Wednesday, September 23, 2009

G-20 Meeting Chaos, and a Very Weakened U.S.

O Estado de Sao Paulo has an article on the state of the G-20 meeting this week. This article might provide quite a different perpective from what you are hearing from the media and government officials.

The article says that according to economists, the recent swing to protectionism has affected the U.S.'s credibility and threatens its leadership.

"Despite the celebrity status of President Barack Obama, the United States arrives with reduced stature to the G-10 summit in Pittsburgh. The main reason is the recent American protectionist, with the imposition of tariffs of 35% on Chinese tires and by again refusing to comply with the provisions of World Trade Organization (WTO) on cotton.

The country has little to show in several areas. It's been a year that Lehman Brothers failed and so far the financial rules are just spinning in place. The main idea of the government, to establish an agency for protecting consumers of financial products, faces fierce opposition from banks and the Congress. The Securities and Exchange Commission is studying ways to make the payment of financial executives subject to its approval, which is a way to avoid more drastic measures such as ceilings on payments.

Obama himself has not shown great willingness to go against with the banks, despite his speech against abuse. "Why are we going to limit executive compensation on Wall Street, but not entrepreneurs in Silicon Valley league or in football," he said last week. However, France and Germany made this issue a "non-negotiable priority".

Regarding the proposal of a mechanism to correct global imbalances and for the U.S. to reduce its deficit and debt and increase savings, Obama has little to show. By the end of the year, the Treasury will have to ask Congress for an increase in the debt ceiling - currently U.S. $12T. The budget deficit this year will be $1.58T, equivalent to 11.2% of GDP. The only time the U.S. had a deficit of this magnitude was during the Second World War.

"The credibility of the U.S., especially in trade, has been hit hard, and its leadership in the G-20 decreased," said Dan Ikenson, associate director of trade policy at the Cato Institute. "Brazil could say that, while the U.S. claimed they were only complying with WTO rules by imposing tariffs on China, when it comes to respecting the determination of the settlement system of the WTO dispute on cotton, is a different story."

For Tim Duy, an economics professor at the University of Oregon, the mechanism of recovery is great - on paper. "This is something that sounds good, but nobody, particularly China and the USA, can make a serious commitment to reducing the imbalances," he says. "The U.S. economy is structurally misaligned, to a disturbing degree. We do not manufacture the products we buy and have the ability to produce things - expensive houses - that nobody wants to buy."

In his blog, Simon Johnson, a researcher at the Peterson Institute, notes that addressing the imbalances will not achive results until they put pressure on surplus countries to appreciate their currencies. "But I do not see how the government's proposal will change that, especially with the Timothy Geithner and Hillary Clinton so eager to be deferential to the Chinese buyers of U.S. debt."

German Chancellor Angela Merkel calls for limits on compensation for financial executives, especially in the U.S., "because it caused the global crisis." Germany, alongside China and Japan, accumulated trade surpluses with the U.S. and resist interference in their model exporter. China as well, and it points the blame to the U.S. in the absence of financial supervision and speculation. And the Europeans say they do not understand why they would have to give up their power in the IMF, for the benefit of emerging countries because of a process initiated by the U.S.. "

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