Only Tsipras Can “Go to China”

Alexis Tsipras, the Greek prime minister, has the chance to play a role for his country analogous to the roles played by Korean President Kim Dae Jung in 1997 and Brazilian President Luiz Inácio Lula da Silva in 2002.  Both of those presidential candidates had been long-time men of the left, with strong ties to labor, and were believed to place little priority on fiscal responsibility or free markets.  Both were elected at a time of economic crisis in their respective countries. Both confronted financial and international constraints in office that had not been especially salient in their minds when they were opposition politicians.  Both were able soon to make the mental and political adjustment to the realities faced by debtor economies.  This flexibility helped both to lead their countries more effectively.

The two new presidents launched needed reforms.  Some of these were “conservative” reforms (or “neo-liberal”) that might not have been possible under more mainstream or conservative politicians.

But Kim and Lula were also able to implement other reforms consistent with their lifetime commitment to reducing income inequality.  South Korea under Kim began to rein in the chaebols, the country’s huge family-owned conglomerates. Brazil under Lula expanded Bolsa Familia, a system of direct cash payments to households that is credited with lifting millions out of poverty.

Mr. Tsipras and his Syriza party, by contrast, spent their first six months in office still mentally blinkered against financial and international realities.  A career as a political party apparatchik is probably not the best training for being able to see things from the perspective of other points on the political spectrum, other segments of the economy, or other countries.  This is true of a career in any political party in any country but especially one on the far left or far right.

The Greek Prime Minister seemed to think that calling the July 5 referendum on whether to accept terms that had been demanded previously by Germany and the other creditor countries would strengthen his bargaining position.  If he were reading from a normal script, he would logically have been asking the Greek people to vote “yes” on the referendum.   But he was asking them to vote “no”, of course, which they did in surprisingly large numbers.   As a result – and contrary to his apparent expectations — the only people’s whose bargaining position was strengthened by this referendum were those Germans who felt the time had come to let Greece drop out of the euro.

The Greek leadership discovered that its euro partners, predictably, are not prepared to offer easier terms than they had been in June, and in fact are asking for more extensive concessions as the price of a third bailout.  Only then, a week after the referendum, did Mr. Tsipras finally begin to face up to reality.

The only possible silver lining to this sorry history is that some of his supporters at home may – paradoxically – now be willing to swallow the bitter medicine that they had opposed in the referendum.  One should not underestimate the opposition that reforms will continue to face among Greeks, in light of the economic hardship already suffered.  But like Kim dae Jung and Lula, he may be able to bring political support of some on the left who figure, “If my leader now says these unpalatable measures are necessary, then it must be true”.  As they say, Only Nixon can go to China.

None of this is to say that the financial and international realities are necessarily always reasonable.  Sometimes global financial markets indulge in unreasonable booms in their eagerness to lend, followed by abrupt reversals.  That describes the large capital inflows into Greece and other European periphery countries in the first ten years after the euro’s 1999 birth.  It also describes the sudden stop in lending to Korea and other emerging market countries in the late 1990s.

Foreign creditor governments can be unreasonable as well.   The misperceptions and errors on the part of leaders in Germany and other creditor countries have been as bad as the misperceptions and errors on the part of the less-experienced Greek leaders.   For example the belief that fiscal austerity raises income rather than lowering it, even in the short run, was a mistaken perception.  The refusal to write down the debt especially in 2010, when most of it was still in the hands of private creditors, was a mistaken policy.  These mistakes explain why the Greek debt/GDP ratio is so much higher today than in 2010 — much higher than was forecast.

A stubborn clinging to wrong propositions on each side has reinforced the stubbornness on the other side.  The Germans would have done better to understand and admit explicitly that fiscal austerity is contractionary in the short run.  The Greeks would have done better to understand and admit explicitly that the preeminence of democracy does not mean that one country’s people can democratically vote for other countries to give them money.

In terms of game theory, the fact that the Greeks and Germans have different economic interests is not enough to explain the very poor outcome of negotiations to date.  The difference in perceptions has been central.  “Getting to yes” in a bargaining situation requires not just that the negotiators have a clear idea of their own top priorities, but also a good idea of what is the top priority of the other side.   We may now be facing a “bad bargain” in which each side is called upon to give up its top priorities.  On one side, Greece shouldn’t expect the ECB and the IMF to be willing explicitly to write down the debt they hold.  On the other side, the creditors shouldn’t expect Greece to run a substantial primary budget surplus.  A “good bargain” would have the creditors stretch out lending terms even further so that Greece doesn’t have to pay over the next few  years and would have the Greeks committing to structural reforms that would raise growth.

One hopes that the awful experience of the recent past has led both sides to clearer perceptions of economic realities and of  top priorities.   Such evolution is necessary if the two sides are to arrive at a good bargain rather than either a bad bargain or a failure of cooperation altogether. The non-cooperative equilibrium is that Greek banks fail and Greece effectively drops out of the euro. This may be even worse than a bad bargain, although I am not sure.

Admittedly, both Kim and Lula had their flaws.  Moreover, Korea and Brazil had some advantages that Greece lacks, beyond Syriza’s delay in adapting to realities.  They had their own currencies. They were able to boost exports in the years following their currency crises.

But a recurrent theme of the Greek crisis ever since it erupted in late 2009 is that both the Greeks and the Euro creditor countries have been reluctant to realize that lessons from previous emerging market crises might apply to their situation.  After all, they said, Greece was not a developing country but rather a member of the euro.   (This is the reason, for example, why Frankfurt and Brussels at first did not want Greece to go to the IMF and did not want to write down the Greek debt.)  But the emerging market crises do have useful lessons for Europe.  If Tsipras were able to shift gears in the way that Kim dae Jung did in Korea and Lula did in Brazil, he would better serve his country.

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Answering the TPA Critics Head-On

In recent op-eds and blog-posts I have argued that prospective trade agreements like the TPP (the Trans Pacific Partnership) would be economically beneficial for reasons similar to past trade agreements and that they would have geopolitical benefits too. I have also opposed adding currency manipulation to the trade negotiations.

I am far from alone. Such support for giving the White House Trade Promotion Authority (TPA) is shared by most economists, including 14 former chairs of the president’s Council of Economic Advisers.  But we supporters have not sufficiently responded to the most common arguments of the critics of the TPA process:  a perceived abandonment of democracy and transparency.

Despite what one reads, I see no such abandonment, relative to the way that trade negotiations have been pursued by the United States in the past or relative to the way that they are pursued by other countries. Regarding democracy: under Trade Promotion Authority the Congress would vote on the final agreement that the executive branch has negotiated (thumbs up or thumbs down). Regarding transparency: the details of TPP or TTIP that are unknown are details that have not yet been concluded in the international negotiations.

The negotiations could not proceed if Congress were intimately involved every step of the way.  That is why it has been done this way in the past. There is nothing different this time around (unless it is the extra degree of exposure that draft texts have received).

It is true that these trade negotiations include more emphasis than many in the past on issues of labor and environment, on the one hand, and intellectual property rights and investor-state dispute settlement on the other hand. And it is true that, to get it right, the details of these issues need fine calibration.  But here is the point that everyone seems to have missed, in my view: even if it were somehow logistically possible for international negotiations to proceed while the US Congress were more intimately involved along the way, the outcome would be far more likely to get the details wrong — with big giveaways to special interests – than under the usual procedure of delegating the detailed negotiations to the White House. I know that no commentator is ever supposed to say that any political leader can be trusted.  But I do trust President Obama on this, far more than I trust Congress.

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The Top Ten Reasons Why Trade Agreements Should Not Cover Currency Manipulation

President Obama is still pressing the difficult campaign to obtain Trade Promotion Authority and use it to conclude international negotiations — across one ocean for the Trans Pacific Partnership (TPP), and then across the other ocean for the Transatlantic Trade and Investment Partnership (TTIP). Many in the Congress, particularly many Democrats, insist that the trade agreements must include mechanisms designed to prevent countries from manipulating their currencies for unfair advantage.

The President is right.  The congressmen are wrong.  More suitable venues for discussing exchange rate issues with our trading partners include the IMF, the G-20, the G-7, and bilateral negotiations.

Here are the top ten reasons why including currency manipulation language in the trade negotiations would be unwise.

  1. If the US were to insist that “strong and enforceable currency disciplines” be part of trade negotiations, that would kill the negotiations.  Other countries would not go along.  And yet both the US and its trading partners stand to gain from these deals.
  2. Other countries would not go along with the manipulation language for good reason:  It is a bad idea.  True, there are times when particular countries’ currencies can be judged undervalued or overvalued and times when their trading partners have a legitimate interest in raising the question with their governments.  But even in those cases when the currency misalignment is relatively clear, trade agreements are not the right venue to address it.  The undervalued RMB  was  addressed in bilateral China-US discussions, 2004-11, eventually with success. China allowed the currency to appreciate 35% over time.  Today it is well within a normal range.
  3. Most often it is impossible to tell whether a currency is overvalued or undervalued.  Manipulation is not like the existence of a tariff or quota that can be verified by independent observers.
  4. A necessary condition for a country to be judged as manipulating its currency is that the authorities are intervening in the foreign exchange market.   The People’s Bank of China, for example, bought up a record quantity of dollars in exchange for renminbi from 2004 to 2014, and thereby kept its currency from appreciating as fast as it otherwise would have.   But, in the first place, the Chinese aren’t doing that anymore.  If anything, they have been selling dollars in exchange for renminbi over the last year, keeping the value the currency higher than it would otherwise be.   (Accordingly China’s reserves peaked at $3.99 trillion in July 2014 and then declined to $3.73 trillion by April 2015.) The implication is that US congressmen who say they want China to stop manipulating the currency might be unhappy with the consequences if that happened. Under current conditions, the renminbi would weaken, not strengthen, and American firms would find themselves at more of a competitive disadvantage, not less.  Be careful what you wish for.
  5. In the second place, there are often legitimate reasons for intervening in the foreign exchange market, including even in cases of intervention to push the currency down.   An example would be the overvalued dollar in 1985, when the US joined with Japan, Germany, and other G-7 countries in concerted  intervention  in the foreign exchange market – associated with  the Plaza Accord — to push the dollar down, bringing it off of a perch that at the time was much higher than where the dollar is today.  Certainly intervening to prevent a currency from appreciating, which is what China did over the last decade, is not per se an illegitimate policy. Indeed a heavy majority of countries pursue either fixed exchange rates, exchange rate targets, or managed floating,  all of which are legitimate policies that by definition entail buying and selling of foreign exchange to moderate or eliminate fluctuations in the exchange rate.
  6. In the third place, China isn’t even in the TPP, nor in the TTIP, the two sets of trade negotiations in which the US is involved and for which President Obama wants Congress to give him Trade Promotion Authority.
  7. Japan is in the TPP and it is true that the yen has depreciated a lot over the last year.  Some US economic interests, particularly the auto industry, accuse Japan of manipulation to keep the yen unfairly undervalued.  Many congressional critics cite Japan as the target of their proposals to insist that currency manipulation language be part of the TPP.  But the last time the Bank of Japan intervened in the foreign exchange market was 2011.  (This was an appropriate move, in the aftermath of its tsunami, to bring the yen down off a perch that was its post-war record high.)  In 2013 Japan joined other G-7 countries in agreeing to a proposal from the Obama Treasury to refrain from foreign exchange intervention.   The agreement is still in effect.

Similarly with Europe: members of the Eurozone are in the TTIP negotiations; the euro too has depreciated a lot over the last year; and some US trade critics accuse Europe of currency manipulation.   But the European Central Bank has not intervened in the foreign exchange market since 2000, and that was to support the euro not depress it.  The ECB was party to the 2013 agreement not to intervene as well.

  1. The critics who accuse Japan and other major countries of currency manipulation presumably know that they haven’t been intervening in the foreign exchange market in recent years.  They generally point instead to recent loosening of monetary policy, such as quantitative easing, i.e., the purchases of domestic bonds, which the Bank of Japan and the European Central Bank have prominently pursued with the predictable side effect of depreciating their currencies.  But countries can hardly be enjoined from easing monetary policy when domestic economic conditions warrant, as was so obviously the case in Japan and Europe.
  2. If monetary expansion does not merit the charge of currency manipulation just because it can be expected to keep the value of the currency lower than it would otherwise be, still less do other sorts of economic policies.  Some have argued that even though the People’s Bank of China has stopped buying US and other foreign assets, China’s Sovereign Wealth Funds still do, and that this too counts as manipulation.  But for China to put some of its saving abroad is a perfectly sensible and legitimate thing to do.  The United States would worry if China and other countries did not want to buy its assets.
    Moreover, think of the reductio ad absurdum.  Every country makes policy decisions of many sorts every week, many of which can be expected to have an indirect side effect on the exchange rate in one direction or the other direction.  (Often stupid policies are the ones that weaken the currency – think of Argentina, Russia, or Venezuela.  But not always.)  That a particular policy might have the effect of weakening the currency does not mean that the country is a manipulator.
  3. Finally is the point that if legal language were written to include the actions of the major trading partners’ central banks that US congressmen accuse of currency manipulation, then it could also be applied the other direction, against the United States.  This would not be a case of misusing a tool – which is common enough among trade remedy cases when interest groups lobby for protection against foreign competition. (An example is the use of Anti-Dumping measures that were originally supposed to address cases of predatory pricing.)  Rather it would be a case of using the tool in precisely the way it was written to be used.   The Fed adopted quantitative easing in 2008 in response to the weakening US economy, just as trading partners have done recently.   It continued to pursue QE up until recently. This had the effect of depreciating the dollar from 2009 to 2011, prompting the same charges of “beggar thy neighbor policies” (allegations of attacks in a supposed currency war) that US congressmen now level against others.

In either direction, whether by the United States or against it, such charges are on shaky ground.   Monetary stimulus in one country may even have a beneficial effect on the rest of the world, as its own restored income growth leads to increased imports from its trading partners.   But in any case, other countries are free to adopt whatever monetary policy suits their own economic circumstances. Whether one considers charges leveled against the US in 2010, against its trading partners in 2015, or against some unknown defendant in the future, it would be asking for trouble to have a trade agency rule on them.

 

Posted in China, Dollar, Euro, Europe, Exchange Rates, Fiscal Stimulus, International Cooperation, International Monetary Fund, International Trade, Japan, Monetary Policy, Obama Administration | Leave a comment

New and Improved Trade Agreements?

WASHINGTON, DC – Trade is high on the agenda in the United States, Europe, and much of Asia this year. In the US, where concern has been heightened by weak recent trade numbers, President Barack Obama is pushing for Congress to give him Trade Promotion Authority (TPA), previously known as fast-track authority, to conclude the mega-regional Trans-Pacific Partnership (TPP) with 11 Asian and Latin American countries. Without TPA, trading partners refrain from offering their best concessions, correctly fearing that Congress would seek to take “another bite of the apple” when asked to ratify any deal.

In marketing the TPP, Obama tends to emphasize some of the features that distinguish it from earlier pacts such as the North American Free Trade Agreement (NAFTA). These include commitments by Pacific countries on the environment and the expansion of enforceable labor rights, as well as the geopolitical argument for America’s much-discussed strategic “rebalancing” toward Asia.
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Give Obama Trade Promotion Authority

Trade is now high on the agenda in Washington. President Obama is pushing hard for Congress to give him Trade Promotion Authority (TPA), once known as fast-track authority.  He intends to use it to complete negotiations with 11 trading partners under the Trans Pacific Partnership.  A majority of trade-skeptical Democrats in Congress have lined up on the wrong side on this one, along with some Tea Party Republicans who automatically oppose anything that Obama is in favor of.

Without TPA, trading partners hold back from offering their best concessions to the president’s trade representative in negotiations, fearing correctly that Congress would seek to take “another bite of the apple” when the White House brought the agreement to them for ratification.  Other countries wised up to this trick 40 years ago.  That is why the Congress has given every president since Richard Nixon fast-track authority, which allows only up-or-down approval of the final agreement.  If they don’t give TPA to Obama, it will not only mean no TPP.  It will also be another step in the ongoing self-inflicted American abdication of global leadership.

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Asia Games: Not Zero-Sum

Two hostesses are rivals in a popularity contest throughout the social season.  When they hold soirees on the same night invitees must choose which one to go to.  The hostesses guard their social ranking jealously, and may even punish a guest who goes to the rival’s party by withholding an invitation next time.

To read about the roles of China and the US over the last month, one would think that Asia/Pacific relations are a zero-sum game like that of these two hostesses in some fictional time and place.   Are countries signing up for China’s Asian Infrastructure Investment Bank?  Or for America’s Trans Pacific Partnership?  Will China’s currency be admitted to the SDR club, or will it be kept humiliatingly waiting at the entrance?  Is the United States still number one globally in economic size, or did China pass it in 2014?

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Devaluations are Often Associated with Changes in Government

The possibility of devaluation is apparently an issue in the upcoming Argentine elections.  (The forward rate for next year is about 13 pesos per dollar, which is close to the informal rate and suggests a big  devaluation relative to the current official exchange rate of 8.)   In this connection, an Argentine newspaper has asked me about “Contractionary Currency Crashes,” a paper that I presented as the 5th Mundell-Fleming Lecture of the  IMF’s Annual Research Conference. 

1) Do you think the conclusions about the connections between devaluation and elections are still valid in 2015 even though your article was published in 2005?

My most relevant finding was that political leaders had historically been twice as likely to lose office in the six months following a big devaluation as otherwise.  It is true that some things have changed over the last ten years.  Medium-sized emerging market countries used to have pegs or targets as their exchange rate policies, with occasional forced devaluation.   Since the turn of the century, the typical medium-sized emerging market country has switched to a managed float.   Thus changes in the exchange rate are more commonplace.   Nevertheless, I think most of the conclusions are still relevant in 2015.

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Does the Dollar Need Another Plaza?

We are at the 30th anniversary of the 1985 Plaza Accord.  It was the most dramatic intervention in the foreign exchange market since Nixon originally floated the US currency.   At the end of February 1985 the dollar reached dizzying heights, which remain a record to this day.  Then it began a long depreciation, encouraged by a shift in policy under the new Treasury Secretary, James Baker, and pushed down by G-5 foreign exchange intervention.  People remember only the September 1985 meeting at the Plaza Hotel in New York City that ratified the policy shift; so celebrations of the 30th anniversary will wait until this coming fall.

The dollar has appreciated sharply over the last year, surpassing its ten-year high.   Some are suggesting it may be time for a new Plaza, to bring the dollar down.   In its on-line “Room for Debate,” the New York Times asked, Will a strong dollar hurt the economy and should the Fed take action?”   Here is my response:

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Will Fed Tightening Choke Emerging Markets?

CAMBRIDGE – As the Federal Reserve moves closer to initiating one of the most long-awaited and widely predicted periods of rising short-term interest rates in the United States, many are asking how emerging markets will be affected. Indeed, the question has been asked at least since May 2013, when then-Fed Chairman Ben Bernanke famously announced that quantitative easing would be “tapered” later that year, causing long-term US interest rates to rise and prompting a reversal of capital flows to emerging markets.

The fear, as IMF Managing Director Christine Lagarde has reminded us, is of a repeat of previous episodes, notably in 1982 and 1994, when the Fed’s policy tightening helped precipitate financial crises in developing countries. If the Fed decides to raise interest rates this year, which emerging markets are most vulnerable to a capital-flow reversal?

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The Non-Problem of Chinese Currency Manipulation

CAMBRIDGE – America’s two political parties rarely agree, but one thing that unites them is their anger about “currency manipulation,” especially by China. Perhaps spurred by the recent appreciation of the dollar and the first signs that it is eroding net exports, congressional Democrats and Republicans are once again considering legislation to counter what they view as unfair currency undervaluation. The proposed measures include countervailing duties against imports from offending countries, even though this would conflict with international trade rules.

This is the wrong approach. Even if one accepts that it is possible to identify currency manipulation, China no longer qualifies. Under recent conditions, if China allowed the renminbi to float freely, without intervention, it would be more likely to depreciate than rise against the dollar, making it harder for US producers to compete in international markets.

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