The Trans-Pacific Partnership (TPP) did not deliver strong disciplines against unfair currency practices because other countries would not have signed on to a TPP with such sanctions. Nonetheless, the TPP could still provide important leadership against the trade distorting effects of artificially low exchange rates. Congress will be analyzing the agreement for its ability to discourage currency manipulation and will focus on how the “Joint Declaration of the Macroeconomic Policy Authorities of TPP Countries” will be implemented. This Declaration was issued by TPP governments at the same time the TPP text was publicly released.
Despite a lack of binding disciplines in the final text, in this Declaration the TPP countries are committing to increasing the transparency of their actions in foreign exchange markets, including monthly reporting of foreign exchange reserves and quarterly reporting of official government intervention in foreign exchange markets (with some exceptions for Brunei, Malaysia, Singapore and Vietnam). At their meetings, TPP macroeconomic officials will share with each other their views on exchange market activities of other TPP members, with the aim of such scrutiny discouraging unfair currency practices. The Joint Declaration indicates that the TPP members will release reports after their meetings, including their collective conclusions.
A TPP member can disagree with a partner country’s assessment of its exchange rate related activities. Notably, the Declaration indicates that the countries ‘may’ invite the International Monetary Fund (IMF) to provide independent input. Instead, the TPP countries should press the IMF for more frequent exchange rate assessments. The IMF is the sole multilateral institution tasked with preventing currency manipulation by its members. Other institutions such as the World Trade Organization (WTO) are required by their treaty agreements to accept the IMF view on currency matters. As part of its global economic surveillance, the IMF recently began preparing an in-depth analysis of exchange rate and related policies in major countries, the External Sector Report (ESR). However, the IMF prepares this report only once a year and does not include updates in its twice yearly World Economic Outlook.
More frequent IMF exchange rate assessments could provide a neutral, analytical basis for discussing exchange rate policies. Such a discussion in a group setting among TPP partners could help foster more accountable exchange rate policies and avoid currency competition. (This is an opportunity that the WTO has failed to take advantage of.)
Key factors influencing exchange rates covered in the ESR include whether the country engages in one-sided foreign exchange market intervention to lower the price of its currency on global markets and increase its exports. This will be reflected in the country accumulating excessive foreign exchange reserves. The IMF makes a bottom line assessment of whether the exchange rate resulting from each country’s policies will support global macroeconomic stability or contribute to larger global imbalances.
Whether the WTO or the TPP or any other grouping of countries is asking, the IMF is the best objective source for evaluating appropriate policies and putting them in a global context. And while not all TPP countries are covered in this report, the IMF continues to evaluate exchange rate policies of each member during its annual economic review of the country and could incorporate these findings into its reports for the TPP.
In its latest World Economic Outlook (October 2015), the IMF included a chapter on how changes in exchange rates typically have sizable effects on export and import volumes, finding that a 10 percent real depreciation in an country’s currency is associated with, on average, a 1.5 percent of GDP rise in real net exports, delivering a substantial boost to that economy. Given this strong statement, the IMF will surely seek to retain its central role as the global monitor of exchange rates and agree to provide TPP finance and central bank officials with more frequent updates, which should also be published (as are the notes the IMF prepares for G-20 meetings). And the IMF could be called on to produce updated assessments for special meetings if exchange rates and trade patterns raise concerns among partner countries.
Clear and comprehensive information about trade-distorting currency policies is an important first step to providing enforceable sanctions against such behavior. While the IMF does not have an effective mechanism to discipline countries engaging in unfair currency practices, it does have a strong voice in setting global practices and influencing country behavior, particularly by publicly releasing its analysis and evaluation.
TPP leadership can foster such frank discussions and prevent a downward spiral of currency competition among countries. U.S. complaints about currency policy in a smaller country can seem unfair coming from a larger, richer country. In a TPP group setting with similar countries producing similar products, officials can share the pressures they face to follow reactive exchange rate policies and discuss alternative means to preserve export competitiveness.
Early and decisive action – preferably before any new countries are admitted to the TPP – is critical for two reasons. First, the IMF has at times chided South Korea for interventions that keep its currency persistently undervalued below its equilibrium level. Securing a central role now for more frequent IMF country assessments and review by TPP peer countries would set the standard for future members of the TPP. Second, the foreign exchange market reporting standards are equally important for increasing partner country, as well as public scrutiny of anti-market behavior. Countries such as South Korea interested in joining TPP should be required to meet those standards (Korea does not at this time). That is a small price to pay for the benefit of being at the table when exchange market activity of your main competitors is being examined. Frank and pointed discussion in this group could cement the principle of cooperation and consultation as a means to address emerging distortions before problems escalate.
Meg Lundsager is a public policy fellow at the Woodrow Wilson International Center for Scholars and former U.S. Executive Director and Alternate Executive Director, International Monetary Fund.