Enforcement of deal to prevent trade war will be a challenge

South Korean special police officers patrolled near a Group of 20 symbol at Gimpo Airport in Seoul yesterday. South Korean special police officers patrolled near a Group of 20 symbol at Gimpo Airport in Seoul yesterday. (Han Sang Kyun/Yonhap via Associated Press)
By Kelly Olsen
Associated Press / October 26, 2010

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SEOUL — Facing the risk of a dangerous trade war, top finance officials from the world’s leading rich and developing nations looked each other in the eye and vowed they wouldn’t use their currencies as economic weapons to boost exports.

The agreement that the members of the Group of 20 reached the past weekend in South Korea, though vague on enforcement and long on promises, was hailed yesterday by officials and analysts as a step forward in defusing tensions.

Still, it could turn out to be just a symbolic handshake unless the disparate forum that has become the board of directors for the global economy after the 2008 financial crisis can act on its words and build a viable enforcement mechanism.

Some of the pressures that have caused global currency tensions showed no immediate signs of significantly easing. The dollar remained under pressure and was near a record low against the Japanese yen amid expectations the Federal Reserve will loosen its already super-easy monetary policy further next week in a bid to boost the weak US economy.

The United States, Europe, and Japan, meanwhile, want China’s currency to strengthen at a much faster pace than Beijing has allowed. A weaker yuan helps make Chinese exports cheaper in world markets.

G-20 finance ministers and central bank governors promised Saturday that they will not artificially devalue their currencies. They also vowed to take steps to correct imbalances in the global economy, such as surpluses and deficits in the current account, a broad measure of trade and investment that currently favors the developing world.

The deal was reached after the direct intervention of South Korean President Lee Myung Bak, who traveled to Gyeongju to address G-20 officials and urged a compromise for the sake of the global economy. Lee, a staunch free trade advocate, hosts his G-20 counterparts next month.

Despite the lack of an enforcement mechanism, other than a promise to agree to guidelines and giving a supervisory role to the International Monetary Fund, analysts expressed some optimism that the G-20 agreement at least marked a step back from potentially dangerous territory. “I felt that the risk of an outright currency war is probably lower now,’’ Yiping Huang, a professor of economics at the Economic Research Center of Peking University and a former chief Asia economist for Citigroup, said about the communique.

Still, the vagueness of the document, which lacks any numerical targets for bringing surpluses and deficits more into line, drew skepticism. “The agreement reached must be described as lacking in transparency in its possible effectiveness,’’ Japan’s conservative Sankei newspaper said in an editorial urging the United States and China, the two biggest economies, to take the initiative in avoiding protectionist moves that could hurt economic growth.

Despite a push by the United States for stronger language, the G-20 said that large imbalances, such as China’s vast trade surplus with the rest of the world, would be “assessed against indicative guidelines to be agreed,’’ vague terminology that highlights the difficulty of forging a measurable enforcement regime.

Robert Zoellick, president of the World Bank, said the temptation to engage in selfish policies needs to be monitored.

“Countries are still preserving what they consider to be their own national interests and we have to keep pushing them to cooperate together in avoiding things like protectionism that could undermine the fragile financial markets,’’ he said.