TPP in Focus: Point-Counterpoint -- The Importance of Currency Manipulation Disciplines in TPP

Apr 13, 2015

This blog post is part of a series about the Trans-Pacific Partnership trade agreement.

We know the impact currency manipulation has had on the U.S. economy. Currency manipulation has cost U.S. workers between one million and five million jobs – and is responsible for as much as half of excess unemployment in the United States. It has contributed to stagnant wages for the middle class and to inequality in the United States. Even opponents of addressing currency manipulation in TPP recognize that currency manipulation is a “legitimate problem.”

Former Treasury Secretary Larry Summers recently asserted that the United States should use the leverage provided by TPP to address “inappropriate producer subsidies – including through manipulated exchange rates.”

A previous “TPP in Focus” blog on currency manipulation explained why including currency manipulation disciplines in TPP would not put U.S. monetary policy at risk. Opponents of addressing currency manipulation in TPP have raised a number of additional arguments. Simon Johnson recently responded to some of these arguments, and this blog responds to a number of others.

Argument: Our “quiet dialogue” on currency manipulation has been working. Japan has not manipulated its currency over the past several years and China’s RMB has consistently appreciated against the U.S. dollar over the past decade. Further, trade agreements are the wrong forum to address this issue – we need to stick with our efforts at the IMF, G7, G20, and other bilateral fora.

Counterpoint: There are at least three responses to this argument. First, diplomatic pressure and quiet dialogue have proven inadequate at resolving the issue. Our diplomats have been pressing other countries to stop manipulating their currencies for at least 25 years now. In fact, Treasury first formally labeled China a currency manipulator more than 20 years ago, and began applying diplomatic pressure at that time. Yet, in 2006, a former IMF official noted that “quiet diplomacy” is producing “meager” results. To this day, the issue remains unresolved. Our officials today admit that progress has not gone “far enough, not fast enough.” That is an understatement when, after more than a quarter century of diplomatic pressure, workers continue to lose jobs.

The practices of some of the most significant currency manipulators, China, Japan, and Korea, demonstrate that “quiet diplomacy” has not adequately addressed the issue:

China: Treasury has produced formal reports on its “quiet diplomacy” with China since 1988. Treasury noted that China devalued its currency by 21% in 1989 and 10% in 1990, allowing China to move from a deficit of more than $4 billion in 1989 to a surplus of $13.8 billion in 1991. Treasury actually labeled China a currency manipulator in reports to Congress in the early 1990s. Of course, this label didn’t end Chinese manipulation, and, after 15 years of quiet dialogue, Treasury found that China was still engaged in “heavy foreign exchange market intervention” in 2007. During this time, China’s intervention peaked at $1.5 billion per day and its surplus reached 10% of GDP.

The impetus for the appreciation of China’s currency over the past few years was not quiet dialogue alone. China decided during the financial crisis to stop allowing any appreciation of its currency. It then announced in June 2010 that it would allow some appreciation again. However, regardless of its stated policy, China continued to intervene massively in the currency markets, and the value of the RMB was essentially unchanged (less than 0.1% appreciation) until September 2010, when the Committee and the House decided to act on currency legislation. The Chinese authorities then allowed the RMB to appreciate significantly in the remaining months of 2010 (2.9% appreciation from September through the end of the year) as the possibility of Senate action loomed.

Nevertheless, Treasury’s most recent report to Congress still found that China’s RMB “remains significantly undervalued,” needs to undergo “further appreciation,” and that China still refuses to disclose its interventions in foreign exchange markets.

Japan: Treasury asserts that quiet diplomacy explains why Japan has not intervened in foreign exchange markets over the past few years. However, a historical perspective demonstrates that Japan’s practice is erratic – Japan goes through spells of intervening heavily and spells where it does not intervene at all (described below). Treasury has been engaged in “quiet dialogue” throughout periods of both intervention and non-intervention. When Japan has chosen to intervene, Treasury’s quiet dialogue has not been an effective deterrent.

Japan’s interventions started in the mid-1970s. The yen eventually became so undervalued against the dollar that a formal agreement (the Plaza Accord), not quiet dialogue, was deemed necessary in 1985 – after Congress began considering a legislative fix. The early 1990s saw continued Japanese intervention until June 1995, and then in 2003 and 2004 Japan again increased its purchase of foreign currency reserves to more than $150 billion each year. Japan then reduced its purchases to less than $50 billion per year until 2011, when it increased purchases to $177 billion. Treasury expressed concern over Japan’s unilateral interventions. Japan’s interventions decimated the U.S. tool-and-die industry and other segments of the automotive industry.

Japan’s practice has fluctuated over time with Japan intervening as it has seen fit, regardless of Treasury’s quiet dialogue.

Korea: Korea has expressed interest in joining the TPP and is also one of the countries that Treasury has labeled as a currency manipulator. Of note, both Treasury and the IMF expressed serious concerns about Korea’s heavy foreign exchange intervention in their 2014 reports. Given that our FTA with Korea does not address currency manipulation and Korea’s desire to join TPP, Korea is another country that needs to be monitored and where Treasury’s “quiet dialogue” has again failed to resolve the issue.

It is also worth recalling that market-determined exchange rates did not come about simply as the result of quiet dialogue. In the early 1970s, President Nixon imposed an import surcharge, which immediately brought our trading partners to the negotiating table. Within months of the action, the Smithsonian Agreement was reached and flexible exchange rates became the norm.

Second, there is a consensus that diplomatic pressure by itself is insufficient to address other trade issues, such as illegitimate food safety measures designed to keep out U.S. agricultural exports or weak intellectual property protections that harm U.S. innovators. TPP will include enforcement mechanisms in those areas and many others. If diplomatic pressure is not sufficient to address these other issues, why would it be considered sufficient to address currency manipulation?

Finally, trade agreements already do include rules against currency manipulation, both in the WTO and the IMF. The problem is that the WTO currency rules – while fully enforceable like all other WTO rules – are outdated (pre-dating today’s flexible, market-based exchange rate system) and somewhat vague. (Many of us, along with Senator Obama and others, petitioned the Bush Administration to bring a WTO case to address currency manipulation. We were told the rules were not clear enough to give us confidence we would win such a case.) On the other hand, the IMF rules – updated and sufficiently clear – are not enforceable.

Specifically, the World Trade Organization already includes the following currency provisions:

  • “Members shall not, by exchange action, frustrate the intent of the provisions of this Agreement[.]” GATT Article XV:4.
  • “Multiple currency practices can in certain circumstances constitute a subsidy to exports which may be met by countervailing duties[.]” GATT Article VI: 2-3 (Ad Note).
  • Prohibited export subsidies include “currency retention schemes” and the provision by governments “of exchange risk programs.” WTO Subsidies Agreement, Annex I.

In fact, Treasury cited some of these provisions during China’s negotiations to accede to the WTO. In a 1993 report in which Treasury asserted that China was manipulating its currency, Treasury stated the following:

Treasury notes that GATT Article XV contains two obligations with respect to exchange restrictions: 1) that GATT members shall not, by exchange action, frustrate the intent of the GATT trade provisions; and 2) that members may apply exchange restrictions only in accordance with the [IMF] Articles. As it accedes to the GATT, China must bring its exchange system into conformity with GATT Article XV and the IMF Articles of Agreement.

Further, leaving currency manipulation out of the TPP is contrary to the Obama Administration’s explicit goal in the TPP – to improve the status quo and establish the rules before another country, such as China, sets up different rules.

Some argue that opposing the TPP is basically settling for the status quo when we have a chance to improve the position of the United States through TPP. Yet, not including currency obligations in TPP is essentially asking us to accept the status quo when it comes to currency manipulation. Given the huge effect that currency manipulation has on trade flows, the TPP presents an important opportunity to improve the status quo for the United States.

Along the same lines, the Administration has argued that the TPP is our opportunity to write the rules and ensure that other countries, such as China, do not write rules that hurt the United States. Currency manipulation is an important issue, given the Chinese and Japanese practices described above, where the United States needs to take a leadership role in writing the rules. While a particular country might not be manipulating its currency at the moment, the international economic order lacks a rule with an enforcement mechanism that deters currency manipulation from occurring in the future. The TPP should provide that rule and enforcement mechanism.

Put simply, those who believe rules-based trade has the potential to improve people’s lives and who believe in international engagement should support a rules-based currency discipline in the TPP.

Argument: Addressing currency manipulation would lead to a trade war. We’d be the target of retaliation or “sanctions” from other countries.

Counterpoint: Jared Bernstein addressed this issue in a piece titled “No, negotiating a currency chapter in the TPP will not cause a trade war or cost us jobs.” Bernstein described the claim that a currency manipulation provision would lead to a trade war as “utter nonsense.” The claim is based on unfounded conjecture – there is no reason to believe that a currency manipulation provision subject to an enforcement mechanism in the TPP would lead to a trade war with any country. (In addition, the WTO clearly prohibits retaliation, and the United States should not base its trade agreement negotiations on fears that a country would illegally retaliate against the United States.) In fact, currency disciplines in the TPP could be a stepping stone in developing a full multilateral structure on this issue – which is the ultimate goal.

Finally, my earlier blog post explains why the United States would not be found to violate a currency provision and, thus, why “sanctions” would not be imposed on the United States because of a provision.

Argument: There is no clear definition of currency manipulation.

Counterpoint: The IMF has already developed guidelines that define currency manipulation. Those guidelines have been accepted by all IMF parties (including all of our TPP negotiating partners). Thus, as explained in the earlier blog, the United States would not face any risk to its monetary policy.

It is also worth recalling that our trade negotiations already deal with some thorny issues, some of which are not easily defined. For instance, we have struggled to define the “minimum standard of treatment” in investment chapters for years, but we have not taken it out of our trade agreements simply because it is hard to define. (I have proposed clarifying the U.S. language on the “minimum standard of treatment” to better strike the balance between protecting U.S. investors abroad and preserving a country’s ability to regulate in the public interest.)

Argument: Currency disciplines would be “one-sided” because the United States does not engage in currency manipulation but does have an accommodative monetary policy that may weaken the dollar.

Counterpoint: The IMF guidelines are not “one-sided” because they distinguish between currency manipulation (a policy that, by definition, benefits one country at the expense of another) and accommodative monetary policies (which typically are in the mutual interest of all countries). To be sure, accommodative monetary policies are not always appropriate and can be harmful when they cause excessive inflation. But in those cases the policies are just as harmful (if not more so) to the home country as they are to other countries. Indeed, inflation concerns generally serve as a natural check on countries using accommodative monetary policy to weaken their currencies.

Currency manipulation is fundamentally different – it involves the purchase of another country’s currency or other assets to artificially depress the value of the country’s own currency. This type of “beggar-thy-neighbor” policy is the type of destructive trade practice that countries want to root out in trade agreements.

Argument: Addressing currency manipulation jeopardizes our status as the world’s reserve currency.

Counterpoint: This concern has not really been fully articulated in a way that allows for a full response. In any event, the United States’ status as the reserve currency will not be affected by a currency manipulation provision. Generally speaking, a country’s currency becomes a reserve currency because of the strength and stability of that country’s economy. A currency manipulation provision in the TPP will not destabilize the U.S. economy (to the contrary, it will make our economy stronger) or do anything to decrease confidence in the dollar. This is yet another argument that lacks substantive merit. In fact, it is because the dollar is the reserve currency of the world that other countries target it when they manipulate their currencies.

Argument: Addressing currency in TPP would be a “poison pill” in the TPP negotiations. Those pushing for currency in TPP are really just trying to undermine the entire agreement.

Counterpoint: A number of us Democrats, as well as Republicans, that are pushing for including currency manipulation provisions in TPP have a long record of working to do trade agreements right and, when successful, supporting them. For us, this is not an underhanded attempt to kill the TPP, quite the opposite. It is an attempt to ensure that TPP is a meaningful agreement that does not ignore a major trade-distorting practice in the 21st Century.

Further, Members have been pushing this issue for years, including our specific proposal almost two years ago.

And this isn’t the first time opponents have claimed that our trading partners would never agree to include an issue that affects trade in a trade agreement. The “poison pill” argument was invoked when House Democrats pushed the Bush Administration to include strong and enforceable labor and environmental commitments in trade agreements. That argument proved to be utterly false, as we learned during the May 10th Agreement.

In any event, after more than five years of negotiations, there are other issues which parties are insisting on that are not called poison pills. Those who push for those provisions are not accused of inserting poison pills. Why should currency manipulation be treated differently?

Our trading partners’ commitments to eliminate tariffs on U.S. exports can be vitiated when countries have the ability to essentially impose import tariffs by manipulating their currencies.


114th Congress