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Categorized | Currencies

Currency anger poses threat to trade talks deal

Posted on September 30, 2013

Pedestrians and shoppers walk through the Ginza area of Tokyo, Japan, on Sunday, Sept. 8, 2013. Japanís economy grew faster than previously estimated in the second quarter, aiding Prime Minister Shinzo Abeís reflation campaign as he considers whether the nation can withstand a sales-tax increase©Bloomberg

When, in the 1990s, Sandy Levin, the veteran congressman, was looking for an example of Japanese trade barriers and the competitive advantage carmakers there gained from a weak yen he headed to Joe’s Auto Parts in Royal Oak, Michigan.

There, Mr Levin bought a universal joint for $11.46. When he took it to Japan, the Michigan Democrat says, he found the same US-made steel joint sold there for $105 and, with that, he had a story to tell.

    These days, the universal joint from Joe’s, which Mr Levin carried with him until it wore a hole in his suit, sits mounted on a plaque on his office window sill. It also, he says, still sells for a whopping $35 in Japan, much more costly than a locally-made part.

    Cars, manufacturing and currency politics still run deep in America. And it is for that reason that, almost two decades after Mr Levin’s trip to Joe’s, the Obama administration is finding itself facing a new currency conundrum as it tries to wrap up a 12-country Pacific Rim trade deal by year-end.

    When 60 Senators from both major parties last week sent a letter to the administration demanding that the issue of currency manipulation be included in the agenda of the Trans-Pacific Partnership, they joined a bipartisan majority of members of the lower house who earlier this year sought the same.

    At a time when getting anyone in Congress to agree on anything is beyond unusual, the bipartisan majority in both houses, driven to act in large part by the US auto industry, sent a very clear signal of intent.

    In depth

    Japan – war on deflation

    Japan War on Deflation

    Aggressive monetary easing is under way in Japan to rid the economy of the deflation that has dogged it for almost two decades

    The question now is what the demands will mean for the Obama administration as it tries to close the TPP deal and how much of a shadow they will cast over talks among the leaders at this week’s Asia-Pacific Economic Cooperation summit in Bali.

    While the immediate target of Congress’s ire is Japan, where the yen has weakened by more than 20 per cent over the past year, the bigger long-term issue for many US legislators is China and its tight management of trading in the renminbi.

    Japan has repeatedly denied that its aggressive monetary policy and other efforts that Prime Minister Shinzo Abe unveiled to tackle deflation are aimed at manipulating the yen.

    The TPP is being sold by the administration as a trade deal that will set benchmarks for others. After initially being critical of the negotiations, Chinese officials have also in recent months been hinting they may some day want to join the bloc.

    Mike Froman, the US Trade Representative, has argued currency is the preserve of the US Treasury department rather than trade negotiators. Others have pointed out that even raising the issue could mean subjecting the Federal Reserve and its response to the financial crisis, which helped drive a weakening of the dollar, to scrutiny.

    But Mr Froman has been forced to at least open talks with Congress over how to address their currency demands. “We share a number of the concerns about currency and its impact on trade and we’re continuing consultations with Congress and stakeholders about their concerns,” he said last week.

    The problem for the administration is that other participating countries have made clear they are not interested in bringing the subject into discussions.

    “We believe a macroeconomic issue like currency issues should be dealt with outside a specific trade negotiation,” Canada’s trade minister, Ed Fast, told the Toronto Globe and Mail.

    But on Capitol Hill, legislators and aides from both parties insist that the administration will at the very least have to insert some language on currency manipulation in any TPP agreement. The risk of ignoring 60 senators would be that, without a reference to currency, any TPP deal could fail to pass Congress.

    Moves are also afoot in Congress to make sure that currency is addressed in any bill restoring the president’s “fast track” authority to negotiate trade agreements, which expired in 2007 and is a “critical tool” Mr Froman wants restored.

    Formally called “Trade Promotion Authority”, its purpose is to allow presidents to negotiate trade deals without subjecting them to myriad amendments when they reach Congress. Securing that authority from Congress is crucial not just for the TPP negotiations but also those over an even larger EU-US trade agreement about to enter their second round.

    Mr Levin, the senior Democrat on the House Ways and Means Committee, which is responsible for overseeing trade in the lower chamber, is clear that he wants currency to be addressed in both the TPP and the fast track. Mr Levin does not hide the fact that, almost two decades after he bought his universal joint from Joe’s, he still has Japan in his sights.

    “As we compete with Japan it’s absolutely essential that we open up the auto market,” he told the FT in an interview. “It is probably the number one objective in TPP.”

    Japan, he concedes, would not now be found guilty of currency manipulation this year under the IMF’s current guidelines. But he has an eye on the future and is determined not to let the issue go. “To say this issue of the currency is not [for] trade negotiations is just wrong.”