Exporters like Germany and China have won through in a battle of wills with President Barack Obama. The cap on trade surpluses and deficits desired by the US will not be imposed at Seoul's G20 summit, Merkel has said.
German Chancellor Angela Merkel announced late on Thursday in Seoul that the issue of current account imbalances - which arise when a country has either a large surplus or deficit in international trade - will not be addressed by imposing fixed limits.
This is a victory for major exporters like Germany and China, who were keen to defend the boost their economies enjoy by exporting significantly more than they import each year.
"We believe that politically imposed upper limits on trade surpluses or deficits are neither economically justified nor politically appropriate," Merkel said earlier on Thursday. "Instead, I believe that free trade should be our focus; that the competitiveness of individual market players should not be undermined by political limitations."
The idea of such limits had been floated by US President Barack Obama, whose import-dependent country is sliding deeper and deeper into debt, due in part to its trade deficit.
"Countries like Germany that export, benefit heavily from our open markets and us buying their goods," Obama said, adding that helping the US recover would be in the interest of the entire world economy.
Instead of the cap advocated by Washington, G20 leaders are expected to discuss what negotiators called an "early warning system," designed to recognize when a country's surpluses or deficits of trade or capital reserves start to get out of control, so that action could be taken if necessary.
"We can still talk about imbalances in the world," Merkel announced late on Thursday. "What we can't do is limit a country's competitiveness to a specific number. We believe that would be counter-productive. And I think that everyone has now given up on this idea."
Chancellor Angela Merkel and US President Barack Obama also held a private meeting on the sidelines of the G20 summit in Seoul on Thursday, trying to put some of their recent squabbles aside.
"We really do work together closely, and well," Chancellor Merkel said. "And I think that is absolutely necessary in a world that can only solve its problems collectively."
Germany and the US have also been at loggerheads over economic policy in recent weeks, with Berlin criticizing a US Federal Reserve decision to buy some $600 billion (434 billion euros) in bonds in a bid to revive the economy. Chancellor Merkel's government has expressed concern that the US might be trying to weaken the dollar's value to promote growth.
However, the two leaders showed no signs of confrontation when they addressed reporters after their one-on-one; Obama said he and Merkel were confident "that we are going to be able to put the world on a path that ensures strong growth and opportunity for both parties."
Merkel and Obama both stressed their countries' bilateral cooperation on a number of issues, not just the economy.
"Only together will we be able to tackle the crucial problems of the world today, problems and issues such as Afghanistan, the upcoming NATO summit meeting, and also obviously issues of the G20," Angela Merkel said after the meeting.
Arguably the main challenge for the G20 leaders at this summit is to recapture the unity achieved out of necessity during the major recession of 2008. Now, the major powers - in various stages of recovery - seem to differ on how best to move forward.
"The G20 has prevented the boat from sinking," European Commission President Jose Manuel Barroso said. "We have picked up speed, but not all engines are working on full power: the G20 must show that it is indeed the premier forum for global economic cooperation."
British Prime Minister David Cameron also acknowledged that the summit could be difficult, but pledged to fight protectionism and said the world had learned the lessons of the 1930s. He also said there was a need to break down what he called "a wall of money in the East (and) a wall of debt in the West."
"I am not saying we are going to solve each and every one of these problems, I am not saying that the G20 is in its heroic phase as it was during the 2008 crisis, but I would challenge those who say that the G20 is losing its relevance," said Cameron, who also agreed in a meeting with President Dmitry Medvedev to visit Russia next year, after a period of frosty relations between London and Moscow.
Thursday's opening agenda was dominated by dozens of bilateral meetings, leading up to a formal dinner which marked the official start of the two-day summit. Already, though, sources in Seoul suggest that any agreement finalized in Friday's final statement is likely to be more of an exercise in compromise than unity.
Author: Mark Hallam (AFP/dpa/Reuters)
Editor: Michael Lawton