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 dot.com 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.