Currency manipulation has been one of the most hotly contested global trade issues over the past decade. Up to 20 countries are alleged to have been engaging in the practice at one time or another, with China most often singled out as being the worst offender owing to its persistent devaluation of the yuan. Despite no longer officially pegging the value of the Renminbi against the U.S. dollar, according to some estimates, government intervention still keeps China’s currency approximately 20% below its free market value against the dollar.
Many economists, trade experts and public officials believe this devaluation effectively confers an unfair trade advantage tantamount to a subsidy which helps China significantly boost its exports while at the same time harming domestic producers in countries like the United States. In this regard, the liberal Economic Policy Institute (EPI) claims that stopping Chinese currency manipulation would reduce the U.S. trade deficit by up to $500 billion over three years, increase GDP by up to $720 billion and create up to 5.8 million American jobs.
Although he has previously stated that the U.S. needed “to make sure our goods are not artificially inflated in price and their goods are not artificially deflated in price; that puts us at a huge competitive disadvantage,” President Barack Obama has so far resisted calls from various lobby groups, think tanks and lawmakers from both sides of the aisle urging the administration to protect American manufacturers against artificial currency devaluation with either countervailing monetary intervention or legislation that would include punitive measures for countries that don’t adopt counter-manipulation policies.
More recently, perhaps spurred by appreciation of the dollar and emerging signs that it is eroding net exports, a drive by a bipartisan coalition to have measures combating currency manipulation included in trade agreements such as the Trans-Pacific Partnership seemed to taking shape in Congress. Bolstered by another EPI paper, this time estimating that the U.S. trade deficit with Japan has cost America $125.3 billion in GDP and “displaced 896,600 U.S. jobs” in the previous year alone – attributable in no small part, the study’s author argued, to a 55% decline in the dollar-value of the yen from 2011 – many in Washington seemed increasingly convinced that monetary policy needs to be taken into account in any new trade deals.
In a speech to the American Enterprise Institute at the end of January, Republican Orin Hatch, the Senate finance committee chair, said, “Our job creators and workers also need to have confidence that their hard work is not being unfairly harmed by currency manipulation.” This sentiment was echoed by Michigan Senator Debbie Stabenow, a Democrat, who indignantly told reporters at a press conference, “I want to export our products, not our jobs. Our business and workers lose when other countries cheat.”
However, the Obama administration, presumably not wanting to further complicate or delay the TPP negotiations, has steadfastly refused to consider including provisions barring currency manipulation in the trade pact. Appearing before a Congressional hearing last month, Trade Representative Michael Froman said that any fight against distortive monetary policy should be waged by the Treasury Department, rather than through free trade treaties. To that end, the Treasury has since claimed that it has been making “significant progress” addressing currency concerns through its diplomatic efforts.
Speaking last week at the Peterson Institute for International Economics – a leading critic of China’s monetary policy and one of the biggest advocates for including currency rules in the TPP – Treasury Undersecretary Nathan Sheets said “This is an issue of great priority to us” and told the think tank’s president, Adam Posen that “every G20 meeting we go to, we raise this issue of currencies and market-determined exchange rates” adding with regards to advances currently being made on this front, “there’s a fair amount of momentum – there’s a wind at our back.” Somewhat surprisingly, Posen endorsed the administration’s view, saying he now considered adding currency rules to the TPP “a terrible idea because your diplomacy is working better,” concluding that, “this could blow up the TPP, which is worth far more for the kind of growth reasons you’ve talked about.”
An even more significant rebuke, one quite likely to doom the nascent push to include currency manipulation provisions in the TPP, came last Tuesday when Federal Reserve chair Janet Yellen told a hearing before the Senate’s Committee on Banking, Housing and Urban Affairs that inclusion of such clauses in the TPP other trade agreements would “hamper or even hobble monetary policy.” Responding to a question about the issue, the central bank chief said, “I would really be concerned about a regime that would introduce sanctions for currency manipulation into trade agreements.”
Yellen told lawmakers that one of the main purposes of implementing the U.S. monetary policy is to support domestic economic activity such as bids to stabilize prices and boost employment and stated that even if the foreign exchange rates move as a result of a monetary policy, it should not be interpreted as an attempt to control the currency given that each central bank sets different goals.