The Currency risk

There was the usual hype before the recent G20 summit meeting about the hope to resolve the stalemate of the Doha Round of the WTO. It seems every time there is a G-something meeting we get served up the same futile hopes.
When the G20 met in Seoul two weeks ago it concluded nothing more than a statement that 2011 (Doha’s 10th anniversary) presents a narrow window of opportunity to complete the long-running Doha saga. It has been so long since we’ve seen any progress in the process, it’s hard to remember what the major players are actually stuck on. There was something about coloured boxes, a few latin terms but the rest was yada yada.

Why is 2011 a window? Nobody important is having an election and the worst of the global financial crisis seems to be over. Well just try telling the Europeans that the crisis is in the past!

The ever-optimistic head of the WTO, Pascal Lamy said he’d seen “strong signals of political resolve” to finish the round in the coming year. Of course “finish” might mean “scrap”. If that happens he said that the entire discipline and structure of the WTO might start to erode and the existing historical agreements have less meaning without the credibility that he attaches to (dare I say) “moving forward”.

But failure to agree on unilateral trade is one thing. The head of the US Central Bank – Bernard Bernanke – reckons there is a far greater threat to freedom in global trade that lies ahead of the world at present as it struggles to recover from the asset bubbles of 2008. Bernanke reckons the under-valuation of currencies of some key exporting countries – read China, India - poses a bigger problem to the stability of the world economy.

The US banker is reflecting the frustration of trying to revive an economy with very low inflation and interest rates and high long-term unemployment. Distorted money flows are going to hamper an even recovery around the globe. He reckons that if exchange rates were allowed to move freely, developing export-led economies would raise their interest rates and allow their currencies to appreciate. This might curb their trade surpluses and reduce their dependence on export expansion for the growth of their economies – something China has said that it would like to achieve. It’s just that the team of central bankers in China have some very delicate policy dials to play with as inflation is haring away and interest rates are already nudging up.

The disagreement between the US and China on how to manage currency values has almost reached “diplomatic row” proportions. China allowed a small float of its yuan in the middle of 2010 but the change was minor.
The US criticism is that self-interest that comes from strong export growth may risk global stability, and hence rebound on China if the distortions created by its own bubbles aren’t reined in.

The hard part here is who will lead the world to sort this unholy mess out. The Europeans are a little preoccupied trying to plug their own leaks, and Barack Obama has lost so much self-confidence after his party’s hammering at the polls that his “fighting words” are even more esoteric and ideological than ever. This mess will get deeper.