Last week, US Treasury Secretary Timothy Geithner floated a trial balloon prior to the G20 Finance Ministers meeting scheduled for the weekend. In a letter addressed to all twenty of the G20 member nations and subsequently released to the media, Geithner called for targets limiting currency account surpluses.
Describing these targets as necessary to ensure the Ã¢â‚¬Å“orderly re-balancing of global demandÃ¢â‚¬Â, Geithner also encouraged the G20 member nations to refrain from engaging in deliberate currency devaluation as a way to boost exports at the expense of other nations.
The current account balance is the difference between the money that flows into a country, and the money that leaves. While there are other factors included in the current account balance, most of this money flow is attributed to international trade making this a common indicator to measure the earnings from exports. A country with a negative account balance imports more than it exports, while a positive account balance points to a trade surplus.
Current Account Targets
In his proposal, Geithner called for those countries with a current account surplus to limit the surpluses to no more than four percent of the countryÃ¢â‚¬â„¢s Gross Domestic Product (GDP). In fairness, there was some muted praise for the idea, but limiting current account surpluses was rejected out-of-hand by several countries, and most notably, by Germany and China.
This is hardly surprising as both countries are highly dependent on their exports to fuel their respective economies. But while weÃ¢â‚¬â„¢re being honest here, letÃ¢â‚¬â„¢s call GeithnerÃ¢â‚¬â„¢s proposal for what it really is Ã¢â‚¬â€œ an attempt to limit ChinaÃ¢â‚¬â„¢s exports that have long been largely funded by the American consumer.
In 2008, ChinaÃ¢â‚¬â„¢s current account surplus topped $426 billion; this worked out to about 9.4 percent of GDP. In 2009 however, ChinaÃ¢â‚¬â„¢s exporters were feeling the pinch of the global recession and exports declined dramatically to $284.1 billion or 5.8 percent of GDP. 2010 is following the previous yearÃ¢â‚¬â„¢s storyline with the first half surplus sitting at $124.2 billion and 4.9 percent of ChinaÃ¢â‚¬â„¢s overall GDP. As such, 2010 will be hard-pressed to improve on the previous yearÃ¢â‚¬â„¢s disappointing sales.
Given the results of the last two years, it appears that ChinaÃ¢â‚¬â„¢s current account surplus is well on the way to meeting GeithnerÃ¢â‚¬â„¢s proposed limit. Rest assured however, China is not content with the current export numbers and is certainly not prepared to accept any target that further limits its exports. If anything, China will act to boost exports and this will be done by keeping the yuan in check.
How will the US respond? Well, like the administrations that have preceded it, the Obama camp will continue to spill much ink forming its position that China unfairly targets the US consumer by manipulating the yuan to keep the true cost of its exports in check. What is more noteworthy however, is that unlike the past few administrations, the House recently passed a bill giving the government the power to impose tariffs and other fees on goods imported into the country. If approved by the Senate, the bill could receive Presidential approval and become law late in the year. Some observers worry that this could mark the beginning of a more serious trade spat with China and other emerging nations looking to access the US market.
Despite the rejection of current account targets, Geithner did manage to extract a tepid Ã¢â‚¬Å“pledgeÃ¢â‚¬Â from the attending finance ministers to refrain from deliberately devaluing currencies in order to maintain trade advantages. Of course, there are no targets or formal guarantees around any of this, so it is likely the agreement is not worth the paper it is written. Assuming of course that it was actually written on paper, which apparently, it wasnÃ¢â‚¬â„¢t.
To call this a Ã¢â‚¬Å“truceÃ¢â‚¬Â that will prevent the likelihood of a currency / trade war is giving the pledge far too much credit. China may allow the yuan to appreciate slightly as it did last week, but you can be sure that China will do what it feels is necessary to keep the yuan low against the US dollar thereby maintaining its trade advantage.
The US too will soon engage in its own form of currency manipulation. Of course, it will not call it currency manipulation. No, the US plans to follow through with the much-hyped second round of quantitative easing dubbed by some as Ã¢â‚¬Å“QE2Ã¢â‚¬Â.
Given the likelihood of further stimulus spending and the negative impact it will have on he dollar, Geithner is being a little disingenuous by targeting ChinaÃ¢â‚¬â„¢s policy of currency manipulation. The government can spin this any way it likes, but for AmericaÃ¢â‚¬â„¢s trading partners, it will be seen as nothing more than an obvious attempt to weaken the dollar at the expense of others.