[CTC] The Barrier to Trade Ignored by the Pacific Proposal

[Arthur Stamoulis]

http://blogs.wsj.com/washwire/2015/05/05/the-barrier-to-trade-ignored-by-the-pacific-proposal/ <http://blogs.wsj.com/washwire/2015/05/05/the-barrier-to-trade-ignored-by-the-pacific-proposal/>

The Barrier to Trade Ignored by the Pacific Proposal
The Wall Street Journal
By Josh Bivens
May 5, 2015
 
A key issue in the debate over the proposed Pacific trade pact is the absence of a strong provision to stop other countries from manipulating the value of their currency <http://www.realclearpolitics.com/articles/2015/02/04/obamas_stance_on_currency_manipulation_--_in_his_own_words_125489.html> for competitive gain against the U.S.
Currency management is probably the single most important <http://www.iie.com/publications/pb/pb12-25.pdf> international economic issue that should be addressed by policy makers. Currency management by U.S. trading partners is, by far, the most important reason the U.S. has run large and chronic trade deficits <http://www.epi.org/publication/stop-currency-manipulation-and-create-millions-of-jobs/> for the past 15 years. If the U.S. could halve the value of its trade deficit in coming years, this would represent a boost to aggregate demand <http://www.cepr.net/publications/reports/the-trade-deficit-the-biggest-obstacle-to-full-employment> greater than what has been provided by all of the Federal Reserve’s unconventional monetary policies <http://www.frbsf.org/economic-research/files/wp12-22bk.pdf> in recent years (quantitative easing and forward guidance).

The U.S. recovery remains constrained by a shortfall of demand, and no fiscal stimulus is likely in the coming years. So ending currency management and reducing the U.S. trade deficit is by far the most economically plausible path to full recovery.

Now, a common argument against <http://www.wsj.com/articles/trade-poison-pill-1429659780> including a currency-management provision in the trade pact is that it would somehow interfere with future Federal Reserve responses to U.S. recessions. Because the Fed’s purchase of U.S. Treasury bonds and mortgage-backed securities during the recovery from the Great Recession put downward pressure on the dollar’s value, some say that this could be defined as currency management and bar the Fed from such actions under the auspices of a currency provision in the proposed trade agreement–hamstringing U.S. policy in future recessions.

This is nonsense. Every macroeconomic policy will have some impact on exchange rates. Tax cuts that raise federal budget deficits lead, all else being equal, to lower dollar values. Yet no one has ever said this constitutes “currency management.” Infrastructure investments that boost productivity growth would have implications for the dollar’s value (depending on which sector’s productivity growth improved), yet nobody has ever considered such investments “currency management.”

The reason no one has ever confused these practices with currency management is because currency management is pretty simple to define: It is the practice of buying assets denominated in foreign currency for the purpose of weakening one’s own currency in an effort to run trade surpluses. So it’s easy to see why the Fed’s asset purchases in recent years would never somehow get scooped up in a well-crafted currency provision: The Fed bought domestic assets with an aim to lower domestic interest rates, not foreign assets with an aim to lower the value of the dollar.

It is obvious why opponents of including a strong currency provision in the Pacific trade pact would want to say that it would hamstring the Fed’s ability to fight recessions–an outcome that would indeed be a bad thing. But the argument is flat wrong – there’s no reason to think that a currency provision based on widely held definitions of what constitutes currency management would be construed as barring a central bank’s purchase of assets denominated in its own country’s currency. This feels like an opportunistic argument to stop a sensible call for the Trans-Pacific Partnership to address the biggest barrier to trade in the global economy.

Josh Bivens is director of research and policy at the Economic Policy Institute <http://www.epi.org/>. He is on Twitter: @JoshBivens_DC <https://twitter.com/joshbivens_DC>
 
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