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Currency Manipulation Concerns and the Trans-Pacific Partnership

July 04, 2015
Currency manipulation, also known as currency intervention occurs when a country purposefully and systematically alters its real exchange rate, to devalue its currency (Laffer). This causes the price of imports to currency manipulating Country A to increase, while the price of exports decreases (Bergsten). Under natural markets, devaluation of currency should cause inflation in Country A, to reflect the new exchange rate. However, Country A instead acts to ‘sterilize’ its price change by buying/selling bonds (Laffer).

By Elissabeth Berdini, C’16

For example, leading up to 2013, China was investing in the U.S. dollar at “an average pace of close to $1 billion per day to keep its exchange rate substantially undervalued” (Bergsten). Overall, the Country A will export more and import less, gaining an export competitive advantage.

Currency manipulation also prevents the exchange rate from stabilizing international markets after macroeconomic shifts (Laffer). For example, countries that engaged in currency manipulation experienced much faster recoveries from the financial crisis in 2009 than the rest of the world (Laffer). In addition, research by Bergsten and Gagnon show that “direct intervention in the currency markets by at least 20 countries has… shifted trade balances by more than $500 billion per year from deficit to surplus countries (Bergsten)”.

Real GDP Growth: 1999-2013The consequential trade balance causes higher unemployment rates in countries that allow for natural currency fluctuations. The United States has been severely hurt by currency manipulation, because countries invest in mainly U.S. assets when they alter their exchange rate, which overvalues the dollar (Bergsten).  According to the Peterson Institute for International Economics, currency manipulation has caused a reduction in U.S. exports, and is responsible for causing approximately a 4% drop in GDP in 2012 (Laffer). In addition, it is estimated that in recent years, currency manipulation has been responsible for adding $200-$500 billion to the US account deficit annually (Bergsten).

Currency manipulation is explicitly prohibited by the International Monetary Fund (IMF), an organization of 188 countries that serves in part to maintain exchange stability (IMF 2008). As stated in the IMF Articles of Agreement, members of the IMF are obliged to “avoid manipulating exchange rates… to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members” (Article IV Section 1). IMF has the duty to survey the exchange rate policy of members to ensure they are abiding by the terms of the agreement (IMF 2008).  In 2012, the IMF enhanced its surveillance when the Executive Board established a new Financial Surveillance Strategy (IMF 2015). The strategy has various focuses including addressing spillover effects from member countries and safeguarding the monetary system to encourage economic and financial stability worldwide (IMF 2015). Though the IMF has a thorough currency intervention surveillance system in place, it has failed to solve the issue. What the IMF is missing are the mechanisms to effectively enforce the agreement.

Some policy makers have turned to trade agreements as a way to combat currency manipulation. In the 113th Congress, 60 senators and 230 members of the House of Representatives asked the Obama Administration for the Trans-Pacific Partnership (TPP) to address currency manipulation, with the Senate letter asking for “strong and enforceable” disciplines (Bergsten). The President has openly rejected the inclusion of binding penalties for countries that manipulate their currencies (Talley). He reasons that strict provisions would not be accepted by the other TPP countries. Instead, he has proposed surveillance and transparency measures, to gather exchange-rate data and hold countries accountable.  As discussed, such a plan has already been tried by the IMF. Rep. Sander Levin (MI-9) the ranking member of the House Ways and Means Committee, along with fellow supporters of binding currency rules, argue that surveillance alone is insufficient to combat currency manipulation (Talley).

Malayisia, Singapore and Japan, three of the twelve countries negotiating the TPP show signs of manipulating their currencies (Bergsten).  Japanese minister in trade, Akira Amari, said that currency manipulation is “not an issue that should be addressed in the TPP” (Talley). Amari believes solving issues of exchange-rates should be addressed by the IMF (Laffer). However, as a member of the IMF, Japan’s yen has depreciated over 45% against the dollar since 2012 due to currency manipulation (Laffer). Based on the past failures of surveillance without sanctions, we cannot pretend that a surveillance clause in the Trans-Pacific Partnership agreement would adequately addresses or prevent countries from engaging in currency manipulation.

After some controversy in both chambers, the Senate passed the Trade Promotion Authority bill on June 24th, finally approving the fast-track authority for President Obama to negotiate the TPP. This means that the President will send the agreement to Congress for a simple up-or-down vote in each chamber, without the option to amend it. Throughout the legislative process, TPA was supported primarily by the Republican Party. As Bolton explains, “labor unions and liberal Democrats had fought hard against the authority and are now likely to turn their attention toward stopping the Trans-Pacific Partnership” (Bolton). To gain bipartisan support, the TPP agreement will need to address the concerns of Democrats related to protecting American jobs and industry, including currency manipulation (NYTimes). 

President Obama must either pressure the other members of the tentative Trans-Pacific Partnership agreement to include strict provisions against currency manipulation, or accept that the trade agreement will not address currency manipulation. In the latter case, the United States could create domestic laws against importing goods that were produced in countries that have proven to purposefully devalue their currency. However, such an amendment was proposed to the Senate TPA bill earlier this month (Pearson). The amendment sought to authorize the U.S. Department of Commerce to impose import duties to counter currency undervaluation (Pearson). The amendment was rejected because it would restrict imports and could be harmful to United States economic interests.  

Overall, it is important that currency manipulation in the international market is addressed, and that we have realistic expectations going forward with the Trans-Pacific Partnership trade agreement. As predicted by Bergsten in his 2014 policy brief, “the final question is what enforcement mechanisms could be included to make the agreement work and assure its credibility; the absence of such mechanisms has been a cardinal flaw of the IMF systems throughout its existence” (Bergsten). Regardless of whether or not currency manipulation is addressed in the Trans-Pacific Partnership agreement, we need to work with trading partners to enact international sanctions to stop currency manipulation.


Bergsten, C. Fred. “Addressing Currency Manipulation Through Trade Agreements.” Peterson Institute for International Economics. PB14.2 (Jan. 2014): 1-11. Print.

Bolton, Alexander. “Senate approves fast-track, sending trade bill to White House.” The Hill. 24 June 2015. thehill.com. Web. 26 June. 2015.

“Factsheet: IMF Surveillance.” International Monetary Fund. 15 April. 2015. www.imf.org.Web. 14 June 2015.

Laffer, Arthur B. “Currency Manipulation and its Distortion of Free Trade.” The Laffer Center. December, 2014. www.laffercenter.com. Web. 14 June. 2015.

Pearson, Daniel. “Currency Manipulation Can’t Be Fixed By Countervailing Duties.” Forbes. 22 May 2015. www.forbes.com. Web. 15 June 2015.

Pennington, Matthew. “US Sees Progress on Currency, Cyberspace and Issues with China.” The Associated Press. 24 June 2015. ap.org. Web. 28 June. 2015.

Talley, Ian. “Obama Presses Currency Compromise in Trade Pact.” Dow Jones Business News, 22 May 2015. NASDAQ.com. Web. 15 June 2015.

“The IMF’s Approach to International Trade Policy Issues.” Independent Evaluation Office of the International Monetary Fund. 13 June 2008. Print.

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