A growing number of economists and a bipartisan majority of members of Congress have called for the inclusion of strong and enforceable measures to combat foreign currency manipulation disciplines in the Trans-Pacific Partnership (TPP). In Stop Currency Manipulation in the Trans-Pacific Partnership, EPI Director of Trade and Manufacturing Policy Research Robert E. Scott discusses how to define currency manipulation, its effects on the U.S. economy, and what can be done to address it.
Currency manipulation—which occurs when governments purchase financial assets denominated in foreign currencies in order to depress the value of their own currencies—is the leading cause of stubbornly high U.S. trade deficits over the past 15 years. High trade deficits have put a drag on the recovery from the recession and have contributed to elevated unemployment and ongoing wage stagnation.
Eliminating currency manipulation would reduce the annual U.S. trade deficit by between $200 and $500 billion and create between 2.3 and 5.8 million jobs. More than 20 countries together spend about $1 trillion per year buying foreign assets to artificially suppress the value of their currencies. Several members of the proposed TPP—including Japan, Malaysia, and Singapore—are well known currency manipulators, and others—including South Korea, Taiwan, and China—have expressed interest in joining the agreement. It is clear that the administration and Congress should demand strong and enforceable tools to end currency manipulation in the TPP.
“Inclusion of a currency manipulation clause in the TPP would be an important first step in creating a regime of enforceable currency manipulation disciplines,” said Scott. “However, the long-run goal must be to end currency manipulation by all countries, not just those who join the TPP. The U.S. needs other tools to end currency manipulation, and new enforcement tools are the key.”
Within the TPP, enforcement of currency manipulation standards could be achieved through the dispute settlement process used to enforce other trade, labor, and environmental disciplines in the agreement. Scott discusses five types of penalties which could be included as enforcement tools in the dispute settlement process: a “snapback” provision which would withdraw the benefits of the agreement; imposition of countervailing duties; tariffs; other monetary penalties and fines; and countervailing currency intervention.
As part of its Trade Promotion Authority package, Congress should authorize the United States to impose countervailing duties on imports from any country engaging in currency manipulation. Currency manipulation is a direct subsidy to exports, and businesses in the United States should be able to obtain relief from it in the form of countervailing duties. A mechanism for countervailing duties might affect only a small share of total U.S. imports but would be an important signal that currency manipulation will no longer be tolerated.
Scott argues against the notion that currency provisions would bar the Federal Reserve from undertaking expansionary monetary policy or quantitative easing. Quantitative easing, which consists of purchases of domestic assets (such as U.S. Treasuries and mortgage-backed securities), is easily distinguishable from currency manipulation, which consists of purchases of foreign currency assets. All relevant international rules and standards acknowledge this distinction and clearly exempt quantitative easing policies from responsibility for currency manipulation.