President Barack Obama and leaders from both parties in Congress agree on the need for expanded international trade. Our leaders recognize that international trade that is conducted on an open, level playing field provides a win-win outcome, growing the U.S. economy and thus creating jobs, while providing similar benefits for our trading partners. Free markets and free trade through effectively addressing tariff and non-tariff barriers will allow America’s companies and citizens to work, produce, invest, and prosper.
However, when countries such as Japan directly intervene in currency markets to devalue their domestic currency, their exports become cheaper relative to ours, leading to potential job loss and decreases in U.S. exports. As such, while Congress considers (TPA) and negotiations continue on the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) agreements, including a method to identify potential currency manipulators is more important now than ever before.
The negative impacts of direct currency intervention are well documented. According to the Peterson Institute for International Economics, in recent years, more than 20 nations have utilized policies that keep “the currencies of the interveners substantially undervalued, thus boosting their international competitiveness and trade surpluses.” The Peterson Institute further estimates that “the United States has lost one to five million jobs due to currency manipulation.”
As the alarm over currency manipulation has grown louder, arguments have been made that currency manipulation is not a trade issue and thus does not need to be addressed in TPP. However, the price of one currency relative to another (i.e. the exchange rate) determines, in part, the volume and value of trade flow. Barriers to freely floating exchange rates can thus be used as non-tariff barriers to trade. The following estimates illustrate the direct impact this unfair trade practice has on the United States, and why it must be considered in ongoing trade negotiations:
- The Peterson Institute finds that as of 2012, the scope of currency manipulation is estimated to be approximately $1.5 trillion per year.
- For example, Japan’s quantitative easing has led to a substantially weaker yen relative to the U.S. dollar. Since the QE policy under Prime Minister Abe was expanded in 2012, the nominal yen to U.S. dollar ratio has increased from ¥78 to ¥118. Since 1991, Japan has conducted official intervention in the foreign exchange market some 376 times.
- According to the Peterson Institute, half of the U.S. current account deficit is due to currency manipulation. The inability to maximize our natural export potential and competitive advantage represents a large portion of the jobs lost.
By allowing trading partners to engage in prolonged, direct currency intervention in order to gain an unfair competitive advantage, the U.S. will continue to lose jobs and economic growth will be stifled both at home and abroad. However, as the U.S. continues to consider TPA and future trade agreements, there are steps we can take to control this practice and regain some of the economic growth and jobs that were lost due to the use of currency manipulation by our trade partners.
The International Monetary Foundation (IMF), and World Trade Organization (WTO) have provisions excluding the use of currency manipulation by one nation to gain an unfair competitive advantage over other nations. The IMF has identified indicators of manipulation that demonstrate when a country is not living up to its commitments. However, these have never been enforced. Using the IMF indicators, a three-part test has been proposed as an effective way to address currency manipulation in future free trade agreements. The test asks:
- Did the nation have a current account surplus over the six-month period in question?
- Did it add to its foreign exchange reserves over that same six-month period?
- Are its foreign exchange reserves more than sufficient (i.e., greater than three months normal imports)?
Identifying currency manipulators and eliminating this unfair trade practice would remove a large impediment to U.S. and global economic growth. By including this test in future trade agreements, global leaders can adopt trade norms that level the playing field for all member nations, and compel the IMF and WTO to better implement their own rules.
There is no doubt the U.S. economy stands to benefit from freer trade because of the potential for job creation and economic growth. However, even the most promising trade pacts can be threatened by other countries’ use of currency manipulation to gain an unfair advantage; therefore, a TPA bill that does not include language designed to level the playing field for all member nations will likely find waning support.
Bipartisan majorities in both the House and Senate sent letters to the Obama administration calling for strong currency provisions to be included in future trade agreements. With such solid bipartisan support for addressing the issue, it is imperative that rules prohibiting currency manipulation are included in all future U.S. trade agreements.
Art Laffer, a member of the President’s Economic Policy Advisory Board from 1981-1989, is chairman of Laffer Associates.