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How the White House misplayed the currency card in the TPP (and how they can still fix it)

AP Photo/Damian Dovarganes

Senate Democrats filibustered “fast track” Tuesday, blocking legislation on trade promotion authority (TPA) from proceeding to the floor for a vote. Their move was a whack at Senate Majority Leader Mitch McConnell for blocking related bills, most notably rules against currency manipulation that subsidize exports to the United States and tax U.S. exports to other countries that the Democrats insist accompany the fast track bill. It was similarly a swipe at the president, who wants TPA so he can get to a simple, up-or-down majority vote on the Trans-Pacific Partnership (TPP) agreement later in the year.

The White House dismissed the loss as a “procedural snafu,” by which I think they mean this is more about Senate Democrats’ forcing McConnell to bring the full package to the floor and less about opposition to the TPP. On the other hand, the administration may find that its cavalier response is inconsistent with its stated beliefs that a) a currency provision in the TPP would kill the deal, and b) there’s nothing that can be done on currency outside of the bill either.

It’s that second point above where I think the administration made, and continues to make, a fundamental mistake in the way it is approaching these votes, at least around this currency issue.

I suspect TPP supporters are on firm ground when they argue that putting enforceable disciplines against currency manipulation in the treaty could derail the deal, one they’ve been negotiating for years. That fact alone may lead some members to question why they should support a deal wherein signatories will jump ship if they can’t manipulate exchange rates to subsidize their exports. Still, I don’t think it’s unreasonable for the administration to protect the deal by labeling currency rules as a poison pill.

But when they tell members that there’s nothing we can do outside of the TPP, that’s a bridge too far. For example, the administration argues, in ways that I and other economists believe are substantively wrong, that any rules against manipulating currency will put our central bank in the cross-hairs of international tribunals that can bring a case against the bank for domestic macro-management (i.e., raising and lowering the interest rate they control to slow or speed up growth in the U.S. economy).

This is akin to arguing that, beyond “quiet diplomacy,” a.k.a. the status quo, we as a nation just have to accept what other countries throw at us in this critically important space. That’s too much for any member from a district—and there more than a few of these—that have been hurt by trade deficits that are themselves a function of currency management.

The administration has also argued that few nations are actively managing their currency, so what’s the problem? To which I counter: do you throw away your umbrella when the sun comes out? Especially once we’ve announced to the world that we’re basically helpless against such currency interventions, it’s not hard for me to imagine that we’re going to need that umbrella again.

I would thus urge my friends to rethink this approach. While for technical reasons it would be much better to have currency rules in the deal, the second best option is to have such measures in place outside the deal. Bergsten and Gagnon, among others, have articulated a useful set of ideas of how the United States will hold manipulators to task:

First, it will undertake countervailing currency intervention (CCI) against countries with convertible currencies by buying amounts of their currencies equal to the amounts of dollars they are buying themselves, to neutralize the impact on exchange rates. Second, it will tax the earnings on, or restrict further purchases of, dollar assets acquired by intervening countries with inconvertible currencies (where CCI could therefore not be fully effective) to penalize them for building up these positions. Third, it will hereafter treat manipulated exchange rates as export subsidies for purposes of levying countervailing import duties. Fourth, hopefully with a number of other adversely affected countries, it will bring a case against the manipulators in the World Trade Organization (WTO) that would authorize more wide-ranging trade retaliation.

If the White House doesn’t like those ideas, then let’s hear some of its own. But Senate Democrats were right to take a stand against the notion that there’s simply nothing to be done about this currency problem. And if the administration is willing to take their concerns seriously and entertain actions outside the bill, it can probably still get the TPA votes it seeks.