The U.S. Senate’s apparent inability to proceed with Trade Promotion Authority (TPA) may represent the day when the Americans conceded leadership on global trade.
The vote that blocked consideration of TPA highlights to the rest of the world that the Americans cannot be counted on to get things done any more. The Trade Promotion Authority (TPA) bill is not just about the Trans-Pacific Partnership (TPP).
TPA is meant to cover a set of extremely important, next generation, trade deals with: the 11 other parties in the TPP; up to 19 members in an expanded TPP by 2020; the Europeans in TTIP; more than two dozen countries in services (TiSA); a hugely important grouping of members in the information technology space (ITA2); with China and others over opening up government procurement markets in a clear and transparent manner (GPA2); more than 160 countries in implementing new rules to move goods faster and cheaper across borders (the WTO Bali deal on trade facilitation); and anything else that might begin negotiations in the next 5 years.
The Senate had an opportunity to outline their primary objectives and allow the Executive Branch to see what is the best possible deal that could be gained. Afterwards, Congress will vote on each individual agreement after consultations along the way.
These ought to have been key objectives for every member of both parties. Yet some members in the Senate have allowed misinformation to guide their thinking. Most damaging has been a set of arguments about currency manipulation, disguised as a discussion about "enforcement" or "enforceable provisions." The agreements currently on the table--all of them, but especially the TPP--already have extremely strong enforcement provisions built in. These help to ensure that participating members in each deal follow the rules.
Currency manipulation is not about enforcement of a trade deal. It is simply a bad idea. It is not workable and will not address the supposed problem. Even worse, the collateral damage might end up ensnaring the United States by preventing actions that the Americans may want to take in the future.
But insisting on including this set of rules alongside the TPA debate just illustrates the nature of the debate in Washington. It is not about creating helpful rules to guide trade in the next five years. It is about following narrow, domestic partisan interests and using flawed arguments.
In the end, it also shows the rest of the world that the United States cannot be viewed as a trusted partner because--no matter how much you bend to accommodate the Americans in a negotiation--they will always add one more bitter pill and insist that you swallow it. Even then, passage of the final deal is never assured.
The TPA legislative vote has been cast by the White House as a “procedural issue.” It is true that the specific problem in voting was whether or not the TPA bill could be considered on its own, or in conjunction with three other bills. One is presumably not controversial—to renew ongoing trade programs with Africa. One is to provide worker training for workers harmed by trade (Trade Adjustment Assistance or TAA). Finally, the worst idea on the table, of having something with currency manipulation as a key objective in (all?) trade agreements.
While Washington has gotten stuck in partisan battles over TPA, the timing for TPP has only gotten worse. This agreement does not just include the United States. Delays over TPA have held up the conclusion of the TPP. If the Americans end up unable to pass the implementing legislation on the TPP until after the next election in 2017, other members may also face similar domestic challenges between now and then that permanently stop the TPP.
By 2017, who knows what will have changed in the other TPP members? Canada votes in an apparently close election in October. The Japanese Prime Minister has staked a great deal on the TPP and his tenure length is unknown. Chile just reshuffled the cabinet. The domestic scene in Malaysia is also uncertain. The Australian Prime Minister has already been forced to survive one vote on his leadership.
This "procedural" issue in the United States Senate over TPA could end up like the proverbial butterfly flapping its wings. The consequences of this delay could, indeed, reverberate for a long time to come.
Let me reprint part of an earlier post to explain again why currency manipulation should never have been an objective and certainly does not deserve to shut the Americans out of a responsible leadership role in trade:
Any sort of currency manipulation clause is unlikely to solve the problem it is ostensibly trying to address. Worse, in order to ensure that American interests are not undermined, the provisions have to be carefully crafted such that they might never be triggered. The final point of damage—even if there are virtually no circumstances under which such clauses might be used, America’s trade partners in the TPP might simply refuse to conclude negotiations at all.
So what is the problem so many backers of such legislation are trying to address? In brief, governments can give a competitive advantage to their export industries if their currency is lower in value than their export partners. The difference in currency values effectively makes imported goods cheaper in the foreign market, encouraging consumers and producers to buy more, relatively cheaper, foreign goods than relatively more expensive domestic items.
How would a government go about making this happen? If a government intervenes in currency markets, it can drive down demand for its own currency (or drive up demand for foreign currencies) by buying and selling currency.
Another way to accomplish the same thing is to print more money domestically. If there is more money in circulation now, the value of any given note is lower. However, governments engaged in such behavior often argue that such policies are not aimed specifically at artificially depressing the value of the currency for the purpose of generating an unfair trade advantage. Therefore, such behavior is not considered currency manipulation, at least as members of Congress appear to want to define it.
The purchase of assets by the government can also change the value of currencies, even if the objective is to stimulate the domestic economy.
Singapore loosened monetary policy recently in response to weaker oil prices and low domestic demand. The government argued it was using one of the primary items in its tool kit to address low inflation, since it does not use interest rates as a tool.
Thus, governments may have lots of legitimate reasons for adjusting currencies without the specific intention of getting a leg up for exports.
It may be important to note that not every country is able to manipulate currencies. If the country is small, especially with limited demand, the value of the currency is more likely set by market forces. A country with limited resources cannot intervene very much to buy or sell currencies. And, finally, the United States has a unique position in the global economy. Since the U.S. dollar functions as a reserve currency, it allows the United States to have different options than anyone else in the markets (for the moment, at least, but that is another story). Let me also note that because of this position, the United States does not have to intervene in currency markets like anyone else.
Efforts to stop countries from “unfairly manipulating” their currency will not work.
There are many reasons why not, but start with the fact that most countries in a position to manipulate currencies also have complex economies. These economies rely on both exports and imports. For many firms, exports can only be produced with imported content. By depressing the value of the currency to make exports cheaper, imports become more expensive. As a result, firms may not actually be competitive in the export market since the price of imported content of the final goods might be more than offset by whatever the discount on the export side might be.
Equally key, for the most complex products, the value of the benefit from a depressed currency is likely to be small. Consider an i-Pod, for instance. Imagine that China were, in fact, manipulating their currency to a massive extent—say 50% off the presumed “normal” value of the yuan. In this hypothetical context, it might appear that Chinese intervention is dramatically affecting the price of the device in the American market. But, in fact, the total amount of Chinese content in an i-Pod could be as little as $4 of the $150 sales price. Thus, the extent of the “unfair” advantage of Chinese currency might make a whole $2 difference to the final buyer.
Recall that this example gives figures for a truly exceptional rate of currency intervention at 50%. The actual extent of manipulation is likely to be considerably smaller. This means that the total price difference could be literally pennies.
While other products may not show such dramatic figures, the point is that—in most complex, higher value items—the content is likely to be provided by multiple countries. As a result, even crazy high manipulation is unlikely to affect the final price very much.
The Big 3 auto companies are driving the issue of currency manipulation in Washington. But a car in the modern, globalized economy is very much like an i-Pod. Even if you could determine that a China or a Japan was intervening to depress currency prices by a lot, the total difference in the price of a finished car is still likely to be much more modest than people realize.
To make this pressure by the Big 3 auto companies more surprising, many of the cars sold in the United States today are actually manufactured in whole or part in the United States (or NAFTA countries). Thus, the value of potential manipulation on the total cost of a car is small.
Practically speaking, a currency manipulation clause has additional challenges. How can the specific amount of currency tweaking be measured? Currencies change regularly in the open market, so a trade agreement has to take this into account somehow. Even in the alleged cases of Japanese or Chinese manipulation, few could agree on the extent of intervention—was it 10 or 45% or something in between?
What is the appropriate response to such intervention? Even if a trade agreement could specify the triggers for determining manipulation, then what? Many of the proposed “solutions” appear to run afoul of other laws and regulations.
The United States, clearly, does not want to become ensnared in its own rules either. Depending on how defined, basic American policy in the independent Federal Reserve could be challenged by foreign governments. Problems like this make whatever provisions that might end up in trade agreements so tightly restrictive that they can never be applied or it might mean that the United States breaches the rules and argues for non-intervention in its own affairs.
Finally, none of the specific partners currently negotiating the TPP are keen to see rules on currency manipulation included. This agreement has been under discussion for more than five years. To add a controversial (to put it mildly) item so late in the game is to risk imploding the whole deal.
Some may argue that TPP partners have already accepted proposals and provisions that they do not like. What is different about currency manipulation from other American ideas? At some point, however, pushing too hard may make others snap. This is likely to be that point. Adding a very unpopular and unworkable idea like currency manipulation clauses into the TPP mix at this late day is a truly dreadful idea that should be discarded immediately.
***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***