How to Fight Currency Manipulation

WASHINGTON, DC – Is it appropriate to use trade agreements to discourage countries from using large-scale intervention in the foreign-exchange market to hold down their currencies’ value? That is the question of the day in American economic-policy circles.

In recent years, Japan, South Korea, and China have manipulated their currencies to keep them undervalued. This boosted their exports, limited imports, and led to large current-account surpluses. But such intervention adversely affects trading partners and is barred under existing international rules. Unfortunately, those rules have proved completely ineffective.

Now a new opportunity to address the issue has emerged: The Trans-Pacific Partnership – the mega-regional free-trade agreement involving the United States, Japan, and ten other countries in Latin America and Asia. With the TPP close to being finalized, South Korea and China are watching intently, and other countries may want to join.

US President Barack Obama correctly argues that this is an occasion to set the rules for trade and investment in the twenty-first century. Yet the US Treasury Department and the US Trade Representative steadfastly refuse to include any language prohibiting currency manipulation in the TPP, for five main reasons – none of which fits the facts.