Curiously, the repeated calls for including a currency clause in the TPP fail to tell us the most important thing: what kind of clause? What behavior is to be proscribed? Who will be in charge of monitoring for transgressions? What types of sanctions would constitute a fair remedy? The silence of pundits on these crucial matters reflects the lack of consensus on what constitutes systematic currency manipulation. When countries maintain fixed exchange rates below their market value, impose extensive controls on capital inflows, and directly intervene in the market to defend a target exchange rate, it is easier to sustain charges of currency manipulation. But beyond these textbook cases we enter a wide grey area.
Take the argument that the buildup of excessive foreign exchange reserves constitutes currency manipulation. Where do we draw the line on what constitutes excessive, and how can we determine that the objective is to obtain unfair competitive advantage and not the accomplishment of legitimate policy goals? Many Asian countries concluded from the havoc wrought by the Asian Financial Crisis that they needed to boost their forex reserves as an insurance mechanism. And many oil producing countries have channeled their foreign reserves into sovereign investment funds to diversify their economic portfolio. Recently, Japan has been accused of unfairly cheapening the yen through its quantitative easing program, but the actions of the Bank of Japan mimic what the Fed has done to combat the post 2008-recession. The important lesson here is that currency manipulation is largely in the eyes of the beholder. Critics read into these policies an attempt at competitive devaluation, while proponents note their merit in terms of prudential financial management, economic diversification, and deflation abatement. Until we have a widely-accepted definition of what constitutes currency manipulation, we don’t know what behavior to outlaw in a trade agreement.
The TPP is not the right platform to embark on the quest for definitional clarity. Currency misalignment is a global issue, one that falls largely outside the purview of this 12 member grouping. The country that generates the most concern in the United States for currency intervention―China―is not participating in the TPP, and among current members only two (Malaysia and Singapore) are on the list of manipulators that according to a recent Peterson Institute (using the foreign reserve criteria) merit a U.S. response. The problem is not that the TPP net will catch few currency manipulators, but rather the folly of attempting to legislate in a trade agreement rules on crucial international financial matters such as currency intervention, without developing first within the IMF a set of specific guidelines on proscribed behavior. The risk of incompatible rules is not minor, if we keep in mind the recent worry that provisions on FTAs may disallow prudential capital controls that the IMF now deems can be useful to maintain global financial stability. In the rush to avail themselves of the trade sanction mechanism, proponents of a currency clause in the TPP have not learnt this lesson and they insist on putting the cart ahead of the horse.
These advocates should also be careful about what they wish for. The United States may introduce the issue of currency
manipulation to the TPP talks, but the final clause will be a negotiated outcome reflecting the views of the other parties to the agreement. And some of the ad hoc arguments made these days by pundits―that the Bank of Japan’s quantitative easing program counts as currency manipulation, but not the actions by the Fed―will certainly not fly in the TPP deliberations. Trade penalties are a double-edged sword: while the United States may go after currency manipulators (and again we don’t know what actions would count as unfair intervention, what the trigger points would be), its own actions will also be subject to legal challenge if target nations challenge the evidence that the United States uses in building its currency manipulation case.
A currency clause in the TPP can do much harm and little good. For starters, it will introduce a very divisive issue on already heated negotiations that are now reaching a delicate final stage. The deadline for completing the agreement has been postponed before, and by overloading the negotiation agenda we risk negotiation drift. Moreover, it can dim the possibilities of constructing an Asia-Pacific wide platform of high level economic integration. If a currency clause discourages China from joining the TPP in the future, it will be a major lost opportunity as many of the disciplines on intellectual property protection and state-owned enterprises, to name a few examples, could provide impetus for the reform of Chinese trading practices.
While the costs are high, the benefits are in question. Currency realignment is not a magic pill to eliminate trade deficits. As several economists , shifts in the value of the Chinese yuan have had a marginal effect in the American trade deficit with China. Nor did the sizable depreciation of the dollar vis-à-vis the yen during the 2000s had any impact in reducing the bilateral trade deficit. This point is important because the auto caucus has used the argument of currency manipulation to oppose Japan’s admission to the TPP. The impact of said clause in the auto trade balance will be modest given that the majority of Japanese brand cars sold in the American market are manufactured on U.S. soil.
Even before Japan sits at the TPP negotiation table, American trade negotiators have substantially advanced the offensive and defensive interests of the Big Three car companies. The Japanese government has agreed to negotiate on non-tariff measures that hinder market access for foreign brands (such as emission standards and preferential tax schemes) and to accept a long phase out of American auto tariffs, a snap back mechanism to reimpose higher duties if disputes arise, and a special safeguard to prevent sudden surges in American imports of Japanese cars. The U.S. auto industry has been well served by the nation’s trade negotiators. It is now time to contemplate how their demand for a currency manipulation clause will be a disservice to American objectives in the TPP.
Editor’s Note: An abridged version of this commentary was published as an op-ed in The Hill’s on July 4, 2013.