US drops call for trade surplus target amid dollar spat

Image caption,
All smiles: the Chinese and US finance ministers both avoided hostile rhetoric

US Treasury Secretary Tim Geithner has tried to calm trade tensions at an Asia Pacific finance ministers' meeting.

He dropped an earlier call for G20 countries to cut their trade imbalances to less than 4% of their output.

The policy was seen as targeting China's substantial trade surplus.

Meanwhile, two separate Chinese finance ministers made sharply contrasting comments about quantitative easing by the US Federal Reserve, with one saying it would cause instability.

Speaking ahead of a G20 heads of government summit in Seoul later this week, Mr Geithner said the US only wanted "indicative guidelines" for current account imbalances, but added that "it's not something that can reduce easily to a single number".

At a meeting of G20 finance ministers last month, Mr Geithner advocated that countries should aim for 4% of economic output as a "benchmark for the future" for such trade imbalances.

The targets would have required surplus countries like China to do more to boost domestic import demand and curtail exports, while deficit countries like the US would need to do the opposite.

China's current account deficit is currently 5% of its gross domestic product.

Mixed message

Mr Geithner was initially met by supportive comments from his counterpart, Chinese finance vice minister Wang Jun, whom he had just met at the Asia-Pacific Economic Co-operation (Apec) forum event in Japan.

Mr Wang gave his backing to the US Federal Reserve's controversial decision to restart quantitative easing - effectively printing dollars to buy up US government debt.

He said the move would help to boost economic growth in the US, which is important to the global recovery.

But Mr Wang's comments were seemingly contradicted later by one of his own colleagues.

Image caption,
Minister Zhu Guangyao has a different view of the Fed's decision

Another Chinese vice finance minister - Zhu Guangyao - said the decision to print $600bn (£373bn) more cash would destabilise world markets.

"[The US] does not recognise, as a country that issues one of the world's major reserve currencies, its obligation to stabilise capital markets," said the minister speaking at a press conference.

"Nor does it take into consideration the impact of this excessive fluidity on the financial markets of emerging currencies."

Defending the Fed

It follows recent criticism of the Federal Reserve from other developing countries, like Brazil and South Africa, as well as from German finance minister Wolfgang Schaeuble.

In response, US President Barack Obama came out in support of the Federal Reserve's decision on Monday.

"The Fed's mandate, my mandate is to grow our economy," he said, speaking on Monday during a state visit to India. "That is not just good for the United States, that is good for the world as a whole."

The criticisms of the Fed are a deflection from the real issue, according to George Magnus, senior economist at UBS.

Surplus countries like Germany and China need to "restructure their economies in a way which is more fitting for a world in which the big economies like the United States and Britain are trying to escape from the debt crisis," he told the BBC World Service.

Hot money

At the heart of the dispute are the differing economic fortunes of the US and of Asian exporters.

The Federal Reserve wants to reignite the US's flagging recovery, as unemployment remains stuck near 10% and inflation threatens to become negative.

A major drag on the US recovery is its continuing trade deficit - meaning that foreign exporters like China benefit disproportionately from expanding US demand.

China and other exporter countries buy up US dollars to hold as currency reserves. But this tends to push the dollar's value up, perpetuating the US trade deficit.

The Fed's quantitative easing policy is likely to depress the value of the US dollar, making US exporters more competitive at the expense of foreign exporters.

But the move may also encourage speculators to borrow in dollars and invest in higher growth developing countries.

Image caption,
Mr Zoellick thinks that gold could replace the dollar

And those countries fear that such "hot money" inflows will lead to destabilising asset bubbles and financial crisis, as occurred in the 1990s.

Gold standard

One solution - proposed by World Bank President Robert Zoellick in the Financial Times on Monday - is to return to a modern version of the gold standard.

Unlike the original gold standard - abandoned during the Great Depression of the 1930s - he does not advocate rigidly fixing the value of currencies against the price of gold.

Instead, Mr Zoellick suggested that a future system of flexible exchange rates should reference gold - instead of the US dollar - as a common point of valuation.

The implication of Mr Zoellick's suggestion is that countries like China would rely much less on buying US dollars, and more on buying gold and other currencies to build up their reserves.

"I would subscribe to Mr Zoellick's comments about the urgency of getting on with this," Mr Magnus at UBS told the BBC.

"The world system is becoming very chaotic and we need to kind of reinstitute a set of rules and behavioural codes which govern the international relations between countries," he said, adding that he had "absolutely zero expectation that anything like this will be forthcoming at the G20 summit".

Free trade area

Mr Geithner and Mr Wang were speaking at a meeting of finance ministers from the 21 Apec countries at Kyoto in Japan.

The Apec finance ministers agreed in a communique that countries would "move towards more market-determined exchange rate systems that reflect underlying economic fundamentals and will refrain from competitive devaluation of currencies".

The ministers also advocated the long-term aim of creating a free trade area to replace the more than 100 bilateral and mini free-trade-area agreements already signed amongst them.

"Rather than doing bilaterally or with a small number of countries, free trade deals work better when more countries get involved," said Haruhiko Kuroda, president of the Asian Development Bank.

Apec countries account for 53% of global economic output, and 44% of global trade. Apec heads of government will hold a summit this weekend.

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