The strong dollar, its impact on growth, and the TPP

March 27th, 2015 at 9:45 am

When it comes to the debate over whether the Trans Pacific Partnership trade agreement should include rules against managing currency, the recent, sharp rise in the value of the dollar offers a little something for everyone.

For TPP supporters who oppose a currency chapter—i.e., explicit actions to be taken against signatories who push down the value of their currency to subsidize their exports and tax their imports—it shows that the value of the dollar against other currencies, up 20% over the past year, can rise for reasons that have little to do with interventions by currency-managing countries. The current appreciation is due to stronger growth rates here compared to Europe, slowing demand in emerging economies, and central bank actions as our Fed is talking about raising rates (which boost the dollar’s value) while Europe’s central bank is aggressively lowering rates.

On the other hand, the dollar’s climb also shows how such an increase raises the cost of our exports, cheapens imports, and thus significantly dampens growth. This morning’s GDP report for 2014Q4 shows that while real GDP was up a moderate 2.2%, the growing trade deficit shaved one percentage point off of that growth.

Researchers from Goldman Sachs (no link) examined trade flows of durable goods and concluded that “the categories that have historically been most sensitive to the dollar have suffered disproportionately since the dollar began to strengthen…we find that the full effect of dollar appreciation so far has probably not yet appeared in the durables data, especially the impact on shipments. These findings reinforce our view that trade is likely to remain a drag on growth.” They expect trade to subtract six-tenths of a point from GDP growth in the current quarter.

It is precisely these sorts of growth impacts that motivate those of us calling for a currency chapter in the trade deal. The fact that the dollar’s rise is not due to actions by our competitors to artificially depress the value of their currency relative to the dollar is not irrelevant—it’s an important reminder that there are lots of moving parts in play here—but neither does nor should it assuage anyone’s concerns. The dollar remains the globe’s main reserve currency and it would be foolish to assume that countries will not at some point down the road accumulate dollars in the interest of raising their exports to us and reducing ours to them.

Interestingly, because the currencies of some of our major trading partners, like Japan and China, do not appear to be misaligned right now, the administration has argued that we don’t need language against currency manipulation. But you don’t throw away your umbrella just because it’s a sunny day. As Simon Johnson wrote in a must-read piece on this issue of currency and the TPP:

[There is] nothing to stop China or any other country from resuming large-scale currency-market intervention if and when it chooses. And the lack of diplomatic tension around exchange rates today makes this a good moment to raise the topic.

This last point is a strong one. If, as the administration claims, this just isn’t a big deal anymore, then it shouldn’t be hard to negotiate. Who’d object to rules against something they don’t do anymore?

As I pointed out above, we just had a decent growth quarter, driven by strong consumer spending, even amidst this dollar induced drag on growth. And as I often stress in this context, in 2000, the last time the US labor market was clearly at full employment, we had a large trade deficit of -4% of GDP (we also had a bubble, which is related to the trade deficit as well, as countries export their excess savings to us in ways that have led to investment bubbles). In other words, trade deficits can and are often offset by growth in other parts of the economy. But since the mid-1970s (!) they’ve been a drag on growth and a major factor in both the decline in our manufacturing sector and wage stagnation for many middle-class earners.

The current dollar episode is a reminder that currency values matter and while manipulation is not in play this time, it could be so again in the future. If the TPP is as important as its advocates say it is, I can think of no better time and place to take preventive action against those who manage their currencies to our disadvantage.

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3 comments in reply to "The strong dollar, its impact on growth, and the TPP"

  1. foosion says:

    Existing law requires the president to declare whether China is a currency manipulator. Although China clearly manipulates its currency, no president has declared it so.

    Why should we believe a similar clause in the TPP would have any useful effect?

    The TPP is about strengthening corporate power, for example, through increased patent and copyright protection and the ability to sue countries, not about trade, especially trade that helps most people.

  2. Kevin Rica says:

    Right now, Central Bank are intervening in foreign exchange markets much than in in the recent past (2013). But if intervention had continued, things would be much worse.

    Maybe the threat of strong US reaction is deterring some countries from overt manipulation. They may have found other ways to skin that cat, such as encouraging their banks to buy US assets. Given the near total lack of transparency in China and the fact that their trade deficit doesn’t seem to vary much, it’s not clear what is happening. Why did their balance stay the same if the Chinese Central Bank stopped intervening? That implies a major, and so far, unremarked tectonic swing in the Chinese capital account from near balance to major deficit. If it’s not a mirage, it’s not clear that this is sustainable. So the Chinese Central Bank may begin intervening again very soon.

    But the point is that we can insist on a currency chapter in the TPP, even if there are other things that we can’t control.

    I’m not advocating that the Administration’s trade negotiators take up drinking, but the would be wise to heed the Alcoholics Anonymous prayer:

    O God, give us the serenity to accept what cannot be changed,
    The courage to change what can be changed,
    and the wisdom to know the one from the other

  3. Duped says:

    We’ve all been conned by a system that was created in the idea that the US and its allies should rule the world. It can’t and it shouldn’t.

    This calls into question a lot of assumptions people make about currency markets, and how the Western world approaches banking and currency. The existing system is based upon control. When happens when we don’t have control anymore? Does it crumble, or do people listen to reason and create new solutions?

    The TPP is an old solution to a new problem. More people should be thinking about solutions that allow multiple, powerful, disparate economies to retain domestic and international peace. The TPP isn’t it. The corporate leaders of today don’t know how to do this despite the probability that they think they do know how to do this.

    Countries with power structures that refuse to adapt to changes generally fail when times change. The ideas that permeate corporate Washington are ideas that worked before, because there was plenty of exploitable labor in the world that had no voice. The insistence on this deal by the administration proves that it is out of touch with reality. It refuses to acknowledge the massive and accumulating damage to the politics of its own country caused by these free-market-based ideas.

    The only advantage we will have in the coming decades, if we have one at all, is a better governing system. Our economic system is not pleasing most of the people of this country anymore. This isn’t about capitalism, it is about the effects that foreign relationships have on our governing/economic system. The people advocating this deal just don’t understand this.

    It seems to me like our leaders are just fine with the idea of eliminating US culture, governance and democratic ideals, which precedes human rights. The people advocating this deal don’t understand much at all, it seems to me, except money and winning. And this is precisely, precisely why nations fail.

    It just isn’t possible that John Boehner, Mitch McConnell and Barack Obama could be for a deal, and that the deal would be in the best interest of this nation. It isn’t possible.

    Why doesn’t Obama get it? Why didn’t Obama understand the financial meltdown? Why did he side with the bankers? It had to be because he believes in banking so strongly, that he believes it is more important than democracy itself.

    There is an inherent conflict between democracy and banking. There always will be, because few people really do know what is fair over the long term. And even fewer are capable of holding to their accurate views over time or changing their inaccurate views over time. This is a fundamental human flaw.

    Banking is not a democratic system, and if it becomes the basis of the international system where there are multiple, disparate powers, as there is today and there never has been in the past, domestic unrest and civil war will be the norm. The US, China and Russia are not immune to civil war. All will happen if we refuse to find a better system.

    A better system is not that hard to conceive of. In fact, I could put it together given a few months. This isn’t actually that hard, people. What is hard is getting the people to understand the issues the power they need to change the system. That is very hard. These days, it seems almost impossible.