x Abu Dhabi, UAEThursday 18 January 2018

Trade imbalance unlikely to be fixed at G20 talks

As tensions simmer before the two-day gathering of G20 leaders in Seoul, China and the US are locked in a dispute over trade and currency values.

SEOUL // Larry Summers, the top financial adviser to the US President Barack Obama, has predicted a prolonged struggle to bring about the "global rebalancing" for which his country is pressing at this week's Group of 20 (G20) summit.

As tensions simmer before tomorrow's two-day gathering of global leaders in the South Korean capital, China and the US are locked in a dispute over trade and currency values.

At the heart of the problem is the recognition that a decades-long economic order centred on the US buying exports from the rest of the world and running up huge trade deficits while countries such as China, Germany and Japan accumulate vast surpluses is no longer tenable.

During the build up to the G20 meeting of leading and emerging economies, the issue has intensified.

Washington has accused Beijing of keeping the yuan artificially weak against the dollar to boost its exports.

In turn, emerging markets have blamed their strengthening currencies on Washington's stimulus programme. The latest measure was the US Federal Reserve's decision last week to pump US$600 billion (Dh2.2 trillion) into government bonds.

"The imbalances will not be fixed," said Mr Summers. "Reaching an agreement on when to start the process of dealing with the imbalance would be a significant achievement. You are going to see continuing discussion."

Last week, Paul Volcker, another senior economic adviser to Mr Obama and a former US Federal Reserve chief, spelled out the problems ahead. "The present world economy is unbalanced," he said. "It's unbalanced in a way that can't persist if we are going to have a thriving global economy."

Analysts have suggested the Seoul summit may end with a face-saving document that puts off real solutions to the next G20 gathering in France next year.

Lee Myung-bak, the South Korean president, has been basking in his role as conference host but is wary of the summit turning into a "talk shop" with few substantial results.

Shin Hyun-song, a senior adviser to Mr Lee, said the leaders would not set any specific target on current accounts surpluses, which would mark the death knell for an earlier US notion to limit surpluses or deficits to a band within 4 per cent of GDP.

Mr Shin told Bloomberg "just a raw current account can be a very misleading number" and "being fixated on a particular number is not desirable".

Rather than come up with an exact number, the leaders are expected simply to talk vaguely about desirable "guidelines" that would avoid any specific commitment.

Timothy Geithner, the US Treasury secretary, first considered the idea of setting a 4 per cent limit but backed down after meeting finance ministers from the Asia-Pacific Economic Co-operation Group last weekend.

"The problem is that we let the imbalances grow so large that there's no easy fix now," Bill Belchere, the chief global economist for Mirae Asset Securities in Hong Kong, told the Associated Press. "The adjustments necessary are politically palatable to no one."

South Korea, to a far lesser degree than China, has also been the target of criticism from the US for setting the won currency at an artificially low rate.

Although the won fluctuates from day to day, the South Korean finance ministry was suspected of manipulating its value by threatening to penalise banks that failed to control the volatility of currency derivatives.

Mr Shin denied the enforcement of regulations was an attempt to keep the won from rising in value. Rather, he said, regulators needed to take "prudential measures that ensure the stability" of markets. He acknowledged, however, the possibility of "spillover effects into exchange rates".