You know that expression, “Timing is everything”? If so, you’re a big step ahead of President Obama, his trade negotiators, and most of Congress. Because it’s becoming ever more screamingly obvious (except to them) that this is a terrible time to be seeking new foreign trade agreements, and that the timing won’t be anywhere near right for the foreseeable future.
As I’ve documented, the United States has been outperforming most of the rest of the world economy since it’s recovery began in mid-2009. All else equal, when fast-growing countries increase trade with slower growers, their imports from the laggards tend to rise faster than their exports to the these countries. As a result, the trade balances of the faster growers typically worsen, turning trade into a drag on their economies.
This reality alone would seem enough to kill the case for President Obama seeking new trade deals with a group of 11 other Pacific Rim countries (the Trans-Pacific Partnership, or TPP) and with the European Union (EU). Even worse, the economies in these groups that are outgrowing America mostly have done so by racking up trade surpluses. So it’s unlikely that their own export-led economies will become growth engines for the United States.
If you look at exchange rates – the value of the dollar versus that of other foreign currencies – pursuing trade expansion, especially a la Obama and Congressional majorities, seems still more counterproductive. All else equal (I know that phrase could be getting tiresome, but it really is needed to underscore how single variables never explain economic trends entirely) once initial effects fade, a weak currency will improve a country’s trade balance (and growth) by lowering the prices of its goods and services versus those of competitors. A strong currency usually has the opposite effect. And nothing could be clearer from the data that the strong dollar points to a trade-inflicted hammering of America’s recovery if the president’s plans bear fruit.
Conveniently, the Federal Reserve tracks exchange rates for a group of countries with “major currencies” – which “circulate widely” outside their home countries. Even more conveniently, these include the yen (since Japan’s is by far the largest non-U.S. economy in the TPP), and the euro (since the eurozone includes the main countries negotiating the US-EU trade deal). What these Fed data show is that the dollar is just shy of near-12-year highs versus this basket of currencies whether you adjust for inflation or not.
Could the dollar weaken much against these currencies going forward? Sure – if you think that Japan and the EU will become world growth leaders in the foreseeable future. Given that both the Japanese and European counterparts of the Fed have been trying to juice those economies with Fed-type bond-buying programs, and given that the results have been even less impressive, that looks like a big stretch. And don’t forget – the eurozone will be strapped with major Greece-like debt problems for many years.
Another major obstacle to sustained dollar weakening will undoubtedly be foreign currency manipulation. Countries like TPP member Japan and China (will looks sure to join before too long) have long histories of artificially weakening their currencies to gain trade advantages when market forces aren’t getting that job done. The president could have favored including in TPP an enforceable ban on this unusually effective form of protectionism, but he opposed such proposals. As a result, both the TPP countries and members of the EU will be completely free to devalue their currencies at America’s expense whenever their growth rates need boosting.
Strangely – or not? – one of the main domestic beneficiaries of trade deal-related timing looks to be President Obama. When the U.S. economy starts suffering the consequences of these misguided agreements, his time in the White House will have come and gone.