One might be excused for thinking last week’s Asia-Pacific Economic Cooperation (APEC) conference anticlimactic, for its most important result was a rather modest pledge not to adopt new forms of protectionism until after 2013. But that does not mean the summit was insignificant, as its failure to produce anything more substantial says much about the fault lines—anxiety about China, disputes over exchange rates and general political weakness—that underlie not only the Asia-Pacific region but in fact the entire global economy.

APEC was born two decades ago, when governments in East Asia were searching for a way to promote regional economic integration and cooperation. There were several alternative visions. Some members were not sure that Latin American countries should be included because of their distinct cultural and historical backgrounds. China, Malaysia and a still-confident Japan wondered whether the United States should be invited to participate because it might distort the region’s evolution through its sheer economic and military weight.

Over time that debate resolved in favor of a broad membership. In fact, many East Asian countries now want a stronger American presence in the area as a means of counterbalancing Beijing’s influence. Concern on this score was probably inevitable given that the Chinese economy is gradually engulfing those of its neighbors, effectively driving a Sinocentric form of regional integration. But Beijing has intensified those worries through copious military investment; vociferous reassertion of claims to disputed maritime territories; skirmishes with ships from Vietnam, Japan and other countries; and the use of informal embargos on rare-earth exports to punish other governments.

This heavy-handedness has had several consequences. One is the aforementioned desire for greater American involvement in East Asia. Another is warmer support for India’s campaign for APEC membership, where it would serve as an additional counterpoise to Chinese power. Still another is hesitation on the part of some APEC countries to proceed with regional integration until Beijing’s geopolitical ambitions clarify.

Another fault line underlying APEC is the incipient quarrel over exchange rates. Much of the world has been waging surreptitious currency wars for well over a decade. For some countries this was a matter of mercantilism. By artificially weakening their exchange rates, they generated more exports and kept GDP growth fast and jobs plentiful. Other states, mainly medium-sized powers in the developing world, were meanwhile motivated by fear of the global monetary system. They learned from the financial crises of the 1990s that they could not trust the global monetary system and the IMF and accordingly decided to self-insure by running current-account surpluses and accumulating vast stocks of foreign reserves that could be deployed in future episodes of instability. By the middle of the first decade of this century, the combination of mercantilism and self-insurance had engendered a situation in which almost the whole developing world was running current account surpluses.

What has brought the exchange-rate problem into the headlines today is the possibility that the United States might join the fray. The old system only worked as long as that country and one or two other spendthrift economies ran enormous deficits, providing the demand necessary to absorb the world’s surpluses and drive global GDP growth. But that pattern required an ineluctable increase in indebtedness that has now crippled the U.S. economy. Washington understandably wants to prevent the danger from mounting again and hence wants to bring the American current account towards balance. Much looser monetary policy and a weaker dollar, however, would cause all manner of problems for the original currency warriors. China, for example, would be forced either to abandon its effective peg to the dollar and suffer more unemployment or to expand its money supply and further inflate its domestic asset bubbles.

Friction on this point was a major obstacle to progress at the recent APEC negotiations. China and the United States were at each other’s throats, and many other countries refused to make new commitments amid the uncertainty about the future of the exchange-rate system and, consequently, their export markets, labor forces and political stability.

The third problem confronting the APEC summit was general political weakness. Japan has of course long suffered from inferior leadership, and the difficulty in enforcing consistent policy in a polity with decentralized power like China is widely recognized. But this time truly is different, for as evidenced by demonstrations in Europe and many other places the Great Recession has vitiated public support for governments all around the world.

Consider the implications of this as they manifested in November. First, Barack Obama and his partisans suffered a historic defeat in the midterm congressional elections. Handicapped by this setback and by growing protectionist sentiment within the United States, he then traveled to Seoul, where he failed both to garner G-20 support for new rules on current-account imbalances and to make the expected progress in talks on a bilateral free-trade agreement with South Korea. He then moved on to Japan for the APEC summit, at which he could no longer credibly make any major new commitments.

November was equally cruel to the Japanese government. Prime Minister Naoto Kan had wanted to use the APEC event, over which he presided, to commit his country to join a regional free-trade area. Upon hearing of that determination, however, over one hundred members of his ruling party convened an emergency meeting and warned against making concessions at the expense of Japanese farmers. Thus humbled, Kan had to retreat during the conference and could only pledge to start talks about whether Tokyo might eventually join formal negotiations. Given the feckless performances of the American, Japanese and Chinese delegations to the summit, the lesser APEC members were free to avoid the difficult discussions—and the appearance of incompetence—altogether. Last week’s APEC conference stands as a stark reminder of how little international cooperation is likely to occur over the next year or two. Much of the world remains in the grip of a profound recession—East Asia is in some respects healthier than Europe—and vulnerable leaders are under intense pressure to preserve jobs at home. In such circumstances the most people can realistically hope for is that governments will refrain from imposing new barriers to international trade and investment. In that respect, the APEC members could have done much worse.

(Photo by Volvo S90)