Once Again, We Correct the Record About Currency Manipulation

By Elizabeth Brotherton-Bunch
Feb 19 2015 |
The Washington Post’s Feb. 19 editorial on currency manipulation, seen above in its print form, had some inaccurate points.

This time, it’s the Washington Post editorial board that needs an editor.

While more Members of Congress from both parties are joining leading economists to press for an enforceable provision on currency manipulation in the proposed trade negotiation known as Trans-Pacific Partnership (TPP), some folks are arguing that such a rule isn’t needed.

First, Ramesh Ponnuru had a dodgy post in Bloomberg View on “currency paranoia,” which we thoughtfully corrected. Now the Washington Post editorial board is up to bat, arguing that adding a currency rule to the TPP would be “too costly.”

Once again, we’re correcting the record.

The Post begins:

1. “FIVE YEARS ago, President Obama declared that the United States should double exports by 2015. At that time, the Federal Reserve was expanding its balance sheet and holding interest rates near 0 percent, the combined effect of which was to weaken the dollar. Americans understood that there was no overt coordination between Mr. Obama and the Fed. A foreign observer, however, could easily have concluded that Washington was manipulating its currency to meet a specific economic goal at the expense of other countries. Indeed, many alleged just that.”

According to guidelines already adopted by International Monetary Fund members, a currency manipulator by definition must have large foreign asset reserves and current account surpluses. The United States has neither.

2. “Keep this history in mind as Congress debates whether to include measures against ‘currency manipulation’ in trade-promotion legislation pending on Capitol Hill. These proposals enjoy bipartisan support from lawmakers who believe that the United States should not go forward with the trade-promotion bill, which would facilitate passage of the 12-nation Trans-Pacific Partnership (TPP) tariff-cutting deal, absent a mechanism that would allow U.S. firms to request sanctions against nations that allegedly victimize them by artificially holding down their currencies’ values.”

Not only do the proposals enjoy widespread bipartisan support — 60 Senators and 230 Members of the House in letters to the Administration — economists on both the left and right also believe a currency provision should be included in the TPP. Their reasoning is simple: Currency manipulation provides an unfair advantage for foreign companies exporting to the U.S. market, since it essentially serves as a government subsidy. It’s commonsense that a mechanism be in place to negate such market distortions.

3. “Advocates cite a Peterson Institute for International Economics study blaming foreign currency interventions for the loss of 5 million jobs over the past decade — 500,000 per year in an economy of more than 140 million jobs.”

The Post is being glib about job loss here — which is unfortunate, given that currency manipulation has been incredibly harmful to the U.S. job market. By one estimate, our trade deficit with Japan (which is largely fueled by Japan aggressively devaluing its currency) contributed to the loss of nearly 900,000 jobs in 2013 alone. Then there’s China, whose currency manipulation helped displace 3.2 million American jobs between 2001 and 2013. Manufacturing in particular has been hard hit by this — still short by roughly five million jobs since China entered the WTO.

The good news? It is projected that ending currency manipulation would create 5.8 million jobs over three years. Seems like a no-brainer that taking steps to prevent currency cheating would be in our best interest.

4. “The underlying grievance here is not so much false as it is one-sided. Japan, which would be a member of the TPP, has engaged in currency ma­nipu­la­tion in the past — depressing the yen but also, in a crucial 1985 pact, agreeing to appreciate it at U.S. request.”

O.K., let’s get real here. Japan didn’t just decide to raise the yen back in 1985 out of the kindness of their hearts. They were compelled by the Plaza Accords, in which the United States told the Japanese that if they wanted access to U.S. markets, they had to stop devaluing their currency.

Which only further proves that deterrents to currency manipulation should be included in TPP. Clear consequences for currency cheating need to be put in place at the start. Such rules serve as a vaccine against cheating, making the system work and protecting American workers and businesses from the perils of foreign protectionism.

5. “China, which is not in the TPP, has pursued a cheap-currency policy to boost exports — although it has quietly allowed an updrift in the yuan in recent years, due partly to U.S. diplomatic pressure. Meanwhile, the dollar functions as the world’s reserve currency, enabling this country to enjoy lower interest rates than it otherwise would, in part because Japan and China bought and held vast amounts of our debt, even as we continued to run large trade and budget deficits.”

Well, China isn’t in the TPP (yet) — but Chinese leaders have said they would be interested in joining, and it’s a real possibility that if the TPP goes into effect, they will.

And let’s get real about the so-called progress made by the Obama administration in convincing China’s leaders to allow the yuan to appreciate. Since 2012, there’s been virtually no change in its value with alarming bad behavior in the past year marked by continued foreign exchange purchases. To his credit, President George W. Bush saw more progress in yuan appreciation during his tenure than President Obama has — though let’s not forget that strong votes in the House and Senate in 2005, 2010, and 2011 sent shockwaves to Beijing that moved the yuan off its peg to the dollar.

“6. In short, while it’s politically expedient to describe global currency markets as rigged against the United States, it’s more accurate to describe them as a manifestation of interdependence. Economic experts disagree as to the ‘correct’ valuations of major currencies; the precise intent behind any particular currency intervention is also hard to establish. These are just two of the many technical reasons why even the International Monetary Fund definitions of currency manipulation, which lawmakers cite as a model, would be difficult to incorporate into a legally binding process.”

Under international standards, there’s nothing difficult about determining that exchange rate manipulation is occurring. And any potential duties to countervail currency manipulation would be determined by the Commerce Department on a case-by-case basis after thorough examination. There is no debate that China and, in the past, Japan have an extensive history of purchasing foreign exchange assets in order to boost exports at our expense. 

7.  “Injecting currency manipulation rules into the trade-promotion bill at this late date could cause a rebellion by TPP negotiating partners, possibly scuttling the entire project, along with all the benefits, geopolitical and economic, of knitting major Pacific Rim economies together under the aegis of U.S.-style free trade. Congress should keep this poison pill out of the law and allow Mr. Obama and his successors to handle currency issues on a separate diplomatic track, the historical approach that has served U.S. interests best.”

Obama’s “separate diplomatic track” simply is not working. The yen is devalued, the yuan is stagnant and the trade deficit with China and Japan is costing millions of American jobs. There is little to no evidence that either nation is taking steps to address this, either. If anything, the administration’s recent defense of Japan sent the wrong message that there won’t be consequences for predatory devaluation.

It is entirely appropriate to include a currency provision in the TPP that mirrors guidelines already agreed to by members of the IMF. In fact, it would be inconsistent for the U.S. to not include a currency provision in a trade pact as large as the TPP. Including a provision ensures all nations play by the same rules, which is fair for everyone. This is something Members of Congress have been asking for since early last year. Unfortunately, at this late date, the administration acknowledges that it has never so much as even mentioned this at the negotiating table. It’s now up to Congress to act.

Related Story: Congress's Currency Paranoia: CORRECTED.