Canada's Finance Minister Jim Flaherty (R) attends the International Monetary and Financial Committee (IMFC) meeting at the IMF headquarters building in Washington October 9, 2010.Yuri Gripa/Reuters
Finance Minister Jim Flaherty stiffened his stand against China's practice of limiting the value of its currency, unabashedly calling the policy an "export subsidy," while pressing for clearer international guidelines on foreign-exchange rates.
"We've agreed at every (Group of 20) summit from Washington, through Pittsburgh, through London, through Toronto that protectionist measures are to be avoided," Mr. Flaherty's told reporters in Washington Saturday. "Well, export subsidies via currency inflexibility is an export subsidy. That's protectionism."
"Subsidy" is one of those words used advisedly in diplomatic circles. Blatant attempts by governments to enable companies to seek a price advantage on international markets can be challenged at the World Trade Organization.
Mr. Flaherty's tossing of protocol reflects rising tension in the global economy as more countries copy China by using policy - usually by using foreign-exchange reserves to buy dollars, but also through controls or taxes on investment flows -- to keep the values of their currencies below what the price would be if left to investors.
The House of Representatives last month passed legislation that would allow the United States Trade Representative erect import duties to retaliate against countries that keep their exchange rates artificially low.
The legislation, which still needs to clear the Senate and would ultimately require the president's endorsement, was a reaction to China, which has allowed the yuan to increase only a little more than 2 per cent since June, even as its economy powers ahead at a pace faster that that of all its major trading partners. Meantime, unmanaged currencies such as the yen, euro and Australian and Canadian dollars have all made significant gains in recent weeks.
Trade lawyers say that it is unclear whether the WTO would accept exchange-rate policy as a subsidy based on the way its statutes are drawn. Mr. Flaherty said Canada has no plans to mount a challenge over currencies at the Geneva-based body.
Instead, Mr. Flaherty said he would continue to push for co-operation on foreign exchange to head off more retaliatory measures like the one passed by the U.S. House.
Finance ministers and central bank governors from the Group of Seven countries - the U.S., Japan, Germany, Britain, France, Italy and Canada - discussed currencies extensively at a dinner hosted by Mr. Flaherty at the Canadian embassy. The issue also has eclipsed most other concerns at the annual meetings of the International Monetary Fund and World Bank, which end Saturday in Washington.
Yet despite all the talk, a definitive solution remains elusive. Timothy Geithner, the U.S. treasury secretary, and others have suggested that the desire of China and other emerging markets to play a greater role at the IMF should be linked to a promise to allow greater currency appreciation.
"It is critical to see more progress by the major emerging market economies to more flexible, more market-oriented exchange rate management," Mr. Geithner said in a speech to the IMF's steering committee Saturday. "This is particularly important for those countries whose currencies are significantly undervalued."
China so far is unmoved. The country's top central banker, Zhou Xiaochuan, said at a panel discussion in Washington Friday that China's government is moving to a more market-oriented exchange rate, but that it would avoid "shock therapy," according to a report by Bloomberg News.
Mr. Flaherty said all the major economies are committed to settling their divisions over currencies. He said the goal should be clarify the "rules of the road," a simple suggestion that reflects that ideological divide on the foreign-exchange issue between countries such as the U.S. and Canada and emerging markets such as China.
"We need to work toward the guidelines or parameters that justify intervention by countries in their currencies," Mr. Flaherty said. "Ultimately, the way toward resolution of this currency issue, this whole protectionism basket of issues, is encouraging co-operation from everybody as parts of the rights and responsibilities as members of the global economy, as members of the G20."
It's clear the IMF will take a central role in any attempt to ease tensions over exchange rates.
The International Monetary and Financial Committee meeting ended with Mr. Flaherty, Mr. Geithner and their counterparts directing the IMF to "deepen" its work on exhange rates and other elements that risk unsettling the economic recovery, according to summary statement.
Dominique Strauss-Kahn, the IMF's managing director, said this enhanced surveillance mandate will include "spillover" reports that show how the policies of big economies such as the U.S. and China affect their trading partners. Mr. Strauss-Kahn also said he would take a personal role in future analysis of five major economies: the U.S., China, Japan, Britain and the euro zone.
The hope is that facts and analysis presented by the 187-member IMF could form the basis for agreement on differences over currency policy and other meausres -- such as the Federal Reserve's ultra-loose monetary policy -- that cause exchange rates to move with such volatility.
Mr. Strauss-Kahn insisted the world economic leaders are committed to working together. Before Saturday's meeting, Mr. Strauss-Kahn said he was concerned the commitment to co-operate was slipping. That is no longer the case, he said.
Referring to using IMF analysis as a basis for settling their economic differences, Mr. Strauss-Kahn said, "The progress of this idea will be strong enough to avoid a conflicting situation."