Tuesday, September 22, 2009

G-20 Pre-Agreement Reached Between U.S and Europe, but China Dissents

Brazilian newspaper O Estado de Sao Paulo today reports that a G-20 pre-agreement has been tentatively reached between the U.S and the European countries, but that China disagrees. The pre-agreement is what would be discussed at the G-20 meeting this week.

The idea is to adopt mechanisms that resolve global imbalances, such as as the surpluses of China, Japan and Germany. The United States, supported from the European Union, will propose establishing a mechanism to address global imbalances, which they claim have been one of the causes of the worsening global financial crisis.

The countries are trying to finalize a document to present at the G-20 meeting on Friday in Pittsburgh. The objective of the scheme, called "Framework for Balanced Growth and Development", is to reduce the surpluses of countries like China, Japan and Germany, and increase savings in deficit countries like the U.S. and Britain.

However, the proposal faces stiff resistance from China, because it opens the discussion about the devaluation of the yuan.

The mechanism will include measures to reduce the budget deficit and increase the U.S. savings rate, making China less dependent on exports and more on its internal market, and Europe to adopt structural changes to increase competition and investment.

"We hope to reach an agreement on a balanced growth model, which will help us deal with the imbalances that led to this crisis, and make countries accountable," he said in an interview with Michael Froman, deputy national security adviser of USA.

Since when did these unbalances lead to this crisis? They may have contributed indirectly, but are they blaming this for the financial crisis? Are we reading this correctly?

China is resisting because the discussion of imbalances inevitably turns into a criticism of the Chinese export model, its large surplusses and the devaluation of the yuan.

"Imbalances certainly were not the cause of the problem and a major cause of the crisis was the lack of supervision, market abuses, high levels of debt and a lot of speculation," said Zhou Wenzhong, Chinese ambassador to Washington. How is that for an answer?

China wants to focus the discussion on the resurgence of protectionism, as the country has been the main target of many tariffs and antidumping measures adopted by nations in recent times, despite the promises of the G-20 to avoid protectionist measure (such as the recent tire tariff in the U.S.).

"It was a huge breach of promises made by the G-20 not to adopt protectionist measures," said State Dan Ikenson, associate director of the Center for Trade Policy at the Cato Institute. "Obama will have no credibility when it is so hypocritical to urge the G-20 to avoid protectionism."

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