THE TRUTH ABOUT CURRENCY MANIPULATION Congress and the Trans-Pacific Partnership __________ U.S. President Barack Obama’s signature international economic initiative, and the centerpiece of his pivot to Asia, is the Trans-Pacific Partnership (TPP), a trade agreement of a dozen Asia-Pacific countries. But the partnership faces a major hurdle. Bipartisan majorities of both houses of Congress insist that the TPP forcefully address the manipulation of exchange rates, the practice through which some countries keep their currencies artificially weak and thus unfairly make their exports more competitive. The U.S. auto industry, likewise, has indicated that it will oppose the TPP unless the issue is effectively addressed, and it has politically important supporters in the labor unions and the steel industry. At the same time, however, many observers believe that a U.S. effort to raise currency concerns would torpedo the agreement. There is a way to resolve this dilemma, but it will require new initiatives by the Obama administration, Congress, and TPP partner countries. The critics of the TPP are correct to link currency and trade. Changes in exchange rates can affect trade flows and trade balances far more than any of the border, or even behind-the-border, barriers that are the usual focus of trade agreements. Indeed, it is just as economically distorting to artificially depress currency values—as China and a number of other countries have done over the past decade—as it is to impose high import tariffs and subsidize exports directly. As a result of this behavior, in some periods the United States has suffered much larger trade deficits and sizable job losses than it otherwise would have. ... SMART STRATEGY An even better strategy for the United States, whether or not currency manipulation is addressed at least partially in the TPP, would be to implement an effective new currency policy on its own. This would respond to legitimate congressional and industry concerns, and should suffice to win passage of the pending trade legislation. In fact, it would be superior to including currency in trade agreements because it could be applied to countries outside as well as inside those agreements, such as China and other major manipulators. It would also avoid putting the FTA partners at a competitive disadvantage to important non-members, which would be unfair to them. Three measures could be adopted. First, the administration should start obeying current law by formally designating countries that are currency manipulators. Both the former and current administrations have refused to do so, even when the practice was obvious, as when China was intervening at a rate of $2 billion per day a few years ago and running an external surplus equal to ten percent of its whole economy. This failure totally undermined U.S. credibility on the issue with the manipulators themselves, with potential U.S. allies on the problem including the IMF, and with Congress. Second, the administration should authorize the imposition of countervailing duties on imports from countries that manipulate their currencies, whether or not they are members of trade agreements with the United States. Such manipulation is as much an export subsidy as any other against which the United States would normally countervail, and failure to do so is an absurd anomaly. The House and Senate have separately passed bills calling for this change, but it could almost certainly be carried out by executive action. Countries hit by the new approach might take the United States to the WTO, but the United States should be quite willing to fight that legal battle, which would take several years to play out. Third, Treasury should announce that it is prepared to conduct “countervailing currency intervention” against manipulators to offset their distortions of the markets. If China buys one billion dollars to keep the dollar artificially strong and its currency artificially weak, for example, the United States would buy one billion Chinese renminbi to offset the exchange-rate impact. The principle is equivalent to the imposition of countervailing duties against subsidized exports, but this method would be far superior because it would affect all trade rather than only imports of individual products. A few implementations of this policy, or perhaps even just its announcement, should be enough to deter future currency manipulation. There would be no budget cost and the policy would almost certainly make money for the United States. The Senate authorized this approach in a currency bill in 2011 but it, too, could be implemented under current law. There are no international rules against it, so no counter-retaliation could be justified. The United States has paid a major economic price for never having established an effective currency manipulation policy. Now it could suffer a huge defeat in trade policy, and indeed foreign policy, for the same reason. The TPP and other prospective trade legislation provide a compelling point of departure to take decisive action, as Congress and key stakeholders are insisting, whether in the new trade agreements themselves or otherwise. The administration is commendably and courageously conducting the most ambitious trade program in the history of the United States, with potentially enormous benefits for both its economy and foreign policy, but the administration must handle the currency issue much more adroitly to bring its strategy to fruition. __________ By C. Fred Bergsten Foreign Affairs Published by the Council on Foreign Relations
Posted on: Thu, 22 Jan 2015 20:26:50 +0000
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