In all honesty, the news report out of the G20 strikes me as such a weird idea that I don’t know what to make of it. From the Financial Times:
During an all-night meeting in South Korea of finance ministers from the G20 group of countries, the US called on nations to cap current account surpluses at an unspecified share of national income, a new tactic to encourage faster appreciation in the Chinese renminbi.
Ahead of the meeting, the plan was criticised by Japan and Germany, with China yet formally to respond. But US officials claimed on Saturday that the plan was making progress during the talks.
Let’s parse this a bit. The impulse behind this proposal is sound. Countries that run persistent, large trade surpluses strain international trade and financial operations. And before you deem this to be a US centric view, Keynes worried long about the very same issue. His concern was that there was no mechanism to discourage countries like France, who had pegged their currency too low in the gold standard era, from accumulating destablizing surpluses which helped precipitate the Great Depression (note: under the Gold standard, the current account deficit country had plenty of incentives to try to reduce their deficit, while the surplus country did not, since the results were advantageous to them). He has wanted a mechanism to discourage this behavior; his proposed currency arrangement, the Bancor, was rejected in favor of the Bretton Woods system.
The problem is the idea of a cap. How pray tell do you enforce it? What are the penalties for non-compliance? There are lots of international agreements that commit to lofty goals but have little follow through, starting with the Kyoto accords. The Geithner plan, by contrast, goes straight to a mechanism rather than stating a general goal, which might seem preferable, but I cannot fathom any way the particulars of an idea like this could be negotiated successfully, much the less made operational.
So am I to cynically assume this is meant to be touted as a pre election victory for Team Obama if Treasury prevails? And does this serve another purpose, to give Treasury cover for not labeling China a currency manipulator?
Reader input very much welcome.
Update: Econoclast offers some details, and finds the plan to be “fraught with difficulties”: