A key to healing U.S. economy? Curbing currency manipulation

Lawmakers are right to be concerned that the TPP trade agreement probably won't include rules on currency

After spending five long years negotiating the Trans-Pacific Partnership trade agreement, 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.

To understand the relationships at work here, imagine that the dollar suddenly rose in value by 20% 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% more of their currency to
buy products from the United States.

This means that a Ford or General Motors car produced in the United States would cost 20% more for a person living in Vietnam or Japan. The same would be true of Microsoft's software or any other item that we might try to sell overseas. Naturally when our prices rise, we expect that people will buy fewer goods and services from us.

The opposite happens on the import side. Our dollar would buy 20% more Japanese yen or Vietnamese dong. So we might be more inclined to buy Japanese cars because they would cost us 20% 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% 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.

A large trade deficit is bad for our economy. In fact, as former Fed Chair Ben Bernanke has argued it is difficult to see how we get back to full employment 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 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 chance to make the dollar more competitive and bring our trade deficit down, who knows when another opportunity 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."

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