TOKYO, Jan. 27 (UPI) -- As finance ministers and central bankers from the world's richest nations prepare to gather in London next weekend, the single most important issue on hand won't be about any one specific concern among the group's member countries. Rather, talks are expected to concentrate on issues regarding a non-member nation, namely China.
But while the focus of attention during the Feb. 4 to 5 meeting will likely be when and how the Chinese will be able to float its currency without jeopardizing the country's economic growth, there may well be a divide among the Group of Seven industrialized nations.
Until recently, whatever differences the G7 nations, namely the United States, Japan, Britain, Germany, France, Italy, and Canada, may have had among themselves, they have largely been united when it came to how they viewed China. But as the world's most populous nation keeps growing as an economic power, differences in opinion on how to deal with China are beginning to emerge among the G7.
For one, the fact that China is being invited to take part in the G7 talks for the second time is evidence of the country's ever-growing economic clout. So while the United States continues to insist that China's fixed foreign exchange regime is one key reason for the ever-growing U.S. trade deficit, especially as its current account deficit with China keeps reaching record levels, other member countries might tend to side more with the Chinese rather than with the United States.
That's because for Japan, China is not just a trading rival, but also a major trading partner as it continues to be a major destination of Japanese exports. In fact, the Japanese finance ministry announced earlier this week that China overtook the United States for the first time as Japan's single biggest trading partner in 2004, as exports and imports between the two Asian nations reached $213 billion last year.
Given that China is now the world's seventh-largest economy, perhaps it is no surprise that trade with China accounted for over 20 percent of Japan's overall flow of goods and services worldwide. Still, there is no doubt that the United States taking second place to China as Japan's trading partner shocked many analysts, as trade with the United States reached $197 billion, or 19 percent of Japan's total trade volume. Moreover, many analysts say that China's importance to Japan will only continue to grow, and China may well continue to be Japan's single-largest trading partner in coming years, a position that was held by the United States continuously since the end of World War II.
But while Japan's post-war growth was certainly supported by U.S. appetite for Japanese goods from Sony to Honda, the trend in recent years for many major Japanese companies has been to invest more in China as well as other neighboring Asian nations, rather than turning to North America or indeed Europe.
Japanese policymakers too have made clear that they regard China as less of a threat and more as a vital economic partner that must be treated accordingly, much as Japan has treated the United States over the years.
"The firmly expanding U.S. and Chinese economies are a plus for Japan," said Prime Minister Junichiro Koizumi before the Diet this week, adding that both countries are vital markets to ensure continued growth of the Japanese economy.
On the other hand, the U.S. trade imbalance with China continues to balloon, as U.S. imports from China for the first 11 months of 2004 reached $179.2 billion, up 29 percent from a year ago, as U.S. exports only reached $31.5 billion, As such, the United States is likely to take a much sterner position with China and likely to insist on the country to take more concrete measures to address its aggressive export practices.
Senior White House officials including President Bush himself have argued that China's policy of fixing the rate of its currency to the dollar and keeping the yuan deliberately lower than its fair market rate has allowed China to have an unfair advantage in the export market. A weak currency makes that country's exports cheaper and thus more competitive overseas.
Yet one Japanese finance ministry official said that while China floating the yuan could improve the U.S. trade imbalance, there remained a bigger fear that China altering its foreign exchange regime too abruptly could hurt China's economy, and thus lead to a decline in global growth.
The official added that given the differences between Japan and the United States in trade relations with China, "Japan will probably not pursue the (currency floating) issue as aggressively as the U.S. authorities" at the upcoming London talks, if the discussions about the issue get heated at all.
