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Our Problem is Free Trade, Not "Currency Manipulation"

Our Problem is Free Trade, Not "Currency Manipulation"

I have enjoyed the comments by readers of my previous article on the harms the KORUS Free Trade treaty has done to America's economy (co-authored with Ken Davis), and notice readers tend to move the discussion from trade policy to currency, i.e., the value of the dollar in relation to currencies of other countries.  This fits a larger pattern I have observed also among many trade policy reform advocates: blaming "currency manipulation" by other countries as the root of our trade deficits and loss of manufacturing.  I do not agree that currency valuation is the main cause of, or solution to, our country's economic problems.

The US trade deficit with China and other countries is the result of globalist policies in Washington DC, not "currency manipulation" by China or our other trade partners.  Specifically, it is the result of liberalization of US trade policy, i.e., the lowering of the protections to domestic industry that served us well for the first 150+ years of our independence as a nation.

This liberalization of US trade policy was the result of the influence on the US government by executives whose fortunes and careers were made in large, "US-based" corporations that sought to expand their markets and operations into a global level, regardless of the effects this would have on our country.  This began at least as early as the Nixon administration, and was detailed in my interview of Ken Davis (former VP and CFO of IBM and former Asst. Secretary of Commerce under Nixon) published here:


Indeed this is still true, as much of the 'made in China" imports flooding the US market today are products of "US-based" companies that off-shored or outsourced their production for the US market, reaping huge windfalls for their executives and large shareholders, and using some fraction of those windfalls to buy both US political parties and fund think tanks such as the Peterson Institute for International Economics (PIIE) and lobbyist groups such as the US Chamber of Commerce, all of whom promote these Free Trade policies.

Read the numerous business press articles describing decisions by individual "US-based" companies to build factories in China or other (mostly Asian) countries.  The American executives offshoring their operations never cite currency values.  Rather they cite subsidies such as cheap capital, cheap or free real estate, wage subsidies, guaranteed input costs, and other industrial policy initiatives of foreign governments.  All of which, I must note, are within the sovereign right of those governments, and, apparently, effective promotions of their national interest in growing employment and manufacturing capacity and encouraging technology transfers to their country.  These American executives, meanwhile, assume that wherever they put their offshore operations, they will be able to use America's Free Trade policies to deliver their wares to the enormous US market.

The idea that "currency manipulation" is the main cause of America's trade deficits --and by implication, our loss of manufacturing capacity and jobs-- originated in reports published by the Peterson Institute, a think-tank that has promoted Free Trade and globalization since a decade before NAFTA, often written by scholars who were promoting trade liberalization as early as during the Nixon administration.

Many trade policy reformers have recently taken the bait of chasing "currency manipulation" rather than directly opposing the Free Trade model.  Virtually all their advocacy reports that conclude our agenda should be to "fight currency manipulation" cite 2 papers published in 2013 on "currency manipulation" --one by Fred Bergston and another by Joseph Gagnon-- both scholars at the Peterson Institute.  Although such a source does not automatically invalidate the findings, we should note that the Peterson Institute promoted NAFTA and KORUS and all the other Free Trade treaties, and now very much want the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) Free Trade treaties to pass.  So Peterson Institute reports were always published by scholars very much committed to these Free Trade treaties.  I will return to consider this agenda behind the recent Peterson Institute papers on "currency manipulation," but first let's step back and see the pattern.

Peterson Institute scholars have over the decades published many reports predicting huge job gains would result from previous Free Trade treaties when they were proposed, of course proven very wrong by history.  An early example was "NAFTA: An Assessment", published in 1993 by Gary Hufbauer and Jeffrey Schott of the Peterson Institute, predicting that NAFTA would raise the U.S. trade surplus with Mexico and create 170,000 net new jobs per year in the United States.  A recent example is “The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment,” published in October 2011, predicting the TPP will serve as a template for a larger Asian free trade treaty that, from 2020 to 2025 "would increase U.S. exports seven-fold…and expand U.S. exports by $327 billion (12%) above the baseline."  At least this time they don't actually predict a trade surplus, since we know now that the Free Trade treaties so far have deepened America's trade deficits by increasing imports much more than exports.

Considering how wrong Peterson Institute scholars have been in their past predictions of job gains and trade surpluses that were supposedly to result from the Free Trade treaties they helped promote, it should not surprise us they now publish papers blaming the bad results not on the liberalization of U.S. trade policy but rather by other countries circumventing Free Trade through "currency manipulation."  In other words, "currency manipulation" is mostly a red herring thrown out by free Traders to distract us from the results of liberalizing American trade policy, i.e., dismantling the protective policies that built our industrial system from the time of Alexander Hamilton to the Nixon administration.

What should surprise us, however, is that critics of these Free Trade policies are now echoing the Peterson Institute's line on so-called "currency manipulation."  Even worse, by allowing themselves to be diverted by the false issue of "currency manipulation" and the idea that "unfair" trade practices by foreigners, who "violate" free trade principles, are the root of our problems, these reformers are unwittingly softening public resistance to the TPP and TTIP --treaties that would undermine American sovereignty and responsive government itself, plus bring so much more of the economic damage the NAFTA model has already caused.

For example, the Economic Policy Institute and its Director of Trade and Manufacturing Policy Research, Robert Scott, just published a report "Stop Currency Manipulation and Create Millions of Jobs: With Gains across States and Congressional Districts."  Therein Mr. Scott asserts that "Currency manipulation, which distorts trade flows by artificially lowering the cost of U.S. imports and raising the cost of U.S. exports, is the primary cause of these growing trade deficits."  He also claims that "Eliminating currency manipulation would reduce the U.S. trade deficit by $200 billion in three years under a 'low-impact' scenario and $500 billion under a high-impact scenario.'”  Among the "solutions" proposed: "the proposed Trans-Pacific Partnership (TPP) trade agreement should include strong, enforceable currency manipulation provisions."

Considering that, according to the US Census Bureau, in the 10 years from 2004 through 2013 the USA has averaged a trade deficit in goods of over $716.5 Billion annually, Mr. Scott seems to be saying that "currency manipulation" is responsible for between 28% to 70% of the US trade deficit.  He relies heavily on the same Peterson Institute article (Gagnon 2013) cited by CPA in its "Currency Wars" flier, citing Gagnon as evidence that "the current constellation of trade imbalances is primarily the result of governments that use intentional policies, especially official purchases of foreign assets (public financial flows), to influence exchange rates."

How ironic that Mr. Gagnon (and those citing him) seems to ignore the fact that, despite this so-called "currency manipulation" by China to devalue the Yuan, the value of the dollar has nonetheless still declined in relation to the Yuan.  According to data published by the Federal Reserve, from Jan 3, 2000 to Feb 21, 2014, the dollar declined in value from 8.2798 Yuan to 6.0912, i.e., a drop of over 26%.

But what is also ignored by those accusing China of "currency manipulation" is that it is the sovereign right of any nation to effect policies to adjust the value of their currency relative to other currencies.  What is really being undervalued here is national sovereignty.  That is the biggest problem in the trade reform community today, because it undermines criticism of Free Trade policies by sharing its global governance assumptions, not to mention the trade liberalization assumptions.  This preference for treaties (and the chimera of genuine "free trade") over acts of sovereignty prevent the trade reform leadership from advocating the most obvious solution: unilateral US trade policy to restrict the amount of imports in order to balance our trade and rebuild our manufacturing ecosystem.

Look, for example, at the Coalition for a Prosperous America's (CPA) "21st Century Trade Agreement Principles."  Rather than assert the sovereign right of the United States to limit imports in order to balance our trade and rebuild our manufacturing capacity, it relies on treaties --"trade and global governance agreements"-- to limit the policies of other governments, thus weakening their sovereignty and ours, and their's and our own capacity for governance that is responsive to their citizenry and free to assert their national interest.

We see this, for example, in the comments under "Reciprocity," saying "the agreements must provide that no new barriers or subsidies outside the scope of the agreement nullify or impair the concessions bargained for."  We see it also in the section "State Owned Commercial Enterprises," which places ideological judgement above national sovereignty by asserting that "Trade agreements must encourage the transformation of state owned and state controlled enterprises to private sector enterprises."  And of course we see it in the section "Currency" where we read "currency valuation issues must be part of a trade agreement, and not treated separately."  In the section "Border Adjustable Taxes," there is the demand that "Trade agreements must neutralize the subsidy and tariff impact of border adjustment of foreign consumption taxes," again preferring treaty limitation of our trade partners' sovereign right to refund value-added taxes to their exporters and treaty limitation of our own sovereign right to unilaterally impose countervailing duties.

Of course it is true that solving America's economic problems will require a transformed trade policy including better trade treaties, and treaty negotiations have always involved voluntary agreement of partners to limit their behavior in exchange for treaty partners also agreeing to limit their behavior.  And certainly the CPA "21st Century Trade Agreement Principles" assert some goals that would significantly improve American prosperity, such as achieving a "manageable balance of trade over time,"  "optimize[ing] value-added supply chains within the U.S." and requiring that all imports be "labeled or marked as to country(s) of origin as a condition of entry."  But these same CPA "Trade Agreement Principles" have underlying globalist assumptions for trade liberalization, which leads to an over-reliance on trade treaties as our solution, and a consequent ignoring of the unilateral use of national sovereignty that could balance our trade and rebuild our manufacturing and prosperity much more effectively than chasing the endless chimera of increased exports through treaties.

Where has this preference for treaties over sovereignty led the trade reform leadership?  The "critics" of Free Trade and the TPP & TTIP treaties are now also demanding that language against "currency manipulation" be added to the TPP!  So the TPP is being rebranded, from the irredeemable attack on our sovereignty and democracy that it is, into a possibly useful tool against "currency manipulation."  Be careful what you ask for --you might get it, and then the TPP will steamroll over the former critics who "won" their "currency manipulation" language.  Its already in Fast Track, the unconstitutional bill that proposes to pass the TPP and TTIP treaties by simple majority of both houses of Congress instead of the ⅔ of the Senate required by Article 2 section 2.

How widespread is this delusion that stopping "currency manipulation" by our trade partners is the answer to America's economic problems?  Unfortunately, VERY widespread.

The Economic Policy Institute's call to insert "currency manipulation" language into the TPP was foreshadowed by CPA's call for it in their "Currency Wars" flier and, just to give another example, in a CPA Trade Reform article "Big Chinese FOREX Intervention in Third Quarter," published November 26, 2013.  The call for including "currency manipulation" language in the TPP has been repeated by Dave Johnson at the Campaign for America's Future website in an article "Want 5.8 Million New U.S. Jobs? Do This," published February 26, 2014.  And Mike Hall, writing for AFL-CIO Now published an article "Want to Create 5.8 Million New Jobs? Here’s How" uncritically quotes the EPI article and then posts a link that lets you "sign a letter for a better TPP."

We don't REALLY intend to support the TPP?  We will demand a lot more than just "currency manipulation" language before we actually support it?  That is the implied hedge here, but again beware.  The Fast Track bill also includes language against state owned enterprises and for preserving American sovereignty.  What does this tell us?  The Free Traders and globalists writing the TPP have heard the critics and intend to beat them by inserting language to neutralize their criticisms.  So this begs the question: do you REALLY think treaty language is going to make other countries drop all the practices that give them trade surpluses and a growing productive economy, just so the USA can rebalance its trade and rebuild its manufacturing?

If only the trade reform leaders would see that America's economic troubles have not been caused by other countries and will not be fixed by negotiating treaties.  The solution can be found where the problem is also found: in Washington DC.  Unilateral acts of national sovereignty could easily cut through what the USTR calls "non-tariff trade barriers."  Rob Scott and the Economic Policy Institute were so close to the solution in 2010 when they published "Re-Balancing US Trade and Capital Accounts: An Analysis of Warren Buffett's Import Certificate Plan."

Another interesting variant of a unilateral solution through asserting our national sovereignty was in the study "The Buffett Plan for Reducing the Trade Deficit" by by Dimitri B. Papadimitriou, Greg Hannsgen and Gennaro Zezza, all from the Levy Economics Institute at Bard College.  They propose a modification to the Buffett plan, namely that Import Certificates (IC's) be auctioned by the Commerce Department directly to importers, and the proceeds of these IC sales be used to reduce the FICA payroll taxes paid by workers and employers.  They argue that the benefits of the ICs would then go to workers across the economy, and that administrative costs and complexities would be reduced in comparison to the IC market originally proposed by Mr. Buffett.

The idea of an auction of ICs described by Papadimitrou et al is just one of several proposals to modify the Buffett Plan that was originally proposed by Warren Buffett in a 2003 Fortune Magazinearticle.  A better approach might be to have the ICs issued for a small administrative fee that covers the cost of the system but does not generate revenue or significantly add costs to imports.  My point is that we'd be a lot better off if our debate was how best to control the flood of imports through unilateral sovereign action rather than how best to control the behavior of the rest of the world.

But that would cross the globalist assumptions that ending "currency manipulation" in order to bring about genuine "free trade" and global governance through treaties will somehow bring different results than the last 40 years of trade liberalization and Free Trade treaties and growing global governance.  I think it IS time to challenge those assumptions.

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