[CTC] Baker on Guardian on currency in TPP

[Deborah James]

http://www.theguardian.com/commentisfree/2015/apr/22/obama-ignoring-currency
-rules-trans-pacific-partnership
Obama is failing us all by ignoring the need for currency rules in TPP
Dean Baker <http://www.theguardian.com/profile/deanbaker>
The sums at stake over currency issues are an order of magnitude larger than
any potential gains from the rest of the Trans-Pacific Partnership


Wednesday 22 April 2015 15.31 BSTLast modified on Wednesday 22 April 2015
15.41 BST

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<http://www.theguardian.com/commentisfree/2015/apr/22/obama-ignoring-currenc
y-rules-trans-pacific-partnership#comments>
The Obama administration is doing its full court press, pulling out all the
stops to get Congress to approve the fast-track authority that is almost
certainly necessary to get the Trans-Pacific Partnership (TPP) through
Congress. One of the biggest remaining stumbling blocks is that the deal
will almost certainly not include provisions on currency. This means that
parties to the agreement will still be able to depress the value of their
currency against the dollar in order to gain a competitive advantage. This
is a really big deal, which everyone thinking about the merits of the TPP
should understand.

The value of the dollar relative to other currencies is by far the main
determinant of our balance of trade. We can talk about better education and
training for our workforce, improving our infrastructure and better
research, all of which are important for the economy.

But anyone who claims that improvements in these areas can offset the impact
of a dollar that is overvalued against another currency by 15-20% is out of
touch with reality. If the dollar is overvalued by 20% against another
country¹s currency, it has the same effect as imposing a 20% tariff on US
exports and giving a government subsidy of 20% to imports.

This is the direct effect when other countries deliberately buy up US assets
to prop up the dollar against their currency. This is the main reason the
United States is currently running a trade deficit of more than $500bn a
year.

This trade deficit creates a huge gap in demand. It has the same impact as
if households were taking $500bn a year out of their paychecks and stuffing
the money under their mattress. There is no obvious way to make up this gap
in demand. In principle we could fill the gap with large budget deficits,
but this is a political non-starter. Based on a dubious reading of the data
from the second half of last year, some analysts had thought the economy was
booming again 
<http://www.washingtonpost.com/blogs/wonkblog/wp/2015/02/02/the-economy-boom
-is-here-to-stay/> , despite the large trade deficit.

More recently, reality and arithmetic have reasserted themselves and most
economists now recognize
<http://www.washingtonpost.com/blogs/wonkblog/wp/2015/04/03/a-dip-or-a-blip-
the-jobs-boom-went-bust-in-march/>  that the economy is not growing fast
enough to fill the demand gap. In fact, the only way we know to fill the
sort of gap in demand created by the trade deficit is with an asset bubble
like the stock bubble in the 1990s or the housing bubble in the last decade.
Not many would advocate going down that path again, which means that we can
look forward to the persistence of high unemployment and a weak labor
market, unless we address the trade deficit.

If we recognize the need to address the trade deficit, and the centrality of
the value of the dollar, then it is mind-boggling that the Obama
administration would not have sought to include rules on currency in the
TPP. After all, the Obama administration has been in office more than six
years and allowed large trade deficits to persist. If they don¹t address
currency rules in the TPP, where exactly do they expect to do it?

Much of the discussion now has the same sort of children¹s table character
that is usually shown toward issues that primarily concern working people.
The rules about investment, about environmental and safety regulation, and
patent and copyright protection are all right there front and center in the
trade agreement. These affect the adults, aka big business. But issues about
currency and trade deficits, that can mean millions of jobs and trillions in
lost output over the next decade, well that¹s kids¹ stuff. The Obama
administration will promise to set up a little table and do a little dance
to humor the people who care about such things. But they must be kept out of
the TPP.

Finally, it is worth noting that sums at stake over currency issues are an
order of magnitude larger than any potential gains from the rest of TPP. We
already have very low barriers with most of the parties in the TPP. Removing
the remaining barriers will have a very limited economic impact, which could
easily be outweighed by the increase in barriers in the form of stronger
patent and copyright protection.

Neither the Obama administration nor anyone else has a politically viable
path back to full employment with a trade deficit equal to 3% of GDP. Full
employment is incredibly important to ensure that those at the middle and
bottom of the income distribution have the bargaining power
<http://www.cepr.net/index.php/publications/books/getting-back-to-full-emplo
yment-a-better-bargain-for-working-people>  needed to share in the gains
from economic growth. If insisting on currency rules risks delaying or even
destroying the TPP, it would be a risk well worth taking.


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