The political class includes some prominent economists, such as Fred Bergsten, for whom China is the target as a class A currency manipulator.
The leap to advocacy of provisions in trade agreements that would govern the terms of national policies affecting national currencies values, however, is a brave one and built on dangerously incomplete understanding of what the link between trade flows and currency values might sensibly mean for the deployment of the proper instruments for achieving appropriate policy objectives in either domain.
The anchor international institutions — the International Monetary Fund (IMF) and the World Trade Organization (WTO) — are designed to deal with these two arms of international economic policy separately. The reality is as Kemal Derviş describes it: ‘Incorporating macroeconomic policies affecting exchange rates into trade negotiations would require either that the WTO acquire the technical capacity (and mandate) to analyse and adjudicate relevant national policies or that the IMF join the dispute-settlement mechanisms that accompany trade treaties’. There are many ways in which a country’s macroeconomic policies might reduce the value of its currency, collaterally increasing the competitiveness of the goods it trades in international markets. In short, Derviş concludes, for ‘policies affecting the exchange rate’to become part of trade agreements, monetary and fiscal policies would have to become part of trade agreements and, in that case, there would be no trade agreements at all.
China, like Japan before it, has been the target of currency manipulation accusations because of its massive trade and current account surpluses, especially before the global financial crisis. China’s current account surplus was running at 10 per cent of GDP before the crisis; it plummeted to 2 per cent in the years that followed. The Chinese yuan has in fact steadily appreciated against the US dollar and other currencies over most of this period. In recent times the yuan has been one of the world’s top-performing currencies, hitching a ride on the strength of the US dollar to which it remains loosely tied. Indeed, the argument in China that the yuan is overvalued and needs to cut loose from the dollar has much going for it, although the Chinese authorities are judiciously cautious about doing anything suddenly that might smack of engaging in a ‘currency war’.
To illustrate the point, consider the situation in Europe. At 7 per cent of GDP, Germany’s current account surplus has been bigger than China’s for a couple of years, and it is likely to grow even larger, owing to the euro’s recent depreciation as Europe comes to terms with trying to reconcile the conflicting objectives of monetary union and macroeconomic policies across the eurozone. As the other European economies have been forced to tighten their international economic belts, the total eurozone trade surplus is now massive. The only way that Germany can reduce its surplus while remaining in the eurozone is to conduct expansionary fiscal policy. If this is ‘currency manipulation’ as some claim, it’s not made of stuff that can be dealt with in the terms of a trade agreement.
Sourabh Gupta, in our lead this week, points out a slew of amendments attached to trade-related bills (notably the Trade Promotion Authority Bill needed to empower President Obama to complete negotiation of TPP) awaiting consideration on the floor of the US Congress would insist that we do just that.
Gupta declares the idea of injecting enforceable currency disciplines into the cross-border trading regime disingenuous and also, quite probably, illegal. ‘The congressional amendments (that are on the table) purport to rely upon the IMF’s approaches to calculating exchange rate undervaluation, and use the IMF’s surveillance-based list of indicators to determine currency manipulation’ Gupta points out. ‘In reality, the amendments selectively pick from the IMF’s indicative list and append additional subjective criteria which, by working backwards, could be expected to reliably indict their favourite suspect — China — and lead to countervailing duties. The IMF’s surveillance-related guidelines require that in order to find manipulation to gain an unfair competitive advantage, the offending country’s exchange rate must be misaligned for the purpose of securing an increase in net exports; the fact that its policies merely have the effect of securing such an increase is not sufficient. The distinction — one that is lost on Capitol Hill — is an important one’. If passed, Gupta adds, these measures would contravene US obligations under the WTO in respect of the justifications that permit the application of countervailing duties.
The ‘currency manipulation measures’ that are being contemplated by US Congress assign the wrong policy instrument to the otherwise laudable objective of fixing a bunch of international macroeconomic problems at the same time as they make mischief with the open trading system.
As Gupta concludes, policymakers would be far better off updating the fraying architecture of the international monetary system which has failed to keep pace with the cross-border surge in private and (post-global financial crisis) official liquidity creation.
And certainly US partners, like Australia and Japan, should be making no secret of their intention of having no part whatsoever in a TPP that incorporates this kind of misguided measure.
Peter Drysdale is Editor of the East Asia Forum.