Why The Trans-Pacific Partnership Will Be Toothless Without Penalty

Tough, currency manipulation penalties contained within the draft of the Trans-Pacific Partnership (TPP) may sound the death knell of the trade pacts approval by the Obama Administration. In recent days, the US administration has made it clear that any agreement that includes language concerning penalties for currency manipulation would be vetoed immediately.

The main argument for the exclusion of any form of penalty or provision for currency manipulators stems from the view that it would interfere with the Federal Reserve’s ability to implement monetary policy. The sticking point seems to be that the administration views the ability to engineer a currency depreciation or devaluation as being a power that should be reserved for states dealing with economic downturns.

However, many within congress support the penalty provisions and see them as the way forward to a level playing field for Pacific trade. The ranking member of the House Committee on Trade, Representative Levin of Michigan, is a significant proponent of stronger currency protections. Subsequently, Levin has strongly suggested that any move to oppose currency manipulation provisions is simply a false argument.

Although there is scant data on the included provisions within the TPP, it seems to be intellectually dishonest to suggest that introducing currency manipulation provisions would impede monetary policy implementation. The agreed definition of “Currency Manipulator” status is likely to have a high burden of proof. Subsequently it could be argued that the majority of loose monetary policy that a central bank may undertake would be unlikely to be caught within that net.

The real reason that the currency provisions are an essential component of the trade agreement is simple. It stops the race to the bottom. In recent years, countries under pressure have realised that it is much easier to depreciate their currencies to secure their export markets then it is to invest in productivity gains to obtain a competitive advantage.

The net effect of a trade agreement, without provisions dealing with currency manipulation, is one of a toothless tiger with no bite. At the first hint of increased competition within critical domestic industries, some participants will seek a currency depreciation to alter the demand and competitiveness of their exports.

Any review of potential currency manipulation would likely be handled by the World Trade Organisation (WTO) in a manner similar to current provisions. So it is difficult to reconcile how enshrining these provisions within the key trade agreement is likely to impede domestic monetary policy. However, the argument has been made that, as there are currently nocase precedents for WTO decisions to rely upon, that any outcome of a complaint would be unpredictable. Surely this aspect is an argument in favour of a tighter framework for dealing with currency manipulators, rather than removing the provisions completely?

Ultimately, the Obama administration is hell-bent on protecting the perceived sovereignty of the Federal Reserve over monetary policy. Subsequently, any move to include the penalty provisions could be a poison pill within negotiations. However, the alternative is unthinkable…an agreement without any form of enforceability that is open to abuse.