NY Times: " Currency Battle Is Tethered to Obama Trade Agenda"

February 17, 2015


WASHINGTON — A number of countries — China most prominent among them — have long acted to hold down the value of their currencies against the dollar, helping their industries by keeping exports to American consumers cheaper and making goods from the United States more expensive.

[by Jonathan Weisman | February 15, 2015 | NY Times]

And while every president from Bill Clinton on has repeatedly criticized the practice, none have ever taken formal action against China or any other nation to try to stop it.

Now, a growing bipartisan majority in Congress is coalescing around a demand that could derail President Obama’s ambitious trade agenda before it really gets moving: include a robust attack on international currency manipulation or no deal.

The push for strong currency provisions — in legislation to grant the president “fast track” trade negotiating authority, in a major trade deal with a dozen Pacific Rim countries, or in both — has presented the White House with what it fears is something of a Catch-22.

If members of Congress are to be believed, unless the president’s trade negotiator includes strict, enforceable prohibitions on policies to intentionally hold down the value of currencies, any completed trade accord will die on Capitol Hill. But, administration officials say, demanding the inclusion of such prohibitions would kill the trade deals before they were completed.

“You cannot be pro trade and pro this kind of currency mechanism,” warned Tony Fratto, a former official in the George W. Bush administration who is working against the congressional currency push. “They are completely incompatible. It will in fact kill a deal.”

None of the officials representing the 12 nations, including the United States, want to see such prohibitions in the Trans-Pacific Partnership, which is near completion, and negotiators working on a follow-up deal with Europe are similarly unenthusiastic.

“We agree with many in Congress that more needs to be done and are working with them to figure out if there is something that can be accomplished in the context of our trade agreements that is consistent with our overall strategy of bilateral and multilateral engagement,” Treasury Secretary Jacob J. Lew said in a statement. “We remain concerned that an enforceable provision on currency could have a negative impact on our ability to protect American workers and firms and set back our international efforts.”

But on Capitol Hill, currency is gaining currency.

“An awful lot of this is real, and the reason is the frustrations on this have built up for a very long time,” said C. Fred Bergsten, director emeritus of the Peterson Institute for International Economics and an administration trade adviser. “There’s a pretty strong insistence on action. Next question is, what action.”

There is little wonder why lawmakers from both parties say their patience has grown thin. For years, the United States has endured a large, chronic trade deficit, intensified by China and some other trading partners that have deliberately kept their currencies cheap relative to the dollar. The Peterson Institute estimates that currency interventions have cost the United States as many as five million jobs over the last decade.

In fact, currency manipulation may be far more effective in distorting trade than the import tariffs and export subsidies that trade agreements focus on, Mr. Bergsten said.

Senator Charles E. Schumer, Democrat of New York, and Senator Lindsey Graham, Republican of South Carolina, have been banging the drum on currency manipulation since 2002. Yet beyond talk, neither the Obama nor the Bush administration has done what they were legally entitled to do: fight back.

Some 230 members of the House have pledged in writing to oppose future trade deals without action on currency, more than enough to stop the president’s agenda.

“If your area of the country has experienced job exporting by the thousands, you understand,” said Representative Marcy Kaptur, a Democrat whose district includes the industrial north of Ohio. “That’s bipartisan.”

The Obama administration fears that prohibitions on currency intervention could boomerang on Washington, allowing trading partners to challenge policies of the independent Federal Reserve Board and possibly even basic fiscal policies, like stimulus spending in times of recession. Officials also worry about other forms of potential retaliation, including reducing purchases of government debt, which help keep long-term interest rates low.

Corporate America is badly split. Some industries, including automobiles, steel and textiles, are standing with Congress. Ford Motor has threatened to oppose the Trans-Pacific Partnership if it lacks a currency chapter. Other companies, better positioned to take advantage of growing globalization, are perfectly happy to buy components from Asia that are artificially cheapened by currency manipulation.

“A lot of Big Business uses currency as a hedge,” said one industry lobbyist, who spoke on condition of anonymity to be frank about the business divide. “They’re comfortable operating in an environment where manipulation is part of the process.”

The administration has a crucial ally in Representative Paul D. Ryan of Wisconsin, the Republican chairman of the House Ways and Means Committee. The trade promotion authority bill he plans to push through his committee by March will include new reporting, monitoring and transparency rules to spotlight currency manipulation, but it will avoid retaliatory enforcement rules that he fears could prompt a trade war.

“Such a result could jeopardize our status as the world’s leading currency,” said Brendan Buck, the committee’s spokesman. “We are confident there are ways the administration can make progress on this issue without upending our trade agenda and the good jobs it stands to create.”

It is difficult at times to distinguish between currency manipulation and market forces that can push currency values in directions that work against the United States. The global currency market is naturally biased toward a strong dollar, the world’s reserve currency. The recent rise in the dollar is more attributable to economic weakness in Europe, China and Japan and falling interest rates abroad than any intentional effort to increase exports at the expense of American workers.

At the same time, the global supply chain has diminished if not nullified the advantage that currency manipulation might bring to sophisticated economies like Japan’s, Mr. Fratto noted. Japan’s exports might be cheaper with a devalued yen, but its manufacturers import components that would be more expensive.

Even in China, the policy has begun to shift. As economic growth fades, foreign investors are starting to show less interest in the country, while Chinese investors are trying harder to put their money into foreign markets that may offer better returns.

The result has been that the Chinese central bank, the People’s Bank of China, has been spending some of the dollars from its hoard to prevent the renminbi from weakening in currency markets, an about-face from when it prevented the renminbi from strengthening.

Still, Congress appears done with equivocating. The traditional pitch that free trade will expand business and help consumers has lost salience in an era when middle-class incomes are declining and well-paying industrial jobs are disappearing.

“To a president, geopolitics matter a great deal, but to senators and congressmen, what matters is how their constituents and economy are doing,” Mr. Schumer said.

Last week lawmakers from both parties and across the ideological spectrum introduced legislation that would allow companies in the United States to petition for relief from foreign competitors benefiting from currency manipulation, setting off a mandatory Commerce Department investigation. That investigation could lead Washington to impose duties on imports that benefit from depressed currencies.

Legislation would also allow the government to counter manipulation with manipulation: If China spent $1 billion to buy United States dollars to drive up their value, the United States could buy the same amount of Chinese currency to negate the move. Such legislation passed the Senate in 2011 by a vote of 63-35. The year before, the legislation passed the House 348-79.

“With more U.S. jobs at stake every year, we must stand up to protect Americans from unfair trade practices by countries who fight dirty via currency manipulation,” Senator Richard M. Burr, Republican of North Carolina, said at the bills’ unveiling.

To the Obama administration, such legislation is unnecessary and dangerous. Mr. Lew testified before the Senate Finance Committee that currency is “the No. 1 topic” he raises in bilateral trade talks, and he insisted that diplomacy was working. China has eased on its manipulation, he said, letting the renminbi appreciate in recent years. Japan has not intervened in currency markets in some time.

“The challenge in the context of a trade agreement is how to address the issue in a way that helps and doesn’t hurt,” he said.

Would the Federal Reserve’s program of “quantitative easing” — basically printing money to keep interest rates low — be an actionable offense under a strict currency regime? asked Bruce Josten, a senior lobbyist at the U.S. Chamber of Commerce. What about large government spending programs financed by international borrowing?

“Treasury needs to figure out what kind of flexibility it needs to manage the economy,” said Tom Linebarger, chairman and chief executive of Cummins, the diesel engine giant, who is heading the trade push for the Business Roundtable, which includes dozens of chief executives from major corporations.

Lawmakers in both parties are not buying it. Mr. Schumer said he had advised the White House to embrace currency protection legislation now, either as part of the bill granting Mr. Obama trade promotion authority or as a stand-alone bill that would move with the Trans-Pacific Partnership. That way, the currency issue would subside before the partnership comes before Congress.

Mr. Schumer said Congress did not “have the votes” for a plain Trans-Pacific Partnership or for granting trade promotion authority.

“They actually might need it to happen,” he said.

Keith Bradsher contributed reporting from Hong Kong.

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