Two Bills introduced in the United States Congress last week could lead to a new kind of trade measure that in the short run may wreck the Trans-Pacific Partnership (TPP) agreement and in the longer run could cause havoc in the global trading system.
The sponsors of the Bills, aimed at preventing "currency manipulation", claim to have majority support among Republicans and Democrats in both the Senate and the House of Representatives. Thus, these Bills are being taken seriously, even if the Obama administration is known to be against linking the currency manipulation issue to trade measures.
The Congress members and their intellectual backers claim that some governments are deliberately manipulating their currencies so as to reduce the prices of their exports, enabling them to sell more to the world market. Their imports are also made more expensive, thus discouraging goods from other countries, the Congress members allege.
They cite studies that claim that the United States has lost five million jobs in the last decade because foreign governments have manipulated their currencies.
The main target of the Bills is China, which has long been labelled by Congress members and some economists as a currency manipulator. But other countries that have been mentioned are Japan, Malaysia and Singapore, in the context of the TPP.
In an opinion article, Senators Sherrod Brown and Jeff Sessions and Representatives Sandy Levin and Mo Brooks (who are among the Bills' sponsors) argued that the US' high trade deficits with China are caused by the Chinese government's action to devalue its currency against the US dollar. "This puts American manufacturers at a serious disadvantage and makes it more difficult for American companies to compete against Chinese companies," they claimed.
Though China is prominently targeted, the legislation can affect any country deemed to be a "currency manipulator".
The trade actions that the Congress members propose include:
- Enabling the American government to treat currency manipulation like illegal government subsidies or dumping of products at low prices. American companies claiming to be affected by foreign countries manipulating their currencies can petition the administration, which can then impose countervailing duties to offset the impact of currency manipulation on a US industry.
- The US government should include provisions in its trade agreements, starting with the TPP, that would deter its trading partners from manipulating their currencies.
The currency Bills' content may thus be injected into the TPP. The timing of the tabling of the Bills seems to be linked to the TPP, which is reported to be near conclusion. A ministerial meeting is scheduled for next month to address outstanding issues.
Many TPP countries are reluctant or unwilling to conclude the negotiations unless the US President is given "fast-track authority" through a Trade Promotion Authority (TPA) law, meaning that Congress can vote only for or against the agreement but cannot amend it.
But the Congress members sponsoring the currency Bills are making the passing of the TPP conditional on the adoption of the currency manipulation legislation. They also want the TPP to contain provisions punishing currency-manipulating countries, by suspending their TPP benefits such as the preferential lowered tariffs.
In last week's media reports on the Congress Bills, Japan was the country most prominently mentioned as a TPP country that could be considered a currency manipulator. But others were also mentioned.
"Currencies rise and fall for lots of reasons, but US Senator Sherrod Brown, congressional colleagues and a number of American manufacturers charge that China, Japan, South Korea, Malaysia and Singapore have used financial and central government mechanisms to keep their currencies artificially low," said an article by Mr Stephen Koff of Northeast Ohio Media Group.
An article by the Peterson Institute's Mr Fred Bergsten, who has been advising some of the Congress members behind the Bills, states that Malaysia and Singapore, "which are engaged in TPP negotiations, have also intervened and piled up sizeable reserves relative to any historical norms".
He mentioned three criteria for identifying currency manipulators: excessive official foreign currency assets (more than three to six months of imports); acquisition of significant additional amounts of official foreign assets, implying substantial intervention over a recent period, say, six months; and a substantial current account surplus.
The Congress legislation aims to counter currency manipulation used as trade protection or promotion. Ironically, it may lead instead to a new big wave of trade protection.
Critics are likely to see the US law as self-serving, as the US will be able to unilaterally define and decide who is a currency manipulator, and then use trade measures such as tariff hikes and suspension of trade benefits.
Many governments and analysts have accused the US itself of lowering its currency's value through policies such as quantitative easing and near-zero interest rates. In their view, the US has also engaged in currency wars and can be considered a manipulator.
If the US can take trade actions against those it perceives as manipulators, others can also take action against the US. The proposed US law, if it takes effect, can thus trigger trade protection measures and retaliation.
Another casualty could be the TPP, which already contains unpopular and controversial components such as an investor-state dispute system, tight intellectual property rules, the opening up of government procurement and curbs on state-owned enterprises.
If the US Congress persuades the administration to inject punishment for currency manipulation as another TPP component, it might be the straw that breaks the camel's back.
THE STAR/ASIA NEWS NETWORK