Currency Warriors’ Pacific Battleground March

The Trans-Pacific trade negotiations between the US and a dozen Asian and Latin American countries entered their final stretch as bipartisan legislation in Congress and a cross-section of business and labor groups insisted on inserting currency issues into the agreement despite Obama administration objections. The Trade Representative and Treasury Department argue that “manipulation” is regularly discussed at G-20 summits as in February’s Istanbul one and is addressed in the latter’s biannual reports to Capitol Hill under a decades-old law. The last review raised concerns about China, Taiwan and Korea but the “manipulator” label has never been formally attached triggering possible sanctions. Think-tank studies put the lost American job toll at millions from the practice, and while Beijing remains the main focus it is not yet a TPP party as it pursues its own pan-Asia free trade agenda. Japan joined the pact talks at its late stage and the central bank has come under fire for sharp yen depreciation with quantitative easing to battle deflation as the ECB now follows the same strategy. When Tokyo started the program foreign counterparts allowed that such monetary policy chiefly for domestic purposes was not an unfair competitive challenge, and exporters with offshore investments found higher input costs offset advantages. Almost half the House of Representatives is on the record as opposing future deals without currency treatment, and the Ways and Means Committee will soon consider promotion authority enabling quick ratification with new reporting and enforcement rules. A separate Senate bill would order automatic Commerce Department investigations following a petition that could impose countervailing import duties as sponsors vowed to protect workers from “dirty fighting.” Treasury Secretary Lew testified to the Finance Committee that bilateral discussions were the preferred route and pointed to the Yuan’s slight appreciation against the dollar in 2014 with authorities’ pledge of greater flexibility and market determination. He pointed out that the WTO dispute settlement mechanism has demurred on currency complaints given the lack of expertise and jurisdiction, and that an effort to alter longstanding norms could backfire with foreign protests against Federal Reserve decisions and dollar swap availability abroad. Time can also overcome the question, as he noted predecessors in the late 1990s did not support formulaic retaliation against Japan then regularly intervening before it began an extended crash and recession. However Senator Schumer from New York, who still represents the Wall Street community and championed the approach, has pressed for revisiting it in a regional context through a chapter in the TPP treaty or as a legislative provision tied to passage.

Among emerging economies prospective signatories like Malaysia, Vietnam and Peru are under the microscope with routine interventions and banking system controls to manage currency pegs and high dollarization levels. Non-residents own over half of Peru’s local debt with the greenback relationship and it has recently cut interest rates and taxes and raised infrastructure spending in an effort to restore 5 percent GDP growth. These considerations may be overlooked as they join the trade realm with Washington’s push and an interim step may be to defer to standing multinational panels of experts to assess manipulation claims and recommend compromises among TPP members before resorting to another set of rigid arrangements.