For smaller countries like Canada, the failure of this week’s G20 summit is particularly worrisome. In effect, both the U.S. and China have refused to bear the cost of righting the imbalances bedevilling the world economy. That means other nations — including this one — will have to do so.

Already, we are seeing some of these costs. The high Canadian dollar, a victim of the currency war brewing between China and the U.S., is hurting our exporters.

Record low Canadian interest rates — another offshoot of U.S. attempts to devalue its currency — penalize those trying to live on their savings and, at the same time, encourage housing prices to career out of control.

As expected, the Seoul summiteers did agree on measures to promote banking stability. But unless checked, the maelstrom in world capital and currency markets could overwhelm these reforms.

Here’s the problem.

First, there’s the global trade imbalance. Put simply, China manufactures and exports too much; the U.S. manufactures and exports too little. Until global recession hit, this imbalance didn’t much matter. Now it does.

In an effort to boost its exports, Washington has embarked on a deliberate policy of currency devaluation. Even former Federal Reserve chair Alan Greenspan has acknowledged this.

China meanwhile, is also boosting employment and exports by keeping its currency weak. As the dollar falls, so — more or less — does the yuan.

U.S. President Barack Obama wants China to revalue its currency upward to give American exporters a break. The Chinese don’t see why they should risk unemployment and social unrest to solve Obama’s political problems.

Second, there’s the U.S. fiscal imbalance. Two wars, several ill-advised tax cuts and one recession have pushed America’s federal debt to over $13 trillion.

As long as every other nation on earth was willing to use the American dollar as a currency reserve, that didn’t matter. Washington could easily fund its military adventures by borrowing abroad.

But now, with America deliberately deflating its currency, the rest of the world is warier about the dollar’s role as international standard of value. That would be fine if another commodity or currency could take the dollar’s place. So far, none has.

Third is the ongoing political paralysis in Washington. Almost every American politician agrees that the U.S. should reduce its debt over the long term (although they don’t agree on how). But in the short run, Americans need a short, sharp surge in government spending to boost employment.

Gridlock between Democrats and Republicans assures that the U.S. will get neither — no economic stimulus now and no credible debt reduction plan later.

Fourth, there’s the incipient currency war. With every fiscal avenue cut off, the only way the U.S. can reduce unemployment is through monetary policy — that is, by printing money.

This is exactly what the Federal Reserve is doing now through what it calls quantitative easing.

That, in turn, has irked other nations like Germany, Brazil and South Korea, which are faced with a flood of liquid capital fleeing the U.S. in search of better returns abroad.

Capital controls, once thought a relic of the 1960s, are being reintroduced. Trading nations like Canada are nervous.

Loading... Loading... Loading... Loading... Loading... Loading...

Even Stephen Harper, Canada’s usually unflappable prime minister, sounded pessimistic Friday.

The G20’s failure at Seoul does not threaten calamity. The world will survive. But we’re in for more stringent times. In the end, countries like Canada — collateral damage countries — will pay the price.

Thomas Walkom’s column appears Wednesday and Saturday.

Read more about: