September 22 is the 30th Anniversary of the Plaza Accord

Exactly 30 years ago, on September 22, 1985, ministers of the Group of Five countries met at the Plaza Hotel in New York and agreed on a successful initiative to reverse what had been a dangerously overvalued dollar. The Plaza Accord was backed up by intervention in the foreign exchange market. The change in policy had the desired effect over the next few years: bringing down the dollar, reducing the US trade deficit and defusing protectionist pressures.  Many economists think that foreign exchange intervention cannot have effects unless it also changes money supplies.  But the Plaza and a number of subsequent episodes of concerted intervention by the G-7 countries suggest otherwise.

In recent years foreign exchange intervention has died out among the largest industrialized countries.  Seeing as how the dollar is again strong and the US Congress once again has trade concerns, some have asked if it might be time for a new Plaza.  My answer is “no, not even close.”   The value of the dollar is not as high now as it was in 1985. More importantly, its recent appreciation is based on the economic fundamentals of the US economy and monetary policy, measured relative to those of our trading partners, whereas in 1985 the appreciation had continued well past the point justified by fundamentals.

The Baker Institute at Rice University is holding a conference on Currency Policy Then and Now: 30th Anniversary of the Plaza Accord.  Among the key figures participating is James Baker, who as the new Treasury Secretary that year was the main initiator of the agreement.   My paper for the conference, “The Plaza Accord, Thirty Years Later,” reviews 1985’s coordinated policy of intervention in the foreign exchange market and contrasts it with the current “anti-Plaza,” a recent G-7 agreement not to intervene, in an attempt to avoid “currency wars.”  I see recent fears of currency wars, i.e., competitive depreciation, as vastly over-done.


Misinterpreting Chinese Intervention in Financial Markets

September 7, 2015

It is tempting to view economic events in China through a single template: the view that they are driven by government intervention because the authorities haven’t learned to let the market operate.  After all, Mao’s portrait still hangs on the wall and the Communist Party still governs.   But the lens of government intervention has led foreign observers to misinterpret some of the most important developments this year in the foreign exchange market and the stock market.  An instance of such misinterpretations is the confused positions of many American congressmen which have helped bring about the opposite of what they really want from China’s exchange rate.

To be sure, Chinese authorities do often intervene strongly in various ways.   In the foreign exchange market, the People’s Bank of China intervened heavily during the decade 2004-13, buying trillions of dollars in foreign exchange reserves and thus preventing the yuan from appreciating as much as it would have if it had floated freely.  Hence years of US allegations of currency manipulation. More recently, in the stock market, the authorities have deployed every piece of artillery they could think of in a crude attempt to moderate the plunge that began in June of this year.

But some important episodes that foreigners decry as the result of government intervention are in fact the opposite.  Two developments this year have dominated the financial pages, but have often been misinterpreted.  One is the depreciation of the yuan against the dollar on August 11.  The other is the bubble in the Chinese stock market that led up to the June peak.

Intervention versus the foreign exchange market

China in August gave American politicians an instance of the adage, “Be careful what you wish for, because you might get it.”  The widely decried 3% “devaluation” of the yuan was the result of a change by the People’s Bank of China in the arrangement for setting the exchange rate, a change that constituted a step in the direction of letting the market decide.  This is what US congressmen have long claimed they wanted and, even now, confusedly still claim they want.

The change sounds technical, but is easily described.  China’s central bank has for some time allowed the value of the yuan to fluctuate each day within a two per cent band, but has not routinely allowed the movements to cumulate from one day to the next.  The change on August 11 was to allow the day’s depreciation to carry over fully to the next day.  Thus market forces can play a greater role in determining the exchange rate.

It is probable that China would not have chosen this time to give the market a larger role in setting the exchange rate if market forces were not working in a direction, toward depreciation, that would help counteract this year’s weakening of economic growth.  And, peering within the country’s decision-making process, it is likely that China’s political leaders were primarily motivated by the desire to support the weakening economy while the People’s Bank of China was primarily motivated by its longer-term reform objectives.

But these two motivations are consistent: market forces would not be pushing so clearly in the direction of currency depreciation if it did not correspond to the fundamentals of the economy.    Market determination of exchange rates can indeed serve a useful function, even if the American politicians who demanded that China float did not realize what the result would be.   In any case, if what they really wanted was something different, one can hardly blame the authorities for taking them at their word.

It is said that a year is a long time in politics.  A year should have been enough time for American politicians to figure out that market forces had reversed direction in mid-2014 and that an end to Chinese intervention in the foreign exchange market would now depreciate the currency rather than appreciate it.

To be sure, China is far from a free-floating currency, let alone from full convertibility of the yuan.  Convertibility would require further liberalization of controls on financial inflows and outflows.  Unification of onshore and offshore markets, not floating of the currency, is what would be required for the yuan to merit an IMF decision this year to include the currency in the definition of its SDR (Special Drawing Right).  Much commentary ahead of the IMF decision underestimated the importance of the criterion that the currency must be “freely usable.”   Increased flexibility alone was not going to be enough to do the trick.

In truth, a 3 percent change in the exchange rate – the size of the so-called “devaluation” against the dollar – is negligible. For example the euro and Japan’s yen have each depreciated far more than this over the last year, against both the dollar and the yuan.

China’s adjustment is said to have triggered a “currency war” of devaluations, relative to the dollar, among a number of emerging market countries.  Most of this was due to happen anyway.  It has been at least a year since the economic fundamentals shifted against emerging markets (and especially away from commodities) and toward the US.   It is natural for exchange rates to adjust to the new equilibrium.  The Chinese move likely influenced the timing.  But the currency war framework is misleading.

Intervention versus the stock market

What about China’s stock market?  The commentary says not only that the authorities consistently pursued a variety of artificial measures to try to boost the market on the way down but also that they did the same during the huge run-up in stock prices between mid-2014 and mid-2015.  The allegation is that the Chinese authorities, particularly the stock market regulator, have not learned how to let the market operate and that they had only themselves to blame for the bubble in the first place.

There is some truth to this overall story.  There was some simple-minded cheer-leading of the bull market in government-sponsored news media, for example.

But many commentators have failed to notice that the regulatory authority, the China Securities Regulatory Commission, took steps to try to dampen the last six months of market run-up.   It tightened margin requirements in January 2015.  It did it again in April.  At that time it also facilitated short-selling, by expanding the number of stocks that could be sold short.  And the event which apparently in the end “pricked” the bubble was the June 12 announcement by the CSRC of plans to limit the amount brokerages could lend for stock trading.

The adjustments in margin requirements are the sort of counter-cyclical  macro prudentialregulatory policy that we economists often call for, but less often see in practice among advanced economies.  Perhaps surprisingly, it is more common in Asia and other emerging markets.  A recent study, for example, found that China and many other developing countries adjust bank reserve requirements counter-cyclically.  Another found effective use of ceilings on loan-to-income ratios to lean against excessive housing credit.

Yes, the extraordinary run-up in stock market prices from June 2014 to June 2015, when the Shanghai stock exchange composite index more than doubled, was fueled by an excessive increase in margin borrowing.  Reasons for the increase in margin borrowing include its original legalization in 2010-11; easing of monetary policy by the People’s Bank of China since November 2014 in response to slowing growth and inflation; and the eagerness of an increasing number of Chinese to take advantage of the ability to buy stocks on credit.

Nevertheless, the stock market regulator responded by leaning against the wind.  Similarly, when the People’s Bank of China has intervened in the foreign exchange market over the last year, it has been to dampen the depreciation of the yuan, not to add to it. These are not trivial points.


Gas Taxes and Oil Subsidies: Time for Reform

World oil prices have been highly volatile during the last decade.   Over the past year they have fallen more than 50%.

Should we root for prices to go up, down, or stay the same?   The economic effects of falling oil prices are negative overall for oil-exporting countries, of course, and positive for oil-importing countries.  The US is now surprisingly close to energy self-sufficiency, so that the macroeconomic effects roughly net out to zero.  But what about effects that are not directly economic?   If we care about environmental and other externalities, should we want oil prices to go up or down?  Up, because that will discourage oil consumption?  Or down because that will discourage oil production?

The answer is that countries should seek to do both: lower the price paid to oil producers and raise the price paid by oil consumers.  How?   By cutting subsidies to oil and refined products or raising taxes on them.   Many emerging market countries have taken advantage of the last year of falling oil prices to implement such reforms.  The US should do it too.

Congress continues to shamefully evade its responsibility to fund the Federal Highway Trust Fund.  On July 30 it punted with a 3-month stop-gap measure, the 35th time since 2009 that it has kicked the gas-can down the road!  There is little disagreement that the nation’s roads and bridges are crumbling and that the national transportation infrastructure requires a renewal of spending on investment and maintenance.  The reason for the repeated failure to put the highway fund on a sound basis for the longer term is the question of how to pay for it.  The obvious answer is, in part, an increase in America’s gasoline taxes, as economists have long urged.  The federal gas tax has been stuck at 18.4 cents a gallon since 1993, the lowest among advanced countries.  Ideally the tax rate would be put on a gradually rising future path.

Fuel pricing is a striking exception to the general rule that if the government has only one policy instrument it can achieve only one policy objective.   A reduction in subsidies or increase in taxes in the oil sector could help accomplish objectives in at least six areas at the same time:

  1. The budget. It isestimated that energy subsidy reform globally (including coal and natural gas along with oil) would offer a fiscal dividend of $3 trillion per year. The money that is saved can either be used to reduce budget deficits or recycled to fund desirable spending, such as US highway construction and maintenance, or cuts in distortionary taxes, e.g., on wages of lower-income workers.
  2. Pollution and its adverse health effects.   Outdoor air-pollution causes anestimated annual 3.2 million premature deaths worldwide.  A gas tax is a more efficient way to address the environmental impact of the automobile than alternatives such as CAFÉ standards which mandate fuel economy for classes of cars.
  3. Greenhouse gas emissions, which lead to global climate change.
  4. Traffic congestion and traffic accidents.
  5. National security.   If the retail price of fuel is low, domestic consumption will be high.  High oil consumption leaves a country vulnerable to oil market disruptions arising, for example, from instability in the Middle East.  If gas taxes are high and consumption low, as in Europe, then fluctuations in the world price of oil have a smaller effect domestically.   It is ironic that U.S. subsidies to oil production have often been sold onnationalsecurity grounds; in fact a policy to “drain Americafirst” reduces self-sufficiency in the longer run.
  6. Income distribution.  Fuel subsidies are often misleadingly sold in the name of improving income distribution.  The reality is more nearly the opposite.  Worldwide, fossil-fuel subsidies are regressive: far less than 20% of them benefit the poorest 20% of the population.  Poor people aren’t the ones who do most of the driving; rather they tend to take public transportation (or walk).   As to producer subsidies, owners of US oil companies don’t need the money as much as construction workers do.

The conventional wisdom in American politics is that it is impossible to increase the gas tax or even to discuss the proposal.   But other countries have political constraints too.  Indeed some governments in developing countries in the past faced civil unrest or even overthrow unless they kept prices of fuel and food artificially low.  Yet some of them have managed to overcome these political obstacles over the last year.  The list of those that have recently reduced or ended fuel subsidies includes Egypt, Ghana, India, Indonesia, Malaysia, Mexico, Morocco, and the United Arab Emirates which abolished subsidies to transportation fuel subsidies effective August 1.

Besides raising taxes on fuel consumption, the US should also stop some of its subsidies to oil production.  Oil companies can “expense” (immediately deduct from their tax liability) a high percentage of their drilling costs, which other industries cannot do with their investments.  Most politicians know that sound economics would call for this benefit to be eliminated.  But they haven’t been ab le to summon the political will.  Among the other benefits given to the oil industry, it has often been able to drill on federal land and offshore without paying the full market rate for the leases.

Those politicians who complain the loudest about the evils of government handouts are often the biggest supporters of handouts in the oil sector. Political contributions and lobbying from the industry must be part of the explanation.  Even so, it is surprising that self-described fiscal conservatives see more political mileage in closing the Export-Import Bank – which earns a profit for the US Treasury while it supports exports – than in ending oil subsidies, which cost the Treasury a great deal.   ‘

A recent study from the IMF estimated that global energy subsidies at either the producer or consumer end are running more than $5 trillion per year.  (Petroleum subsidies account for about $1 ½ trillion of that. A lot also goes to coal, which does even more environmental damage than oil.)  US fossil fuel subsidies have been conservatively estimated at $37 billion per year, not including the cost of environmental externalities.

Leaders in emerging market countries have now recognized something that American politicians have apparently missed, that this is the best time to implement such reforms.  Oil prices

he summer of 2014. So governments that act now can reduce energy subsidies or increase taxes without consumers seeing an increase in the retail price from one year to the next.

For the US and other advanced countries it is also a good time for fuel price reform from the standpoint of macroeconomic policy.  In the past, countries had to worry that a rising fuel tax could become built into uncomfortably high inflation rates.  Currently, however, central bankers are not worried about inflation except in the sense that they are trying to get it to be a little higher.

Congress will have to come back to highway funding in September. If other countries have found that the “politically impossible” has suddenly turned out to be possible, why not the United States?

Did China’s regulators exacerbate its recent stock market bubble?

The plunge of China’s stock market that has taken place since June 2015 has received a lot of attention.  All the commentary says not only that the Chinese authorities have taken a variety of artificial measures to try to boost the market on the way down but also that they did the same during the huge run-up in stock prices between mid-2014 and mid-2015, when the Shanghai stock exchange composite index more than doubled.  The finger-wagging implications are that the Chinese authorities, particularly the stock market regulator, have not learned how to let the market operate and that they had only themselves to blame for the bubble in the first place.

There is unquestionably a lot of truth to this overall story.  But am I the only one to notice that the Chinese authorities repeatedly tightened margin requirements during the bubble, in January and April 2015?   And that in fact the event which apparently in the end “pricked” the bubble was the June 12 announcement by the China Securities Regulatory Commission of plans to limit the amount brokerages can lend for stock trading?

It seems pretty clear that the extraordinary run-up in stock market prices from June 2014 to June 2015 was indeed fueled  by an excessive increase in margin borrowing.  Reasons for the increase in margin borrowing include its original legalization in 2010-11; easing of monetary policy by the People’s Bank of China since November 2014 (in response to slowing growth and inflation); and the eagerness of an increasing number of Chinese  to take advantage of the ability to buy stocks on credit.   Nevertheless, it appears that the stock market regulator responded by leaning in the opposite direction.

This is the sort of counter-cyclical macroprudential regulatory policy that we economists often call for, but less often see in practice.  (I survey some of the research  in the 2015#2 issue of theNBER Reporter.   A recent study by Federico, Végh, and Vuletin, for example, found that China and a majority of other developing countries also adjust bank reserve requirements counter-cyclically.)

Someone could criticize the Chinese increases in margin requirements by saying either, on the one hand, that their effects on the stock market did not last long (January and April, 2015) or, on the other hand, that they caused the recent crash (June).  But at least the moves were in the right direction, which is not a trivial point.

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.

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.

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.


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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A Blog by Jeffrey Frankel