G-20 warned of protectionism, currency tension

G-20 warned of protectionism, currency tension

Geneva: The global economy is threatened by “dark clouds" of intensifying protectionist pressures, the heads of three international organizations said on Thursday in a warning to leaders of the G-20.

These pressures are driven by high unemployment, macroeconomic imbalances and tensions over foreign exchange rates, said the heads of the World Trade Organization (WTO), Organisation for Economic Co-operation and Development (OECD) and United Nations Conference on Trade and Development (UNCTAD).

“The stability of the trading system will be put at considerable risk if currencies move in what some perceive as the pursuit of an exchange-rate-induced comparative advantage," they said in a summary of reports ordered by the G-20 for its summit in Seoul next week.

“We urge G-20 governments to address these risks," WTO Director-General Pascal Lamy, OECD Secretary-General Angel Gurria and UNCTAD Secretary-General Supachai Panitchpakdi said in the summary, whose message was reported by Reuters on Wednesday.

Shift in tone

The G-20 committed to keeping markets open at its first summit in Washington two years ago to deal with the financial crisis and also at subsequent meetings. It commissioned regular reports from the three organizations to monitor trade and investment policy for protectionism.

Previous reports from the three had concluded that protectionism was being held in check, so Thursday’s warning marks a significant shift in tone.

The WTO forecasts that global export volumes will rebound by an unprecedented 13.5% this year. But trade, both a motor and reflection of recovery, has slowed in recent months and is at risk from economic uncertainty and protectionism.

WTO chief Lamy and UNCTAD officials have warned in recent weeks specifically of the risks to the economy of currency tension, but the direct warning from the three heads to the G-20 in the report shows just how strong these concerns have become.

Tensions over exchange rates and monetary policy have bedevilled US-Chinese relations for months and many other countries, including G-20-host South Korea, Japan and Brazil have also sounded the alarm about their partners’ policies.

The US Federal Reserve launched a new effort on Wednesday to support the US economy by printing money to buy bonds, but critics fear the policy will lead to high inflation and worry low interest rates in the United States could fuel asset bubbles in other countries and destabilize currencies.

In a report on trade, the WTO said G-20 countries had continued to exercise restraint in imposing new restrictions since their last summit in Toronto at the end of June.

New measures, increasing but at a slower rate, covered 0.3% of G-20 imports and 0.2% of total world imports.

But the steady accumulation of measures since the financial crisis burst in 2008 meant restrictions now covered 1.8% of G-20 imports, and only 15% of them had been withdrawn.

“This is too low. G20 governments need to give priority to removing those measures," the three heads said.

On foreign investment, UNCTAD and the OECD said the G-20 countries were resisting protectionism, with the majority of measures taken by 17 G-20 states since the last summit aiming to facilitate and encourage investment flows.

But James Zhan, who heads UNCTAD’s investment and enterprise division, said this assessment did not include the protectionist way in which governments were handling existing rules.

“We do observe a kind of covert investment protectionism in the implementation of existing investment policies," he told a news conference. He noted approval of new investment projects was particularly subject to obstacles -- an apparent reference to Canada’s decision to block BHP Billiton’s $39 billion bid for Potash Corp.

The share of restrictive measures in total investment policies had risen to 30% in 2009 from 2% in 2008.

Flows to G-20 countries of foreign direct investment such as cross-border mergers and greenfield investments plunged 36% in the second quarter of this year.

Zhan said this included a rise of 20% of investment flows to China and 30% to Russia.

But overall UNCTAD was sticking to its view that global FDI flows would stagnate at about $1.2 trillion this year -- still 25% below the average in 2005-2007, the three years before the crisis -- with no significant recovery in sight.