After spending five long years negotiating the Trans-Pacific Partnership trade agreement, the Obama administration is now pushing for the fast-track authority from Congress that would make it easier to get the final deal approved. One serious problem is that the TPP is not likely to include rules on currency, which is leading lawmakers from both parties to consider opposing the agreement. They are right to be concerned.
A good deal, from the American perspective, would have rules preventing countries from strategically depressing the value of their currency. Japan, Malaysia and South Korea have all been identified as engaging in such manipulation. While this point may seem obscure, the cost of the dollar relative to other currencies is hugely important in determining the size of our trade deficit, which is in turn a major obstacle to growth and employment.
To understand the relationships at work here, imagine that the dollar suddenly rose in value by 20% against the Vietnamese dong and the Japanese yen. Since we sell our goods and services in dollars, people living in Vietnam and Japan would then need 20% more of their currency to buy products from the United States.
This means that a Ford or General Motors car produced in the United States would cost 20% more for a person living in Vietnam or Japan. The same would be true of Microsoft’s software or any other item that we might try to sell overseas. Naturally when our prices rise, we expect that people will buy fewer goods and services from us.
The opposite happens on the import side. Our dollar would buy 20% more Japanese yen or Vietnamese dong. So we might be more inclined to buy Japanese cars because they would cost us 20% less than they would have before the rise in the dollar.
If we sell fewer goods to other countries even as we buy more goods from them, we end up with a larger trade deficit. Currently the U.S. trade deficit is running at more than a $500 billion annual rate, roughly 3% of our GDP. This has the same impact on demand in the U.S. economy as if families or businesses just pulled $500 billion out of circulation and stuffed it under their mattresses.