The G20 Summit and the Rise and Fall of G2 Power
China Times editorial (Taipei, Taiwan, ROC)
November 16, 2010
On the 12th of this month, under the dark cloud of a currency war, the Group of Twenty (G20) Summit adjourned its meeting in Seoul, South Korea. In the end, summit leaders issued a vaguely worded statement. They agreed to adopt a more market-oriented exchange rate system in order to avoid a currency war and trade protectionism. Discussion of the specifics were postponed until next year. The vague statement is unlikely to resolve tensions between the major currencies, or improve global economic imbalances. It also reflects the rise of Mainland China, and the decline of US power.
The Group of Twenty is comprised of the world's 19 largest economies, plus the European Union. Following the outbreak of the financial tsunami, leaders of the G20 met in Washington for the first time, seeking a way to resolve the financial crisis. The G20 has replaced the original G8, and become a major global economic forum. During the financial crisis, national leaders experienced a heightened sense of crisis. They were willing to work together to resolve difficulties. As a result last year's summit in London arrived at a number of specific agreements designed to prevent the global economy from falling into a Great Depression. The Seoul summit was the fifth Leadership Conference held since the outbreak of the financial crisis. As each of the nations moves towards recovery, selfish considerations have paradoxically made concrete agreements more difficult. Steven Harper, Prime Minister of Canada, said bluntly that the summit failed to address any critical problems.
This time the leaders of both Mainland China and the US confronted each other over exchange rates. This became the focus of the summit. President Barack Obama once again applied pressure on the RMB exchange rate, but failed to elicit an explicit response. Mainland President Hu Jintao stressed that the Mainland would adopt gradual exchange rate reform. He also criticized U.S. Federal Reserve monetary policy for its second wave of quantitative easing. This actually made for a weaker dollar and triggered the large scale entry of hot money into emerging markets. He called on the United States as a major reserve currency economy to adopt a responsible monetary policy, and to consider the interests of emerging economies. Also, the United States had previously proposed a quantitative indicator to avoid competition over currency devaluation. It had proposed limiting the GDP current account surplus or deficit to approximately four percent. In the end this motion came to nothing due to opposition from Mainland China and Germany.
During Barak Obama's recent ten-day Asian trip, the main theme was economic and trade issues. But it ran aground during negotiations on the RMB exchange rate issue and the bilateral US-South Korea Free Trade Agreement. This suggests that U.S. influence in the international arena is gradually weakening. The Wall Street Journal noted that Obama's setback in Seoul was due mainly to the weak U.S. economic recovery and the defeat of the Democratic Party in the midterm elections. This weakened the United States as a global economic leader. The New York Times noted that the compromise-filled "Seoul Declaration" reflects the rise of Mainland Chinese influence.
This year for the first time, Mainland China's economy surpassed Japan's. It has now become the world's second largest economy. It is not merely the world's largest factory. It is also the world's largest market. According to statistics, last year it accounted for nearly half the world's consumption of coal, zinc, and aluminum. It consumes twice as much iron and steel as the US, the European Union, and Japan combined. China is also the world's largest automotive and mobile phone market.
According to the International Monetary Fund, Mainland China will account for one-fifth of the world's economic growth this year. During the financial crisis, the U.S. entered an economic recession. Mainland China on the other hand, maintained its growth. Although Mainland China still cannot replace the United States, the fact that the United States failed to make a breakthrough on trade issues during the G20 summit underscores Mainland China's growing international influence.
The Fed's quantitative easing has become everyone's favorite target. This has weakened the United States' demands for RMB appreciation. Even host nation South Korea expressed concern. This is one reason US-South Korea free trade negotiations failed to reach any agreement. The International Monetary Fund has long opposed capital controls. Now however, it favors capital controls for emerging countries, when necessary. The "Seoul Declaration" in particular, hinted that emerging nations could adopt prudent capital controls measures to avoid exchange rate volatility caused by hot money. This endorsement handed emerging nations their most powerful weapon in their fight against hot money. It also showed how intense dissatisfaction was among emerging nations for the United States' policy of quantitative easing.
Obama declared the Seoul summit a success. But U.S. economic power is undeniably waning in the wake of the financial crisis. This was the reason for the setbacks Obama suffered. On the other hand, on international economic and trade issues, Mainland China's voice is increasingly influential. Without Mainland China's cooperation it is difficult to reach a consensus. As we monitor the rise of Mainland China and the decline of U.S. power, we realize that power is never permanent. Nations will cooperate. They will also compete and conflict. Within the fabric of the international trade system, if one wishes to become a major power, one can do so only through overwhelming economic strength.