With France and China already plotting to replace the US dollar as the world’s reserve currency at the next G20 summit in Cannes, don’t count on this international forum’s lasting too much longer.
The huge fiscal divisions that were already in evidence at the G20 summit in Toronto last June morphed into even bigger and more rancorous divisions on exchange rates at the recent Seoul summit. With the US at China’s throat about its record trade surplus, and China at the US’s throat over the Federal Reserve Board’s blatantly devaluationist policy of quantitative easing, it’s little wonder nothing was accomplished.
More importantly, this likely marks the end of the great China–US economic accord, which defined the apex of globalization. That once virtuous and self-reinforcing circle of trade and capital flows, whereby Chinese savings invested in the Treasuries market effectively funded US consumer demand for Chinese exports, is clearly in both countries’ gun sights these days.
At the summit in Seoul, gone was any pretense of a coordinated policy approach to manage the global economy. Coordinating national economic policies may once have been easy, when everybody’s economy was mired in the deepest recession of the entire post-war era. But very disparate rates of economic recovery across the G20 have spun equally disparate policy responses from member countries.
And the more anemic the recovery, the more disparate the policy responses have been. Record fiscal stimulus and printing money have become the new orthodoxies in American economic policy, even as most of the US’s trading partners are reining in their fiscal deficits and hiking interest rates.
What’s increasingly clear is that growth imbalances are going to increase, not decrease, in the future, and that the G20 is hardly going to be the forum for policy arbitration between countries. If you thought the growth gap between emerging market economies and the OECD ones was big before the recession, you can expect it to be much larger in the future, in view of the craters of debt that the recession has left behind in the American and European economies.
With no remedies in sight, look for more trade friction in the future. US Treasury Secretary Timothy Geithner’s proposal to target countries’ current account or trade balances is only the opening salvo in potential future trade wars. If the Fed’s printing presses don’t devalue the greenback enough, there are always tariff walls to be rebuilt.
If the discussions seemed strained in Seoul, listen carefully to the tone from Cannes in six months’ time. At the rate things are going at G20 summits these days, the next one’s agenda will have the Smoot–Hawley Tariff of the 1930’s on it.
