Leaders of 20 major economies on Friday refused to back a U.S. push to make China boost its currency's value.That will keep alive a dispute that raises fears of a global trade war amid criticism that cheap Chinese exports are costing American jobs.
A joint statement issued by the leaders including President Barack Obama and China's Hu Jintao tried to recreate the unity that was evident when the Group of 20 rich and developing nations held its first summit two years ago during the global financial meltdown.
But deep divisions, especially over the U.S.-China currency dispute, left G-20 officials negotiating all night to draft a watered-down statement for the leaders to endorse.
"Instead of hitting home runs sometimes we're gonna hit singles. But they're really important singles," Obama told a news conference after the summit.
Other leaders also tried to portray the summit as a success, pointing to their pledges to fight protectionism and develop guidelines next year that will measure the imbalances between trade surplus and trade deficit countries.
The G-20's failure to adopt the U.S. stand has underlined Washington's reduced influence on the international stage, especially on economic matters. In another setback, Obama also failed to conclude a free trade agreement this week with South Korea.
Rejecting a Stronger Wording
The biggest disappointment for the U.S. was the pledge by the leaders to refrain from "competitive devaluation" of currencies. Such a statement is of little consequence since countries usually only devalue their currencies -- making it less worth against the dollar -- in extreme situations like a severe financial crisis.
The statement decided against using a slightly different wording favored by the U.S. -- "competitive undervaluation," which would have shown the G-20 taking a stronger stance on China's currency policy. The crux of the dispute is Washington's allegations that Beijing is artificially keeping its currency, the yuan, weak to gain a trade advantage.
U.S. business lobbies say a cheaper yuan costs American jobs because production moves to China to take advantage of low labor costs and undervalued currency. A stronger yuan would shrink the U.S. trade deficit with China, which is on track this year to match its 2008 record of $268 billion, and encourage Chinese companies to sell more to their own consumers rather than rely so much on the U.S. and others to buy low-priced Chinese goods.
But the U.S. position has been undermined by its own central bank's decision to print $600 billion to boost a sluggish economy, which is weakening the dollar.
Also, developing countries like Thailand and Indonesia fear that much of the "hot" money will flood their markets, where returns are higher. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.
Obama said China's currency policy is an "irritant" not just for the U.S. but for many of its other trading partners. The G-20 countries -- ranging from industrialized nations such as U.S. and Germany to developing ones like China, Brazil and India -- account for 85% of the world's economic activity.
"China spends enormous amounts of money intervening in the market to keep [the yuan] undervalued, so what we have said is it is important for China in a gradual fashion to transition to a market-based system," Obama said.
The dispute is threatening to resurrect destructive protectionist policies like those that worsened the Great Depression in the 1930s. The biggest fear is that trade barriers will send the global economy back into recession. The possibility of a currency war "absolutely" remains, said Brazilian Finance Minister Guido Mantega.
Focusing on Process, Not Results?
Friday's statement is also unlikely to resolve the most vexing problem facing the G-20 members: how to fix a global economy that's long been marked by huge U.S. trade deficits with exporters like China, Germany and Japan. Americans consume far more in foreign goods and services from these countries than American companies sell abroad.
The leaders called for the guidelines to be developed by the G-20, along with help from the International Monetary Fund and other global organizations, and for finance ministers and central bank governors to meet in the first half of next year to discuss progress.
Analysts were not convinced.
"Leaders are putting the best face on matters by suggesting that it is the process that matters rather than results," said Stephen Lewis, chief economist for London-based Monument Securities. "The only concrete agreement seems to be that they should go on measuring the size of the problem rather than doing something about it."