What do we want?
A currency chapter!
When do we want it?
OK, maybe that’s not the stuff of protest movements, but it should be.
The issue at hand is the Trans-Pacific Partnership, a proposed set of rules governing trade between the US and 11 other countries. Here’s how the US Trade Representative, the agency within the Obama administration that’s trying to sell the deal to the Congress, describes it:
“…an ambitious, 21st century trade agreement that the United States is negotiating with 11 other countries throughout the Asia-Pacific region…When complete, TPP will unlock opportunities for American workers, families, businesses, farmers, and ranchers by providing increased access to some of the fastest growing markets in the world.”
Then you have Lori Wallach, director of Public Citizen’s Global Trade Watch, who knows more about what’s actually in the TPP than anyone else I’ve met, which is no small feat because the text of the damn thing is confidential. The public has no access to materials drafted thus far, and even members of Congress have limited access. Wallach:
Meanwhile, more than 500 official corporate “trade advisors” have special access…
Although it is called a “free trade” agreement, the TPP is not mainly about trade. Of TPP’s 29 draft chapters, only five deal with traditional trade issues. One chapter would provide incentives to offshore jobs to low-wage countries. Many would impose limits on government policies that we rely on in our daily lives for safe food, a clean environment, and more. Our domestic federal, state and local policies would be required to comply with TPP rules.
At CBPP we’ve not previously weighed in much on trade agreements, but Paul Van de Water’s been concerned that the TPP “threatens to make prescription drugs less affordable for consumers and taxpayers” by providing drug companies the ability to extend existing patents. As Dean Baker relentlessly points out, it’s hard to square such protectionist-sounding measures with “free trade.”
So who’s right and what does a currency chapter have to do with it?
The opponents are unquestionably correct on two critical points. First, to call this or any other such pact a “free trade deal” is meaningless. It’s really a contract between the signatory countries on the rules by which they’ll manage trade. Some of those rules will lower tariffs and other trade protections; some of them will elevate new protective measures, often around patents and intellectual property. To articulate such rules is by no means inherently bad, but let’s be clear that unlike the benign-sounding “free trade,” in reality there’s no such deal that doesn’t create winners and losers.
Second, the lack of transparency is a big problem. There’s no way we the public should get behind something as encompassing as the TPP without scrutiny. I understand the motivation for the secrecy: it’s notoriously difficult to negotiate a unilateral trade deal; one with this many players is high-dimensional chess. So I can see where the trade reps want to avoid messy public input. But too bad. To do so is undemocratic.
The pro-side also makes fair points. Relative to many of our Asian trading partners, our trade rules are quite unrestrictive. Thus, rules that lower tariff and non-tariff barriers should help our exporters more than theirs. Also, while the pro-TPP’ers too often ignore how increased globalization has caused deep and serious damage to workers in tradable-goods industries, the increased supply of goods wrought by globalization has been a huge boon to consumers. The future clearly holds more global trade, so agreeing on rules-of-the-road is a reasonable thing to undertake.
But as stressed above, what matters is the nature of those rules, and here’s where currency comes in. While tariffs get a lot of attention, the key determinant of trade balances between countries is the relative value, or exchange rate, of their currencies. By taking actions that depress the value of their currencies relative to ours, numerous countries gain a net export advantage: their exports to us are cheaper while ours to them are more expensive.
As Fred Bergsten recently wrote:
Bergsten and Gagnon (2012) estimate that the US current account deficit has averaged $200 billion to $500 billion per year higher as a result of the manipulation (by all countries, not just those prospectively involved in the TPP). This translates into a loss of between one and five million US jobs within the environment of continuing high unemployment and shortage of alternative policy instruments to remedy the problem.
Bergsten’s piece, which I consider to be the most important reading on this question of a TPP currency chapter, provides an outline of a workable process to finally do something about this long-lasting problem. To identify when currency manipulation is taking place, “only three variables would need to be identified: current account surpluses, levels of reserves (to determine if they are “excessive”), and amounts of intervention (or changes in reserve levels as a proxy if actual intervention numbers are not available on a timely basis).”
The devil’s in the details. Countries collect dollars (and other reserve currencies) both to insulate themselves against debt crises as well as to keep their currency’s value low relative to the dollar. So there would need to be rules like the ones suggested by Bergsten based on the value of, for example, three to six months’ worth of imports, or a year’s worth of external debt liabilities.
Bergsten suggests five possible ways to enforce the anti-manipulation rules: “withdrawal of concessions made in the [TPP] itself, imposition of countervailing duties, import surcharges, monetary penalties (fines), and countervailing currency intervention.” The latter, which I’ve discussed under the rubric of reciprocity (following Daniel Gros), seems like a no-brainer in a TPP: if countries can go into currency markets and buy dollars, then we must be able to do the same re their currency. This is not currently the case with China and other countries that employ capital controls.
Read Fred’s piece for the details, and I’m sure many who know this space well will have valid issues to raise, but the larger point of his work (along with that of Joe Gagnon and others) is that the argument you often hear—“there’s no way to either identify or stop currency manipulation”—is simply not valid.
So, here’s my position on the TPP and if I may be so bold, I suggest it be yours as well: no deal unless there’s a credible currency chapter. I’d argue that’s a stance that reasonable people on both sides of the deal can and should take.
But won’t this kill the deal? Again, I’m with Bergsten on this:
Including clear obligations to avoid currency manipulation in the TPP and other future trade agreements, along with an effective dispute settlement mechanism and sanctions against violators to make sure the obligations are observed, is in fact necessary to save TPP and other pacts because Congress is unlikely to approve them otherwise.
I’d probably put it: “because Congress should be unlikely to approve them otherwise.” I’m not so sure which way the politics of this will bounce. But I will be urging anyone who will listen, inside and out of the Congress and the US Trade Rep’s office, that a TPP without a currency chapter is something they should rigorously oppose.