*Perilous Times

World on Brink of trade war looms as G-20 nations gather*

By JEAN H. LEE and PAUL WISEMAN
The Associated Press
Thursday, November 11, 2010; 6:10 PM

SEOUL, South Korea -- The world's economies stand on the brink of a
trade war as leaders of rich and emerging nations gather in Seoul. A
dispute over whether China and the United States are manipulating their
currencies is threatening to resurrect destructive protectionist
policies like those that worsened the Great Depression.

The biggest fear is that trade barriers will send the global economy
back into recession.

Hopes had been high that the Group of 20, which includes wealthy nations
like Germany and the U.S. and rising giants like China, could be a forum
to forge a lasting global economic recovery. Yet so far, G-20 countries
haven't agreed on an agenda, let alone solutions to the problems that
divide them.

G-20 leaders were expected to issue a communique detailing results of
the summit on Friday.

The delegates have clashed in particular over the value of their
currencies. Some countries, like the United States, want China to let
the value of its currency, the yuan, rise. That would make Chinese
exports costlier abroad and make U.S. imports cheaper for the Chinese to
buy. It would shrink the United States' trade deficit with China, which
is on track this year to match its 2008 record of $268 billion.

But other countries are irate over the Federal Reserve's plans to pump
$600 billion into the sluggish American economy. They see that move as a
reckless and selfish scheme to flood markets with dollars, driving down
the value of the U.S. currency and giving American exporters an advantage.

Richard Portes, president of the Center for Economic Policy Research in
London, said the dim prospect for a substantive agreement "is very
dangerous for the world economy."'

Portes said he fears "the possibility that currency wars and global
imbalances might lead to severe trade protectionism over the next year
or so."

For now, the G-20 countries are expected to agree on noncontroversial
issues, like an anti-corruption initiative and the need for oversight by
the International Monetary Fund.

But they're finding no common ground on the most vexing problem: how to
address a global economy that's long been nourished by huge U.S. trade
deficits with China, Germany and Japan.

Exports to the United States powered those countries' economies for
years. But they've also produced enormous trade gaps for the U.S.
because Americans consume far more in foreign goods and services than
they sell abroad.

President Barack Obama told fellow leaders that the U.S. cannot just
keep borrowing lavishly and sending its money overseas. It needs other
countries to buy more exports from the United States and elsewhere so
Americans can afford to buy other countries' goods, he said.

"The most important thing that the United States can do for the world
economy is to grow, because we continue to be the world's largest market
and a huge engine for all other countries to grow," Obama said at a news
conference in Seoul.

But Brazil's president, Luiz Inacio Lula da Silva, warned that the world
would go "bankrupt" if rich countries reduced their consumption and
tried to export their way to prosperity.

"There would be no one to buy," he told reporters.

A failure to agree on currency and trade in Seoul could intensify
countries' efforts to rig their currencies to gain an advantage. A
full-blown trade war could lead countries to erect punitive barriers to
imports - a replay of what happened in the 1930s. A law the United
States passed in 1930 that raised tariffs on imports is widely thought
to have deepened the Great Depression by stifling trade.

The U.S. Congress "wants to see some blood ... wants a bit of a spat
with China on currency wars," contends Gregory Chin, a senior fellow at
the Center for International Governance Innovation in Canada. The House
recently voted to punish China for keeping its currency artificially low.

Government ministers and senior G-20 officials have tried to draft a
substantive joint statement to be issued Friday, summit spokesman Kim
Yoon-kyung said.

Leaders held a working dinner Thursday at Seoul's grand National Museum
of Korea, greeted by sentries in royal garb and escorted by children in
traditional Korean dress. Outside, a few thousand protesters rallied
against the G-20 and the South Korean government. Some scuffled with
riot police, but the march from Seoul's main train station was largely
peaceful.

"We can put people watching this summit at ease by reaching a concrete
agreement that takes a step forward," South Korean President Lee
Myung-bak said.

But Lee was unable to announce a long-stalled free-trade deal with
Obama. That impasse between two close allies didn't bode well for any
broader compromises.

Besides providing a political boost for both leaders, an agreement could
have helped shift the tone for a summit in which nations appeared set to
defend their short-term economic interests above all.

The bickering in Seoul contrasts with the first G-20 meeting in
Washington two years ago and the second one in London in 2009. Back
then, rich and developing countries agreed to cooperate to lift the
world out of the Great Recession, reform their financial systems and
pursue free trade.

But the global economy was in free fall then. It's in a tepid recovery
now. And some countries, such as China and Germany, are prospering on
the strength of their exports. As a result, G-20 countries "feel less
pressure" to cooperate, says Richard Portes, president of the Center for
Economic Policy Research in London.

"This is very dangerous for the world economy," he said.

Obama suggested the global economy will function best when countries let
the markets set the value of their currencies, rather than trying to rig
them. His message was aimed mainly at China, whose trade surplus with
the U.S. exceeds that of any other trading partner. Obama wants Chinese
companies to sell more to their own consumers, rather than rely so much
on the U.S. and others to buy low-priced Chinese goods.

President Hu Jintao assured Obama on Thursday that China has an
unswerving commitment to pressing ahead with currency reform, said Ma
Zhaoxu, spokesman for the Chinese delegation.

But China doesn't want to discuss its trade or currency conflicts with
the U.S. in an international forum like the G-20, said Yu Jianhua,
director general of the Department of International Trade and Economic
Affairs in the Commerce Ministry.

Some critics warn that U.S. interest rates kept too low for too long
could inflate new bubbles in the prices of commodities, stocks and other
assets. Developing countries like Thailand and Indonesia fear that
falling yields on U.S. government bonds will send money flooding their
way in search of higher returns. Such emerging markets could be left
vulnerable to a crash if investors later decide to pull out and move
their money elsewhere.

China and Taiwan this week announced plans to restrict how much foreign
money moves into their markets. At the same time, a U.S. proposal to
limit trade surpluses and deficits to 4 percent of a country's economy
has run into resistance.

"Targets are neither economically appropriate or appropriate from a
financial perspective," German Chancellor Angela Merkel said. "What's
important is that we don't resort to protectionist measures."

---

Wiseman reported from Washington. Associated Press writers Ben Feller,
Kelly Olsen, Foster Klug, Hyung-jin Kim, Vijay Joshi and Greg Keller in
Seoul; Charles Hutzler in Beijing; and David Stringer in London
contributed to this report.