Pessimism pervades as G20 leaders show divide

SEOUL, South Korea -- A strong sense of pessimism shrouded the start of an economic summit of rich and emerging economies Thursday, with President Barack Obama and fellow world leaders arriving in Seoul sharply divided over currency and trade policies.

Failure in Seoul could have severe consequences. The risk is that countries would try to keep their currencies artificially low to give their exporters a competitive edge in global markets. That could lead to a destructive trade war. Countries might throw up barriers to imports -- a repeat of policies that worsened the Great Depression.

Hopes had been high that the Group of 20 -- encompassing rich nations such as Germany and the U.S. and growing giants such as China and Brazil -- could be a forum for sketching an economic path forward from financial crisis. But so far, G-20 countries haven't agreed on an agenda, let alone solutions to the problems that divide them.

Some countries, such as the United States, want China to let its currency rise. Such a move would put a dent in China's huge trade surplus with the United States by making Chinese exports costlier and U.S. imports cheaper.

Others are irate over the U.S. Federal Reserve's plans to pump $600 billion in new money into the sluggish American economy. They see the Fed's move as a reckless and selfish scheme to flood the markets with dollars, thereby driving down the dollar's value and giving U.S. exporters an unfair price advantage.

The G-20 countries are expected to agree on noncontroversial issues, such as an anti-corruption initiative. But they're finding little common ground on the most vexing problem: What to do about a global economy that depends on huge U.S. trade deficits with China, Germany and Japan.

Those U.S. trade gaps exist because Americans consume far more in foreign goods and services than they sell abroad. Obama told fellow leaders that the U.S. can't remain a profligate consumer using borrowed money. It needs other countries to buy more exports from the United States and elsewhere, so it 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.

But Brazil's president, Luiz Inacio Lula da Silva, warned that the world would go "bankrupt" if rich countries cut back on consumption and tried to export their way to prosperity. "There would be no one to buy," he told reporters. "Everybody would like to sell."

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

Leaders held a working dinner Thursday at Seoul's grand National Museum of Korea, greeted by sentries dressed 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. "You, world leaders, know that our global economy can achieve a continuous, balanced growth with international solidarity."

But Lee was unable to announce a long-stalled free trade deal with Obama -- an impasse between two close allies that did not bode well for the mood for compromise.

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

The bickering in Seoul is a stark contrast to the first G-20 meeting in London two years ago. At that time, rich and developing countries agreed to cooperate to lift the world out of the Great Recession, reform their financial systems and reject protectionist policies.

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."

Obama made a pitch for balanced recovery across the globe and pushed for exchange rates based on the market. The message was aimed primarily at China, whose trade surplus with the U.S. is bigger than with any other trading partner. The U.S. contends that China deliberately undervalues its currency, the yuan, which gives it is exports an unfair competitive edge.

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

But China does not 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 Treasuries 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 inflows of foreign money into their markets. At the same time, a U.S. proposal to limit current account surpluses and deficits to 4 percent of gross domestic product as a way to reduce trade gaps has met with opposition.

Current accounts are the broadest measures of trade because they include not only goods and services but also investment flows between countries.

"Targets are neither economically appropriate or appropriate from a financial perspective," German Chancellor Angela Merkel said. "Current account balances are hard to target. What's important is that we don't resort to protectionist measures." ------ Associated Press writers Ben Feller, Kelly Olsen, Foster Klug, Hyung-jin Kim, Vijay Joshi and Greg Keller in Seoul and Charles Hutzler in Beijing contributed to this report.