(What’s Left of) Our Economy: New Body Blows for Three Major China Currency and Economy Myths

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Australia, Canada, China, Congress, currency, currency manipulation, devaluation, dollar, export-led growth, Federal Reserve, infrastructure, Jack Lew, Janet Yellen, New Zealand, purchasing power parity, The New York Times, The Wall Street Journal, TPP, Trade, Trans-Pacific Partnership, Treasury Department, {What's Left of) Our Economy

For all the intensive and wide-ranging media coverage of China’s yuan devaluation just over a week ago, three crucial aspects with big implications for Sino-American trade relations and for President Obama’s Trans-Pacific Partnership (TPP) have been neglected.

First, compelling new evidence has emerged that China’s currency move does indeed represent manipulation to achieve advantages in trade – a conclusion that the U.S. Treasury Department has long balked at reaching in its Congressionally mandated reports on foreign exchange rate policies. Of course, Treasury has for years called the yuan undervalued. But it’s excused Beijing of the currency manipulation charge by (most recently) citing the yuan’s “real progress” in appreciating in real terms versus the dollar and China’s reduced intervention in foreign exchange markets.

Treasury, however, will be hard pressed to explain away The New York Times‘ disclosure earlier this week that:

“In a little-noted [July] advisory to government agencies, [China’s] cabinet said it was essential to fix the export problem, and the currency had to be part of the solution….Soon after, the Communist Party leaders issued a statement also urging action on exports. It all set the stage for the currency devaluation last week that resulted in the biggest drop in the renminbi since 1994. The cabinet’s call to action: The country needed to give the currency more flexibility and to reinvigorate exports. If officials did not act, China risked deeper turmoil at home, threatening the stability of the government.”

In other words, the entire top Chinese leadership – not just the Ministry of Commerce, which has explicitly championed a cheap yuan as an export booster frequently in the past – is now on record as having supported a deliberately weakened yuan in order to improve China’s global price competitiveness. What else do American authorities need to make the manipulation accusation officially?

More important, because a Treasury manipulation finding does not, contrary to the conventional wisdom, require any policy follow up, how can supporters of the TPP now justify the agreement’s failure to incorporate effective curbs on such exchange-rate protectionism? During Congress’ recent debate, lawmakers who opposed such measures, along with the administration, insisted that TPP currency sanctions could backfire against the United States because they could be legitimately used to counter any currency effects of the easy money policies of America’s Federal Reserve.  So did Fed Chair Janet Yellen herself, along with Treasury Secretary Jack Lew.

Now, however, it couldn’t be clearer that trade-related currency devaluations having nothing to do with monetary policy are a clear and present danger to the U.S. economy. It’s true, as I’ve noted, that even strong currency language in the Pacific Rim trade deal would not automatically amount to solving the problem, since many other first round and follow-on TPP countries have powerful incentives to retain a currency manipulation arrow in their policy quiver. But at the very least, it’s no longer possible to argue that TPP currency provisions inevitably create a dangerous downside for the United States. And however unlikely, an upside can’t be completely ruled out. The case for unilateral American responses, which the president also adamantly opposes, just got a lot stronger, too. 

Second, new data challenges the claims of administration and other opponents of any currency curbs that the yuan undervaluation problem is steadily solving itself thanks to China’s voluntary actions. Yes, the International Monetary Fund in April declared that the yuan is now appropriately valued. But exactly the opposite conclusion looks more accurate upon bringing into the picture one widely accepted tool for dealing with analytical complications arising from the often dramatically differing price levels among economies – especially those at different stages of economic development.

Thus according to Purchasing Power Parity methodology, the yuan is still more than 40 percent undervalued versus the dollar. Not far behind is the Japan’s yen. And the currencies of three other first-round TPP countries – Australia, Canada, and New Zealand – also supposedly belong in this category.

Finally, even more new data debunks another major argument against strong currency manipulation actions – the contention that China is shifting dramatically from an export-led growth model to a demand-led blueprint. Optimists on this score typically cite figures showing much faster growth in investment in China than in exports. But yesterday, an important Wall Street Journal piece featured an insight regarding the makeup of China’s economy and growth that decision-makers and analysts urgently need to understand: Properly measuring the importance of exports to China requires counting much more than the country’s total overseas sales or even its trade and current account surpluses. It requires counting all the infrastructure spending on all of the roads, bridges, ports, airports, and other projects that are needed to support exports, and that have been one of China’s major competitive strengths.

Figures reported by Journal correspondent Greg Ip show that, when the export sector is properly defined, its contribution to China’s growth is down since 2010, but “still remarkable amid slower growth in its trading partners and a higher yuan.” In the process, he supported a point that I’ve been making for several years. On top of this finding, data I’ve previously spotlighted shows that, given its overall growth slowdown and expanding trade surpluses, China has been getting even more export-oriented lately.

A China that’s unmistakably manipulating its currency and increasingly export-heavy, and a yuan whose value remains massively distorted by Beijing don’t of course guarantee that Congress will start expressing big second thoughts about endorsing President Obama’s TPP and China trade status quos. But they do mean that lawmakers will be even shorter than usual of reasons not to.      

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(What’s Left of) Our Economy: Treasury’s Lew Exposes Fast Track as a Sham

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Congress, currency manipulation, fast track, Jack Lew, monetary policy, Obama, Senate Finance Committee, TPA, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, Treasury Department, {What's Left of) Our Economy

For someone supposed to be a political whiz due to staff experience on Capitol Hill, Treasury Secretary Jack Lew sure has been acting like a political bungler in explaining to Congress why strong currency manipulation sanctions don’t belong in trade deals like President Obama’s proposed Trans-Pacific Partnership (TPP).

In his April 21 letter to the Senate Finance Committee, Lew both fatally undermined both the president’s insistence that the fast track bill gives Congress meaningful influence on U.S. trade negotiations, and Washington’s (feeble) efforts to end protectionist exchange rate policies abroad.

Lew’s letter, after all, emphasized two arguments. He claimed, “all of the partners consulted have made clear that they will not support the introduction of enforceable currency provisions in the context of trade agreements, and specifically, the TPP.” And he pointed to the administration’s “serious concern that in any trade negotiation other countries would insist that an enforceable currency provision be designed so it could be used to challenge legitimate U.S. monetary policy, an outcome we would find unacceptable.“

Lew’s first point amounts to an admission that Congress can put all the negotiating instructions it wants to in a fast track bill, but that the administration will ignore them if the other TPP countries (or any other countries talking trade with Washington) say they oppose them. Of course, this position not only tells lawmakers they’re kidding themselves. It also tells America’s interlocutors that they have the whip hand in trade talks.

Lew’s second point needlessly hands foreign governments an all-purpose excuse to stonewall Washington’s efforts to eliminate “unfair and inappropriate currency polices [that] have hurt our workers and firms,” as he has labeled them. For now his counterparts need only claim that these measures are no different from America’s own monetary easing.

Especially weird about this Lew argument is that, assuming it’s serious, his own efforts to end these foreign exchange rate policies logically have to be based on a belief that they are clearly different from the Federal Reserve’s moves. Rather than strengthen foreign governments’ positions, why doesn’t he tell Congress, the American people, and U.S. trade rivals what these distinctions are, and urge American lawmakers to add to his bargaining power by linking countermeasures to the trade talks?

One likely answer: Despite official protestations to the contrary, President Obama is ready to accept a bad TPP trade deal over no deal at all. Consequently, Congress has been put squarely on the spot. A senior U.S. official has now openly admitted that its instructions are pointless, and that Mr. Obama’s position on lawmakers’ currency concerns is a matter of choice, not necessity. What better reasons to end the sham of TPP and fast tracking its approval once and for all?

(What’s Left of) Our Economy: Is Obama’s Trade Agenda Based on Currency Lies?

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(What's Left of) the Economy, currency manipulation, easing, fast track, G20, Jack Lew, Michael Froman, monetary policy, Obama, TPA, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, Treasury Department, U.S. Trade Representative

If President Obama’s request for fast track trade negotiating authority and his proposed Trans-Pacific Partnership (TPP) trade deals are indeed in trouble in Congress over currency manipulation, he should blame his own administration’s deserved lack of credibility on this critical issue. In recent weeks, overwhelming evidence for two major falsehoods has emerged.

First, Treasury Secretary Jack Lew recently stated that the administration is “working with [Congress] to figure out if there is something that can be accomplished in the context of our trade agreements that is consistent with our overall strategy of bilateral and multilateral engagement.” Yet the president himself reportedly told a January gathering of House Democrats that “adding currency rules into the TPP would be too complicated and could sink the talks, which are nearing completion.”

Second, the Treasury’s own role in handling currency manipulation seems to have been badly misrepresented. U.S. Trade Representative Michael Froman has often told Congress – and most recently in late January – that Lew “had the lead in currency issues ‘at this point’ and was raising them bilaterally and in international groups such as the Group of Seven and the International Monetary Fund.”

But the Treasury Secretary had his latest chance in international groups and clearly punted. Despite Lew’s participation, last week’s meeting of G20 finance ministers and central bank chiefs in Turkey wound up issuing a communique that repeated a pledge to “stick to our previous exchange rate commitments and will resist protectionism” but that also strongly endorsed the kinds of recent monetary easing policies that inevitably have depreciated currencies.

In fact, on the eve of the G20 meeting, a “senior Treasury official” told the Financial Times that “The fact that the European Central Bank, and others around the world, have moved aggressively to loosen monetary policy was broadly positive, even if it helped fuel renewed concerns over “’currency misalignments.’”

Before another step is taken by any U.S. official or legislator on trade deals or trade promotion authority, these glaring inconsistencies need to be cleared up – under oath. If they’re not, some formal perjury investigations should be able to get the job done.

(What’s Left of) Our Economy: Does Jack Lew Believe in America Decoupled?

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currency, decoupling, dollar, Financial Crisis, G-20, Global Imbalances, globalization, Jack Lew, recovery, TPP, TPP. Trans-Pacific Partnership, Trade, {What's Left of) Our Economy

Is the Obama administration starting to recognize that, contrary to decades of willful blindness and therefore needlessly counterproductive policies, the United States can do quite nicely economically without much help from the rest of the world? That’s surely an exaggeration. But some awfully suggestive clues can be found in Treasury Secretary Jack Lew’s testimony to Congress today.

At first glance, the relevant passages in Lew’s prepared remarks on President Obama’s new budget sounded like the longstanding conventional wisdom about America’s economic fate being inseparable from the world’s. The Financial Times certainly thought so, headlining its report on the House Ways and Means hearings, “US economy cannot go it alone, says Jack Lew.”

Dig deeper though, and you see how misleading (though not necessarily intentionally) the FT phrasing was. Lew decidedly did not say that America couldn’t go it alone because its own growth would falter without better growth abroad. He said that:

“While the recovery in the U.S. economy has helped to drive global growth, the rest of the world cannot depend on the United States to be the sole engine of growth.  At the recent G-20 meeting in Brisbane, there was agreement that more needs to be done to stimulate domestic demand around the world.  Our strength allows us to maintain our leadership in the global community, and while we must lead by example, we cannot do it alone.”  

The reference to the G-20 – a quasi-formal grouping of the world’s 20 largest economies – may have amounted to Lew simply repeating a longstanding American warning (which never seems to go beyond rhetoric) that the United States can’t long power global growth without producing the kinds of record economic imbalances that can lead to financial crises – and did so in 2008.  But Lew never referred to any of those considerations.

What’s left is a declaration by the Treasury Secretary that what the United States is unable to accomplish by itself isn’t sustaining its own recovery. In fact, in sync with President Obama’s assessment in his State of the Union address, Lew said that this recovery “appears” to be self-sustaining. The only remaining obstacle he mentioned was domestic – the lingering effects of recent Washington political gridlock. Instead, what’s left is a Lew statement that what America can’t do singlehandedly is stoke the rest of the world’s recovery.  At least by implication, he suggested that the U.S. economy has in fact become decoupled from the world economy.  

As I’ve written, given the nation’s immense wealth (both natural and human-made) and still-dynamism-friendly social structure and economic institutions, America’s capacity for such decoupling (i.e., domestic-based prosperity) has been staring policymakers in the face for its entire history, but has only been studiously ignored since the 1930s. Nowadays, it seems at least as strong as ever. Yet so far, globalist dogma still seems to be trumping the facts.

Thus the president’s policy continues taking a tack exactly opposite the one suggested by Lew’s words (assuming they were carefully chosen). Although the rest of the world is lagging America economically, Mr. Obama is working to tie the nation more closely to the slowpokes with the Trans-Pacific Partnership (TPP) and the rest of his trade policy agenda. Lew of course incongruously endorsed these measures as an “important component of our growth strategy.” In addition, there’s no sign that the administration is entertaining second thoughts about a thoroughly boneheaded decision reported by The New York Times last fall – to allow the dollar to keep rising against the currencies of America’s leading trade partners.

For a country believing itself to be tightly tied to growth elsewhere, this approach – which would enable other economies to trade their way to faster growth by ramping up sales to the United States while reducing their U.S. imports – at least embodies a certain logic. But for the country described today by Lew, the decision makes no sense – unless you believe that the U.S. economy is just strong enough to keep growing short-term without better global growth, but not strong enough to keep up the pace over any significant timespan.

Indeed, if this is their thinking, how do Lew and the president think they’ll continue even the current recovery’s lackluster pace if they wink at trade-and currency-related hits to growth? Are they counting on faster global recovery to kick in just in time? These would add up to one heckuva riverboat gamble.

So the burden of proof remains squarely with the optimists to show that some genuinely strategic lights are going on in the ranks of senior U.S. leaders. Conveniently, the upcoming TPP fight will be a genuinely momentous test. If the administration flunks – meaning that it finishes the deal and successfully steers it through Congress – the links between America’s economy and the world’s could grow broad and deep enough to ensure sluggish-at-best domestic growth for many more years.