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U.S. faces criticism over policy changes ahead of G20 summit

Several of the world's economic powers are heading for a collision with the United States at the G20 summit in Seoul as officials from China, Germany, Brazil and other countries sharpen their criticisms of U.S. economic policies they say are putting the global economic recovery at risk.

The focus of the rising fury is an effort by the United States to lower interest rates, dampen the value of the U.S. dollar, and reduce its massive trade deficit by stoking exports and making imports more expensive. That strategy, which is geared at bringing down a U.S. unemployment rate of 9.6 per cent, could harm stronger emerging markets such as Brazil and countries in southeast Asia - driving speculative money to them, unleashing inflation, curbing their exports and eventually undermining their own economic growth.

The upshot is that President Barack Obama will arrive in South Korea for the meetings that begin on Thursday with few friends and little support for U.S. efforts to press China to revalue its under-priced yuan, which is carefully managed to keep its export-driven manufacturing sector humming. The United States pulled back on a proposal to set targets that would essentially limit the size of countries' trade balances after the concept failed to get traction with other members of the G20 club.

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The idea is to reduce the huge imbalances between countries such as China and Germany, which export far more than they import, and the United States, for which the reverse is true.

The decision by the U.S. Federal Reserve to pump $600-billion (U.S.) into the financial system over the next eight months in an effort to reduce longer-term interest rates and boost domestic spending was a lightning rod for criticism even before the details were unveiled last week. And it has grown nastier in the days leading up to the Seoul summit.

Mr. Obama told a press conference in India that the plan could be "good for the world as a whole" and warned that trade imbalances must be addressed. "We can't continue in a situation in which some countries are maintaining massive surpluses and other countries are maintaining massive deficits."

The President does have some allies on the issue, including Indian Prime Minister Manmohan Singh, who said: "Anything that stimulates the underlying growth impulses of entrepreneurship in the United States would help the cause of global prosperity."

Canada has so far avoided direct comment on the Federal Reserve plan, simply suggesting it is one of several issues that G20 leaders should discuss in Seoul. But Prime Minister Stephen Harper did endorse the U.S. proposal to set clear targets for national trade surpluses and deficits as a way of stabilizing the world economy, before Washington backed off in the face of the growing attacks from across the G20.

The result of all the division is that expectations for Seoul are exceedingly modest. "I don't think there's much that can be resolved," said David Watt, senior currency strategist with RBC Dominion Securities in Toronto. The Federal Reserve has concluded that domestic policy requires further easing, while several other key G20 members, notably in emerging markets, need more tightening of monetary policy, and "there's just no way to get around that."

As a result, the G20 is likely to punt its most divisive issue to a committee rather than have world leaders hash it out.

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Last week, Chinese central bank adviser Xia Bin attacked the Federal Reserve plan as "uncontrolled" money printing, and German Finance Minister Wolfgang Schauble called it "clueless." He has since ratcheted up the rhetoric, declaring in a magazine interview that Washington's policy choices "undermine the credibility of the U.S. in finance policy-making."

Mr. Schauble also singled out the Obama administration's efforts to win support in its long-simmering dispute with China over the value of the yuan. "It doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar."

Governments fear that much of the extra U.S. cash will quickly find its way into other markets as people pursue stock, real estate and other investments with higher returns in stronger economies. The fear is that this will stoke inflation in those economies.

Brazil, South Korea and a handful of other emerging countries are resorting to new taxes on foreign purchases of certain bonds and other capital controls in a bid to cool off the hot money.

In one of the stranger responses, Russia intends to call on Washington to submit future Fed policy changes to the scrutiny of the G20 in advance, said Arkady Dvorkovich, Moscow's top G20 negotiator. "Russia's President will insist … that such actions are taken with preliminary consultations with other members," Mr. Dvorkovich told reporters in Moscow. But he quickly added that monetary policy is an internal matter with which Russia has no problem "in principle."

U.S. Treasury Secretary Timothy Geithner told reporters at a gathering of finance ministers in Japan over the weekend that current account deficits or surpluses are not "something that is amenable to limits or targets."

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This marked a complete reversal for Mr. Geithner, who also took pains to reassure other governments that the United States is not trying to devalue the greenback, whose continuing status as the world's reserve currency is increasingly being questioned. The problem is coming up with an acceptable alternative.

Finance Minister Jim Flaherty had called on G20 leaders to strike more detailed trade targets in Seoul, but acknowledged the fading odds over the weekend. "Well, I think you heard Mr. Geithner say that was not a likelihood; that that is not likely to happen," he said. "I think that is a reasonable assessment."

With trade targets seemingly off the table, an obviously relieved China seemed to soften its view on the Fed easing. Vice-Finance Minister Wang Jun said it could contribute "tremendously" to global growth, according to a report from Bloomberg. China is poised to announce its second-highest monthly trade surplus of this year before the G20 meeting.

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About the Authors
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

Parliamentary reporter

A member of the Parliamentary Press Gallery since 1999, Bill Curry worked for The Hill Times and the National Post prior to joining The Globe in Feb. 2005. Originally from North Bay, Ont., Bill reports on a wide range of topics on Parliament Hill, with a focus on finance. More

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