By Na Jeong-ju
The United States and China, the world’s two largest economies, should hold direct talks to find solutions to the growing currency dispute to prevent it from escalating into a trade war and ensure sustainable global growth, a top American economist said Thursday.
The proposal came amid concerns that the currency row could hamper consensus on ways to resuscitate the global economic health at the G20 summit slated for Seoul on Nov. 11 and 12.
Critics say the Chinese government has been tightly controlling the value of the yuan, a fact that continues to frustrate their major trade partners, including the United States, the European Union and Japan.
As a result, an increasing number of countries have taken measures to weaken their own currencies, prompting concerns of a full-scale currency war.
“China needs to let the yuan appreciate both for its own good and for the good of the world,” Barry Eichengreen, professor of economics and political science at the University of California, Berkeley, said in an interview with The Korea Times.
“The United States can encourage China to do the right thing by reassuring it that its holdings of U.S. treasury bonds are safe and by taking the form of a promise that America will put its fiscal house in order in coming years.”
Like it or not, the currency issue is expected to be a key discussion topic at the Seoul summit. The professor said the conflict is fundamentally a problem for the U.S. and China to resolve, and the other 18 members of the G20 are really bystanders in the bilateral dispute, for better or worse.
On several occasions, President Lee Myung-bak said Korea will help countries find common ground on resolving the dispute at the upcoming meeting of the 20 wealthiest nations, warning that any failure could pose a threat to the global economy.
“If the countries fail to reach an agreement and continue to seek their own interests, they will eventually see protectionism prevail across the world,” Lee said last week during an economic policy coordination meeting.
However, many analysts worry that the Seoul meeting could be turned into a battlefield between China and Western countries over Beijing’s weak yuan policy and that they are unlikely to come to an agreement. Eichengreen agrees.
“There’s no question that the currency tensions will be the most difficult problem when the G20 nations assemble in Seoul,” the 58-year-old economist said.
“There will be agreement on pursuing further financial reform. There will be agreement on fleshing out Korea’s proposal for a global financial safety net. But whether the G20 will succeed in doing anything to help defuse the problem of currency conflict is less clear.”
Touching on the issue of global financial reform, Eichengreen said the case for faster IMF quota reform and for enhancing the representation of emerging markets on the IMF board are compelling.
He said he hopes a more far-reaching solution involving larger quotas for emerging markets, comprehensive reform of the executive board, and agreement on a fair and open process for selecting the heads of the World Bank and IMF will be agreed in Seoul.
Stressing the relations between the G20 and the IMF, Eichengreen said they will remain the two premier forums for international monetary and financial cooperation in the 21st century.
“There is a temptation to rely on the G20 rather than the IMF because of the feeling that the fund is slow moving and dominated by the U.S. and the Europeans,” he said.
“But if it can streamline its operations and enhance its legitimacy by increasing Asian countries’ quotas and Executive Board representation, there is a scenario in which it can come to play a larger role relative to the G20.”
As host of the summit, Korea has been pushing for an agreement on the use of bank levies, which can recoup the funds used to bail out financial firms, create capital buffers for future financial crises, prevent financial market instability and limit size and risk-taking for financial firms. However, nations are split over the use of bank levies and each country will likely promote any future bank levies independently.
The professor said Korea has been right to prioritize bank levies as an instrument for making financial systems safer, but it is a shame that certain G20 countries, including Canada, are reluctant to go along.
“The top economic advisor to President Lee, professor Shin Hyun-song, has convincingly made the case for a tax on the noncore liabilities of the banks,” Eichengreen said.
“It would be a shame if countries like Canada, which were fortunate enough to escape the last crisis, succumbed to hubris and resisted going along.”