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Important members of the US Congress are actively engaged in opening a new front in the global currency wars. They advocate including a currency chapter in the Trans-Pacific Partnership (TPP) agreement now in the final stages of negotiation. According to the advocates, the chapter should establish enforceable obligations that would bar trading partners from manipulating their currency exchange rates, a practice of a number of countries to improve their trade balances. Under the currency-chapter proposal, trade sanctions could be imposed if a participant were found to have violated its obligations.
Currency manipulation by trading partners has been a serious problem. But if the effort to include a chapter on currency in the TPP succeeds, the economic and financial casualties and collateral damage would be substantial.
First, the current TPP negotiations do not contain a currency chapter. US insistence on one would further delay the negotiations. Almost certainly, the effort would be a classic deal breaker. None of the other 11 participants in the negotiations has expressed any interest in such a provision. Although none of the TPP members is likely to qualify as “currency manipulators” today, several of them would be justified to view such a provision as laying the basis for the United States and other partners to renege on their concessions once the TPP is in force. These countries include Japan, Malaysia, Singapore, and potential member South Korea. Each of these economies has a global current account surplus, each in recent years has intervened on a large scale to prevent its currency from appreciating, and all except Singapore have a trade surplus with the United States. More important, in recent years US economists have suggested with some justification that each of these countries is guilty of artificially holding down its currency in order to boost its exports and limit its imports.
For those who see little value in the TPP agreement or do not support it on other grounds, the delay or failure of the TPP negotiations would involve either no economic and financial cost to the United States or a benefit. For those who see bilateral and, in particular, plurilateral trade and investment agreements as making positive net contributions to the economies of the participants, including the United States, and as a device to push for broader, high-quality trade agreements, delay or failure of the TPP negotiations would involve costs in terms of benefits foregone.
Second, if the United States were to pursue the inclusion of a currency chapter with enforceable obligations in the TPP, US negotiators would have to make more concessions to other parties or receive fewer concessions from them, reducing the value of TPP to the United States in terms of increased trade and investment.
Third, acceptance of a currency chapter in the TPP by US partners, however unlikely that would be, would dramatically undermine the international financial architecture. The International Monetary Fund (IMF) would be demoted from its central role in promoting international monetary cooperation. In addition, the policy independence of the central banks in the participating countries would be threatened.
Exchange rates are important economic variables. Every exchange rate has two sides. For this reason, 188 member countries have endowed the IMF with the authority to oversee the operation of the global exchange rate system. The IMF articles of agreement establish obligations for each member country with respect to its exchange rate policy, and the IMF is charged with ensuring that each member live up to its obligations.
Some observers, and I count myself among them, are unsatisfied with the way the IMF has discharged its responsibilities in recent years. They think that the IMF should have identified China and other countries with manipulation of their exchange rates. But the truth is that such decisions are not made by the management and staff of the IMF, but by the members represented on the IMF executive board. The same would be true for the enforcement of any currency provisions in the TPP; designation of a country as a currency manipulator would likely be blocked as at the IMF. However, the introduction of trade ministers into overseeing a major portion of the global exchange rate system would reduce the role and legitimacy of the IMF.
To understand why inclusion of a currency chapter in the TPP would threaten the independence of central banks, it helps to know how such policies are made. Exchange rate considerations would be introduced into monetary policy discussions involving the full range of central bank policies—from conventional open market operations to large scale asset purchases (quantitative easing) as well as purchases and sales of foreign currency. The involvement of trade and finance ministries in these decisions by central banks would tend to politicize their decision-making processes and take their focus away from issues of inflation and overall economic growth.
Exchange rates are important international economic variables and appropriate topics for international surveillance and discussion. We have an institution charged with these responsibilities—the IMF. It may not have done its job as effectively as US administrations have wanted. But the appropriate response is for the United States to continue to urge the IMF and its members not to fall “asleep at the wheel,” as Tim Adams said some years ago when he was Under Secretary of the Treasury for International Affairs.
