Incoherency on the TPP’s currency “side deal”

November 13th, 2015 at 9:42 am

The WaPo’s editorial in support of ratifying the Trans Pacific Partnership 12-country trade deal makes some good points, like you need to learn what’s in this beast before you sound off about it.

I’m working my way through the TPP and will have more to say at a later date. So far, I’ve seen better language in parts of the text than in past agreements, but you’ve got to be careful. It was good to see a requirement for minimum wages in the labor chapter, for example, but I didn’t see anything that would prevent a signatory country from setting a minimum wage at the equivalent of one cent and being in compliance.

The dispute settlements process may be improved—the text calls for greater transparency and more input from individual states representing their “public interest,” but only in practice will we know how much substantive input sovereign states have in these multi-country tribunals. The fact that the tobacco industry is explicitly prohibited from bringing dispute cases regarding public health regulations is both a clear, progressive advance, and a worrisome reminder that other safety hazards do not have such carve outs.

But the ed board is incoherent on currency management. There is no currency chapter in the deal, just a side agreement with no enforcement mechanisms against countries managing the value of their currency, typically suppressing its value relative to the dollar to make their exports more price competitive. According to the WaPo, echoing the administration:

…this omission is entirely appropriate. Any agreement that intruded so deeply on the monetary policies of the member states, the United States included, would have been rejected by all — in the unlikely event currency ma­nipu­la­tion could have been reduced to an intelligible, legally binding definition in the first place. Differences over currencies are best handled through diplomacy; and, through a side agreement, the TPP negotiations produced promises to avoid unfair currency practices and a first-of-its-kind forum through which countries can press complaints as they arise.

First, it is widely known by participants in this debate, or at least it should be, that the IMF has long had an “intelligible” definition of the action that comprise currency management. In fact, the declaration itself mentions the IMF’s “exchange rate assessment” as a useful tool in identifying the problem (see part above about the importance of actually reading these materials before you hold forth).

Second, accepting the argument that pressing action against currency manipulation intrudes on monetary policies essentially undermines any posturing that the declaration, despite the fact that its language reveals a solid understanding of the problem, goes beyond current, inadequate policy in this area.

If countries can simply cry “we’re simply engaged in domestic monetary policy!” as they intervene aggressively in foreign exchange markets, and there’s no enforceable discipline against doing so, it’s hard to see the value of the joint declaration, with one possible exception: the declaration calls for better, more timely data that would allow analysts to identify exchange rate manipulation by specific countries in close to real time. OTOH, that may leave us all dressed up with nowhere to go.

While they could have stuck with the reasonable argument that the other countries simply wouldn’t accept a currency chapter (though that kinda tells you it’s necessary), the administration created this problem by opportunistically arguing that a currency chapter would undermine sovereign monetary policy, an argument that makes little sense from the US perspective (our holdings of foreign reserves have always been and will likely always be tiny compared to those of known currency managers). Again, once you accept that premise, you’ve blocked yourself from prosecuting the case.

So where do we go from here? Absent legislative action that would allow Congress and future administrations to take action against currency managers, we’re back where we started. Of course, the administration will be pushing hard on members of Congress in both parties to support the TPP in the forthcoming up-or-down vote. While the deal can’t be amended (it’s on a “fast track”), there’s no reason members can’t make their support contingent on enforceable currency rules outside of the TPP, e.g., legislation that gives Congress the ability to assess countervailing duties against currency managers. In fact, such a measure could have greater scope in that it would apply to all our trading partners, including China and other non-TPP countries. (BTW, the argument that because China’s currency is no longer misaligned, it will never be so again should not be taken seriously.)

The dollar is strong right now due to relative growth rates and relative central bank plans (we’re considering raising interest rates; Europe is not), not, as far as I can tell, due to currency management. But the impact of the strong dollar can be seen in the growing trade deficit, the drag that creates on growth, and the flat-lining of manufacturing employment so far this year. This gives you a sense of what’s at stake here. Based on the language in the joint declaration, I suspect USTR and the Obama admin agrees with these stakes. We need to find a way to do something real about them.

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5 comments in reply to "Incoherency on the TPP’s currency “side deal”"

  1. Steve Bannister says:

    Thank you, Dr. Bernstein, for wading through this so I don’t have to.

  2. Steve Bannister says:

    Also, there was an analysis on Vox claiming developing economies are in favor of the ISDS chapter because it becomes a proxy for their deficient legal systems in terms of encouraging FDI. A new view that I am certainly thinking about.

    • Kevin Rica says:

      But if the US is already a safe-haven currency and foreign investors pile into the US just to park their money here so it will be safe, what does the US gain from the ISDS chapter? Why should the US make any further concessions? Is the purpose just to help American firms move someplace with poor legal protections?

      If that is the case, why should the other 99% of Americans sacrifice our ability to pass laws in the public good without compensating concessions? Why did the Obama Administration make any concessions on behalf of the larger American population to help and implicitly subsidize our firms investing their money abroad rather than at home? A perfect example of how the Chamber of Commerce hates laissez-faire economics when they want the government to intervene on their behalf.

      And the CoC knows that the best legal minds will earn millions finding a way for foreigners to win in arbitration. And if foreign firms win, so will American firms, since no advantage can be granted to foreign firms that would not also be shared with their domestic counterparts. Any loss for the American Government at the tribunal is a win for the CoC.

  3. Kevin Rica says:

    If we are worried about freedom to conduct monetary policy freely, then exclude it from the definition of manipulation, where it doesn’t belong anyway. Besides, in a world where most Central Banks are already at the zero lower of interest rates, the point is substantially moot.

    We need to ban forex intervention (which we do) by countries with large current account surpluses, then we need to make that specifically illegal. And if we can’t get that, the benefits of the TPP ain’t worth the effort.