TPP and Currency

Currency manipulation is ignored in the TPP. But a separate agreement among TPP countries is promoted as addressing the problem. See why that separate agreement does nothing.

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How can one more consultation without enforcement fix the problem?

The Trans-Pacific Partnership has no provisions regarding currency misalignment in its text.  Instead, there is a side agreement called a “Joint Declaration of Macroeconomic Policy Authorities” that is being promoted as addressing the issue.  Unfortunately, the Joint Declaration simply restates existing obligations, fails to provide any enforcement tools and merely relies upon more diplomatic talk. 

Since December 1945, currency manipulation has been prohibited under the rules of the International Monetary Fund.  Article 4, Section 1 (iii) of the IMF Articles obliges members to: “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members….”  This obligation is designed in part to serve one of the fundamental objectives set forth in IMF Article 1:  the expansion and balanced growth of international trade.  The framers of the post-World War II international system understood that imbalanced trade was mercantilism and sought a monetary system that would avoid one-sided trade results. 

Nevertheless, today some 20 countries – 40 percent of the global economy – have achieved a strong competitive advantage, running persistent balance of payments surpluses by maintaining trade imbalances and selling their own currencies to buy US dollars and other financial assets.  One country, the United States, has run trade deficits for more than 40 years and has amassed more than $17 trillion in foreign debt.  By no stretch of the imagination can this be the sort of “balanced growth of international trade” that the IMF rules are supposed to foster.    

Over the past 70 years the IMF has had the authority to enforce Article 4 obligations.  In practice, it engages in regular consultations to persuade key members to adjust their policies.  The use of mere moral suasion has failed to produce meaningful results, rendering the IMF increasingly irrelevant.

Earlier this year the Congress directed US negotiators to seek to put teeth into the IMF obligations.   The logic has a broad appeal:  clubs of “free traders” are seen as ways to create higher levels of obligation and more effective solutions to problems that plague the multilateral trading system as a whole.   True “free traders” should be the most ready to play by tougher, fairer rules in pursuit of expanded and balanced trade.   The Trans-Pacific Partnership agreement concluded on October 5 was the first test of the Congressional mandate. 

The TPP flunks that congressional test.  Despite an explicit Congressional instruction, there is no currency provision within the TPP itself.  Instead, the Treasury negotiated a “Joint Declaration of Macroeconomic Policy Authorities” that largely restates existing obligations, fails to include any additional enforcement tools, and merely adds yet another consultation process.  The Joint Declaration:

1. Entails a “confirmation” that each TPP country is “bound” under IMF rules to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.”  Nothing has changed from the obligations agreed 70 years ago.

2. Specifies that each macroeconomic authority is to “take policy actions to foster an exchange rate system that reflects underlying economic fundamentals, and avoid persistent exchange rate misalignments. Each Authority will refrain from competitive devaluation and will not target its country’s exchange rate for competitive purposes.”  How else could they have expected to comply with their IMF obligations established seven decades ago?

3. Requires regular reporting on foreign exchange intervention and reserve holdings.  Amazingly, this basic information is sometimes withheld from the IMF, so the Joint Declaration might produce a modest improvement in transparency.

4. Establishes regular consultations among the macroeconomic authorities.  This will be in addition to the periodic meetings of IMF officials, APEC, the G-7, the G-20 and bilateral consultations.  Japan, whose currency has fallen by 55% since Prime Minister Abe took office, is a full participant in most existing fora.  The value of one more venue for consultations is highly debatable. 

There is ample precedent for taking strong action to correct currency misalignment in conjunction with past major trade agreements.  The Tokyo Round and the Uruguay Round were each preceded by a realignment of currencies to reduce imbalances in the world economy.  If the Joint Declaration indeed would make any difference in the real world of trade, one might expect it to come into effect immediately. Instead of removing obstacles to TPP implementation by realigning currencies in advance, the Joint Declaration will take effect if and when the TPP enters into force.

The bottom line is the macroeconomic and the trade negotiators together have failed to produce even a modest step forward toward an effective, enforceable currency provision.  With the TPP negotiations concluded, the only alternative effective response would seem to be enactment of the Currency Reform for Fair Trade Act (H.R. 820) or its equivalent such as Title VII of the Customs Enforcement legislation that passed the Senate.  Either would mandate the use of WTO-consistent remedies to offset injurious currency subsidies.  That would be a modest first step toward confronting mercantilist currency policies, and it’s long overdue.