Obama’s G-20 Misfire
by Zachary Karabell
Zachary Karabell is President of River Twice Research and River Twice Capital. A regular commentator on CNBC and columnist for Time, he is the co-author of Sustainable Excellence: The Future of Business in a Fast-Changing World and Superfusion: How China and America Became One Economy and Why the World’s Prosperity Depends On It.
President Obama hoped to leave the Group of 20 trade summit boasting a free-trade agreement with South Korea and a host of accords with other countries, but he looks to leave Seoul empty-handed. A trade pact between the U.S. and South Korea, first negotiated by the Bush administration, failed to materialize after Obama and South Korean President Lee Myung-bak couldn’t agree on protections for American workers. Major disputes erupted between the U.S., China, Britain, Germany and Brazil, as each country rejected Obama’s strategy to focus on economic growth before deficit reduction. The international community, joined by former U.S. Fed Chief Alan Greenspan, accused the U.S. of intentionally devaluing its currency to give an edge to American exports. The tone of the summit was a stark departure from recent meetings on the global economy, in which leaders largely came to agreement on economic policy.
The Daily Beast’s Zachary Karabell reports on Obama’s mistake going into the summit.
With the leaders of the world gathering for two days of economic points and counterpoints under the aegis of the G-20, Seoul has become the scene of a showdown between a testy set of European and Asian powers and a rather flummoxed and flat-footed America represented by President Obama in all his post-Nov. 2 glory and malaise.
The agenda of the meeting has long been telegraphed by multiple mini-summits over the past few months, but with the announcement by the U.S. Federal Reserve this month of $600 billion in further “quantitative easing” (read: printing more money), the tenor has shifted. Two years after the uncorking of the global financial crisis, the United States faces a cohort of other wealthy nations that have had it with being told what to do by Americans, regardless of the merits. They are in a mood to lecture and berate, and recent statements by Obama and Treasury Secretary Tim Geithner, and Fed Chief Ben Bernanke’s actions, have given them ample fodder.
German and Chinese officials have been especially critical of U.S. economic policy. China’s Deputy Finance Minister Zhu Guangyao lectured that the United States should “realize its responsibility and obligation as a major currency issuing country, and take responsible macroeconomic policies.” Germany’s Angela Merkel has been equally dismissive of recent ideas floated by Geithner that there should be global limits on how much surplus or deficit countries can run.
Obama sought to defuse the tension with a letter he released as he landed in Seoul yesterday. In it, he repeats much of what has become established wisdom over the past 12 to 18 months: that the United States has over-consumed and under-saved and is now doing the hard work to reverse that, and that other countries have over-saved and under-consumed and must work to change that as well. The tone of the letter is reasonable and measured, taking full responsibility for America’s contribution to the crisis and urging joint action “to avoid the kind of imbalances that weakened the global economy on the eve of the crisis” two years ago.
But whatever Obama’s personal stature, this isn’t an argument that other countries are buying. The problem isn’t a looming currency war or any imminent backlash—global currencies are so linked that no one can retaliate without doing themselves great harm. The problem is that in the search for common frameworks to create a more stable future, the United States government is advocating policies that treat the world as a 20th-century collection of nations rather than a 21st-century mishmash of competing and intertwined state and non-state actors.
The hostile reaction to the United States and to Obama is the result of decades of being lectured to about the “right way” to manage economically.
• Currency Showdown in Seoul The U.S. is hardly alone in clinging to this anachronism. One could argue that all governments see the world through the lens of national sovereignty. But the steadfast mantra, coming from the United States and urged on the leading nations of the world, that global imbalances caused the recent crisis is a bigger problem than if a similar perspective were coming from, say, Argentina.
For all Obama’s creativity and nimbleness, his international economic team embraces an orthodox economic view of the global system that treats trade deficits or surpluses, current account deficits or surpluses, and differing patterns of consumption and production as imbalances in need of correcting. But just because that thesis has been repeated endlessly doesn’t make it true. In a world where trillions of dollars in public and private capital flows unimpeded daily, where every major company in the world has constructed global supply chains extending through dozens if not hundreds of countries, where any individual good may be manufactured in five or 10 countries, what is the point of holding each country to some theoretical notion of “balance”?
Take the ubiquitous BlackBerry, made by a Canadian company whose shares trade on the New York Stock Exchange; whose devices may be produced with rubber from Malaysia, chip sets from Korea or Taiwan, assembled in a plant in Mexico, Hungary or China, with intellectual property from the United States; shipped on Greek container ships to Long Beach, California, over CSX rails to a German T-Mobile store in New York. Is that an import from Mexico, or from Canada, or from anywhere?
Or take current accounts. If China has a $2.6 trillion surplus, over half of which is then invested in U.S. Treasury bonds, how is that purely a current account deficit, when the money is pumped directly into the U.S. economy?
The problem here is not just the Obama administration; it’s archaic statistics and an economics profession that treats the questions above as answered and any questioning of them as foolish. The Chinese, meanwhile, know that there is much they don’t know, but they do know that the orthodox economic answers dictated for decades by the West would never have led to the economic miracle of China in the past 20 years. And those who believe that China’s emergence can be explained by currency manipulation must be wondering why Zimbabwe isn’t booming.
The hostile reaction to the United States and to Obama is the result of decades of being lectured to about the “right way” to manage economically. As long as the United States was the economic primus inter pares, those arguments were hard to gainsay. Now they are hard to stomach. Obama’s calls for global coordination of economic policy and governance are absolutely imperative, as are continued measures to weave together what is now a chaotic and erratic global system. To do that will require new thinking and not old orthodoxies. That is something Obama himself seems uniquely capable of, but creativity seems to have deserted him as he plunges into the fray in Seoul. That is more than a problem for his presidency; it is a problem for the world.
Zachary Karabell is president of River Twice Research and River Twice Capital. A regular commentator on CNBC and a columnist for Time magazine, he is the co-author of Sustainable Excellence: The Future of Business in a Fast-Changing World and Superfusion: How China and America Became One Economy and Why the World’s Prosperity Depends On It.