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.

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  1. Chauncey Gardiner

    Thank you for this post. This is a puzzling set of developments to me. From a raw timing perspective, why are trade protectionism measures in response to “currency manipulation” being raised concurrently with consideration of the TPPA and TTIP? I don’t believe it’s all about China.

    Would potential targets of trade protection include currency blocs such as the euro zone? And is the ECB’s renewed implementation of quantitative easing and negative bond yields to be considered primarily a currency suppression effort to support EU (read German) exporters, or (setting aside policy efficacy issues) is the ECB’s policy arguably intended to lower interest rates and increase demand and currently depressed economic activity within the euro zone? Ditto Japan.

    And what about commodity and energy exporting nations who have seen prices of their commodity exports fall in U.S. dollar terms, particularly after many borrowed large sums of U.S. dollars under low interest rate carry trades and now find themselves facing difficult debt payments in increasingly expensive dollars, and/or are confronting domestic budget issues?

    This is further complicated by the role of the U.S. dollar as both the petrodollar and the global reserve currency, which I believe requires that the U.S. run large current account deficits that almost by definition impair the capacity of U.S. manufacturers to compete on price globally and thus reduce domestic employment and wage levels. Seems to me there was a fundamental policy choice that was made about this matter decades ago to the detriment of American manufacturers and labor. Perhaps that policy is now being reconsidered, but I believe it will be difficult to put the genie back in the lamp.

    1. craazyboy

      Does make you wonder how everyone can be an “Export Tiger” when all the consumers[and governments] in the world are either broke and in debt up to their eyebrows…or still poor after working their butts off.

      And if you have any net worth, you have to “invest” in stocks or bonds – betting on a good outcome from this situation!

      1. TG

        How can we all be “export tigers” at the same time?

        Answer: RACE TO THE BOTTOM! That’s why these trade agreements keep driving wages down. It’s like a bunch of drowning men all trying to climb on top of each other to be the only one with their head above water..

    2. C

      I believe that this may be a way to appease some trade sckeptics. I have been told my my elected rep that he supports the “idea” of TPP as a way to counter China’s currency manipulation and from what he and other proponents have said I think they may have been sold it on the promise that the secret text will do just that. Perhaps these bills are a way of either softening them up in the face of large public opposition or an attempt to tackle that problem independently of the deals and thus weaken it further.

    3. MyLessThanPrimeBeef

      We run current account deficits so we can put our money into global circulation – that’s the price of having the global reserve currency.

      But why do they put their hard-earned US money back into US Treasuries? (“China or others won’t dump their Ts.”) That’s not facilitating global commerce.

      At the end, current account deficits finance government borrowing (even though “it doesn’t need to borrow”).

      So, perhaps we’re losing too many jobs (due to trade deficits) un-necessarily (because the imperial money in global circulation currently is above what is needed for facilitating global commerce)???

      1. Chauncey Gardiner

        Re: “So, perhaps we’re losing too many jobs (due to trade deficits) un-necessarily (because the imperial money in global circulation currently is above what is needed for facilitating global commerce)???”

        Don’t really know, Prime, but that doesn’t appear to me to be the case. Suppose it also depends on how you define “global commerce”.

        The very rapid upward momentum in the $USD suggests relative currency scarcity regardless of the underlying causes (such as offsides swaps positions?).

    4. Yves Smith Post author

      Completely different interests. This bill is coming from progressive Senators. The TPP and TTIP are coming from the Administration. That is why they are at cross purposes.

  2. Schofield

    Is NeoConservatice ideology changing and recognition forming that Ricardian Comparative Advantage has to be offset by the success of global “barge economics” being dependent not on the idea of the maximizing or maintaining the value of money but setting it low enough in order to optimize the “demand amount” of it in active circulation within an economy? Are NeoConderthals splitting into two camps? One that sees political advantage in pushing patriotic production of goods and services versus those in hock to agnostic globally based “financial capitalism?” Will the Chinese Communist Party unwittingly promote this split by pursuing an agenda of global domination? History suggests that human being’s Nature driven instinct to counter domination through mutualizing behavior always ultimately prevails in the long run.

  3. C

    Yves, thank you for the precis of Summers’ comments. I wonder though whether he is really sounding reasonable here or just parroting the line?

    I’ve noticed that he seems to have no problem trying to sign on to any letter or ride any groundswell of conventional thought and has never had a problem holding conflicting viewpoints. Some months ago he signed on to a letter calling for improvements for the American middle class even as he continued to champion financial deregulation as if the two have nothing to do with each other.

  4. Mel

    So that out-of-nowhere paragraph about protective monetary policy in yesterday’s TPP-supporting letter from the dozen economists wasn’t really out-of-nowhere? Hm. And here I had this whole song and dance about sticking it in just to add gravitas.

  5. Stephen

    The bizarre dissonance between the TPP and the new bills proposed in congress seem to be an interesting microcosm of the lack of economic savvy in Washington. If critics of the TPP wanted to protect the middle class a neo-mercantilist currency bill makes no sense. The only context this bill makes sense in is if policy makers don’t understand the TPP or many other domestic problems that have plagued the middle class. The primary threat that the TPP seems to present to the middle class is the ways in which it continues to move economic bargaining power into the hands of small interests. If they wanted to protect the American middle class, policies that relax ip laws and protect tax payers from the onerous demands of powerful banks and business would be a more reasonable approach. I don’t see how swinging a stick at China is going to revive American manufacturing. If my neighbor’s kid gets a better education than my kid because he attends a different school, trying to burn down the school isn’t going to help my kid learn any better. When is the U.S. gonna sit down and and get to a real jobs program, regulate banks worth a damn, or eliminate the wasteful juggernaut of private health insurance? The TPP is a s*** bill if I were in congress and wanted to protect the middle class I would threaten to hold out my vote on the TPP until congress approved a measure requiring facial and genital tattoos for each national candidate featuring the emblems or names associated with each candidates top donor. Face would have to go first, not sure if the modern edition of politician has gonads.

  6. TG

    “Put it another way: when Larry Summers comes off sounding sensible, you know it’s bad.”

    Great line! I hereby invoke Godwin’s law: When Hitler says that something might be bad for the jews, you know it’s REALLY bad…

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