Global Trends by Martin Khor

Monday 16 February 2015

A new wave of trade protection?

Two US Congress bills on currency manipulation threaten a new wave of trade protection and may also derail trade agreements like the TPPA


Two bills introduced in the United States Congress last week could lead to a new kind of trade measure that in the short run may wreck the Trans Pacific Partnership Agreement and in the longer run could cause havoc in the global trading system.

The sponsors of the bills aimed at preventing “currency manipulation” claim to have majority support among Republicans and Democrats in both the Senate and the House of Representatives. 

Thus, these bills are being taken seriously, even if the Obama administration is known to be against linking the currency manipulation issue to trade measures.

The Congress members and their intellectual backers claim that some governments are deliberately manipulating to make their currencies artificially low so as to reduce the prices of their exports, enabling them to sell more to the world market.

The manipulating countries’ imports are also made more expensive, thus discouraging goods from other countries, the Congress members allege.

They cite studies that claim that the US has lost 5 million jobs in the last decade because foreign governments have manipulated their currencies. 

The main target of the bills is China, which has long been blamed by Congress members and some economists as currency manipulators.

But other countries that have been mentioned are Japan, Malaysia and Singapore, in the context of the TPPA.

In an opinion article, Senators Sherrod Brown and Jeff Sessions and Represenatives Sandy Levin and Mo Brooks (who are among the bills’ sponsors) argued that the United States’ high trade deficits with China are caused by the Chinese government’s action to devalue its own currency against the US dollar.

“This puts American manufacturers at a serious disadvantage and makes it more difficult for American companies to compete against Chinese companies,” they claimed. 

Though China is prominently targeted, the legislation can affect any country deemed to be “currency manipulators.”

The trade actions that the Congress members propose include:

  • Enabling the American government to treat currency manipulation like illegal government subsidies or dumping of products at low prices.  American companies claiming to be affected by foreign countries manipulating their currencies can petition the Administration, which can then impose countervailing duties to offset the impact of currency manipulation on a US industry.
  • The US government should include provisions in its trade agreements, starting with the TPPA, that would deter its trading partners from manipulating their currency.  The currency bills’ content may thus be injected into the TPPA.

The timing of the tabling of the bills seems to be linked to the TPPA, which is reported to be near conclusion.  A Ministerial meeting is scheduled for March to address outstanding issues.

Many TPPA countries are reluctant or unwilling to conclude the negotiations unless the US President is given “fast track authority” through a Trade Promotion Authority (TPA) law, meaning that Congress can only vote for or against the agreement but cannot amend it.

But the Congress members sponsoring the currency bills are making the passing of the TPA conditional on the adoption of the currency manipulation legislation.  They also want the TPPA to contain provisions punishing currency-manipulating countries, by suspending their TPPA benefits such as the preferential lowered tariffs.   

In last week’s media reports on the Congress bills, Japan was the country most prominently mentioned as a TPPA country that could be considered a currency manipulator.

But others were also mentioned.  “Currencies rise and fall for lots of reasons, but US

Sen. Sherrod Brown, congressional colleagues and a number of American manufacturers charge that China, Japan, South Korea, Malaysia, and Singapore have used financial and central-government mechanisms to keep their currencies artificially low – and that this gives their factories an unfair pricing advantage and undercuts American competitors,” said an article by Stephen Koff of Northeast Ohio Media Group.

An article by the Peterson Institute’s Fred Bergsten, who has been advising some of the Congress members behind the bills, states that  Malaysia and Singapore, “which are engaged in TPP negotiations, have also intervened and piled up sizeable reserves relative to any historical norms.”

He mentioned three criteria for identifying currency manipulators: excessive official foreign currency assets (more than 3 to 6 months of imports); acquisition of significant additional amounts of official foreign assets, implying substantial intervention, over a recent period, say six months; and a substantial current account surplus.

The Congress bills rely on IMF guidelines on what constitutes currency manipulation. These include large-scale intervention in one direction in currency markets; excessive accumulation of foreign exchange reserves; restrictions on or incentives for transactions or capital flows for balance of payments purposes; encouragement of capital flows through monetary policy for balance of payments purposes; fundamental exchange rate misalignment; and long and sustained current account surpluses. 

The Congress legislation aims to counter currency manipulation used as trade protection or promotion.  Ironically, however, it may lead instead to a new big wave of trade protection.

Critics are likely to see the US law as self serving, as the US will be able unilaterally to define and decide who is a currency manipulator, and then to use trade measures such as tariff hikes and suspension of trade benefits.

Many governments and analysts have accused the US itself of lowering its currency’s value through policies such as quantitative easing and near-zero interest rates.  In their view, the US has also engaged in currency wars and can be considered a manipulator.  If the US can take trade actions against those it perceives as manipulators, others can also take action against the US.

Some US Congress members have defended US monetary policy as having legitimate aims, even though one effect is a low currency level.  But other countries can similarly defend their actions.

The US proposed law, if it takes effect, can thus trigger trade protection measures and retaliation.

Another casualty could be the TPPA, which already contains unpopular and controversial components such as an investor-state dispute system, tight intellectual property rules, the opening up of government procurement and curbs on state-owned enterprises.

If the US Congress persuades the administration to inject punishment for currency manipulation as another TPPA component, it might be just too much, just like the straw that broke the camel’s back.