As the Obama Administration has begun to gather support in Congress for the Trans Pacific Partnership (TPP) free trade agreement (FTA) with 11 other countries, it has received pushback from both parties in Congress on currency manipulation provisions. This is not a new issue. In the last Congress, 60 Senators and 230 Representatives signed letters calling for tougher TPP currency provisions and in Trade Promotion Authority (TPA) to negotiate trade agreement with the support of Congress.
Nonbinding currency language was included in a version of TPA that was introduced in the last Congress, but not acted on. Some type of currency provisions are expected in legislation that House Ways & Means Committee and Senate Finance Committee leaders plan to introduce in a few weeks. Language similar to last year’s is not likely to be strong enough to get a majority vote in both houses.
Some Senators and Representatives will vote against TPA and TPP regardless of the currency manipulation provisions, but many others have heard from constituents and special interest groups and want to respond positively without derailing trade negotiations. Some have proposed to make an undervalued currency a “countervailable subsidy” under trade agreements requiring action under a countervailing duty or antidumping duty proceedings. That would be a new area for trade agreements.
The “Exchange Rates and International Economic Policy Coordination Act of 1988” requires the Treasury Department to analyze annually the exchange rate policies of other countries and consider whether they manipulate exchange rates of the U.S. dollar. China was the last country cited in 1994. The Treasury Department is to work with the International Monetary Fund and other international agencies to find a solution. That is now viewed as an insufficient response.
The U.S. government has to be careful in this subject because the U.S. has been accused of currency manipulation. Some developing countries accused the U.S. of using monetary policy to devalue the dollar after the economic recession of 2009 and unfairly competed with developing countries. The increase in the value of the dollar in recent years has muted that criticism.
Given that Congress intends to ‘do something’ on currency manipulation, what should they focus on? The Peterson Institute for International Economics, a well known Washington, DC think tank that believes there has been currency manipulation that may have cost the U.S. economy up to $1.5 trillion per year, recently released an analysis on the issue. C. Fred Bergsten, Senior Fellow and Director Emeritus, acknowledges that trade imbalances and volume of intervention have declined significantly in recent years, but the problem has recurred repeatedly and cannot be ignored. He argues that currency problems have never been addressed in trade agreements because trade or foreign ministries oversee trade, while finance ministries handle monetary and macroeconomic matters. Each ministry guards its turf and discourages coordination.
Bergsten believes that discussing exchange rates would not kill the TPP talks because none of the eleven countries negotiating with the U.S. would now be subject to a rigorous definition, even Japan. China is not involved in the negotiations, but may ask to join at some point. Bergsten’s bottom line on TPP is, “A currency clause would thus solely deter future misbehavior, including by possible future adherents to TPP, which would be enormously valuable but might make it more acceptable now.” If this is too aggressive, setting norms or guidelines rather than legally binding commitments would be better than avoiding the issue.
Whatever is done in the TPP FTA, Bergsten believes a better strategy for the U.S. is to develop on its own effective new currency policy. It could be applied to all countries regardless of trade agreements, such as China, and would also avoid putting FTA partners at a competitive disadvantage.
This strategy would have three parts. The first step would be to formally designate countries as currency manipulators under the 1988 law, something this and previous administrations have refused to do. According to Bergsten, “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, countervailing duties should be imposed on imports from countries that manipulate their currencies, whether or not they have a FTA with the U.S. Some country would likely file a case against the U.S. at the WTO, but the U.S. should be willing to pursue a multi-year dispute at the WTO on the issue.
The third part of Bergsten’s plan is to have the U.S. Treasury Department announce that it is prepared to conduct “countervailing currency intervention” to offset the market distortions caused by currency manipulators. This is equivalent to imposing countervailing duties against subsidized exports, but would affect all trade rather than only imports of individual products. Bergsten says there are no international rules against it, so no counter-retaliation could be justified.
This plan is a clear break with current trade policies that are distinct from monetary policy. Bergsten’s plan and similar ones should be subject to full committee hearings in the House and Senators. Supporter and opponents should be fully engaged. The goal should be to make clear decisions on currency policy and move on to expanding two-way trade. The Bergsten proposal would keep U.S. monetary policy out of trade agreements and under control of Congress. The plan would also focus on broad trade policies and away from trade in individual products were trade protectionists often have the upper hand.
Senate Finance Committee chairman Hatch (UT-R) said at a recent hearing after several committee members raised the issue that currency language would be part of a TPA bill, but it remains uncertain what would be included.
Bergsten concluded his analysis by saying that the Obama Administration should be commended for pursuing such an aggressive trade policy agenda with broad economic and foreign policy benefits. They need to address currency manipulation in the agreements or as separate legislation or risk failure to achieve their goals.
Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org).