Should currency factor into our governments' trade agreements?
That's the question a recent letter from leading economists to US congressional leaders has raised once again. The concept of linking trade deals to currency rules has always been a much-debated one. It's back up for discussion as the government prepares a cross-party bill to allow a yes-or-no vote in Congress when it comes to negotiations for trade deals.
The economists who authored the letter advised against factoring currency into the government's trade agreements. They made clear their opinion that laws preventing trading partners from weakening their currencies are a bad idea, as they would have a domino effect impacting ordinary people. They said: "Attempts to penalize countries for supposedly manipulating exchange rates would thus impose constraints on U.S. monetary policy, to the detriment of all Americans.”
At first glance these arguments appear perfectly fair, but there's a clear opposition. Art Laffer, chairman at Laffer Associates, an economic research and consulting firm, summed this up in an article for The Daily Caller: “When countries such as Japan directly intervene in currency markets to devalue their domestic currency, their exports become cheaper relative to ours, leading to potential job loss and decreases in U.S. exports.”
Although the International Monetary Fund does have principles against currency manipulation, these aren't enforced. Weakening currency can be hugely valuable to governments' trade deals, as it means they can be much more competitive than their international rivals.
The arguments on both side are relevant to all governments, but in the case of the US there's significant statistics behind why lawmakers might be more keen to prevent currency manipulation. It's estimated that over 20 countries have deliberately manipulated their currency's value, leading to a loss of one to five million jobs in America.
This is not only an economic worry, but also a political one. It's an issue that could lead voters to believe that the government is putting broader trade deals first, ignoring the needs of the people, if they don't take steps to counteract currency manipulation.
However, on the other side of the debate there's the likes of Tony Fratto, a former Republican White House spokesman now working for pro-trade groups. He argued that such measures would “wreck our trade agenda”. Others have supported his claims, saying this kind of legislation could draw unwanted attention to Federal Reserve policies.
And while currency manipulation is linked closely to trade, they don't technically fall under the same scope. Merging the two legislations is new territory and could have a negative impact that would be difficult to predict.
Of course, ultimately this is just as much about winning votes as it is about making smart, long-term economic policies. As Gary Hufbauer of Washington think-tank Peterson Institute for International Economics told The Wall Street Journal, “these negotiating objectives will only be put in if they deliver votes”.
What's clear is that while legislating against currency manipulation could have a positive outcome for trade, it could also be seriously detrimental to international relations and make waves in the current system. Whether or not America's politicians can reconcile their differences and the bill can be agreed on is yet to be seen.