How to rein in global currency manipulators

One way - to include a section on the principles of monetary policy in the agreement on the Trans-Pacific Partnership

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In an effort to curb the strengthening of the national currency, central banks very often resort to large-scale intervention in the currency markets. Are their actions to prevent the trade agreements? This issue is being actively discussed American politicians and economists. How to rein in global currency manipulators In recent years, Japan, South Korea and China is manipulating currency exchange rate, preventing their growth. So they stimulate exports and restrict imports, as a result, form a huge current account surpluses. Trading partners such practice causes great damage, so the existing international rules prohibit it. Unfortunately, international rules have proven ineffective.

A chance to change the situation gives Trans-Pacific Partnership (TTP) - an incredibly large-scale inter-regional free-trade agreement between the US, Japan and the ten countries of Latin America and Asia. The initiative can join other countries. Negotiations reached the finish line, followed closely watched South Korea and China.
Barack Obama has rightly observed that the TTP - is the ability to set the rules of investment and trade in the XXI century. Nevertheless, the Ministry of Finance and the US Trade Representative stubbornly do not allow to enter into a treaty to ban the word of currency manipulation. In defense of their position, they are five reasons, none of which really does not hold water.
The first argument. With currency manipulation can handle the IMF. The Fund is really guided fresh directives designed to prevent such violations. In the mid-2000s, the United States not only supported these rules. They insisted that they took: the US is very worried about an undervalued Chinese yuan. While strongly undervalued Chinese currency contributed to a reduction of millions of jobs in the US manufacturing plants.
However, to apply the rules of the IMF can not: slow down the sanctions themselves able delinquent. This is common practice with which I am familiar even to work as chief economist of the Fund (from the beginning of 2007 to August of 2008).
The second argument. To agree on stricter rules in monetary policy supposedly impossible. But the rules of the IMF could approve in 2007 and in 2012. They co-ordinate the US Treasury itself. With this nuance familiar Sander Levin, chief representative of the Democratic Party in the ongoing budget commission of the US Congress, is also responsible for international trade. It was his idea to include in the agreement TTP section devoted to foreign exchange regulation on the basis of the directives of the IMF. They identified a situation where the country, despite the large current account surplus continues to buy large quantities of long-lived assets other states. That is the problem we are fighting: so central banks restrain appreciation of the national currency.
The third argument - the inclusion of provisions in the TTP on the monetary policy: these rules will prevent the United States to apply monetary stimulus. Here there is a profound lack of understanding of the problem. Competently composed a section on foreign exchange regulations in TTP will not damage the monetary independence of the United States.
Conventional monetary policy is implemented through the adjustment of short-term interest rates. This includes buying and selling of sovereign bonds by the central bank with little maturity. No intervention in the currency markets - Forex Trading - in this case are not used.
Similarly, quantitative easing (QE), which has recently become the main trend in the largest central banks, does not require the purchase and sale of foreign assets. As part of the Federal Reserve QE gets - and promises to continue buying - a limited list of assets. This is a long-term US debt and the various mortgage-backed securities, denominated in dollars.
The fourth argument. No major country today is not manipulating its currency, so the reasons for concern disappeared. Yes, since the mid-2000s the yuan rose significantly against the dollar. But nothing prevents neither China nor any other country to resume large-scale intervention in the currency markets whenever you want. And once on the exchange rates now no diplomatic tensions, it's time to raise the issue.
Last argument - do not include foreign currency items in the agreement: the participating countries will never come to a consensus on this issue. But this argument is untenable, if you carefully look at the composition of potential participants TTP.
Canada, Australia and New Zealand - countries with a developed economy and a floating exchange rate - is unprofitable to promote currency manipulation. Not prone to this and Chile, with its relatively high level of income and responsible macroeconomic policies. If we talk about Mexico and Peru, they rather fear that other countries will return to the practice of currency manipulation.
A similar situation in Japan, launched its own version of QE: it increasingly concerned about the risk of foul play on the part of other countries, such as South Korea and China. The same is true for Malaysia and Singapore, which have accumulated an impressive foreign exchange reserves. In Vietnam before joining the TTP full of problems more important, especially in the area of ​​workers' rights. Brunei, with its relatively small population is unlikely to object.
Currency manipulation - a serious problem, which leads to serious damage. Agreement on the TTP may be the best way to resolve it. To do this, you must install the dispute resolution mechanism, which allows you to quickly discard the trivial requirements and focus on pressing issues.

Simon Johnson
Professor Sloan School of Management at the Massachusetts Institute of Technology






posted by Forbes