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Free trade or nothing

By David Roberts




So, not surprisingly, last week's G-20 summit in South Korean capital Seoul failed to resolve the global spat over currencies and their supposed undervaluation in certain countries, most notably the US and China.

Beijing and Washington accuse each other of deliberately maintaining their currencies below their real values - the Chinese yuan by direct state control and the greenback by using methods such as quantitative easing to pump money into the stuttering economy. The objective in both cases, the detractors say, is to unfairly boost exports.

The Korean summit came out with few specifics on how to address the issue, with the final communiqué pledging moves towards "more market determined exchange rate systems, enhancing exchange rate flexibility to reflect underlying economic fundamentals and refraining from competitive devaluation of currencies." Exactly how these fine and lofty objectives are to be achieved, however, is something we weren't told.

More progress seemed to be made at the APEC summit in Yokohama, Japan a few days later. With leaders from many of the same nations present (although Chile and Peru are in APEC and Brazil and Argentina are in the G-20, Mexico is the only Latin American country in both), agreement was reached in principle to create a Free Trade Area of the Asia-Pacific, which would include the US, by 2020.

President Barack Obama clearly believes free trade has an important role in finding a way out of the impasse on issues such as undervalued currencies and fiscal deficits, rather than direct intervention in the markets or, worse still, protectionism. And he has a point, as free trade could indeed play a crucial part in helping the world economy achieve sustainable, and equally important, balanced growth. It's also no coincidence that amid the chaos in certain Eurozone countries over deficits, debts and the euro itself, Germany, with its largely export-based economy, stands out as a beacon of strength and stability.

For many Latin America nations, however, exports are not enough. Several of the region's "star performers" in recent years - Chile, Brazil and Peru for example - have done so well precisely because of their exports, mainly raw materials such as minerals, and to a large extent thanks to the burgeoning Chinese market. One result has been, if anything, those countries now having overvalued currencies as dollars have poured into their economies from the sale of commodities.

Although strong demand in Asia, mainly China, for raw materials helped these Latin American countries emerge from the crisis relatively unscathed, overreliance on such commodities is not a long-term sustainable solution. There's nothing wrong, of course, with being rich in natural resources, as long as these are managed sensibly and the boom times are used to compensate for the price troughs, as Chile has generally done with copper - in other words, there's nothing inevitable about the so-called Dutch disease.

But what is needed is a move towards exports of higher added value and more developed domestic markets, with greater internal demand. While China has managed to add value to its exports in recent years, it too needs to develop its domestic market, and as that happens the yuan must be allowed to appreciate, if only to benefit ordinary Chinese people by giving them greater purchasing power and thereby - in something of a virtuous circle - further boosting the internal market.

In the meantime, let's wish efforts to create a Free Trade Area of the Asia-Pacific the best of luck. Hopefully, it will fare better than the Free Trade Area of the Americas, which was one of the major initiatives of President George H W Bush back in the 1990s. That was supposed to be the free trade bloc par excellence, from Alaska to Tierra del Fuego and be in place by the year 2000. Ten years on, nothing.

bnamericas


November 20, 2010 | 7:24 PM Comments  {num} comments

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