Leaders of 20 major economies on Friday refused to endorse a U.S. push to get China to let its currency rise, keeping alive a dispute that has raised the specter of a global trade war amid criticism that cheap Chinese exports are costing American jobs.
A joint statement issued by the Group of 20 leaders including President Barack Obama and China's President Hu Jintao tried to recreate the unity that was evident when the group of rich and developing nations held its first leaders' summit two years ago during the global financial meltdown.
But deep divisions, especially over the U.S.-China currency dispute, left officials negotiating all night to draft the watered-down statement for the leaders to endorse.
After an acrimonious start, the developed and emerging nations agreed at a summit in Seoul to set vague "indicative guidelines" for measuring imbalances between their multi-speed economies but, calling a timeout to let tempers cool, left the details to be discussed in the first half of next year.
Obama made a case that he had a stronger hand on the world stage, despite his failure to push through a tougher stance on China's currency.
"It wasn't any easier to talk about currency when I was first elected and my poll numbers were at 65 percent," Obama argued at the close of the G-20 summit, after bluntly accusing Beijing of undervaluing its currency.
He contended he has now developed genuine friendships with leaders including Indian Prime Minister Manmohan Singh, German Chancellor Angela Merkel and South Korean President Lee Myung Bak — and even China's Hu.
"That doesn't mean there aren't going to be differences," the president added.
European leaders broke away for their own mini-gathering in the middle of the summit to discuss a deepening credit crisis in Ireland, a stark reminder that the consequences of the worst financial crisis since the Great Depression still posed a serious threat to global stability.
Friday's statement is unlikely to immediately resolve the most vexing problem facing the G-20 members: How to fix a global economy that's long been nourished by huge U.S. trade deficits with China, Germany and Japan.
Exports to the United States powered those countries' economies for years. But they've also produced enormous trade gaps for the U.S. because Americans consume far more in foreign goods and services than they sell abroad.
The biggest disappointment for the United States 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.
Using a slightly different wording favored by the U.S. — "competitive undervaluation" — 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. But the U.S. position has been undermined by its own recent policy of printing money to boost a sluggish economy, which is weakening the dollar.
The G-20's failure to adopt the U.S. stand has also underlined Washington's reduced influence on the international stage, especially on economic matters. Obama also failed to conclude a free trade agreement this week with South Korea.
"Instead of hitting home runs sometimes we're gonna hit singles. But they're really important singles," Obama told a news conference where leaders tried to portray the summit as a success, pointing to pledges to fight protectionism and develop guidelines next year that will measure the imbalances between trade surplus and trade deficit countries.
Obama said China's currency is an "irritant" not just for the United States but for many of its other trading partners. The G-20 countries — ranging from industrialized countries such as U.S. and Germany to developing countries like China, Brazil and India — account for 85 percent of the world's economic activity.
"China spends enormous amounts of money intervening in the market to keep it undervalued so what we have said is it is important for China" to follow a market-based system, Obama said. "We have to understand that this is not solved overnight. But it needs to be dealt with and I am confident it can be."
The leaders' inability to reach a consensus on how to identify when global imbalances pose a threat to economic stability and merely committing themselves to a discussion of a range of indicators in the first half of 2011 fell short of the progress hoped for going into the summit.
"They decided just to put down a lot of laudable objectives as the conclusion of the meeting and hope that they can do better, that more can be accomplished in future meetings," Tim Condon, head of research at ING Financial Markets in Singapore told Reuters.
Destructive protectionist policies
The dispute over whether China and the United States are manipulating their currencies 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. A law the United States passed in 1930 that raised tariffs on imports is widely thought to have deepened the Great Depression by stifling trade.
The possibility of a currency war "absolutely" remains but the nations now have the tools to reduce the intensity of the standoff, said Brazilian Finance Minister Guido Mantega.
The G-20 leaders also pledged to move toward more market-determined exchange rate systems. Although directed against China, the statement leaves significant room for interpretation since the language is vague and does not impose any timeframe for the adoption of exchange rates determined by supply and demand.
The U.S. says a higher-valued yuan would make Chinese exports costlier abroad and make U.S. imports cheaper for the Chinese to buy. It 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.
U.S. business lobbies say that a cheaper yuan costs American jobs because production moves to China to take advantage of low labor costs and undervalued currency.
Other countries are irate over the Federal Reserve's plans to pump $600 billion into the sluggish American economy. They see that move as a reckless and selfish scheme to flood markets with dollars, driving down the value of the U.S. currency and giving American exporters an advantage.
Some critics warn that U.S. interest rates kept too low for too long could inflate new bubbles in the prices of commodities, stocks and other assets.
Developing countries like Thailand and Indonesia fear that falling yields on U.S. government bonds will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.
'Persistently large imbalances'
The G-20 leaders said they will pursue policies to reduce the gaps between nations running large trade surpluses and those running deficits.
The "persistently large imbalances" in current accounts — a broad measure of a nation's trade and investment with the rest of the world — would be measured by what they called "indicative guidelines" to be determined later.
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."