Currency Manipulation in the NAFTA Renegotiation



US Trade Representative Robert Lighthizer has indicated that the Trump administration will seek to include the currency issue in the renegotiated North American Free Trade Agreement (NAFTA) and in any other trade agreements it might pursue. Secretary of Commerce Wilbur Ross has also called for the impact of currency misalignments to be taken into account in trade deals, "whether or not due to manipulation." The goal of a currency component of a trade agreement would presumably be to avoid manipulation as an unfair trade practice.

The Trump administration would be misguided to try to use trade agreements to reduce the US deficit, which is a macroeconomic problem that requires macroeconomic solutions. It would be doubly misguided to focus on bilateral trade imbalances, whose reduction would do little or nothing to correct the global US deficit, especially with countries like Mexico and Canada that are running large global deficits themselves. But currency manipulation is an unfair trade practice that can have huge effects on trade flows and trade balances, and it is thus quite appropriate for the administration to address it in their trade negotiations.

A currency chapter in the new NAFTA and other trade agreements could accomplish four things. It should commit the members to avoid manipulation or competitive depreciation. It should encompass a simple definition of manipulation to identify violators of that commitment as incorporated in currency legislation as passed by the Congress a year ago: substantial intervention in the currency markets by countries with sizable surpluses to block or limit significant appreciation of their exchange rates. It should subject these commitments to the dispute settlement mechanism of the overall trade agreement. Most critically, it should provide effective sanctions against violators in order to deter future manipulation, including a "snapback" of the trade advantages that the violators had gained under the agreement.

Currency manipulation has been a major issue in trade disputes over many years, especially because of massive intervention by China and many others during 2003–13. In my new book with Joseph E. Gagnon, Currency Conflict and Trade Policy, we show that excessive intervention averaged over $600 billion per year, and the result was a shift of more than $300 billion of annual current account balances. The US current account deficit increased by $150 billion to $200 billion annually as a result, and the United States lost more than a million jobs during the Great Recession and the tepid recovery from it.

Both Canada and Mexico maintain floating exchange rates that are largely "clean," i.e., conducted without intervention. Both countries in fact run sizable global current account deficits, on the order of 2.5 to 3.0 percent of their GDPs. For both these reasons, the practical impact of adding currency issues to NAFTA would be modest or even nonexistent at present. However, this should make it relatively easy to add currency to the new NAFTA and thus set a useful precedent for other trade agreements where it might be more relevant (e.g., Japan or a revived Trans-Pacific Partnership).

Trade and currency policies have traditionally been conducted separately by the United States and most other countries. That bifurcation is no longer viable in the United States, however, as demonstrated by the central role played by concerns over currency manipulation, based on its very substantial costs to the US economy and in the political backlash against trade agreements and globalization more broadly. Manipulation is now largely in remission but much more forceful policy responses to its possible return will almost certainly be a necessary component of any sustainable new political foundation for an open foreign economic policy in the United States. One part of that response should be inclusion of enforceable currency disciplines in new US trade agreements, starting with the renegotiation of NAFTA.

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