The Chimera of Currency Manipulation

CAMBRIDGE – US President Barack Obama is still pressing to obtain Trade Promotion Authority and use it to conclude negotiations for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. But many in the US Congress insist that provisions must be added to the agreements to prevent currency manipulation.

Let’s be clear: If the US were to insist that “strong and enforceable currency disciplines” be part of trade agreements, no deals would be concluded. Other countries would refuse – and they would be right. Linking efforts to prevent currency manipulation to trade agreements has always been a bad idea, and it still is.

True, there are times when particular countries’ currencies can be judged to be undervalued or overvalued, and there are times when their trading partners have a legitimate interest in raising the issue. But even when currency misalignment is relatively clear, trade agreements are not the right way to address it. More suitable venues for resolving exchange-rate issues include the International Monetary Fund, the G-20, the G-7, and bilateral negotiations.

For example the undervalued renminbi was successfully addressed in bilateral China-US discussions from 2004 to 2011. China allowed the currency to appreciate 35% over time. Today it is well within a normal range.