OK–I’m officially astounded: Summers et al on the importance of anti-currency manipulation language in trade deals.

January 15th, 2015 at 4:03 pm

I’ll have a lot more to say about this important and impressive new report from CAP about “inclusive growth” which some are hailing as a conversation starter for the 2016 D’s agenda. The commission behind the report is co-chaired by Larry Summers, a former Treasury Sec’y (that’s relevant to the part I’m about to highlight).

In lots of writings lately, I’ve been obsessing about the wage- and growth-dampening role of global imbalances, our persistent trade deficits, and most recently, the need for a currency chapter in any forthcoming trade deals, most notably the Trans-Pacific Partnership.

So this officially blew me away (my bold):

“…mechanisms must be found to ensure that the goal of free trade is not subverted by exchange rate manipulation. With the U.S. dollar at the center of the international financial system, misaligned exchange rates present an impediment to employment and wage growth for the United States in particular. But undervalued exchange rates also pose significant costs to people in the countries that are doing the manipulating, effectively reducing their real wages by raising the cost of imported goods and services—and therefore that of domestic, import-competing goods and services.

 The World Trade Organization, or WTO, rules pertaining to exchange rates are inadequate to address the challenge of unfair advantage from skewed exchange rates. Thus, it is unsurprising that no WTO member country has ever brought a currency dispute to the body. New trade agreements should explicitly include enforceable disciplines against currency manipulation that appropriately tie mutual trade preferences to mutual recognition that exchange rates should not be allowed to subsidize one party’s exports at the expense of others.”

To be clear, I’m not saying everyone on the commission, including Larry, endorses this. The intro to the doc notes: “there may be specific matters…on which some of us have different views.”

But the imprimatur of a former US Treasury Sec’y who is also one of the world’s top economists makes this all the more impactful. For those of us who’ve held this position for a long time, it’s a powerful and explicit endorsement of a critically important policy change.

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3 comments in reply to "OK–I’m officially astounded: Summers et al on the importance of anti-currency manipulation language in trade deals."

  1. Jude Boudreaux says:

    I think it’s an important shift, and long overdue. We’ve all got to recognize that while exchange rate imbalances here are often manageable, it can be incredibly impactful on emerging economies and the working poor who inhabit them.

  2. Dave says:

    Very good news. I wonder how they will define manipulation.

    I suggested a punitive remedy of an ‘inverse tariff’ a while back. That being excess reserves, rather than be used for buying foreign assets be distributed in some fashion over the population for the express purpose of letting them buy imported goods from the nation of the reserve holdings.

    I’m not holding my breath for this, but it is encouraging to see progress. It would help balance out trade. Logistically it might be a mess though. Perhaps it could be implemented through subsidies for imported goods (as opposed to tariffs) as long the imbalance exists.

  3. Raphy says:

    There’s a thoughtful proposal that’s floating around that’s been validated by a number of economists, ranging from Art Laffer on the right, to (I believe) Jared Bernstein on the left, to numerous economists at the Peterson Institute in the middle. It’s a three-part test that really gets at direct interventions, not QE. It makes sense that if we’re going to negotiate free trade agreements with chronic currency manipulators that we ensure they don’t undermine the potential benefits of the free trade agreement with currency manipulation. This is especially the case with Japan, who used currency manipulation to undermine the ’95 auto agreement. The fact that these countries don’t want to commit to not manipulate their currencies to undermine the trade agreement countries is quite telling.