U.S. Trade Agreements and Currency Manipulation

7/28/2019 U.S. Trade Agreements and Currency Manipulation

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Topline

Currency exchange rates, as the medium in which trade occurs, can be asimportant a determinant of trade outcomes as the qualities of the goods orservices themselves.

Some governments work with their central banks and other partners tomanipulate their currencys value in order to provide their exporters an unfaircompetitive advantage.

While the International Monetary Fund (IMF) and the World Trade Organization(WTO) have rules against these practices, no steps have been taken to stop them.

Korea and Japan have engaged in currency manipulation that favors theirautomakers, with harmful effect on American manufacturing and Americas jobmarket.

Unless the Trans Pacific Partnership (TPP) Agreement prohibits this kind ofcurrency manipulation, it will fail to achieve its objectives (including growing U.S.exports). In fact, a poorly negotiated TPP Agreement i.e., one that allows Koreaand Japan to continue to undermine trade agreements by manipulating theircurrencies could harm the U.S. economy and diminish American exports.

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How Manipulation Affects the U.S.Currency manipulators effectively protect jobs in their homecountry at the expense of jobs and economic growth in their

trading partners economies.A December, 2012 Peterson Institute study, CurrencyManipulation, the U.S. Economy, and the Global Economic Order,explains that:

1. A buildup of official assets mainly through intervention inthe foreign exchange markets keeps the currencies of theinterveners substantially undervalued, thus boosting their

international competitiveness and trade surpluses2. (t)he largest share of the loss centers on the United States,

whose trade deficit has increased by $200 billion to $500 billionper year as a result. The United States has lost 1 to 5 million

jobs due to this foreign currency manipulation.

3. (t)he United States must eliminate or at least sharply reduceits large trade deficit to accelerate growth and restore full

employment. The way to do so, at no cost to the US budget, isto insist that other countries stop manipulating their currenciesand permit the dollar to regain a competitive level.

4. Eliminating excessive currency intervention would narrowthe U.S. trade deficit by 1 to 3 percent of GDP and would thusmove the U.S. economy much of the way to full employment,with an even larger effect possible

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The current account of

the United States may

have been pushed downby about 4% of GDP

because of currency

manipulation [and is]

responsible for millions

of lost jobs in the United

States.Peterson Institute, Combating Widespread

Currency Manipulation, July 2012.


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Multilateral Disciplines

The charter of the International Monetary Fundprohibits members from manipulating theircurrency. The IMF charter states that membersshould avoid manipulating exchange rates in orderto gain an unfair competitive advantage overother members and defines such manipulation asprotracted, large-scale intervention in onedirection in the exchange market.

The World Trade Organization also prohibitscurrency manipulation- linking to IMF.

However, neither organization has taken actionagainst currency manipulators.

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International Monetary Fund & World Trade Organization:


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Source: Global Insight

11.1

8.9

4.8

0

2

4

6

8

10

12

Capacity Production Sales

JAPAN AUTO PRODUCTION(2012, in millions)

5.3

3.9

1.4

0

1

2

3

4

5

6

Capacity Production Sales

Industrial Overcapacity

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Why would a nation manipulate its own currency in a way that makes itharder for its citizens to afford imported products? Because its economy

depends substantially on the exports of one or two of its biggest industries

In Korea and Japan, governments have taken dramatic steps to maintainproduction capacity in auto plants by subsidizing the exports of vehicles toother markets. Therefore avoiding the need to right-size their industry, andinstead push off that burden on to their trade partners

KOREAN AUTO PRODUCTION(2012, in millions)


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$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Japan Reserves (x $1 million)

$1.274

trillion

$314 billion

Source: Bank of KoreaSource: Bank of Japan

Foreign Currency ReservesA clear sign a country is manipulating (weakening) its currency is a substantialincrease in its foreign currency reserves, which occurs as it buys and holds

foreign currencies (in large part $ & ).

Korea Reserves (x $1 million)

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Because cars, trucks and auto parts are its largest export, Japan has used direct

intervention in currency markets and the threat of intervention to gain a

competitive export advantage.

2. Currency

manipulation

3. Exporting overcapacity1. Aggressive

One-Sided FTA Strategy

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Japans Trade Tactics

IndustrialOvercapacity,Dependence on

Exports

One-sidedFTA Strategy

Currency

Manipulation

At the same time, Japan seeks

admission into multilateral

free trade agreements (FTAs),like the Trans Pacific

Partnership, which would

grant it preferential treatment

in trade with the U.S. and

other participants.


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75

80

85

90

95

100

105

110

115

120

1-Oct-12 1-Nov-12 1-Dec-12 1-Jan-13 1-Feb-13 1-Mar-13 1-Apr-13 1-May-13

In anticipation of a new Japanese government putting in place a

weak yen policy, and subsequent policy actions by that government,

the yen has weakened by 30% since October 1, 2012.

78 (yen/$)

101 (yen/$)

3. Exporting overcapacity1. Aggressive

One-Sided FTA Strategy

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Recent Weak Yen Policy Impact


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Weak Yen Subsidy Per Car

* Based on the October 1, 2012 rate of 78 yen/$.

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102

Yen to dollar ratio

Weak Yen Gain Per CarBenefit from each Yen drop on a $25K vehicle

101 Yen per dollar provides a huge advantage

compared to October 1, 2012. A $25,000 car

imported from Japan into the U.S. will receive an

estimated $5,700 gain * from the weaker yen.


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Japanese Automakers Two Views

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When Japanese OEMs enjoy large exchange

rate windfall

When exchange rate corrects itself

"We've been begging to remove the headwinds

of the exchange rate since 2008. Five yearslater, it's happening so we applaud it. Carlos

Ghosn, Nissan CEO, May 10, 2013

*T+his tale of the manipulated yen is far more

spectral than, say, Casper, our friendly ghost

Toyota, Open Road Blog, January 8, 2008

So, as the yen falls *t+he net result is no

advantage to Japanese automakers seeking to

sell more cars abroad Toyota, Open Road

Blog, January 8, 2008

Our competitors are jealous of our success.

President of Toyota's North Americanproduction group, Feb 15, 2007

We don't see a serious impact on our business

from current exchange rate levels, Fujio Cho,

Toyota President, May 28, 2002

[E]very one-yen gain against the dollar cuts 20

billion yen ($228 million) from operating profit andthat 100 yen to the dollar is optimal. - Carlos Ghosn,

Nissan CEO, Jan 11, 2013

So unless the rate reaches 100, theres no doubt

that Japans auto production and monozukuri are in

crisis. - Akio Toyoda, Toyota CEO, Jan 11, 2013

"Under the current exchange rate of 80 yen per

dollar, our export business doesn't make any profit.

- Fumihiko Ike, Honda CFO, June 11, 2012

"Some say that they cant feel any real substance in

the whole Abenomics phenomenon, but as a

result, its weakened the yen and boosted stockprices." - Toyota Senior Managing Officer Takahiko

Ijichi, Feb 5, 2013


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Japanese Officials Singular View

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(Soon-to-be Prime Minister) Shinzo Abe

has vowed to weaken the nations currency

and boost government spending to stimulatethe economy. That has spurred speculation

carmakers will see rising profits from exports

Bloomberg, Nov 26, 2012

(T)he yen will inevitably strengthen. It's vital to

resist this. Prime Minister-elect Shinzo Abe, WSJ,

Dec 23, 2012

I will act (to weaken the yen) when I find it

necessary, and I mean it. Former JapanFinance Minister, Jun Azumi, WSJ, July 24,

2012

Even though weve tried our best, and put our

hearts into our efforts, the strong yen makes usunable to be competitive. Prime Minister Shinzo

Abe, Jan 11, 2013

It is "completely different" for Japanese

companies if the dollar is in the 80-yen range,

as it is now, as opposed to the 90s, Mr. Abe

said. If the dollar "is above 85, companies

that haven't been paying taxes until now

*because they don't have profit+can pay

taxes. Japan Prime Minister-elect Shinzo Abe,

Dec 23, 2012

The yen "is making headway toward the

appropriate level" and that the government

"must ensure that this movement will take hold. -

Minister in charge of Economic Revitalization,

Akira Amari, Dec 27, 2012


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Yen Value Benefit for Japans OEMs TOYOTA: A one-yen decline against the dollar adds about 35 billion

yen ($377 million) to Toyotas operating profit, the carmaker

estimates. Toyota makes about 45 percent of its cars in Japan and hasvowed to maintain domestic production of at least 3 million vehiclesa year. Bloomberg, Feb. 5, 2013

HONDA: According to Honda, its operating income gains by 16billion yen ($172 million) annually for every one-yen drop in thedollar rate...Bloomberg, Feb. 1, 2013

NISSAN: Nissan CEO Carlos Ghosn has said that every one yen gainagainst the dollarcuts 20 billion yen ($228 million) from operatingprofitand that 100 yen to the dollar is optimal.Nissan Report, Jan.

11, 2013

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101 yen per dollar represents an annual unearned windfall benefit of more

than $9 billion for Toyota; $4.1 billion to Honda; and $5.4 billion to Nissan.

Based on the October 1, 2012 rate of 78 yen/$.


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What Others Are Saying About Currency & FTAs

Coalition of 10 US Business Assoc. - May 22nd 2012 letter to Treasury Sec Geithner & USTR Kirk:

we strongly recommend that the United States government pursue, as a leading priority,inclusion of strong currency disciplines in all future free trade agreements, including theTrans-Pacific Partnership (TPP) agreement.

Peterson Institute, Currency Manipulation, the US Economy, and the Global Economic Order:

Efforts should be made to include the *currency+ manipulation issue in future tradeagreements at all levels (multilateral, regional, and bilateral).

Woodrow Wilson Center, Negotiations for a Trans-Pacific Partnership:If the TPP negotiations are to fulfill this promise, however, it is critical that the rules beright. This means that they must deal with the major gaps in the World Trade Organizationrules, such asaddressing currency manipulation, an issue that is not currently on the TPPnegotiating table.

Economic Strategy Institute, The Trans-Pacific Partnership and Japan:

Although the TPP is being touted as a Twenty First Century agreement, it is, in fact,nothing of the sort in terms of substance.In order to become a truly 21st century tradeagreement, the TPP must be expanded to include provisions barring currencymanipulation

Canadian Imperial Bank of Commerce, Free Trade, Free Currencies:

So let the negotiations continue, not just on trade, but on currencies, other distortionarypolicies, and their implications for global imbalances. Free trade, but free currencies as

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What Congress Has Said About Currency & FTAs

A majority of Members of Congress in a May 13, 2013 letter to the President:

Despite U.S. efforts to address currency manipulation at the G-20, major currencies remainsignificantly undervalued. Including currency disciplines in the TPP is consistent with and willbolster our ongoing efforts to respond to these trade-distorting policies. It will also raise TPPto the 21stcentury agreement standard set by the Administration.

Senators Baucus and Hatch and Congressmen Camp and Levin in a November 8, 2011 letter to thePresident:

New disciplines on non-tariff barriers, as well as other rules, such as restrictions on theoperations on the operation of state-owned enterprises, being proposed for TPP, could, if

sufficiently robust, be applied to address some of these concerns...

24 Senators in a November 30, 2012 letter to the President:

To prevent the artificial suppression of job-creating American exports, the TPP shouldexplicitly allow countries to respond to and offset currency manipulation.

Senator Hatch, Ranking Member of Finance Committee, in a January 18, 2012 letter:

Addressing currency manipulation in the TPP becomes particularly important as theAdministration considers the possibility of new TPP participants, such as Japan, who havedemonstrated a pattern of currency interventions.

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Proposal: FTAs & Currency Manipulation

Free Trade Agreements (FTAs) are negotiated between countries

that agree to provide preferential access to each others markets,and are carefully negotiated to be mutually beneficial.

Currency manipulation can completely undermine the UnitedStates expected benefits of a FTA, and have an adverse impact onthe US economy and jobs.

Multilateral, organizations such as the IMF and the WTO have nottaken action to address this problem.

Given this, many have come to the conclusion that prohibitionson currency manipulation need to be included in future US FTAs.And, if a FTA partner manipulates its currency, therebyundermining its expected benefits of the FTA, it would lose the

benefits of the agreement. Many in the U.S. business community and in the US Congress are

now calling for the TPP agreement, and all future FTAs thatinclude the United States, to include disciplines on currencymanipulation.

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Documents

U.S. Trade Agreements and Currency Manipulation