The Case for Binding Rules on Currency Moves

Congressman Sandy Levin–a key player in the House of Representatives on trade–offered his perspective yesterday on the blockbuster trade negotiations underway, including the Trans-Pacific Partnership and the proposed U.S.-EU deal. Along the way,  he made some pointed remarks about currency manipulation:

[W]e need an enforceable obligation to avoid manipulating exchange rates.  The IMF already prohibits currency manipulation and has done quite a bit to define what actions constitute currency manipulation.  The problem is that the IMF lacks an enforcement mechanism.  We need to take the disciplines that have been developed at the IMF, build upon them, and subject those disciplines to binding dispute settlement – more or less the same dispute settlement mechanism that applies to the other obligations in the agreement.

Former IMF chief economist Simon Johnson–who worked on currency issues at the Fund– thinks Levin’s ideas should be taken seriously:

Mr. Levin proposes to establish a panel, as part of the Trans-Pacific Partnership Agreement, that would determine if currency manipulation has taken place. (Trade agreements typically include similar mediation mechanisms, but it would be innovative to do this for currency manipulation.) Relying on the I.M.F. or the United States Treasury to make a currency manipulation determination in the past has not worked, primarily for political reasons.

If a country manipulates its currency to gain an unfair advantage, the tariff on its goods and services sold to the United States would rise back to the level that would have existed without the free trade agreement, Mr. Levin proposes. In other words, it is just the additional perceived benefit of the proposed reduction that is on the table in the Trans-Pacific Partnership Agreement or any other free trade proposal.

The question of how international rules could be tweaked or reinterpreted to punish currency manipulation has preoccupied a number of experts recently. In a 2012 paper, Gary Hufbauer and Jeffrey Schott sketched an idea for cooperation between the World Trade Organization and the IMF on the currency question:

A member country…could lodge a complaint against another member country when it perceives that the second country’s currency has been seriously undervalued against a relevant basket of currencies for a prolonged period. This would trigger a request from the WTO director-general to the IMF managing director to conduct a staff review of the currency in question.

Fred Bergsten surveyed that option and several others in a major May speech. But Bergsten concluded that the chances of formal change to IMF or WTO rules are slim and suggested that reforming multilateral instruments may ultimately require unilateral action. "As with most systemic change," he said, "it may be necessary for one or several major countries to break some crockery to galvanize serious consideration of the issue and launch the multilateral reform process."