In the run-up to the event, much of the spirit of co-operation that characterised the immediate aftermath of the ‘credit crunch’ two years ago appeared to have evaporated. While the USA was under pressure for running a massive trade deficit and devaluing its currency through quantitative easing, China was being similarly pressured for holding its currency at an artificially-low level.
Following talks at the summit in Seoul, South Korea, the leaders agreed to avoid ‘competitive devaluation’ and also pledged to come up with ‘indicative guidelines’ on how to correct distortions in currency and trade.
While it is to be welcomed that the heads of state at least agree on the problem, reaching a solution will not be easy. One of the biggest issues in the weakness of China’s currency, the yuan, which critics say gives the country’s exporters an unfair advantage as well as allowing the country to amass huge foreign reserves.
China has responded that it will allow the yuan to gradually appreciate, but only when global economic conditions are right. Proposals for a four per cent limit on deficits or surpluses were blocked by China and Germany – the two biggest exporters in the G20.
While other countries’ concern at the Chinese position is understandable, it is difficult to criticise them for holding their currency down when other countries, such as the USA and UK, have effectively done the same through interest rate cuts and quantitative easing.
While the immediate threat of a currency war may have receded, this issue may crop up again in future as countries’ put their own interests ahead of those of the global economy. However, the fact that governments at least recognise such an outcome would not be desirable is positive news.
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