A Test of U.S. Trade Clout with China

As finance ministers and central bankers dispersed after posing for a Group of 20 "class photo" on Oct. 22 in South Korea, Timothy Geithner made a beeline for People's Bank of China Governor Zhou Xiaochuan. It was a friendly overture from the U.S. Treasury Secretary—and suggestive of Beijing's current leverage in U.S.-China relations. "The U.S.," says David Rothkopf, a former Clinton Administration trade official who now heads Garten Rothkopf, a consulting firm, "is in the weakest position in terms of leading international negotiations that it's been in a very long time."

Just how much pull President Barack Obama has with Beijing may become clear on Nov. 11 and 12, when the G-20 leaders meet in Seoul to consider a U.S. proposal to limit current-account (the broadest measure of trade) surpluses and deficits to about 4 percent of a country's gross domestic product. In the recent G-20 meeting, finance ministers endorsed a vague statement that trade imbalances should be kept at "sustainable levels." The focus on trade targets is an indirect way of averting a global currency brawl. Emerging markets from Brazil to South Korea hope to protect exports by restraining their exchange rates, as the U.S. dollar declines and the yuan remains undervalued by many measures.

Zhou and Chinese Finance Minister Xie Xuren haven't yet backed numerical targets, though they have resisted pressure to let the Chinese currency appreciate. Will Obama get his way in Seoul? Some Chinese financial experts say yes. "China should not be afraid of numerical targets for reducing its trade surplus," Li Daokui, an adviser to the People's Bank of China, told the Financial Times on Oct. 27. "China is well positioned politically and economically to make this argument." That meshes with an Oct. 9 pledge in Washington by deputy governor Yi Gang for China to cut its surplus below 4 percent of GDP in the next three to five years.

Geithner hasn't yet been able to get G-20 partners to commit to a 4 percent target, thanks to objections from Japan and Germany, both surplus countries. (China's surplus is about 5 percent of GDP, while the U.S. deficit is about 3.2 percent.) Even so, Geithner said in a Bloomberg TV interview that 4 percent "will become the benchmark for the future." It's worth recalling, though, that a similar effort overseen by the International Monetary Fund in 2006 failed.

Obama could use a win. Elections on Nov. 2 are expected to hand control of at least one house of Congress to the Republicans. The following day, the Fed may resume buying U.S. assets to spark economic growth. By dramatically expanding the U.S. money supply, the Fed could undermine the dollar—and undercut Obama's sermons against currency meddling.

Also, numerical targets may not be all that effective. The G-20 only has peer pressure to enforce its decisions, and its track record has been patchy of late. True, countries united to bail out banks and craft stimulus plans to avert a global depression. Now, G-20 members are divided on topics like reversing budget deficits and taxing financial speculation. Pledges not to engage in protectionism have been ignored about 400 times in two years, according to Global Trade Alert, an independent monitor. Such are the current realities of global trade.

The bottom line: The U.S.'s leverage in international negotiations is slipping, just as Obama is pushing for numerical targets for trade imbalances.

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