Time to stop manipulating the debate on currency

A familiar complaint about other countries’ supposed currency manipulation has arisen in tandem with Congressional efforts to grant President Obama Trade Promotion Authority to finalize trade deals with our economic and national security partners in Asia and Europe. The current and previous CEO’s of Ford Motor Company have called Japan a currency manipulator that hurts U.S. competitiveness—even while Ford’s fourth quarter earnings beat estimates with a “benign impact” from currency issues. Such critics of trade expansion want to require that the U.S. penalize currency manipulators as part of the agreements. These efforts are misguided.

An inaccurate accusation of currency manipulation is too readily made and can easily rebound on ourselves. The complaint against Japan is an example. The Japanese yen is weaker by 15 percent against the U.S. dollar over the past year, but labeling this as currency manipulation confuses the effect with the cause. The Bank of Japan last October increased its quantitative easing program to head off deflation and boost the faltering Japanese economy. This approach was recommended by academics and policymakers – notably including former Federal Reserve Chair Ben Bernanke – as a way to break Japan out of 15 years of stagnation.

{mosads}A weaker currency is an outcome of printing more Yen, but that was not the goal.  This monetary policy decision is appropriate to Japan’s circumstances—if anything, the action is long overdue. A strong economy in key U.S. allies such as Japan is fundamentally in our best interest.  It would be harmful to both countries if necessary policy decisions were held up by concerns over baseless trade lawsuits.

Similarly misguided complaints could be made against the United States.  After all, the Fed’s quantitative easing led Brazilian policymakers to accuse Bernanke of currency manipulation rather than merely responding to the financial crisis. Do we really want to pursue a policy agenda that could hinder the Federal Reserve’s ability to fight recessions?

An irony is that the country that has targeted its currency—China—is not even a part of the Trans-Pacific Partnership (TPP) trade agreement, and would not be affected by these manipulation proposals.

Proposals to have the Trans-Pacific Partnership (TPP) include penalties on supposed currency manipulators or to otherwise address a supposed currency advantage range from ineffective to dangerous. One idea is to tax the U.S. Treasury bond purchases of offending nations, ostensibly to make it more expensive and thus less attractive for others to intervene in currency markets. But sales of Treasury bonds are how the U.S. finances its still-massive budget deficits. This self-defeating tax would raise borrowing costs for our own government.  Another misguided approach is for the U.S. to impose tariffs on imports from so-called manipulators. The problem is that global supply chains mean that an imported good is built in many countries, not one, and it would impossible to set the tariffs properly to account for the different country contributions for each item (even if we could have confidence in the uncertain measures of currency misalignment).

More broadly, proponents of anti-currency manipulation measures in trade deals talk as if currency manipulation is a shortcut to prosperity. It’s not. Long-run growth is determined by a country’s productivity. Reducing the value of one’s currency makes imports more expensive for one’s own consumers and businesses, offsetting the supposed benefits of an undervalued currency in encouraging exports. Meanwhile, we benefit from a strong dollar, and the greater variety and lower cost of products that come with it. Policies that block trade again would be self-harming by reducing the benefits for Americans, notably the gains from trade that make family incomes go further at the checkout register (a point illustrated in past research by President Obama’s chief economist).

Trade politics are always tough. The benefits are spread widely, while the smaller number of people made worse off from increased competition naturally speak out and present a coordinated and sympathetic message. Moreover, past trade deals have sometimes oversold the short-term gains. TPP will spur long-term productivity and raise Americans’ incomes over time, and jobs will be gained as U.S. firms take advantage of opportunities in expanded markets. But the agreement is not a fix for the currently unemployed. Still, trade deals over time mean better jobs, more choices, and a bigger economic pie—providing a greater ability to address policymakers’ distributional concerns.

Efforts to have trade agreements address supposed currency manipulation are misguided, both because they will hinder U.S. monetary policymaking and because they will likely kill the TPP. This might be the underlying motivation of the proposals, but this is an outcome that will ultimately hurt American families and undercut our global leadership.

Swagel, a professor at the University of Maryland’s School of Public Policy, was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.