When Treasury Secretary Timothy Geithner traveled to Gyeongju, South Korea, for a late October meeting of the G-20 nations' finance ministers and central bank governors, he had history on his mind. The twin threats of deflation and beggar-thy-neighbor currency devaluation have been on the global agenda this year in a way perhaps not seen since 1944, when world leaders met in Bretton Woods, N.H., to build the postwar, post-Depression financial architecture that included the International Monetary Fund. Now as then, the issue is what to do about chronic trade imbalances that threaten global economic stability. Geithner's team prepared for the G-20 meeting by dusting off the IMF's founding document, which includes, as the secretary noted in an Oct. 6 speech in Washington, "a now-obscure paragraph" requiring the Fund to investigate countries with chronic trade surpluses and recommend how to shrink them. Finishing the thought in Gyeongju, he advocated a 4 percent limit on the size of countries' trade surpluses as a share of their economic output.
In so doing, Geithner was playing a role made famous in the 1940s by the British economist John Maynard Keynes. Geithner warned in Gyeongju, as he has many times before, that global growth will be hindered if indebted nations are forced to bear the full brunt of correcting imbalances. He urged surplus nations to shift "away from export dependence and toward stronger domestic-demand-led growth." Keynes said the same thing more ornately in 1942, vowing to "offset the contractionist pressure which might otherwise overwhelm in social disorder and disappointment the good hopes of our modern world."
This echo across the years is a reminder of how dramatically America's position in the world has changed. In Bretton Woods, the U.S. delegation under Treasury official Harry Dexter White represented the world's biggest creditor, bestriding the world like a colossus. That's China's part now. At Gyeongju, as in other recent international parleys, the U.S. was reduced to the part that Britain played in the 1940s—a weakened power, running chronic trade deficits and uncertain of how to restart growth. Geithner's startling idea for limiting trade surpluses relied on language that, according to James M. Boughton, the official historian of the IMF, was inserted into the IMF's charter nearly seven decades ago at the insistence of the deficit-ridden British.
The role reversal brings to life a saying attributed to Rufus Miles, an aide to Presidents Eisenhower, Kennedy, and Johnson: Where you stand depends on where you sit. Geithner is channeling his inner Keynes, at least on trade matters, for the simple reason that it's in his nation's interest to do so. Says Boughton: "The shoe is on the other foot now. The U.S. authorities are trying to persuade other countries to share the burden."
Geithner didn't get the 4 percent caps—export powerhouses China and Germany shot down the idea, though the U.S. will try again when the G-20 heads of state meet in Seoul on Nov. 11-12. The ministers did make the IMF a cop for bringing trade imbalances under control, and they promised to refrain from competitive devaluation. But they didn't say anything about countries like China, which, although not devaluing, are preventing their currencies from rising.
The outcome in Gyeongju won't quiet the growing chorus of American free-trade skeptics, who argue that unfettered global commerce is killing American jobs and industries. Ian Fletcher, an adjunct fellow at the U.S. Business and Industry Council, wrote in a Bloomberg News column on Oct. 26 that the U.S. should slap tariffs on imports "that compete with existing and startup domestic producers, if only as bargaining chips to force other nations to play fair." Nor will Gyeongju appease Congress. On Sept. 29 the House passed by 348-79 a bill directing the Commerce Dept. to treat currency undervaluation as a prohibited export subsidy. Although it applies to any country, China is clearly the No. 1 target. "If this risks upsetting the People's Republic of China, so be it," said co-sponsor Representative Tim Ryan, an Ohio Democrat.
The Obama Administration has resisted congressional pressure for retaliatory measures on grounds that they could trigger a trade war that would harm the U.S. as well as its trading partners. But there are few other good options. Broadly speaking, there are just three ways to correct chronic trade imbalances. One is currency devaluation, and that's happening now: The dollar has fallen by one-third against major currencies since early 2002. Another is trade barriers, which the Obama Administration opposes except when authorized by the World Trade Organization. And the third is restrictions on investment in the U.S. That would force foreigners to spend their dollars on American goods and services rather than adding to their piles of Treasuries. It's such a heretical idea that it's not even up for discussion.
The optimistic view among economists is that trade imbalances will gradually diminish because of market forces. "Looking at it historically, I do think these things come and go," says Jagdish Bhagwati, a trade economist at Columbia University. Barry Eichengreen, an economist at the University of California at Berkeley, says the stresses in the international financial system can be traced to a disjunction between the real global economy, which has become multipolar, and the financial system, which remains overdependent on the U.S. dollar. Eichengreen argues in a forthcoming book, Exorbitant Privilege, that diminution of the dollar's role will relieve stresses in the system: "This will work itself out in time if nobody screws up."
It's easy for academic economists to preach patience. Not so easy for Geithner, who has been trying to demonstrate progress on trade before the midterm elections, to help minimize losses of Democratic seats in the House and Senate. In that respect, too, Geithner resembles Keynes, who famously said: "The long run is a misleading guide to current affairs. In the long run we are all dead."
With Rebecca Christie
Coy is Bloomberg Businessweek's Economics editor.
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