Can Trade Agreements Stop Currency Manipulation?

WASHINGTON, DC – It is impossible to deny that trade and exchange rates are closely linked. But does that mean that international trade agreements should include provisions governing national policies that affect currency values?

Some economists certainly think so. Simon Johnson, for example, recently argued that mega-regional agreements like the Trans-Pacific Partnership should be used to discourage countries from intervening in the currency market to prevent exchange-rate appreciation; Fred Bergsten has made a similar argument. But the United States Treasury and the Office of the US Trade Representative continue to argue that macroeconomic issues should be kept separate from trade negotiations.

As it stands, the relevant international institutions – the World Trade Organization and the International Monetary Fund – are not organized to respond effectively to possible currency manipulation on their own. Incorporating macroeconomic policies affecting exchange rates into trade negotiations would require either that the WTO acquire the technical capacity (and mandate) to analyze and adjudicate relevant national policies or that the IMF join the dispute-settlement mechanisms that accompany trade treaties.

To be sure, since 2007, the IMF has prohibited “large-scale intervention in one direction in the exchange market,” in a decision on “bilateral surveillance” that also identifies “large and prolonged” current-account imbalances as a reason for review. But neither that decision nor later IMF policy papers on multilateral surveillance provide specific and comparative quantitative indicators that would eliminate the need for case-by-case judgment.