Reuters/Brasilia

 

 

Geithner addresses Brazilian students at Getulio Vargas Foundation in Sao Paulo, yesterday. He pledged to work with Brazil to help address global economic imbalances including China’s undervalued currency

US Treasury Secretary Timothy Geithner said yesterday Brazil is bearing a disproportionate burden from capital inflows because other emerging economies are trying to sustain undervalued currencies.

Seeking to cement common ground with Brasilia on the issue of China’s undervalued yuan, Geithner called on such emerging markets with big trade surpluses and inflexible currencies to do more to rebalance the global economy.

This will aid Brazil and other emerging countries that have flexible exchange rates and open markets, he added, without specifically mentioning China by name.

“As countries with large surpluses act to strengthen domestic demand in their economies, open their capital markets and allow their currencies to reflect fundamentals, we will see more balance in the flow of capital, less upward pressure on Brazil’s currency, and more robust growth in Brazil’s exports, especially manufacturing exports,” Geithner said at a think-tank in Sao Paulo.

Geithner is making a one-day visit to Brazil – his first as Treasury Secretary – to nurture a rapidly improving relationship between Washington and Brasilia.

After strains in recent years over trade disputes and Brazil’s cozy relationship with Iran, new President Dilma Rousseff has openly sought closer ties with the US since she took office on January 1.

Ahead of the February 18-19 meeting of the G20 group of nations in France, both countries are seeking ways to co-operate to convince China to let its currency appreciate more quickly.

The undervalued yuan – part of what Brazil has called a global currency war – has posed a major problem for Brazil’s otherwise prosperous economy by fast eroding its trade balance and transferring jobs abroad.

Geithner’s comments came three days after the Treasury released a long-delayed report that declined to name China as a currency manipulator, but said the yuan was “substantially undervalued.”

Geithner’s visit is also designed to lay the groundwork for a trip by US President Barack Obama in March, which officials on both sides say will signal a better era of co-operation between the Western Hemisphere’s two biggest economies.

“Brazil’s relationship with Washington will be driven less by ideology than in recent years,” a senior aide to Rousseff told Reuters.

Rousseff, a pragmatic leftist, believes that closing ranks with Washington is one of the only avenues available to convince China to correct trade imbalances, advisers say.

“The US is thrilled with the language the Brazilian government has been using in regards to global economic issues, in particular, regarding China,” said Mauricio Cardenas, director of the Latin America studies program at the Brookings Institution, a Washington think tank.

Rousseff also wants to work with Washington against France’s proposal to tighten international commodity market regulations, a move it argues benefits only wealthy food importers and could stifle output by major food producers.

Lael Brainard, a US Treasury undersecretary who is accompanying Geithner on the trip, said Brazil and the US share common ground on the G20 commodities agenda and want to keep the focus on improving market functioning.

“The approach that we’ll want to take there is to improve transparency in the commodity markets,” she said. “But it’s with a view to making markets function more effectively as opposed to supplanting markets.”

 Rousseff is also reevaluating a large jet fighter deal which France’s Dassault was widely thought to have won, thus reconsidering bids by US-based Boeing and Sweden’s Saab.

 Geithner, who will meet with Finance Minister Guido Mantega and central bank chief Alexandre Tombini, will also aim to discuss shared bilateral goals such as how best to rein in government spending and rebalance global growth.

He said that the US was working to restore its own fiscal sustainability, with “growth friendly reforms to reduce our long-term deficits.”

Geithner’s remarks also raised the idea of capital controls as a potential policy tool that could help Brazil curb inflation brought about by rapid capital inflows. Raising interest rates alone may exacerbate the problem by attracting more inflows from countries with low rates, such as the US.

“Countries facing an outsized burden of adjustment and overvalued flexible exchange rates may need to adopt carefully designed macro-prudential measures, as a complement to fiscal reforms,” he added.