House Ways and Means Committee Chairman Dave Camp (MI-R) has indicated that currency valuations will be a negotiating objective in a Trade Promotion Authority (TPA) bill to be introduced early next year. That is no surprise since earlier this year 60 members of the Senate and 230 members of the House of both political parties signed letters requesting inclusion of currency manipulation in the Trans-Pacific Partnership (TPP) trade agreement talks. Congress has made clear that currencies valuations are viewed as a trade policy issue.
Currency manipulation has been a recurring issue. 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. If ‘manipulation’ is occurring, the Treasury Secretary is to initiate negotiations, through the IMF or bilaterally, to eliminate the ‘unfair’ advantage. The act requires the Treasury Secretary to annually report to the House and Senate Banking Committees, with written six-month updates.
According to analyses by the Congressional Research Service (CRS) and the U.S. Government Accountability Office (GAO), Taiwan, South Korea and China were the only countries ever cited, with China being the most recent in 1994. The annual reports generate considerable political attention and cause countries to try to influence the Treasury Secretary to not include them as a manipulator. It gives the U.S. government leverage in discussions about currency values.
Two bills on currency values and trade have been introduced in the current Congress. H.R. 1276, Currency Reform for Fair Trade by Representative Sander Levin (MI-D), the Ranking Minority Member of the Ways and Means Committee, amends the Tariff Act of 1930 to include a fundamentally undervalued currency for an 18 month period as a “countervailable subsidy” requiring action under a countervailing duty or antidumping duty proceedings. This provision would also apply to Canada and Mexico, even though they are part of NAFTA. Representative Levin has previously introduced similar bills, including one that passed the House in September 2010.
S. 114, the Currency Exchange Rate Oversight Reform Act of 2013 by Senator Sherrod Brown (OH-D), repeals current law and replaces is with similar language and requires reporting on ‘priority action’ taken against offending countries. It has similar language to H.R. 1276 on countervailing duties and antidumping duties and also includes Mexico and Canada. A similar bill by Senator Brown was passed by the Senate in October 2011.
Some other countries see the U.S. as the currency manipulator. Brazilian Finance Minister Guido Mantega referred to a ‘currency war’ when developed countries pursued a monetary policy called quantitative easing that caused his country’s currency to increase in value by 25 percent in 2009 and 2010 and made Brazil’s products more expensive in world markets. Defenders of the policy argue that monetary policy is not a zero sum game and economic growth in the U.S. was beneficial for the rest of the world.
Research at the Peterson Institute for International Economics, a well-respected, bi-partisan Washington, DC based think tank, by Joseph Gagnon in 2012 put the total currency manipulation at up to $1.5 trillion per year. This pushed down U.S. GDP by as much as 4 percent, with the EU facing a similar reduction resulting in millions of lost jobs in both economies. Gagnon says, “Four groups of countries stand out: (1) longstanding advanced economies such as Japan and Switzerland; (2) newly industrialized economies such as Israel, Singapore, and Taiwan; (3) developing Asian economies such as China, Malaysia, and Thailand; and (4) oil exporters such as Algeria, Russia, and Saudi Arabia.” This manipulation is a violation of current IMF rules, and Gagnon suggested the WTO may have a role in resolving the issue.
A recent analysis by the Congressional Research Service (CRS) suggests some forums to address disagreements about currency values. The author’s starting point for resolution of the issue is the same as Gagnon’s, the IMF and the WTO. One weakness of the IMF is it has never labeled a member a currency manipulator, despite rules against it. The WTO deals with trade distorting subsidies, but no dispute over exchange rates has been brought to the WTO. The G-7 and G-20 meetings have been good places to discuss issues and air differences, but positions are not binding. The language from the 1988 trade bill, the TPA bills and trade agreements were the last recommendations by the CRS analysis to possibly achieve resolution. The 2002 TPA legislation had language “to establish consultative mechanisms among parties to trade agreements to examine the trade consequences of significant and unanticipated currency movements and to scrutinize whether a foreign government engaged in a pattern of manipulating its currency to promote a competitive advantage in international trade.”
The CRS analysis notes that the IMF and the U.S. Treasury Department have the clearest rules pertaining to currency manipulation. Some see the lack of action by the two as a policy failure, while others see the lack of action as indication that serious violations on currencies have not occurred. Treasury has been hesitant due to fears of trade retaliation if it labeled a country a currency manipulator.
The House and Senate letters asking that currency manipulation be included in the TPP trade talks did not include a general action plan or specific language. The reason is that this is uncharted waters for trade policy. More U.S. legislative language is probably not needed. As the CRS analysis explained, the ball is in the court of either the IMF or the U.S. Treasury Department.
Two actions are needed at this point. First, the IMF or Treasury has to pull together the best economic analyses from around the world to measure the size of the problem and the extent of trade and investment distortions. Somehow reasonable people have to agree on the facts. Then political leaders of a group of countries have to gather around those facts to work out a solution.
While the U.S. Congress has a role to play in holding the Administration’s attention on the issue, this is not political territory. Trade policy negotiators and economic number crunchers need to work out the details. The end product should reduce the trade and investment distortions caused by currency manipulation. The result would be stronger economies around the world. Virtually everybody has to win or an agreement will not work.