Strong Dollar? US Currency Manipulation Bills Return

US lawmakers are again seeing red(s) over currency manipulation.

The post title should be a dead giveaway as to the subject matter here. Last decade, there were all sorts of currency bills being flogged by American lawmakers [1, 2] to punish China for having an excessively weak currency achieved through "manipulation" as its foreign exchange reserves and its bilateral trade surplus with the US swelled. Remarkably, these bills were being readied by Democrats and Republicans alike, making China-bashing a bipartisan sport--especially among lawmakers whose constituencies had large import-competing sectors.

Fast-forward to 2015. The United States appears set to lead the world in raising interest rates. Therefore, the US dollar has been on a tear as of late. With US competitiveness overseas suffering as a result of a strong dollar and imports again becoming relatively cheap Stateside, the clarion call has been sounded once more: Punish the currency manipulators! A potential victim here is the Trans-Pacific Partnership (TPP) expansion being negotiated by the United States. A number of TPP participants are being singled out for currency manipulation. What's more, the backers of these bills wish to tie granting President Obama's request for fast track authority--being able to obtain votes on FTAs on a yes/no basis instead of having them modified--with passing currency manipulation legislation. From Martin Khor:

Two bills in the US Congress linking ‘currency manipulation’ to trade measures threaten to unleash a new wave of trade protection as well as to derail the Trans Pacific Partnership agreement. ---- Two bills introduced in the United States Congress last week could lead to a new kind of trade measure that in the short run may wreck the Trans Pacific Partnership Agreement (TPPA) and in the longer run could cause havoc in the global trading system.

The sponsors of the bills aimed at preventing “currency manipulation” claim to have majority support among Republicans and Democrats in both the Senate and the House of Representatives. Moreover the bills’ sponsors and supporters intend to link passage of the legislation to the adoption of fast-track authority for the President and to approval of the TPPA. Thus, this issue and these bills are being taken seriously, even if the Obama administration is opposed to the linking the currency manipulation issue to trade measures.

The Congress members and their intellectual backers claim that some governments are deliberately manipulating to make their currencies artificially low so as to reduce the prices of their exports, enabling them to sell more to the world market. The manipulating countries’ imports are also made more expensive, thus discouraging goods from other countries, the Congress members allege. They cite studies that claim that the U.S. has lost 5 million jobs in the last decade because foreign governments have manipulated their currencies.

The main target of the bills is China, which has long been blamed by Congress members and some economists as currency manipulators. But other countries that have been mentioned are Japan, Malaysia and Singapore, in the context of the TPPA. In an opinion article, Senators Sherrod Brown and Jeff Sessions and Representatives Sandy Levin and Mo Brooks (who are among the bills’ sponsors) argued that the United States’ high trade deficits with China are caused by the Chinese government’s action to devalue its own currency against the U.S. dollar. “This puts American manufacturers at a serious disadvantage and makes it more difficult for American companies to compete against Chinese companies,” they claimed.

Ho hum, here we go again. Fred Bergsten of the Peterson Institute is cheerleading the whole endeavor, as before:

An article by the Peterson Institute’s Fred Bergsten, who has been advising some of the Congress members behind the bills, states that Malaysia and Singapore, “which are engaged in TPP negotiations, have also intervened and piled up sizeable reserves relative to any historical norms.” He mentioned three criteria for identifying currency manipulators: excessive official foreign currency assets (more than 3 to 6 months of imports); acquisition of significant additional amounts of official foreign assets, implying substantial intervention, over a recent period, say six months; and a substantial current account surplus.

The Congress bills rely on IMF guidelines on what constitutes currency manipulation. These include large-scale intervention in one direction in currency markets; excessive accumulation of foreign exchange reserves; restrictions on or incentives for transactions or capital flows for balance of payments purposes; encouragement of capital flows through monetary policy for balance of payments purposes; fundamental exchange rate misalignment; and long and sustained current account surpluses.

The IMF guidelines were of course implemented at the behest of the US. Americans like Fred Bergsten tend to have a parochial view of the rest of the world as readily receptive to American dictates and pressures. What incentive do countries like Malaysia and Singapore have for participating in TPP if they are only going to get bashed in the US as a result? TPP having iffy prospects already, these congressional detours certainly do not help matters since many of the other negotiating countries are requesting that Obama obtain fast-tract authority before proceeding. After all, why agree on a deal that cannot get past the US congress?

The Hill has more on the resurrection of these currency manipulation bills. The characters are for the most part the same as before like Lindsey Graham (R-SC) and Debbie Stabenow (D-MI).