The chimera of currency manipulation
US President Barack Obama is still pressing to obtain Trade Promotion Authority and use it to conclude negotiations for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. But many in the US Congress insist that provisions must be added to the agreements to prevent currency manipulation.
Let’s be clear: If the US were to insist that “strong and enforceable currency disciplines” be part of trade agreements, no deals would be concluded. Other countries would refuse – and they would be right. Linking efforts to prevent currency manipulation to trade agreements has always been a bad idea, and it still is.
True, there are times when particular countries’ currencies can be judged to be undervalued or overvalued, and there are times when their trading partners have a legitimate interest in raising the issue. But even when currency misalignment is relatively clear, trade agreements are not the right way to address it. More suitable venues for resolving exchange-rate issues include the International Monetary Fund, the G-20, the G-7, and bilateral negotiations.
For example the undervalued renminbi was successfully addressed in bilateral China-US discussions from 2004 to 2011. China allowed the currency to appreciate 35% over time. Today it is well within a normal range.
But the fact remains that it is mostly impossible to tell whether a currency is overvalued or undervalued. Manipulation is not like the existence of a tariff or quota that can be verified by independent observers.
A necessary condition for concluding that a country is manipulating its currency is that its authorities are intervening in the foreign-exchange market. The People’s Bank of China, for example, bought a record quantity of dollars from 2004 to 2014, thereby preventing the renminbi’s exchange rate from appreciating as fast as it otherwise would have done. But the Chinese are not doing that anymore. If anything, they have been selling dollars over the last year, keeping the renminbi’s value higher than it would otherwise be.
Moreover, there are often legitimate reasons for intervening in foreign-exchange markets. For example, under the Plaza Accord, the US joined with Japan, Germany, and other G-7 countries in 1985 to intervene cooperatively to weaken the dollar. Indeed, a majority of countries pursue either fixed exchange rates, exchange-rate targets, or managed floating, all of which by definition entail buying and selling foreign exchange to moderate or eliminate exchangerate fluctuations.
China is not a party to the TPP, but Japan is, and many congressional critics cite it as the target of their insistence that provisions to prevent currency manipulation be included in the deal. The yen has depreciated sharply over the last year, and some US economic interests, particularly the auto industry, accuse Japan of manipulation to keep the currency undervalued. But the last time the Bank of Japan intervened in the foreign exchange market was in 2011. In 2013, Japan joined other G-7 countries in agreeing to a proposal by the US Treasury to refrain from foreign-exchange intervention.
The euro, too, has depreciated significantly against the dollar over the last year, and some US trade critics want provisions to prevent currency manipulation added to the TTIP. But the European Central Bank has not intervened in the foreign-exchange market since 2000 – and that was to support the euro, not weaken it.
Critics who accuse Japan and other countries of currency manipulation presumably know that they have not been intervening in the foreign-exchange market in recent years. They generally point instead to recent monetary loosening. The predictable side effect of quantitative easing (QE) – that is, the purchase of domestic bonds – by the BOJ and the ECB has been the depreciation of the yen and the euro. But central banks can hardly be enjoined from easing monetary policy when domestic economic conditions warrant it, as has obviously been the case in Japan and Europe (and in the US when the Federal Reserve embraced QE).
If monetary expansion does not merit the charge of currency manipulation, still less do other sorts of economic policies. Some have argued that even though the PBOC has stopped buying US and other foreign assets, China’s sovereign wealth funds still do, and that this, too, counts as manipulation.
But it is perfectly sensible and legitimate for China to put some of its savings abroad. (The US would become worried if China and other countries did not want to buy its assets.) Every country makes policy decisions of many sorts every week, many of which can be expected to have an indirect effect on the exchange rate in one direction or the other. The mere fact that a particular policy might weaken the currency does not make that country a manipulator.
Finally, provisions that target other central banks could also be applied against the US. This would not be a case of misusing a tool (a frequent occurrence in trade policy when interest groups lobby for protection against foreign competition); rather, it would be a case of using the tool in precisely the intended way. This is worth bearing in mind, given that the Fed’s adoption of QE in 2008 (which it continued to pursue until last year) had the effect of weakening the dollar from 2009 to 2011, prompting the same accusations of “beggar thy neighbour policies” against the US that congressmen now level against others.
Such charges are always on shaky ground, regardless of their origin. Monetary stimulus in one country may even have a beneficial effect on the rest of the world, as its own restored income growth boosts imports from its trading partners. Whether one considers the accusations of currency manipulation against the US in 2010, its trading partners in 2015, or a future defendant, designating some trade agency to rule on them would merely cause trouble.