Now that the Senate has approved legislation that would give President Barack Obama authority to complete a trade partnership agreement with Japan and 10 other Pacific nations later this year, the bill moves to the House for further debate. Its ultimate fate is in question, however—not only because it pits fervent free trade advocates against leery protectionists, but because it ignores the impact of currency movements on the prices of imports and exports.
Many lawmakers were caught off-guard when the issue of “currency manipulation” rose to the top of concerns over proceeding toward a major trade agreement that will govern America’s relationship with a region encompassing almost 800 million people and roughly 40 percent of the world economy. China, the world’s second-largest economy, is excluded from the envisioned Trans-Pacific Partnership for now. But the fact that China might join at some future date is fueling an increasingly rancorous debate over the question: Should governments be allowed to manipulate the value of their currencies in foreign exchange markets to achieve a trade advantage?
The answer is no. When currencies misrepresent the true value of goods and services, it skews the benefits of free trade and undermines the principles of free-market competition.
But we shouldn’t reject a historic opportunity to move toward an open global economy for lack of coherent monetary arrangements; we shouldn’t throw the baby out with the bathwater, so to speak—where the bathwater is the dirty float of the world’s current exchange-rate swamp. Instead, we should take this opportunity to begin discussing how to build a rules-based international monetary system to foster productive economic growth for a community of nations still reeling from the last global financial crisis.
Indeed, it’s surprising that it has taken this long to elevate currency misalignments over tariffs as the chief culprit in sullying the virtues of free trade. Who cares about tariffs, which are mostly in the single digits, when a shifting exchange rate can utterly transform the dynamics of price competition? Japan, for example, imposes an average tariff of 4.7 percent on imported goods, but the value of the yen to the dollar has been cut in half over the past three years—effectively boosting the price of goods imported from the United States by some 50 percent while slashing the price of Japanese exports in U.S. markets.
No wonder Republican senator Rob Portman of Ohio and Democratic senator Debbie Stabenow of Michigan forged a bipartisan effort to attach an amendment to last month’s trade authority legislation that would seek enforceable currency rules as part of any future trade agreements. (It failed in a close vote of 48 to 51.) Automotive workers in their respective states deserve to compete in foreign markets without having the price of U.S. cars jacked up purely through currency effects. Nor is it fair that cars produced in countries that cheapen their currency appear more “competitively” priced in U.S. markets.
Currency devaluation is not competing—it’s cheating.
Which is why the time has come to develop a comprehensive approach to international monetary reform compatible with genuine free trade under free-market conditions. If markets are to function properly, money needs to convey accurate price signals; that won’t happen as long as governments can manipulate exchange rates.
It’s hardly a new concept. When the vision of a peaceful and prosperous postwar world was presented to delegates at Bretton Woods, New Hampshire, in July 1944, it came with certain ground rules. Goods and services could be freely traded among participating nations, investment capital would be allowed to flow to its most productive use, the disrupting effects of financial instability and capital flight would be avoided—so long as a level playing field was maintained through fixed exchange rates. Deliberate “beggar-thy-neighbor” devaluations would not be allowed. Participating nations agreed to fix their currencies to the U.S. dollar, and the dollar was fixed to gold.
The International Monetary Fund was established to oversee this new international monetary order and to ensure its continued viability—a responsibility that was upended in August 1971, when President Nixon suspended the dollar-gold link.
Into the vacuum of a dismantled currency system came the theory of floating exchange rates, propounded by economist Milton Friedman, which posited that a “free-market” approach would allow the forces of supply and demand to determine the appropriate exchange rate among currencies. What Friedman didn’t anticipate—and would later bemoan—was that governments would intervene massively in foreign exchange markets to strategically position their own currencies and thus confound the process for achieving a market-determined exchange rate.
Today the IMF not only permits but openly endorses a do-your-own-thing approach to international monetary relations, instructing member countries that they are “free to choose any form of exchange arrangement they wish”—with the exception, perversely, of being permitted to peg their currencies to gold.
Ironically, the person who may have best summed up the conundrum
of today’s monetary disorder is Jacques de Larosière, who served as IMF managing director from 1978 to 1987. Speaking at a Vienna conference in February 2014, he lamented the “volatility, persistent imbalances, disorderly capital movements, currency misalignments, and eventually currency wars and capital controls” resulting from our existing currency mishmash. Far worse than a non-system, according to Larosière, it amounts to an “anti-system.”
Can the legitimate need for an ethical and orderly monetary system be reconciled with the Trans-Pacific Partnership—without scuttling the latter? A watered-down amendment on currency manipulation that merely authorizes selective enforcement against targeted countries would only further compromise the ideal of an open global marketplace. And protocols that require trying to discern the intent behind central bank decisions that debase a currency—as if monetary policy decisions can be separated from their exchange-rate consequences—is likely to provoke more cynicism than clarity.
It’s time to begin thinking on a grander scale. We need to evoke the rationality and the resolve of Bretton Woods if we are to meaningfully preserve America’s commitment to free trade.
Judy Shelton, author of Money Meltdown: Restoring Order to the Global Currency System, is a senior fellow at the Atlas Network and co-director of its Sound Money Project.
