TPP/Currency Manipulation (Oct. 15)

Mike & Co. —

Little action to report this recess week on the Hill but there was a signal “district work period” development.  Speaker Boehner’s chief of staff told a Ripon Society meeting that Congress was unlikely to move on the massive trade package until a late 2016 lame-duck session.  The policy director for Senate Majority Leader McConnell, at the same session, agreed that a TPP vote was a not likely to happen until the lame-duck. 

That would increase the likelihood that TPP and trade will be prominently in the mix in the general election.  The discussion on TPP has not yet focused on the issue of currency manipulation but the issue got considerable legislative attention during consideration of TPA this spring.  A bipartisan amendment to add enforcement provisions against nations manipulating their currency lost by three votes in the Senate.

Below, some very brief background and a hypothetical exchange that addresses some opponents’ objections to such a currency provision.  Tomorrow, rumblings on the debt limit front, where the USG default deadline is now said to be 19 days away. 

Best,

Dana

PS — The Secretary’s performance at the Las Vegas debate was commanding in every respect — congrats to all involved.

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For at least a decade, Congress has been focusing on currency manipulation -– a charge leveled at countries that purportedly intervene in foreign-exchange markets in order to suppress their currencies’ value, thereby subsidizing exports.

In 2005, Sens. Schumer and Graham a formed an unlikely alliance to defend beleaguered middle-class US workers from supposedly unfair competitive practices.  Their bill to sought to stop the currency manipulation so America’s gaping trade deficit would narrow – providing lasting and meaningful benefits to hard-pressed workers.

The bill lost and the problem from  decade ago remains:  China accounted for 47 percent of America’s still outsize merchandise trade deficit in 2014.

Defining currency manipulation and the mechanics of responses via trade policy are complex and no solution has been attempted or even secured international consensus.  Some of the main objections to a trade policy response to currency manipulation from classic laissez-faire economists are raised and addressed below:

  1.  If a country decides to drive down the value of its currency to boost exports, it benefits not only American consumers, but also importing producers, because a significant amount of trade consists of intermediate goods — semi-finished products like car engines or commodities like sugar used to make candy.  So does China’s role in the global supply chain, where it often provides such intermediate goods, mean its monetary policy doesn’t always affect the price of final consumer products?
  2.   Yes, China’s monetary policy is a factor in the price of all of its exports.  The ordinary market-based central bank functions may not apply but China has long applied currency controls to a degree where they have depressed export prices by anywhere from 10 to 45 percent over the last ten years.   Increased domestic consumer spending is welcome but it does not have to come at the expense of American producers’ and service providers’ prices being undercut — which ultimately forces job cuts — by currency manipulation.
  3.   Members of Congress and the auto and steel industries claim that currency manipulation gives an unfair advantage to foreign producers and discriminates against the U.S. exporters, creating trade deficits and job losses, especially in manufacturing.  It may be true that employment in exporting sectors might decline, but is the U.S. losing jobs on net as a result?
  4.   Currency manipulation is a big deal.  Brookings estimates that total foreign currency manipulation has cost the United States between one million and five million jobs and has caused the American trade deficit to increase by $200 billion to $500 billion per year.  Per the Economic Policy Institute it costs up to 5.8 million American jobs and costs U.S. GDP by up to $720 billion.
  5.  Higher imports release resources, including labor, that can be used to produce other goods that otherwise would not be locally available.  Moreover, the figures show that foreign investment in the U.S. exceeds capital outflows, also creating economic activity and jobs.  Why ticker with success?
  6.   We do not seek to reduce imports, which have numerous benefits, but to have consistency, transparency, and fairness in currency policy and management. Similarly, these benefits do not depend on currency manipulation. In fact, increased capital investment in the U.S. is beneficial and is encouraged by its floating rate and global reserve currency.
  7. There is no general agreement on the true value of a certain currency — doesn’t that make it impossible to create provisions that would not result in further market distortions?
  8.   Actually. there is agreement on the value of every currency in which trading occurs, which is to say all of them.   Whether traded prices are “true” is an abstract question in a market context.  But the largest non-market distortion in the equation by far is currency policy.  A change in the price of a product reflecting a change in monetary policy is probably not a move closer to its “true” price.
  9.   What do you propose?
  10.   Fred Bergsten, director emeritus at the Peterson Institute and a member of the President’s Advisory Committee on Trade Policy and Negotiations points out that countries buy foreign currencies for various reasons, not just to gain a trade advantage, and they shouldn’t necessarily be held to account for doing so.

Moreover, opponents argue that it would cover the actions of our own central bank, the Federal Reserve, and open it to charges that it also manipulates exchange rates (think lowering the short-term interest rate or quantitative easing; one clear consequence is to lower the value of the dollar.)

But that argument doesn’t quite hold.  Intent to manipulate must be shown.  Fortunately, there is a clear test of whether the central bank is engaging in domestic demand management or currency management:  the simplest way to tell is to observe whether the bank is buying foreign currencies.  Some purchasing of foreign currency should be fine under the agreement.  But holding enough foreign currency to cover a year’s worth of external liabilities might be a sound benchmark; anything more would be questionable and might be the basis for triggering an investigation or permitting a claim.

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