With respect to the TPP, Rep. Levin has proposed that U.S. duties on motor vehicles imported from Japan be subjected to the longest possible phase‐out period and that, if the auto import penetration rates in Japan do not increase to some benchmark percentage of domestic sales, the U.S. duties (2.5% on cars and 25.0% on pick‐up trucks) should remain in place. In other words, the question of whether and how much U.S. consumers are taxed on purchases of imported vehicles from Japan should be determined by whether, and to what extent, the U.S. automakers attempt to succeed in Japan — a market they’ve put very little effort into cultivating, judging from the relative success of European automakers there.
In a statement released just hours after the fast track bill was introduced, Levin indicated that any legislation that he might consider supporting must include provisions to allow the United States to impose countervailing duties on imports from countries where the currency is intentionally undervalued to secure a trade advantage. Of course that dismisses the fact that economists disagree widely on how to determine whether a currency is undervalued, let alone how to measure the extent of undervaluation or to ascertain whether it derives from a deliberate policy to secure a trade advantage. Without that knowledge, the cure is likely to be more distorting than the conditions it is presumed to treat.
Coincidentally, on Thursday the American Automotive Policy Council, which represents the interests of GM, Ford, and Chrysler in Washington and works closely with Levin, unveiled its own “plan for strong, enforceable currency provisions in the Trans‐Pacific Partnership (TPP) agreement.” The AAPC has been raising accusations about Japanese currency manipulation since Tokyo expressed interest in joining the TPP. But there have been no interventions in currency exchange markets to corroborate such allegations. Sure, the Yen’s been depreciating as a result of Japanese monetary expansion, much like the dollar has depreciated alongside the Federal Reserve’s quantitative easing. When the AAPC attempted to differentiate the two experiences by claiming — without any evidence — that the intent of Japan’s loose monetary policy was to secure an unfair trade advantage through a weaker yen, Fed Chairman Bernanke interjected: “They’re not manipulating their exchange rate. They’re not directly trying to set their exchange rate at a given level. Japan is trying to expand its overall economy.”
Moreover, if policy‐induced currency depreciation with evidence of intent to secure an unfair trade advantage is the offense, the United States with its official policy goal of doubling exports by the end of 2014 — as compared to the base year of 2009 — looks pretty guilty (see the National Export Initiative). Pursuing policies that depress the value of the dollar in the midst of an official effort to prime exports is more than a smoking gun.
AAPC apparently grasped the weakness of its argument and changed tack. Rather than define “actionable” currency manipulation in a manner that leaves the United States vulnerable, the AAPC’s proposal carefully defines a set of conditions which, if found to exist, would warrant a finding of “currency manipulation for the purpose of securing an unfair trade advantage.” That is: If a trade agreement partner accumulates foreign currency reserves over a six month period that amount to more than three months‐worth of “normal” imports, and if the member has a current account surplus during the entire six month period, it is manipulating its currency to secure an unfair trade advantage. Such a finding would lead to suspension of the TPP tariff benefits enjoyed by the offending member’s exporters for a period of at least one year.
The first point to note is that the United States would never be captured by this definition. As the issuer of the world’s primary reserve currency, the United States has little need to accumulate reserves. Likewise, the United States hasn’t had a current account surplus in decades and, barring a complete collapse in demand and a massive increase in savings rates, shouldn’t be expected to anytime soon. Thus, under the AAPC’s definition, the United States would have carte blanche to depress the value of the dollar in order to pursue a variety of ill‐considered policy objectives that Rep. Levin might support, such as doubling exports, halving imports, or achieving trade account balance without meeting the triggering criteria of the provision, as long as its current account remains in deficit. Meanwhile, countries that tend to run current account surpluses — such as Japan, Singapore, Vietnam, Malaysia, and Brunei among TPP countries — are already half‐way toward losing their tariff benefits.
Second, there will be collateral damage. Governments engage in foreign reserve accumulation for a variety of reasons — as insurance against capital outflows, to attract foreign investment, to prepare for leaner economic conditions, to share today’s exhaustible bounty (in the case of commodity‐dependent economies) with future generations, etc. Reserve accumulation in excess of “three‐times imports” is not uncommon. Governments that accumulate reserves also tend to run current account surpluses. By targeting conditions that may also reflect benign intentions, these rules would impose de facto limitations on the policy options available to foreign governments to exercise their domestic sovereignty. As such, it is certain to be opposed by the other TPP negotiating partners.
Yet, despite all of its flaws, the AAPC proposal is arguably less onerous than Levin’s, which suggests it will be set up as a compromise between the current, relatively subdued currency language in the fast track bill and Levin’s countervailing duty approach. Pitching it as a compromise may make sense tactically, but the fact is that the idea is a solution in search of a problem. As the overwhelming majority of trade flows today are intermediate goods, the effect of currency values on final prices cuts in different directions. That’s why, despite a 38 percent appreciation of the Chinese Renminbi vis‐à‐vis the dollar since 2005, the bilateral U.S. trade deficit with China has increased by 46 percent.
For U.S. negotiators to single out currency manipulation as a primary concern for remediation, the United States should have clean hands. But the U.S. government engages in all sorts of market‐distorting behavior, the consequences of which cut in many different directions: the Federal Reserve’s open market operations are distinct interventions that affect the supply and demand of money and credit; tax credits and other government subsidies to, say, green energy production are interventions into goods markets; “Buy American” and other buy local laws, minimum wage laws, and government‐administered bankruptcy proceedings are interventions into labor and goods markets. The purchasing, production, and investment decisions of state‐owned enterprises, nationalized industries, sovereign wealth funds, and other government‐influenced actors all affect markets in ways that skew outcomes away from their optimums. So the argument that currency manipulation is somehow more odious or problematic than these other interventions, which all spill over into the real economy, is not all that compelling.
Given the need for support from House Democrats and Levin’s refusal to play a constructive role in that process, President Obama must finally engage meaningfully and sincerely in the discussion and make a compelling case for why he needs Trade Promotion Authority and why the Trans‐Pacific Partnership agreement is good for the United States.
Until now, he has avoided taking firm positions that might offend his traditional constituencies, who tend to be skeptical of trade, if not hostile to it. But the time for equivocation is over. To bring to fruition the trade liberalizing agenda his administration has pursued, the president must show some courage and lead on trade. He should start this week by telling Detroit “enough!”