Viewpoint: The False Promise of Proposed Currency Legislaton

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IBM’s Christopher Padilla, a former U.S. Under Secretary of Commerce for International Trade, explains why leveraging U.S. trade law is not an effective means to address currency manipulation.

By Christopher A. Padilla, Vice President, IBM Government and Regulatory Affairs

As Congress considers Trade Promotion Authority (TPA) legislation and 11 Pacific Rim countries seek to finalize the long-awaited Trans-Pacific Partnership (TPP), an old and perennial debate is underway in the United States.  Currency manipulation—or exchange rate intervention—is now squarely in the sights of some prominent Members of Congress who seek to redress trading imbalances and guarantee that exchange rates don’t undermine U.S. competitiveness.

The currency manipulation argument isn’t new.  For several years, proposals have circulated to tackle alleged currency distortions by including a consideration of relative currency values in trade remedy cases administered by the U.S. Department of Commerce’s International Trade Administration.  These proposals would require Commerce to calculate currency exchange rates when investigating Anti-Dumping (AD) and countervailing duty (CVD) cases.

When I served as Under Secretary of Commerce responsible for enforcing U.S. trade laws, such measures were often suggested as “the solution” to the bilateral trade deficit with China, and to China’s then-undervalued currency.  But what was true eight years ago under a Republican president remains true today under a Democratic one:  using U.S. trade laws to punish countries for the value of their currencies is a very bad idea.

There are at least four reasons for this.

First, inserting currency judgments into trade remedy cases would hurt American consumers and producers by driving up the price of imports.  Competitively priced imports keep inflation low and bolster the wide availability of affordable goods and services to American consumers.  Driving up consumer prices amid a sluggish economic recovery would place significant hardships on tens of millions of American households.  But imports are not just for consumers; many imported products are inputs used as parts and components of finished goods that are manufactured and assembled here in the United States, for domestic consumption or for export to third markets.  Making imported inputs more expensive would not reduce the trade deficit, but would surely hurt the competitiveness of U.S. manufacturers.

Second, there are serious questions about how the Commerce Department would administer a trade-remedy regime that turns on currency valuation.  The staff at the Commerce Department’s Enforcement and Compliance Administration work hard to measure prices and subsidies in a transparent, objective manner. But calculating the actual value of a currency would be close to impossible, and create insurmountable operational challenges.  Ask ten different economists for the “objective” market value of a foreign currency, and you will get ten different answers – all well-argued and backed by econometric analysis, but all different.  Which should the Commerce Department choose?  Making judgments about currencies is so imprecise that one of the better methods is used by The Economist – and that relies on the input prices for a Big Mac in various economies!

This highlights a practical difficulty:  various currency bills that have been introduced in Congress would require the Commerce Department to consider only how currency affects the final price of products.  This overlooks that a low currency value simultaneously increases the price countries (such as China) pay to import components that go into those final products.  Yet currency valuation under proposed legislation is to be considered on a one-way basis – only when there is alleged foreign undervaluation, with no offsetting effect when the dollar is relatively weak compared to overseas currencies.

Third, inserting relative currency values into trade remedy cases could open a Pandora’s Box of never-ending trade retaliation. The lesson of introducing new instruments to “punish” foreign trade practices is that those same measures can be, and often are, used against the United States.  America is already one of the largest victims of antidumping cases, according to the World Trade Organization (WTO).  If we insert our own judgments on the value of foreign currencies into trade remedy cases, similar counter-measures would be directed against our exports.  Remember that it was not that long ago that a Brazilian finance minister said that the Federal Reserve’s policy of quantitative easing was “an international currency war.”  Are we really prepared to have foreign countries use trade measures to try to influence U.S. monetary policy?  This not only would limit the independence of the Federal Reserve, but also would expose U.S. exporters to harmful sanctions any time foreigners feel that the dollar is “too weak.”

Fourth and finally, the U.S. trade deficit – often cited as the reason to attack currency manipulation through trade laws – is driven by much more than just relative currency values.  It is influenced by a range of complex economic factors from relative growth, inflation, interest and savings rates, among others.  Targeting just one alleged cause would undermine efforts to address the larger, structural causes of America’s trade deficit.

The conclusion?

Passing currency legislation or attaching currency provisions on pending trade agreements will not make the trade deficit go away.  Rather, it would make pending trade deals such as the Trans-Pacific Partnership impossible to conclude.  And that, of course, is the real goal of some proponents of these bills.  Instead, Congress should pass Trade Promotion Authority to empower this President – and those who will follow him – to negotiate bold new agreements that attack the new protectionist barriers of the 21st Century.

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