[Viewpoint] Echoes of the past haunt G-20

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[Viewpoint] Echoes of the past haunt G-20

In June 1933, the newly elected United States president, Franklin Delano Roosevelt, sent Secretary of State Cordell Hull to London for an unprecedented World Economic Conference in London designed to end protectionism and competitive currency devaluation, which were driving the global economy into a deeper crisis and depression.

The conference ended in complete failure. Hull himself was committed to reducing America’s destructively high tariffs and reaching an agreement on international currency stabilization, but Roosevelt had other priorities. The new President was focused on his domestic agenda and remaking the American economy at home through an ambitious salvo of legislation during the first 100 days of what he called the “New Deal.”

Roosevelt undercut Hull by sending along to London a drunken isolationist senator and then disappearing himself for a month-long vacation. When the London conference finally reached agreement in early July, Roosevelt fired-off the famous “bombshell” message from the cruiser USS Indianapolis, rejecting international management of currency issues and putting priority on American solutions at home. With that, the last effort to prevent the international financial system from falling into competitive blocs collapsed.

As President Obama and the other leaders of the G-20 head to Korea later this month, this history is unlikely to repeat itself. The U.S. is actively leading the diplomatic process; international finance is more global than ever; and the issue at hand is how to reform and strengthen an international financial architecture that has worked well for 60 years, instead of trying to create one out of whole cloth as in the 1930s, after the major world economies went off the Gold Standard.

Moreover, while the 1933 London World Economic Conference took place in the context of 25 percent unemployment in the U.S. and a collapse of world trade by more than 50 percent, today the U.S. unemployment rate is less than 10 percent and economic recovery is slowly taking hold in some of the hardest hit industrialized economies. In other words, the situation is bad, but not debilitating.

However, even if history does not repeat itself in November, there is still some danger that it might rhyme. Like Roosevelt, President Obama has inherited an economic crisis and chosen to focus his political capital primarily on a domestic agenda aimed at restructuring
the U.S. economy. The Obama administration’s top officials have spoken admiringly of Roosevelt’s ambitious domestic agenda in the first 100 days and have emulated his record by submitting bills on health care reform (which passed) and a cap-and-trade system to battle climate change (which only passed in the House of Representatives).

Obama is instinctively a free-trader like Roosevelt, but both presidents kept trade strategy on the back-burner while they focused on domestic priorities in their first year. Roosevelt’s decision not to back Hull’s efforts at tariff reduction in London in 1933 undercut American credibility.

Fortunately, President Obama has backed his trade negotiators by declaring his desire to see the Korea-U.S. Free Trade Agreement approved by the end of this year, but that is the easy part. Its passage will require him to exhibit leadership by side-stepping some of his own in the Democratic caucus and working with (probably) a majority Republican House.

This will take a lot of political capital. The fact that the White House still talks about “exports” rather than “trade” leaves some worrisome questions about how much the administration really understands and is committed to this goal.

In addition, while Secretary of Treasury Timothy Geithner and the Obama administration are committed to using the G-20 process to establish new international norms on currency policy - in stark difference to Roosevelt in 1933 - there are serious divisions within the G-20, and questions about the U.S.’ motivation will continue to get in the way of substantive agreements.

The divisions are well known: China is resisting pressure to revalue the renminbi, while other export economies led by Germany are skeptical of proposals to put a ceiling on external balances as a percentage of GDP.

The U.S.’ leverage is weakened by suspicions that Washington’s primary aim is quasi-mercantalist, to increase U.S. exports and not just achieve a market-based balance in the global economy. Many G-20 participants appear to believe that the U.S. wants to drive the dollar down and exports up through an easy monetary policy.

This perception is not entirely fair, but neither is it entirely inaccurate. In 1933, Roosevelt told the world that in the midst of an international financial crisis his intention was to “put first
things first” and that meant boosting U.S. employment through solutions like inflation. There are faint echoes of that sentiment today.

One thing about the G-20 that would have been unimaginable to Roosevelt and Hull is the democratic makeup of the group. Korea’s role in the G-20 is unprecedented. It is the first non-G-7 country, the first “emerging” economy, and the first non-Anglophone country to chair the G-20. President Lee will have an enormous burden in November to move his fellow leaders toward more of a consensus on international currency policies and to remove the faint wisp of London 1933 that lingers in the air.

*The writer is a senior advisor at the Center for Strategic and International Studies in Washington, D.C.

By Michael Green
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