I had a chilling thought on my way back home from the Seoul G20 Summit. I had just begun my normal dash to find something to buy the kids and my wife on the way home from a business trip and use up the last of my local currency, in this case, the South Korean Won, valued at about 1,000 to the dollar. (At least it was on Saturday).
But hustling through the sparkling duty-free stores of the immense and gleaming Incheon Airport, I reminded myself to save a few of the Won in my pocket so I could play the normal game on the kids when I came back home from an emerging market country.
I’d give them 10,000 of whatever it was, and let them get all excited. Then, I’d tell them the bad news: “It’s worth about $10.” They’d be disappointed for a minute and then marvel at how little it was. (They’re older now, but it still kind of works.)
The thought I had this time: What if one day I came home and it was the opposite? What if just one of theirs equaled 1,000 of ours, and the kids marveled at how little their own currency was worth?
It was that kind of summit.
It was the kind of summit where you came home thinking not about American global power, but about American global weakness. It was the kind of summit where, instead of the U.S. dictating terms on what the world would agree to when it came to China’s trade imbalance, it had to struggle to find allies from countries like Brazil and India to pressure China. It was the kind of summit where the US found agreement, but only to the weakest possible terms.
And, it was the kind of summit that found America not strong enough economically to sign a free trade agreement with South Korea despite trade practices that keep US autos out of South Korea. There was a time when, for the greater good of free trade and even US economic interests, there was value in just accepting those terms for the sake of a few thousand or even a few tens of thousands of cars not being sold abroad by US producers. Or, there was time when the pact would be signed with a developing nation agreeing to lower its trade barriers over time.
This is not that time.
It was hard to know if President Obama and Treasury Secretary Tim Geithner were playing a strong hand weakly, or just doing the best they could with a weak hand. US growth is sluggish, military power appears strained and the economic moral standing of the nation abroad has suffered a deep blow from the financial crisis. (Watch video of Steve Liesman's interview with Secretary Geithner here.)
The Federal Reserve, meanwhile, was the absent whipping boy of the summit, with its decision a few weeks earlier to print $600 billion more dollars seized upon by global competitors as an example of national financial depravity. The Fed apparently found it unnecessary to explain itself either to the American public, or world leaders ahead of the G20 Summit. One foreign central banker told me he thought the the Fed’s communications strategy was “appalling.”
Simply put, the global shift in economic power means other nations are much less likely to anger China in these talks than they are the US.
With this backdrop, the US idea of convincing other nations to pressure China because it’s in their interest makes sense. There isn’t really much pressure that the US by itself can bring to bear. Clearly, the go-it-alone strategy hasn't worked and the Chinese have let their currency appreciate ahead of this and previous summits.
So the US settled in the final communiqué for watered down language that the G20 over the next year would develop standards to gauge large trade imbalances and then use those standards to assess who’s within the guidelines and who is not. In historical perspective, this is something of a success. The imbalances have been around for decades and they have never been seriously addressed on a global level.
The G7 barely, if ever, even used the word imbalance. That’s in part, because they never mattered as much as they did to the US. They do now. The new process agreed to holds hope for some improvement over time. It is certainly better than the opposite: trade barriers. But nothing in the final agreement explained what would happen if a nation were found to be violating those “indicative guidelines.” For the moment, it represents just incremental progress.
With its economy weak and expected to underperform for years, the US now has little choice but to work both bilaterally and multilaterally to bring more balance to its trade account. Likewise, despite the embarrassing picture of President Obama standing on the podium next to the South Korean president without a trade pact in hand, he was not in a position economically to accept an unfair trade deal the way past presidents might have been. (Perhaps some of the current weakness stems from those unfair trade deals.) The point is, it didn’t mater then. It does now.
It’s also not entirely clear that a decision by the Fed not to use additional quantitative easing would result in better outcomes for the economy or the dollar. Bernanke has a point that, given the outlook, he needed to ease. It’s a point he might have spent time explaining to the world.
I’d explain all this to the kids, but it’s a little hard to turn their attention away these days from the video game they are playing on their foreign-manufactured Playstation hooked up to their foreign-manufactured plasma television.
I've been home for 24 hours now and still haven’t given them the 10,000 won that I saved from my trip. I'm thinking I'll hold on to it. It might be worth something some day and I can give it to them then.