The chimera of cur­rency ma­nip­u­la­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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