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Economic tensions likely to fester after G-20 summit

President Barack Obama has suggested China is undervaluing its currency, helping exporters to make goods cheaper. The U.S., however, is facing similar charges.

Associated Press

President Barack Obama has suggested China is undervaluing its currency, helping exporters to make goods cheaper. The U.S., however, is facing similar charges.

WASHINGTON — The world's most important economies are going home to look after themselves, without any meaningful agreement, finding it ever harder to cooperate and more likely to erect trade barriers to protect their own interests.

The Group of 20 meeting of leading rich and developing nations ended Friday in South Korea with no solutions to long-standing tensions over trade and currency, and with the cooperation of the 2008 financial crisis now a distant memory.

The United States couldn't persuade other countries to pressure China to stop manipulating its currency or limit their own trade surpluses and deficits. The Americans faced charges of doing some currency manipulation of their own by pumping $600 billion into their economy.

The stalemate in Seoul means that trade disputes could intensify, warned Eswar Prasad, professor of trade policy at Cornell University. He's worried that there "may be more open conflicts on currency matters. This has the potential to feed into more explicit forms of protectionism, which could set back the global recovery."

The summit was a diplomatic setback for the United States.

China was supposed to be the villain of the G-20 meeting. The U.S. and other countries have accused Beijing of keeping its currency, the yuan, artificially low to give its exporters an unfair advantage. The currency manipulation helps Chinese exporters by making their goods less expensive around the world, leading to charges that cheap Chinese products cost America jobs at a time when U.S. unemployment is stuck at 9.6 percent.

The U.S. wanted to rally other G-20 delegates to strong-arm China over the yuan. A stronger yuan would reduce the U.S. trade deficit with China, which is on track to match the 2008 record of $268 billion. But the U.S. argument was undercut by accusations that the Federal Reserve was rigging the currency market, too.

Last week, the Fed said it would essentially print $600 billion to jolt the U.S. economy. The Fed says its plan to buy Treasury bonds was designed to lower long-term interest rates, spur economic growth and create jobs. Since the Fed hinted at the policy in late August, the Dow Jones industrials have risen 13 percent, and interest rates on 30-year fixed-rate mortgages have hit a record low of 4.17 percent.

Foreigners saw a more sinister intent: to flood world markets with dollars, driving down the value of the U.S. currency and giving U.S. exporters a price edge.

"Basically, what happened was a diplomatic coup for China," says William Cline, senior fellow with the Peterson Institute for International Economics. A few months ago, countries from Brazil to Germany were criticizing Chinese trade policies. "Fast-forward, and now China and Germany and Brazil are blaming the United States for causing currency problems."

Cornell's Prasad expects to see China and other countries impose tariffs and duties, subsidize their exporters with cheap bank financing or tax credits, bring cases against each other in the World Trade Organization and use bogus health concerns to block some imports.

In a sign of the United States' diminished clout at the summit, the U.S. could not even close a long-awaited free-trade agreement with close ally and summit host South Korea. The trade pact would slash tariffs and other trade barriers between the two countries.

Economic tensions likely to fester after G-20 summit 11/12/10 [Last modified: Monday, November 7, 2011 1:21pm]
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