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Geithner calls for balanced world trade
Howard Richman, 10/24/2010

In an October 20 letter to the finance ministers of the G-20 countries, Treasury Secretary Geithner called for balanced world trade with each country limiting its trade surplus or deficit to an unspecified percentage of its GDP. Only raw materials exporters with huge trade imbalances (e.g., Saudi Arabia and Russia) would be excluded from the requirement.

According to a New York Times report, Geithner's proposal was supported by the UK, Canada and Australia but opposed by Germany. The Obama administration has finally identified America's economic problem and has gotten the other English speaking countries to stand with it!

If this is more than just talk, the next step will be for the Obama administration and the other English speaking countries to threaten and, if necessary, institute an Import Certificates plan or a scaled tariff that would gradually force their trade toward balance over the next few years.

Other trade deficit countries would soon follow suit. The result would be balanced world trade. The world, led by the trade-deficit countries, would recover quickly from the Great Recession. Not only that, but the English speaking countries would continue to lead the world politically and economically, and the Obama administration would go into the 2012 elections presiding over an economic recovery.

On the other hand, Geithner's letter may just be another case in which the Obama administration substitutes words for action. The Chinese government will not give up its successful mercantilist strategy voluntarily. China's WTO-illegal cut-off of Rare Earth shipments to the United States this week may be its first rejection of Geithner's proposal. As in the past when China broke the U.S. embargo against shipping gasoline to Iran and supported North Korea's torpedoing of a South Korean ship, the Obama administration will once again wipe the Chinese spit from its face, look up at the sky, and pretend that it is raining.

Here is the text of Geithner's letter:

October 20, 2010

Dear G-20 Colleagues:

I am writing to offer some suggestions for our meeting later this week. We are obviously at a moment when the world is looking to the G-20 to provide a stronger commitment to work together to address the major challenges to a sustainable global recovery. I know that some of you will want to reserve any substantive agreement until the November Leaders' Summit, but I think we should take advantage of the presence of the central bank governors to try to reach agreement on the broad elements this weekend, and put those in a report to our Leaders.

Building on Pittsburgh's Framework for Strong, Sustainable, and Balanced Growth and Toronto's commitments to addressing sovereign debt sustainability, here are three specific suggestions designed to provide a stronger framework of cooperation on international financial issues:

First, G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials. This means that G-20 countries running persistent deficits should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels and by strengthening export performance. Conversely, G-20 countries with persistent surpluses should undertake structural, fiscal, and exchange rate policies to boost domestic sources of growth and support global demand. Since our current account balances depend on our own policy choices as well as on the policies pursued by other G-20 countries, these commitments require a cooperative effort.

Second, to facilitate the orderly rebalancing of global demand, G-20 countries should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency. G-20 emerging market countries with significantly undervalued currencies and adequate precautionary reserves need to allow their exchange rates to adjust fully over time to levels consistent with economic fundamentals. G-20 advanced countries will work to ensure against excessive volatility and disorderly movements in exchange rates. Together these actions should reduce the risk of excessive volatility in capital flows for emerging economies that have flexible exchange rates.

Third, the G-20 should call on the IMF to assume a special role in monitoring progress on our commitments. The IMF should publish a semiannual report assessing G-20 countries' progress toward the agreed objectives on external sustainability and the consistency of countries' exchange rate, capital account, structural, and fiscal policies toward the agreed objectives on external sustainability and the consistency of countries' exchange rate, capital account, structural, and fiscal policies toward meeting those objectives.

With progress on these fronts, we should reach final agreement on an ambitious package of reforms to strengthen the IMF's financial resources and its financial tools, and to reform the governance structure to increase the voice and representation of dynamic emerging economies.


Timothy F. Geithner

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]