Treasury Secretary Timothy Geithner is back in the news, urging finance ministers meeting in South Korea as the global economic powerhouse G20 – or Group of 20 – to focus more on reducing trade deficits. The call could be viewed as a subtle response to China, as investors and policymakers worldwide grew nervous over Beijing’s recent increase of interest rates. Observers warn that there is a larger trade war looming, particularly as China recently outranked Japan as the world’s second largest economy.
But, it’s also a signal of stronger belt-tightening in the industrialized world, even as unemployment and foreclosures remain high.
Geithner said finance ministers meeting in South Korea should reduce trade gaps “below a specified share” of their economies, according to an Oct. 20 letter obtained by Bloomberg News. Brazil’s real was poised for its biggest weekly drop since July after the country raised taxes on foreign inflows to stem the currency’s gain and protect exports.
“The Geithner comments overnight were a little surprising coming out looking for these targets, so the market is biding its time waiting to see how this event passes,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “People will wait for the event risk of the weekend to pass and then start selling the dollar again.”
The larger picture, however, is about concerns over stagnant economic growth and sluggish recoveries throughout the industrialized world. As the global recession lingers, countries like Greece, Britain, France and others have been leading the charge for more fiscal austerity measures despite growing public discontent and outright hostility. Andrew Busch of BMO Strategies writes in CNBC.com:
Sec. Geithner sent a letter to the G20 requesting that, “G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials.” Sec. Geithner wants deficit countries to save more, surplus countries to stop undervaluing their currencies and the IMF to act as referee on the current account target of 4%.
Essentially, both China and the United States are engaged in polices that are driving the size and scope of the global imbalances. The Geithner proposal carries no enforcement mechanism nor does it carry any agreement. While the G20 members understand each other’s positions, they unfortunately share a Babel-like economic view. More than ever, the construction of an integrated global financial and structure is at risk of having the economic recovery work stopped.
Domestic policy observers in the U.S. are watching these latest developments with much caution, especially on the heels of the Congressional midterm elections and how a potential Republican takeover could impact markets worldwide. With the global economy increasingly interconnected, experts wonder how much these moves on currency, trade deficits and surpluses will impact a stubborn unemployment rate back home.