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The G20 Summit and the exchange rate war between USA and China The leaders of the world’ s 19 leading national economies plus the European Union held another summit this year in Seoul this month trying to bring once again both the developed and the emerging countries around a single table in order to address more effectively global economic imbalances between cash-rich exporters and debt-burdened importers. The issue that attracted most interest and concern was the so called “currency war”, a series of national efforts from around the globe to promote economic growth through competitive devaluation of currencies. A devalued currency stimulates exports and attracts capital inflows. Industrialized and export oriented China seems to be one of the leaders to this policy. The devalued renmibi makes Chinese exports more attractive and has a negative impact on the American and European products to the global markets. It is true though that huge capital reserves due to trade revalue the exchange rate, which means that normally the yuan should be stronger. The United States accuses China of intervening to the economy (and buying dollars) in order to maintain the yuan devalued. Fearing that the (sinoamerican) currency conflict would affect world growth, the G20 leaders tried to tackle trade imbalances declaring some indicative guidelines which are outlined in the Seoul Declaration, the official document of the G20 2010 summit in Seoul, South Korea. "Exchange rates must reflect economic realities…Emerging economies need to allow for currencies that are market-driven. This is something that I raised with President Hu of China and we will closely watch the appreciation of China's currency” said US president Barak Obama. Indeed, there is some progress in this issue since China is slowly but steadily moving towards a market-based exchange rate and increasing domestic consumption, trends that will reduce its trade surpluses. As Chinese officials argue though, the reform of the currency regime is a national matter that takes time and needs global economic stability. The United States appeared to be disappointed, since its most important propositions at the summit were ignored. The first posed a 4% limit on national trade deficits and surpluses and the second called on nations to avoid competitive currency undervaluations. Both propositions would have put more pressure on China, the leading world exporter with an undervalued currency. The G20 final statement was softer calling economies to avoid competitive devaluations…This was the “lowest common denominator”.

During the talks though the US Federal Reserve decided to revive the domestic economy buying 600 billion dollars worth treasuries. This move was a major irritant at the G20

meeting. Former Fed Chairman Alan Greenspan said the United States was pursuing a policy of weakening the dollar. Although U.S. Treasury Secretary Timothy Geithner denied that accusation, arguing that the USA will never weaken its currency in order to gain competitive advantage or to grow the economy, in fact this move would help America tackle its trade deficit and reduce unemployment. Nevertheless, it would cause inflation and again slow down American exports. Finally, this move that weakens the dollar affects Europe negatively for the most part since the Chinese yuan is pegged to the dollar since late 2008, when the global economic crisis knocked on China’s door. Trade surpluses though seem to be as dangerous as deficits. Deficits slow down growth and increase unemployment, but surpluses result to inflation pressures. China does not refuse that consumer price inflation hit a 25-month high in October 2010. As economics teaches us, the best way to address trade imbalances is through organising domestic demand and investments. Americans should avoid excessive borrowing and spending and should save more. The Chinese on the other hand should save less and consume more, which would enable them to tackle the global decrease in demand due to the international recession. Nevertheless, US saving will lead to higher unemployment and Chinese spending will finally lead to inflation. These are the two faces of Janus. China is even arguing that the appreciation of the yuan could be bad for the economy since the economic crisis is not over yet while China is increasing its imports of raw materials and other products essentials for its industries. The Seoul Summit satisfied for the most part the emerging economies, such as China, since it better reflected their national concerns. First of all, the G20 restructured global economic governance by including emerging economies in the talks (the G8 scheme was overruled). Second, the G20 ministerial meeting shifted the IMF quota shares and changed the board composition, a fact that better reflected global economic realities. Emerging and developing countries gained quota shares of over 6% and two seats at the executive board. Third, a new concept of “macroprudential measures” was introduced that enables emerging economies with adequate reserves and overvalued flexible exchange rates to address the negative impact of excessive capital flows. This new concept is primarily a policy to stabilise financial markets than to control capital flows. This last point is very important since it reminds us of global currency crises that followed the American subprime crisis of 2007. Although emerging markets reacted prudently amassing reserves, the shadowy banking system infected the currency market via capital overflows. On the sidelines, the United States and South Korea failed to reach an accord on a free trade deal, an embarrassment to both countries' leaders. “WHAT we promise, we will deliver” was one of the shorter sentences in the G20

leaders’ declaration released after their summit in Seoul on November 12th. It reflects perfectly the global economic situation and the summit’s achievements. It was not a breakthrough, but it reflected the shift of economic power from the west to the east. The USA was not satisfied, the emerging economies with China leading were satisfied and Europe was almost absent.

The G20 Summit and the exchange rate war between USA and China