Will Currency Manipulation Vigilance Kick Off a New Wave of Trade Protection?

Yves here. Even though Treasury is required to make semi-annual reports of whether any major trade counterparites countries are engaging in currency manipulation under the U.S. Trade and Competitiveness Act of 1988, the law appears to be overly forgiving, since economists and financial analysts recognize that the so-called Asian tigers, and most of all China, kept their currencies low in order to build up foreign exchange reserves. That of course meant they also ran trade surpluses, which hurt American companies and workers. And indeed, Treasury did designate China to be a currency manipulator prior to 2012, but that designation does not appear to have played much of a role in China’s decision to liberalize the pricing of its currency.

Note that the bill that would toughen the US stance on currency manipulation comes up when we’ve had even more currency jockeying than normal thanks to faltering economic conditions in the wake of the crisis. Japan saw the yen go into nosebleed territory as a result of China manipulating the yen as a stealtier way to cheapen the remnimbi versus the dollar than buying dollars directly. Similarly, many analysts believe the only clear economic benefit of Eurozone QE will be to drive the Euro lower. When the Eurozone crisis first broke, Wolfgang Munchau argued it would take a Euro value at between 60 and 80 cents for the Eurozone to have a high enough growth rate so as to fend off the need for structural reforms. Will QE drive it that low, and even if so, is the US prepared to tolerate that?

And while this bill has the potential to throw sand in the gears of pending (misnamed) trade deals, I’m told the bill’s sponsors believe in it on its own merits. And it’s intriguing to observe that Larry Summers, who appears to be seeking to displace Krugman as the anchor of respectable leftie thinking, has a “damning with faint praise” comment in the Financial Times on the pending trade deals, A trade deal must work for America’s middle class. Without going as far as questioning the logic of “more trade is better” he does a lot more of the two-handed economist routine than is typical for him. For instance:

The US economy is certainly capable of prospering without an agreement. And lack of global profit opportunities for US headquartered corporations is far from one of our economy’s most pressing problems.

And he argues for dropping many of the worst provisions, including a coded attack on investor state dispute settlement panels:

Some matters that are pushed by elements of the business community have little or nothing to do with the interests of the vast majority of American workers. These include pressuring other countries to change health and safety regulation, to extend and strengthen patent protection and to deregulate financial services. In these areas on grounds of fairness it is reasonable for us to strive for the principle of national treatment — no discrimination against foreign firms — but not to use inherently scarce negotiating power to alter other countries’ basic choices…

Conversely, it is appropriate in TPP, and our international economic diplomacy more generally, that we use the substantial leverage we possess in areas that do bear directly on middle-class living standards. These include the prevention of inappropriate producer subsidies — including through manipulated exchange rates or distorted state enterprise accounting. And, more generally, co-operation to ensure that a world in which the greater mobility of capital and of companies does not become one in which governments lose the ability to protect citizens. If global integration means local disintegration it will be a failure.

Of course, the wee problem with Summers’ argument is those “matters pushed by elements of the business community” are the reason the Administration is so keen to push this deal over the line. Put it another way: when Larry Summers comes off sounding sensible, you know it’s bad.

By Martin Kohr, Executive Director of the South Centre, Geneva. Originally published at The Star (Malaysia)

Two bills introduced in the United States Congress last week could lead to a new kind of trade measure that in the short run may wreck the Trans-Pacific Partnership Agreement (TPPA) and in the longer run could cause havoc in the global trading system.

The sponsors of the bills aimed at preventing “currency manipulation” claim to have majority support among Republicans and Democrats in both the Senate and the House of Representatives. Thus, these bills are being taken seriously, even if the Obama administration is known to be against linking the currency manipulation issue to trade measures.

The Congress members and their intellectual backers claim that some governments are deliberately manipulating to make their currencies artificially low so as to reduce the prices of their exports, enabling them to sell more to the world market. The manipulating countries’ imports are also made more expensive, thus discouraging goods from other countries, the Congress members allege. They cite studies that claim that the United States has lost five million jobs in the last decade because foreign governments have manipulated their currencies. The main target of the bills is China, which has long been blamed by Congress members and some economists as currency manipulators. But other countries that have been mentioned are Japan, Malaysia and Singapore, in the context of the TPPA.

In an opinion article, Senators Sherrod Brown and Jeff Sessions and Representatives Sandy Levin and Mo Brooks (who are among the bills’ sponsors) argued that the United States’ high trade deficits with China are caused by the Chinese government’s action to devalue its own currency against the U.S. dollar. “This puts American manufacturers at a serious disadvantage and makes it more difficult for American companies to compete against Chinese companies,” they claimed. Though China is prominently targeted, the legislation can affect any country deemed to be “currency manipulators.”

The trade actions that the Congress members propose include:

– Enabling the American government to treat currency manipulation like illegal government subsidies or dumping of products at low prices. American companies claiming to be affected by foreign countries manipulating their currencies can petition the Administration, which can then impose countervailing duties to offset the impact of currency manipulation on a U.S. industry.

– The U.S. government should include provisions in its trade agreements, starting with the TPPA, that would deter its trading partners from manipulating their currency. The currency bills’ content may thus be injected into the TPPA.

The timing of the tabling of the bills seems to be linked to the TPPA, which is reported to be near conclusion. A Ministerial meeting is scheduled for March to address outstanding issues. Many TPPA countries are reluctant or unwilling to conclude the negotiations unless the U.S. President is given “fast track authority” through a Trade Promotion Authority (TPA) law, meaning that Congress can only vote for or against the agreement but cannot amend it. But the Congress members sponsoring the currency bills are making the passing of the TPA conditional on the adoption of the currency manipulation legislation. They also want the TPPA to contain provisions punishing currency-manipulating countries, by suspending their TPPA benefits such as the preferential lowered tariffs.

In last week’s media reports on the Congress bills, Japan was the country most prominently mentioned as a TPPA country that could be considered a currency manipulator. But others were also mentioned.

“Currencies rise and fall for lots of reasons, but U.S. Sen. Sherrod Brown, congressional colleagues and a number of American manufacturers charge that China, Japan, South Korea, Malaysia and Singapore have used financial and central-government mechanisms to keep their currencies artificially low – and that this gives their factories an unfair pricing advantage and undercuts American competitors,” said an article by Stephen Koff of Northeast Ohio Media Group.

An article by the Peterson Institute’s Fred Bergsten, who has been advising some of the Congress members behind the bills, states that Malaysia and Singapore, “which are engaged in TPP negotiations, have also intervened and piled up sizeable reserves relative to any historical norms.” He mentioned three criteria for identifying currency manipulators: excessive official foreign currency assets (more than three to six months of imports); acquisition of significant additional amounts of official foreign assets, implying substantial intervention over a recent period, say six months; and a substantial current account surplus.

The Congress legislation aims to counter currency manipulation used as trade protection or promotion. Ironically, however, it may lead instead to a new big wave of trade protection. Critics are likely to see the U.S. law as self serving, as the United States will be able unilaterally to define and decide who is a currency manipulator, and then to use trade measures such as tariff hikes and suspension of trade benefits. Many governments and analysts have accused the United States itself of lowering its currency’s value through policies such as quantitative easing and near-zero interest rates. In their view, the United States has also engaged in currency wars and can be considered a manipulator. If the United States can take trade actions against those it perceives as manipulators, others can also take action against the United States. Some U.S. Congress members have defended U.S. monetary policy as having legitimate aims, even though one effect is a low currency level. But other countries can similarly defend their actions. The proposed U.S. law, if it takes effect, can thus trigger trade protection measures and retaliation.

Another casualty could be the TPPA, which already contains unpopular and controversial components such as an investor-state dispute system, tight intellectual property rules, the opening up of government procurement and curbs on state-owned enterprises.

If the U.S. Congress persuades the administration to inject punishment for currency manipulation as another TPPA component, it might be just too much, just like the straw that broke the camel’s back.