Rules on currency must be developed

By Dean Baker

Los Angeles Times

After negotiating the Trans-Pacific Partnership trade agreement over the last five years, the Obama administration is now pushing for the fast-track authority from Congress that would make it easier to get the final deal approved. One serious problem is that the TPP is not likely to include rules on currency, which is leading lawmakers from both parties to consider opposing the agreement. They are right to be concerned.

A good deal, from the American perspective, would have rules preventing countries from strategically depressing the value of their currency. Japan, Malaysia and South Korea have all been identified as engaging in such manipulation. While this point may seem obscure, the cost of the dollar relative to other currencies is hugely important in determining the size of our trade deficit, which is in turn a major obstacle to growth and employment.

Dollar’s value

To understand the relationships at work here, imagine that the dollar suddenly rose in value by 20 percent against the Vietnamese dong and the Japanese yen. Since we sell our goods and services in dollars, people living in Vietnam and Japan would then need 20 percent more of their currency to buy products from the United States.

The opposite happens on the import side. Our dollar would buy 20 percent more Japanese yen or Vietnamese dong. So we might be more inclined to buy Japanese cars because they would cost us 20 percent less than they would have before the rise in the dollar.

If we sell fewer goods to other countries even as we buy more goods from them, we end up with a larger trade deficit. Currently the U.S. trade deficit is running at more than a $500 billion annual rate, roughly 3 percent of our GDP. This has the same impact on demand in the U.S. economy as if families or businesses just pulled $500 billion out of circulation and stuffed it under their mattresses.

Trade deficit

So long as we have a large trade deficit, our economy suffers. In fact, as former Fed Chair Ben Bernanke has argued it is difficult to see how we get back to a full employed economy as long as we import so much more than we export.

Conversely, if we snapped our fingers and our trade deficit went to zero, we would have more demand for U.S. goods and millions of additional jobs. Firms would have to compete for workers, which would put workers in a position to demand better pay and better benefits.

It would be one thing if the value of the dollar were rising and falling against other currencies purely as a result of market forces. That, however, is not the case. Many countries deliberately prop up the value of the dollar against their currencies. They do this by buying up trillions of dollars via international currency markets.

It would be possible to crack down on this practice by limiting large-scale purchases of foreign currency in the TPP. But the Obama administration seems totally uninterested in getting this done. President Barack Obama has been in office six years and has done nothing to curb currency manipulation.

That’s a shame. If we don’t take this opportunity to make the dollar more competitive and bring our trade deficit down, who knows when another will arise?

Dean Baker is the co-director of the Center for Economic and Policy Research. He is the coauthor of “Getting Back to Full Employment: A Better Bargain for Working People.” He wrote this for the Los Angeles Times.