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You might have missed the story about Japan’s trade surplus last week. That’s because there wasn’t one. Last Thursday morning, Tokyo announced that their trade deficit had reached $75 billion for the first half of this year. Japan has now posted 24 straight months of trade deficits.
There are many things to conclude from Japan’s trade patterns but one concerns the bane of American trade policy. Currency manipulation is back on the front burner because it’s an election year and the Trans-Pacific Partnership (TPP) agreement is headed for a 2015 congressional vote. Currency manipulation is also wildly overrated as an issue.
Not only is Japan still considered a currency manipulator by many, it is indeed driving down the value of the yen. Since Prime Minister Abe took office in December 2012 and pushed the Bank of Japan into extending still more credit, the yen has fallen 16 percent against the dollar. Its effective exchange rate against all world currencies has fallen slightly faster.
The result: Japanese exports are struggling while imports slowly rise. There are multiple reasons but the most basic is Japan is an aging country and older people consume more than they produce. As the work force has aged and shrunk, Japanese production has moved outside the country while consumption has held.
Regardless of what the Bank of Japan does, because Japan’s population is aging, the country will tend increasingly toward trade deficits. The exchange rate will remain unimportant.
Despite this, there is a vocal group insisting that the U.S. must act to prevent Japanese currency manipulation. They want to include a currency chapter in the TPP, which includes Japan. Such a chapter will not materially help our economy and may end up hurting a good deal.
Consider the American Automotive Policy Council, leading proponents of a currency chapter. The autos group deserves credit for a concrete proposal, but its very concreteness makes clear the proposal would accomplish almost nothing.
One part of the proposal is to identify manipulators through a large and persistent current account surplus. Japan has not been running large current account surpluses since the financial crisis and won’t for years to come. Instead, a TPP currency chapter would primarily affect Singapore, population five million.
And it would outright hurt the U.S. if the currency chapter distracted from the transformative potential of the TPP.
America’s comparative advantage versus our trading partners lies in agriculture and innovation. Members of Congress have been right to push Japan and other countries to fully open agriculture markets. Such an opening can be phased, and would also require changes in American policies regarding dairy and sugar. It would utterly dwarf the value of a currency chapter.
Similarly, U.S. negotiators have been right to push TPP members for a broad strengthening in protection of intellectual property (IP). Individual IP provisions can certainly be argued over but stronger IP protection generally would mean the U.S. retains more of the gains from our own innovation. This in turn would drive improvements in living standards here and around the world.
So a TPP currency chapter does the U.S. no good with current partners and threatens more important goals. But what about down the road? Much of the exchange rate discussion concerns China, which is not party to the TPP. Could a TPP currency chapter set a precedent that would alter Chinese policy?
Possibly, but emphasizing currency with China would also be a mistake. Instead, the precedent-setting chapters in the TPP for China should involve IP and state-owned enterprises.
In the middle of last decade, critics of Chinese exchange rate policy argued the yuan was 20-40 percent undervalued against the dollar. However, the slow, 25-percent revaluation of the yuan starting in 2005 coincided with a 50-percent rise in the U.S. merchandise trade deficit with China. We’ve been down the currency road already.
What we haven’t tried with China is to attack the true barriers to American exports: IP theft and subsidies for state firms. China is arguably the world’s worst offender in both areas. As a result, a TPP that is strong on IP protection is also probably the best means of changing Chinese behavior.
Further, TPP would have a chapter on “competitive neutrality”- thus taking away advantages from state-owned enterprises. If this is effective in barring no-cost financing and regulations to keep state firms in business no matter how inefficient they are, it would open markets to American goods and services globally.
In comparison, currency critics are stuck in the past. It isn’t 1994, when China devalued the yuan (and U.S. unemployment fell). It isn’t 1986 when Japanese ran large surpluses and the yen was over 160 to the dollar. American comparative advantage, the evidence from China, and Japan’s trade deficit make it clear we have much higher priorities than currency manipulation.
Scissors is a resident scholar at the American Enterprise Institute (AEI), a conservative think tank, where he studies Asian economic issues and trends.
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