Any day now, a major debate will commence in Congress over legislation to grant Trade Promotion Authority to the executive branch.
Among the more controversial issues to be debated will be proposals to include “currency manipulation” provisions in the Trans-Pacific Partnership and other future free trade agreements. These provisions would require the United States to retaliate if a trading partner is found to intentionally undervalue its currency to boost exports, suppress imports or to gain other commercial advantages.
Even aside from the fact motive is almost impossible to attribute, this is a seriously flawed concept.
First, there is no consensus among economists about how to measure undervaluation. For example, some say the Chinese RMB is undervalued as much as 35 percent, but others say the yuan is approximately at fair market value given its 38 percent appreciation against the dollar between 2005 and 2013.
Second, there are other ways to manipulate currency besides the conventional method of a central bank selling its own currency in lieu of buying foreign currencies. Thus far this year, more than 20 central banks have eased monetary policy, which means they increased the amount of their currency in circulation. This is an indirect means of currency manipulation.
Then there is the issue of quantitative easing. The U.S. Federal Reserve’s balance sheet has increased from $900 billion in 2009 to approximately $4.4 trillion today. The Fed’s three rounds of quantitative easing – which increased the stock of dollars in circulation – are essentially no different than conventional Japanese and Chinese currency manipulations.
Third, the dollar’s relative strength (according to the Financial Times, on a trade-weighted basis it has appreciated at a faster pace during the past eight months than any similar period since the end of the Bretton Woods system in 1971) largely reflects economic fundamentals, not currency intervention. U.S. economic growth has been far stronger since 2008 than the rest of the developed world.
Fourth, in 2014, 44 percent of U.S. imports were intermediate goods. Slapping countervailing duties on imports would simply increase the price of final goods (or reduce profit margins), damaging the competitiveness of U.S. producers.
There is one last thing to ponder. A currency manipulation clause is guaranteed to kill any prospects for passage of the Trans-Pacific Partnership or any other future agreement. In fact, that may be why supporters want to include it.
