An Urban's Rural View

What To Do About Currency Manipulation

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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It's not surprising that many agriculture groups have tentatively applauded the Trans-Pacific Partnership trade agreement. Details are still trickling out, which is why the endorsements are tentative, but American ag is generally thought to be one of the winners in the 12-nation TPP deal. U.S. negotiators say they scored both cuts in tariffs on U.S. ag exports and a lowering of non-tariff barriers.

It's also not surprising, though, that the National Farmers Union isn't joining the applause. Like Ford Motor Company and a number of Congressmen, NFU has long said it would oppose any agreement that didn't include strong and enforceable rules against currency manipulation. This one doesn't. The best negotiators could offer is a still-to-be-completed side deal under which nations will promise not to use devaluations as a competitive weapon.

Even TPP supporters can sympathize with these critics. Currency manipulation is a problem. That said, here are three reasons why the lack of enforceable rules against it shouldn't be held against the TPP deal.

One: Currency manipulation will take place whether or not Congress approves TPP. It's not as if the agreement liberalizes the rules; it just doesn't tighten them.

Two: It's questionable whether a trade agreement with tough rules could be reached. You have to think if anti-manipulation terms were gettable, our TPP negotiators would have gotten them. They knew failing to get them would increase the already considerable risk of Congress rejecting the deal.

As it happens, trade compacts are poor vehicles for dealing with currency manipulation. They often don't include key global players and they rarely acknowledge that flows of capital are more critical to foreign-exchange issues than flows of goods.

It's possible to imagine a better vehicle. As the Economist reported in a recent cover story (…), the dollar-based international monetary system faces serious threats to its stability. A much broader group of countries than the trans-Pacific 12 could meet to devise solutions to these challenges, currency manipulation among them. At a minimum, the participants would include the U.S. and Japan, which are parties to the TPP, and the European Union and China, which are not.

Three: When does a government's intervention in the markets rise to the level of currency manipulation and when doesn't it? The distinction is in reality not that easy to define. Under many definitions, the first defendant before the TPP dispute panel would be the U.S.

An example illustrates the problem. In the wake of the 2008 financial crisis, the Federal Reserve flooded the market with dollars. The inevitable and foreseeable result was to devalue our currency. We thought of the dollar inundation as stimulus for the economy; much of the rest of the world suspected currency manipulation. And whatever the Fed's intent, that wasn't an unreasonable suspicion. A glance at the charts in a blog post (…) by economist Brad DeLong underscores how explosive was the resulting boom in U.S. exports.

The lack of anti-manipulation rules is, to be sure, only one of the hindrances to Congressional approval of TPP. Many Congressional Democrats and some Congressional Republicans oppose TPP because they either distrust trade deals or dislike President Obama, or both.

Hillary Clinton, once a proponent, has flip-flopped on the issue, further undercutting the few Congressional Democrats who might have been tempted to vote for it. Some analysts are now suggesting Congress won't even consider the pact until after next year's presidential election.

When, if ever, Congress gets around to the TPP, let's hope it's with a realistic understanding of what can actually be done about currency manipulation, and how.

Urban Lehner



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