Canada is siding with the Washington as U.S. Treasury Secretary Tim Geithner pushes a reluctant G20 to strike a deal this weekend to narrow the financial gap between nations with big surpluses and those who are deep in debt.
The large scale current account surpluses – particularly China’s – are at the heart of U.S. concern over exchange rates and general concern that the world economy may turn to protectionist trade policies.
Following a day of negotiations at the officials level, finance ministers and central bank governors began talks Friday that will be dominated by concern over exchange rates.
“I think we’re all agreed on the direction,” Canada’s Finance Minister Jim Flaherty told reporters Friday in advance of the G20 talks. Earlier in the day, Mr. Flaherty held one-on-one meetings with his counterparts from China, India and South Korea.
“No one wants to be confrontational here,” he said. “No one wants to walk away from here without an agreement on an action plan, so that’s what we’re trying to do.”
Mr. Geithner’s proposal to focus on current accounts – which is the difference between the value of exports and the value of imports as well as the difference between national savings and investment – is far from a done deal. In fact, it is just one of several floating around inside the room. Japan’s finance minister has already questioned the move, describing specific targets as unrealistic.
In a letter to the G20 colleagues dated Oct. 20, Mr. Geithner proposes a way forward that could lead to a final deal Saturday, rather than waiting for the Nov. 11-12 gathering of G20 leaders in Seoul.
“I know that some of you will want to reserve any substantive agreement until the November Leaders' Summit, but I think we should take advantage of the presence of the central bank governors to try to reach agreement on the broad elements this weekend, and put those in a report to our Leaders,” writes Mr. Geithner in the letter.
The three measures proposed by the U.S. in the letter, which was summarized by a senior Canadian finance official and later posted in its entirety by Reuters, include:
- A commitment by G20 countries to reduce external imbalances below a specific share of GDP over the next few years, with exceptions for large exporters of raw materials. That means deficit nations should increase their savings and surplus nations should adopt policies and exchange rates that encourage domestic consumption.
- A pledge to refrain from exchange rate policies designed to achieve competitive advantage by weakening their currency or preventing appreciation of an undervalued currency.
- Allow the International Monetary fund to take on a special role as a monitor of these commitments and to publish semi-annual reports.
“With progress on these fronts, we should reach final agreement on an ambitious package of reforms to strengthen IMF's financial resources and its financial tools, and to reform the governance structure to increase the voice and representation of dynamic emerging economies,” writes Mr. Geithner.
