are unusual among finance ministers. What seemed to really get their blood boiling was the fact that the Fed announced the action without giving the other governments as much as a heads up. This week’s G-20 summit in Seoul, Korea concluded without any meaningful agreement, other than a timid pledge to “refrain from competitive devaluation of currencies.” So much for the G-20 fulfilling its self-declared status as the “premier forum for international economic cooperation.”
Meanwhile, to deal with the surge of short-term “hot” money that could drive up the value of their currencies, Brazil, Taiwan, and several other countries are imposing various forms of controls on capital inflows. However, this is not really an option for the 52 countries that have signed U.S. trade or investment treaties which severely restrict the use of this policy tool. If they violate these restrictions, they run the risk of facing expensive lawsuits from affected foreign investors.
Hopefully the Obama administration will now recognize that bans on capital controls are outmoded and work to revise them. As Dani Rodrik, of Harvard University puts it, “capital controls are now orthodox.”
While giving governments the authority to use policy tools at the national level to control capital flows is critical, this patchwork approach is not ideal. We need a new international monetary system that can help prevent the kind of “currency wars” we’re seeing today. That’s something French President Nicolas Sarkozy plans to put at the center of the G-20 agenda now that he has taken over the presidency of that body for the next year. Let’s hope he can get the other leaders to stop squabbling and take the challenge seriously.