Who’s manipulating whose currency?

Although it is currently in the process of disposing of its shares in an orderly fashion, the U.S. government still owns a piece of General Motors (GM). That makes recent statements by top GM executives in South Korea extremely interesting and noteworthy.

In a recent interview with the Financial Times, GM Korea CEO Sergio Rocha urged new Korean President Park Geun-hye to help manufacturers based in her country by manipulating the value of the won to keep it undervalued as a spur to exports."

"On our left and right side, they do things to support their own industry, to allow them to export — both China and Japan, " said Rocha. The won has strengthened by 6 percent against the dollar over the past year and by a whopping 27 percent against the Japanese yen which has been falling as a consequence of weak yen policy of new Japanese Prime Minister Shinzo Abe. According to Société Générale, South Korea "stands on the front line of the Asian currency war." As consequence of Japan’s policy to drive the yen down, the growth of sales of the Korean auto makers in the crucial U.S. and European markets (they have no sales in Japan) has slowed dramatically. Mr. Rocha underlines that "the Korean won is moving in the wrong direction" while noting the GM remains committed to its decision to invest $7.5 billion in South Korean manufacturing over the next five years.

Of course, people are accustomed to thinking of GM as the quintessential American company and so may wonder why GM wants Korea to join in the currency manipulation game. But the truth is that GM is a major producer in Korea and exports about 80 percent of what it produces there. It is thus very sensitive to the effect of fluctuations of the won with regard to the yen, dollar, and Chinese yuan. It will lose sales in the U.S. market to Japanese and Chinese producers if the won is too strong.

What makes this so interesting is the posture of the U.S. government. As an owner of GM it is implicitly associating itself with Rocha’s complaints. Yet at the official level, the U.S. Treasury, the White House, and the State Department all maintain that, Rocha to the contrary not withstanding, there is no currency manipulation going on in China or Japan. Indeed, for the past four years, the Secretary of the Treasury has carefully and steadfastly refrained from making any finding of currency manipulation by anybody even when countries have been accumulating enormous dollar reserves as a result of dollar buying in the global currency markets.  Maybe Rocha and Jack Lew, the new U.S. Treasury Secretary, should Skype for a while — I mean, nothing to lose.

Even more interesting is the fact that this question of currency, which Rocha and GM obviously find of central importance to their trade prospects, is not included in any way in the presently on-going negotiation of the American led Trans Pacific Partnership Free Trade Agreement (TPP). Ford Motor company is objecting to the inclusion of Japan in the TPP talks because Ford shares GM’s concern about the efforts of Japan to drive down the value of the yen and the potential of that to distort trade elsewhere while negating other market opening measures in Japan. But the U.S. government is rejecting this complaint and insisting that no currency manipulation is taking place.

Just to add to the mix, in a recent meeting at the Sasakawa Peace Foundation in Washington D.C., Ford executive Steve Biegun’s argument that Japan’s auto trade is distorted by currency management by the Japanese government was vigorously rejected by several representatives of the Japanese auto industry present in the audience.

Here is a fundamental split of opinion about something that should be subject to factual examination and analysis and that lies at the heart of the question of the significance of free trade agreements and indeed of free trade itself.

Maybe Rocha is right. An aggressive currency intervention policy by the South Koreans might be just the catalyst needed to persuade Japan, China, and others to talk seriously about currency policy in the context of free trade.