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Prime Minister Stephen Harper on Thursday arrives for the G20 Summit in Seoul

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Group of 20 leaders face a critical test at their Seoul summit as mounting fury over economic measures taken by the biggest players - the United States and China - threatens to hamper efforts to rebalance global trade and fashion a system less prone to crises.

Prime Minister Stephen Harper, U.S. President Barack Obama and their counterparts woke up Thursday to briefing books and nervous officials, hours away from what threatened to be the most tense session since the G20 met for the first time two years ago in Washington.

A backlash from developed and emerging economies against the Federal Reserve's plan to buy $600-billion (U.S.) in government bonds, to kick-start America's recovery, is casting a pall over negotiations on everything from exchange rate policies, the overhaul of financial regulation, and reviving dormant global trade talks.

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Complicating matters further were fresh signs Wednesday that China's low currency is restraining a shift from exports to domestic spending that would be required to narrow gaps in global growth, and that a weaker U.S. dollar is already giving some American exporters a leg up on emerging-market rivals.

The summit will test whether the G20 can once again overcome competing interests and act for the collective good of the world economy, like a big family that casts aside resentments and jealousies to unite when it counts.

Failure to make discernible progress at the two-day summit, which starts with a dinner Thursday evening, would undermine the legitimacy of the group, which anointed itself the steering committee for global economic policy in Pittsburgh a year ago, replacing the smaller Group of seven advanced nations to reflect a new order.

Two years ago, G20 leaders got past strains caused by having to come to grips with a historic global recession and eventually committed to juicing their economies with stimulus spending worth at least 2 per cent of gross domestic product, a move many say averted catastrophe.

Now, against the backdrop of a recovery that has been more slow and grinding than hoped, they meet in a climate of impatience, mistrust and sharp disagreement. The G20 seems likely to miss its self-imposed deadline to decide this week how to police financial institutions that are so big their collapse would threaten the world's financial system, while South Korean President Lee Myung-bak's pledge to sort out the bickering over currencies also appears in doubt.

"There are some fairly strong feelings right now on certain issues, so I'm not sure how much we will be able to get people to agree, even on modest proposals," Finance Minister Jim Flaherty said in an interview after arriving in Seoul Wednesday.

In a final volley before boarding his plane for Seoul, Turkish Prime Minister Tayyip Erdogan lashed out at the U.S. central bank's bond-purchasing plan, telling Reuters in Ankara that it is "not a fair approach." The Fed's strategy is being characterized as selfish by many U.S. trading partners because investors are selling dollars and moving to faster-growing economies where interest rates are higher.

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Officials from China, Germany, Brazil and Russia are among those who have criticized the move as everything from "clueless" to "uncontrolled."

A spokesman for the South Korean government quipped that pre-summit talks between non-elected officials had grown so heated that the door to the meeting room had to be opened to cool the temperature.

Already, Timothy Geithner, the U.S. Treasury Secretary, on the weekend gave up trying to persuade his allies to adopt strict targets for their current account balances, a broad measure of trade and investment flows that can indicate when countries are taking on too much debt or doing too little to stimulate domestic demand. Still, he expressed optimism Wednesday that hard feelings wouldn't prevent "broad support" for a "co-operative framework" on reducing distortions in global trade, even if it doesn't include hard caps.

As always, China's policies are an issue for the U.S., where lawmakers are threatening retaliatory measures unless the tightly controlled yuan appreciates more quickly. Wednesday brought fresh ammunition for China hawks in the U.S. and elsewhere, as the country posted a larger-than-anticipated trade surplus for October, to the tune of $27.1-billion (U.S.).

That windfall is pumping so much cash into Asia's fastest-growing economy that China's central bank this week boosted reserve requirements for lenders.

By the same token, the Fed's policy has put the U.S. in the unfamiliar position of playing defence with few clear allies. German Chancellor Angela Merkel pushed back at the U.S.-led effort to control current account balances, telling newspaper Die Welt that trade balances are "indicators of performance" and "our export success proves how competitive German products are."

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The weaker U.S. dollar is already helping to prop up the fragile U.S. rebound. China's data coincided with news that America's trade shortfall with the rest of the world narrowed more than expected in September, as exports climbed to the highest level in two years.

Accused of adopting a beggar-thy-neighbour approach to the U.S. recovery - even though the U.S. trade gap remains wide at $44-billion (U.S.) - Mr. Obama defended the policy actions coming from Washington ahead of his meeting Thursday with Chinese President Hu Jintao.

"The dollar's strength ultimately rests on the fundamental strength of the U.S. economy," he said in a letter to G20 leaders posted by Reuters that argues that improving U.S. growth ultimately benefits others. "We all now recognize that the foundation for a strong and durable recovery will not materialize if American households stop saving and go back to spending based on borrowing. Yet no one country can achieve our joint objective of a strong, sustainable and balanced recovery on its own."

Mr. Geithner's initial proposal was for nations to keep current account surpluses or deficits from growing bigger than 4 per cent of gross domestic product. Germany's surplus has exceeded that level since 2004 and is set to expand to 6 per cent this year, according to the International Monetary Fund. (China's current account surplus for 2010 is expected to be 4.7 per cent of GDP.)

Mr. Geithner's proposal was undercut by the firestorm created by the Fed's so-called quantitative easing policy, dubbed QE2. Emerging-market countries that oppose it are worried about the prospect of lower long-term interest rates in the U.S. and a big supply of dollars accelerating the rush of foreign capital into fast-growing economies. Plus, most of those countries run export-driven growth programs and currency volatility hurts exports.

Gregory Chin, a senior fellow at the Centre for International Governance Innovation who has been attending meetings in Asia over the past week and is now in Seoul for the summit, said in an interview that the animosity over QE2 is "real," because there is a sense that the move is an "act of desperation" by the Fed that doesn't adequately take conditions outside the U.S. into account.

"There is a whole bunch of countries saying, 'What is up with this?' " he said.

Still, there is a chance tensions will ease once the leaders assemble.

"Hu Jintao and Obama have to look at each other," Mr. Chin said. "Their minions will be burning the midnight oil to give them something."

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About the Authors
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

Parliamentary reporter

A member of the Parliamentary Press Gallery since 1999, Bill Curry worked for The Hill Times and the National Post prior to joining The Globe in Feb. 2005. Originally from North Bay, Ont., Bill reports on a wide range of topics on Parliament Hill, with a focus on finance. More

Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

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