A bold American plan to redress "global imbalances" in international trade and limit the surpluses that can be run by nations such as China was yesterday rejected out of hand.
Timothy Geithner, US Treasury Secretary, had hoped that a letter to finance ministers attending the G20 summit in Korea might be seen as an acceptable way to end the row over the valuation of currencies that has escalated in recent weeks.
"G20 countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth and support global demand," Mr Geithner's letter said.
"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."
US officials suggested that trade surpluses should be capped at 4 per cent of national product, with few doubting China is the main target of the move. Its trade surplus peaked at over 11 per cent of GDP in 2007, sliding to less than 6 per cent by 2009, meaning that the US proposal is a relatively modest one.
However, China has rejected anything but the most glacial appreciation of the yuan; in the run-up to the IMF annual meeting recently the Chinese Prime Minister, Wen Jiabao, said that "if the yuan is not stable, it will bring disaster to China and the world".
Chinese officials are yet to react to Mr Geithner's overtures, but other surplus nations were dismissive. The Japanese finance minister said the idea of a cap was "not realistic", while his German counterpart warned about "planned economy thinking".
As a result, the draft communiqué from the summit, according to the Russian minister, contains no numerical targets. "The communiqué is very politically correct," he said. "There's nothing sharp in it. In the long term the focus should be on the exchange rates reflecting market conditions. Excessive state interference in currencies should be avoided."
Many observers view diplomaticattempts to persuade China to run down her surplus and refocus her economy from exports to domestic consumption as a last resort before exasperated US politicians turn to protectionism to combat what they see as Chinese intransigence over her trade surplus and the undervalued yuan.
Even after the politically chargedatmosphere of the mid-term elections passes in a few weeks, concerns about America's "jobless recovery" seem set to pile on the pressure for the White House to be seen to be taking some decisive action to help boost the economy. The stimulus packages enacted two years ago contained clauses to ensure that tax dollars were spent on US-made products; such measures could be repeated.
Alternatively, and more likely, the US Treasury could encourage the Federal Reserve to engage in an even more radical programme of "quantitative easing", injecting more money into the economy. This would both stimulate activity and drive the exchange rate of the dollar down against the yuan. Beijing would then have to step up heralready energetic policy of buying those dollars and building an ever higher pile of dollar assets that, in the longer term, may be prone to devaluation. Such a process might well result in severefinancial instability and that is one reason why such a currency war is feared by almost everyone.
"We must find a solution to this," the Indian Finance Minister, Pranab Mukherjee, added.