FIVE YEARS ago, President Obama declared that the United States should double exports by 2015. At that time, the Federal Reserve was expanding its balance sheet and holding interest rates near 0 percent, the combined effect of which was to weaken the dollar. Americans understood that there was no overt coordination between Mr. Obama and the Fed. A foreign observer, however, could easily have concluded that Washington was manipulating its currency to meet a specific economic goal at the expense of other countries. Indeed, many alleged just that.
Keep this history in mind as Congress debates whether to include measures against “currency manipulation” in trade-promotion legislation pending on Capitol Hill. These proposals enjoy bipartisan support from lawmakers who believe that the United States should not go forward with the trade-promotion bill, which would facilitate passage of the 12-nation Trans-Pacific Partnership (TPP) tariff-cutting deal, absent a mechanism that would allow U.S. firms to request sanctions against nations that allegedly victimize them by artificially holding down their currencies’ values. Advocates cite a Peterson Institute for International Economics study blaming foreign currency interventions for the loss of 5 million jobs over the past decade — 500,000 per year in an economy of more than 140 million jobs.
The underlying grievance here is not so much false as it is one-sided. Japan, which would be a member of the TPP, has engaged in currency manipulation in the past — depressing the yen but also, in a crucial 1985 pact, agreeing to appreciate it at U.S. request. China, which is not in the TPP, has pursued a cheap-currency policy to boost exports — although it has quietly allowed an updrift in the yuan in recent years, due partly to U.S. diplomatic pressure. Meanwhile, the dollar functions as the world’s reserve currency, enabling this country to enjoy lower interest rates than it otherwise would, in part because Japan and China bought and held vast amounts of our debt, even as we continued to run large trade and budget deficits.
In short, while it’s politically expedient to describe global currency markets as rigged against the United States, it’s more accurate to describe them as a manifestation of interdependence. Economic experts disagree as to the “correct” valuations of major currencies; the precise intent behind any particular currency intervention is also hard to establish. These are just two of the many technical reasons why even the International Monetary Fund definitions of currency manipulation, which lawmakers cite as a model, would be difficult to incorporate into a legally binding process.
Injecting currency manipulation rules into the trade-promotion bill at this late date could cause a rebellion by TPP negotiating partners, possibly scuttling the entire project, along with all the benefits, geopolitical and economic, of knitting major Pacific Rim economies together under the aegis of U.S.-style free trade. Congress should keep this poison pill out of the law and allow Mr. Obama and his successors to handle currency issues on a separate diplomatic track, the historical approach that has served U.S. interests best.
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