Trade Deal’s Currency Flaw

The normally wonkish subject of exchange-rate management is being used by Donald Trump and others to attack Trans-Pacific Partnership trade agreement, which is ardently supported by Trump haters in the Establishment.

Despite an assurance from President Obama that the TPP would “raise the bar” on currency manipulation, and despite pleas from across the U.S. political spectrum to punish countries that directly intervene in foreign currency markets to gain an unfair trading advantage, such provisions were excluded entirely from the final 5,554-page agreement.

Though the practice of devaluing one’s currency to subsidize exports is largely clandestine, it has had devastating effects on the U.S. economy.

C. Fred Bergsten, an economist at the Peterson Institute for International Economics, estimates that currency manipulation has added between $200-$500 billion to the U.S. trade deficit and cost between 1-5 million U.S. jobs over the past 15 years.

During Tuesday’s GOP debate, Trump blasted the TPP deal for its failure to address this issue and cited it as another example of how other countries are taking advantage of the U.S. through trade.

“Currency manipulation is the greatest weapon people have. They don’t even discuss it in this agreement,” he said.

The U.S. and the 11 other member countries signed a toothless side declaration pledging to address unfair currency practices.

In an attempt to make it appear that at least some action is being taken, the U.S. and the 11 other member countries signed a toothless side declaration pledging to address unfair currency practices but lacking any discernible way of enforcing this goal or punishing violators.

The Obama administration has conspicuously avoided making this issue a negotiating priority, despite bipartisan pleas from Congress to address it in the TPP. Instead, advocates for its inclusion have been called out for engaging in “deceptive lobbying.”

Currency manipulation is one of the oldest mercantilist tricks in the book. Several countries in the TPP — such as Japan, Singapore and Malaysia, and several others that could potentially join in the future, like China, South Korea and Taiwan — have been criticized for deliberately reducing the value of their currency to artificially stimulate economic growth.

By deliberately intervening to lower the value of its currency, a country makes its goods cheaper and more competitive on the foreign market. It also provides protection to its domestic industry by making imported goods more expensive to buy.

The possibility that U.S. business interests hungry for cheap products will turn around and seek to include China once they pocket the TPP is particularly problematic.

China has also been widely labeled the world’s largest currency manipulator for keeping its currency, the renminbi, undervalued by 15-40 percent. The U.S. has declined to label it a currency manipulator for political reasons.

Trump has raised fears that a Chinese entrance into the TPP would mean even more harm to American workers and has launched a pre-emptive strike on its currency practices.

“On day one of the Trump administration the U.S. Treasury Department will designate China as a currency manipulator,” Trump’s website states.

“On day one of the Trump administration the U.S. Treasury Department will designate China as a currency manipulator,” his website states in a new policy position paper on U.S.-China trade relations.

The case of U.S. automakers offers a good example. Ford, General Motors and Chrysler assert that because of unfair currency practices by the Japanese, America is being flooded with cheap Japan-built cars while exported American cars are virtually nonexistent in Japan.

Robert E. Scott, an economist with the liberal Economic Policy Institute, estimates the U.S. lost nearly 900,000 jobs in 2013 alone because of its trade deficit with Japan, which is in large part attributable to unfair Japanese currency practices. He also said eliminating currency manipulation by the 20 worst offending countries would increase U.S. gross domestic product by hundreds of billions of dollars and create upwards of 6 million new jobs.

The practice has become common among export-focused East Asian economies that have built up massive foreign currency reserves and, in the process, created large trade surpluses and kept their currencies artificially depressed.