A currency clause in the TPP is unworkable, unsuitable, and counterproductive

Curiously, the repeated calls for including a currency clause in the TPP fail to tell us the most important thing: What kind of clause? What behavior is to be proscribed? Who will be in charge of monitoring for transgressions? What types of sanctions would constitute a fair remedy? The silence of pundits on these crucial matters reflects the lack of consensus on what constitutes systematic currency manipulation. When countries maintain fixed exchange rates below their market value, impose extensive controls on capital inflows, and directly intervene in the market to defend a target exchange rate, it is easier to sustain charges of currency manipulation. But beyond these textbook cases we enter a wide gray area.

Take the argument that the buildup of excessive foreign exchange reserves constitutes currency manipulation. Where do we draw the line on what constitutes excessive, and how can we determine that the objective is to obtain unfair competitive advantage and not the accomplishment of legitimate policy goals? Many Asian countries concluded from the havoc wrought by the Asian Financial Crisis that they needed to boost their forex reserves as an insurance mechanism. And many oil producing countries have channeled their foreign reserves into sovereign investment funds to diversify their economic portfolio. Recently, Japan has been accused of unfairly cheapening the yen through its quantitative easing program, but the actions of the Bank of Japan mimic what the Fed has done to combat the post 2008-recession. The important lesson here is that currency manipulation is largely in the eyes of the beholder. Critics read into these policies an attempt at competitive devaluation, while proponents note their merit in terms of prudential financial management, economic diversification, and deflation abatement. Until we have a widely-accepted definition of what constitutes currency manipulation, we don’t know what behavior to outlaw in a trade agreement.

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Currency misalignment is a global issue, one that falls largely outside the purview of this 12-member trade grouping. China is not participating in the TPP, and among current members only two (Malaysia and Singapore) are on the list of manipulators that according to a recent Peterson Institute study (using the foreign reserve criteria) merit a U.S. response.

A currency clause in the TPP can do much harm and little good. It will introduce a very divisive issue on negotiations that are now reaching a delicate final stage. By overloading the negotiation agenda we risk negotiation drift. Moreover, it can dim the possibilities of constructing an Asia-Pacific wide platform of high level economic integration by deterring China from joining.

While the costs are high, the benefits are in question.  Currency realignment is not a magic pill to eliminate trade deficits. As several economists have pointed out, shifts in the value of the Chinese yuan have had a marginal effect in the American trade deficit with China. Nor did the sizable depreciation of the dollar vis-à-vis the yen during the 2000s had any impact in reducing the bilateral trade deficit. This point is important because the auto caucus has used the argument of currency manipulation to oppose Japan’s admission to the TPP. The impact of said clause in the auto trade balance will be modest given that the majority of Japanese brand cars sold in the American market are manufactured on U.S. soil.

Even before Japan sits at the TPP negotiation table, American trade negotiators have substantially advanced the offensive and defensive interests of the Big Three car companies. The Japanese government has agreed to negotiate on non-tariff measures that hinder market access for foreign brands, to accept a long phase out of American auto tariffs, a snap back mechanism to reimpose higher duties if disputes arise, and a special safeguard to prevent sudden surges in American imports of Japanese cars. The U.S. auto industry has been well served by the nation’s trade negotiators. It is now time to contemplate how their demand for a currency manipulation clause will be a disservice to American objectives in the TPP.

Solis is Senior Fellow and Knight Chair in Japan Studies at The Brookings Institution, and associate professor at American University.