NEW YORK TIMES: PREVENTING CURRENCY MANIPULATION
PREVENTING CURRENCY MANIPULATION By Simon Johnson
Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
The Obama administration is keen to agree on a “Trans-Pacific Partnership” that will increase market access in the United States in return for reducing trade barriers in other participating countries, all bordering on the Pacific Ocean.
The partnership is also intended to write new rules for a wide range of international trade and investment transactions.
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But a new and perhaps insurmountable obstacle has now appeared: there is likely to be a great deal of congressional opposition to a potential deal as currently envisaged, because it does not do anything to prevent currency undervaluation resulting from direct intervention in the currency markets.
Because the latest powerful challenge to the trans-Pacific agreement comes from an unlikely quarter – policy intellectuals who are strongly in favor of freer trade, along with some large manufacturing companies (including in the automobile sector) – this opposition is likely to succeed.
Trade liberalization agreements of this kind are usually supported, even championed, by large companies in the United States capable of operating across borders.
To them, market access elsewhere presents a valuable opportunity (for example, American pharmaceutical companies can sell their products more easily if there is stronger patent protection outside the United States).
And easier access to the United States can also be good — for example, if they have manufacturing capacity overseas or if they find it easy to buy from foreign suppliers.
The typical opponents of reducing barriers to trade include people concerned about the impact on jobs in the United States (particularly with regard to who will lose out to enhanced foreign competition), and those who are concerned about other effects.
Doctors Without Borders (also known as Médecins Sans Frontières), for one, has taken out advertisements criticizing the proposed trade agreement, asserting that it might undermine access to low-cost pharmaceuticals in poorer countries.
That is one likely consequence of enforcing United States-style patents (and it was part of what happened as a result of the multilateralUruguay Round of trade negotiations, which concluded in the mid-1990s). The organization’s message strikes me as entirely reasonable, although I don’t have access to the precise text being negotiated.
The less predictable criticism comes from C. Fred Bergsten and Joseph Gagnon, who wrote a paper in December 2012 contending that “currency manipulation” by other countries is an important public policy problem and one that must be addressed in any free trade agreement that the United States signs.
(Both are my colleagues at the Peterson Institute for International Economics; I have not worked on this project, but I did recently attend a bipartisan event on Capitol Hill to discuss these issues, organized by Senator Lindsey Graham, Republican of South Carolina, and Representative Sander Levin, Democrat of Michigan.)
Mr. Bergsten has for more than 30 years been a leading voice for tariff reductions and other forms of trade liberalization. He is also a leading proponent of free-trade agreements.
Yet in recent years he and many others have become increasingly outspoken about the use of intervention in currency markets to prevent particular currencies from appreciating.
(Mr. Bergsten first flagged related issues in the 1960s, but the scale of the issue today is far larger and more global than it has ever been.) Currency manipulation involves the systematic and sustained undervaluation of currencies, which helps the country in question export more.
If a country has some success in selling exports (e.g., to the United States), then all other things being equal, more dollars will be sold by its companies – as they convert their foreign exchange earnings into local currency to pay wages and other domestic costs.
The arrival of more dollars on the currency market should cause an “appreciation,” an increase in the value of this local currency relative to the dollar (this is demand and supply at work, in its simplest free-market form).
But a country’s government may decide that it does not want its currency to appreciate; it would rather run a current account surplus (with the value of exports greater than that of imports) and prevent its exporters from losing their price edge.
To achieve this, the central bank would buy up the extra dollars being offered by selling more local currency. (In general, you need to worry about inflation when engaging in this strategy, but some countries in recent years have pulled off this maneuver while keeping inflation at acceptable levels.)
The net effect is that a big war chest of dollars, known as foreign exchange reserves, accumulates; when it gets really big, it is partly rebranded as a sovereign wealth fund (and invested around the world).
China has engaged in such activities on a huge scale in recent years (although less now than before 2008). Japan has also had this approach in the past, although it does not currently intervene in this way.
Mr. Bergsten and Mr. Gagnon list, on Page 3 of their paper, 20 other countries that they consider currency manipulators – of these, Malaysia and Singapore are currently in the Trans-Pacific Partnership negotiations, but others may wish to join. (All the countries involved would resist the term “manipulation,” and determining who actually does this in an unfair manner is always contentious.)
The problem, of course, is that this edge for one country’s exporters is also a disadvantage for the United States; both its exporters to other countries and companies that compete against importers are going to find it more difficult to make a profit.
At the very least, the United States would lose jobs in those sectors, further shifting its economy from high-end manufacturing jobs toward lower-paid service-sector jobs.
(For a highly relevant analysis of the effects of import competition on manufacturing and unemployment, see a paper by David Autor, my colleague at the Massachusetts Institute of Technology, David Dorn and Gordon Hanson.)
The Bergsten-Gagnon work also asserts that the United States may have lower employment overall as a result of currency manipulation overseas.
Any reasonable trans-Pacific agreement should include mutually agreed-upon provisions that prohibit currency manipulation – along precisely the lines suggested by Mr. Bergsten and Mr. Gagnon.
If that means that the trade pact is harder to achieve, or even impossible, given the attitude of other countries, the United States should accept that outcome.