The article headline is this: Toyota Profit Increases Sharply. Hmm. Toyota must be more efficient making cars than last year. Right? Wrong.
The yen, which has weakened by almost 30 percent since September, has also given Toyota’s profit a major bump, driving up the value of its overseas earnings in the home currency and making production in Japan more cost-efficient. For every yen the currency loses in value against the dollar, Toyota estimates, its operating profit rises ¥35 billion.
Wow. That’s quite a ratio. Nothing to do with cost effective production. A lot to do with currency movements. And if your government can manipulate or otherwise affect currency values, imagine the impact across the whole economy!
That’s why I said that the TPP (or any other trade agreements) has to have a currency fix “hard wired” into it… probably via Congressional Trade Promotion Authority. That’s not enough to make a trade agreement work for the U.S., but one cannot make a successful economic argument that trade agreements are worth it for America without a currency fix.
Imagine if Congress had approved the Trans Pacific Partnership last September… and Japan was a part of it… and Japan lowered tariffs of U.S. goods by 5% overall (they’re already in the WTO now).
Prime Minister Abe campaigned on the need to reduce the value of the yen last fall.
Now Japan’s currency value has fallen 30% since September… swamping the hypothetical 5% tariff decrease.
This example illustrates the Paul Volcker quotation: “In five minutes, exchange rates can wipe out what it took trade negotiators ten years to accomplish.”
It is fact that the trade agreements have not improved our trade balance. The assumption that lower foreign tariffs give us export opportunities that (a) become realized and (b) exceed the domestic market share ceded to imports, is wrong. That’s why USTR claims “increased two way trade” is good for us. That’s all they’ve got. As weak as the claim is, you’ll find it parroted around DC by the Very Serious People.
Remember Fast Track? Fast Track was contained in Trade Promotion Authority (TPA) legislation, not a separate bill. TPA is the statutory vehicle for Congress to give up part of its constitutional authority to oversee international trade to the administration. For nearly 40 years, Congress has included a currency fix provision in the TPAs. But the administration never, ever does it.
So don’t be fooled by a Congress including another currency fix provision in a TPA which may be submitted this year. It’s toothless… unless it has teeth. Unless it has more than teeth… unless the language hard wires currency into the process.
Congress has to tell the USTR “do not bring us a trade agreement unless it has this specific mechanism to prevent or remedy currency manipulation.”
Treasury will oppose the language. Because Treasury wants to control the currency issue. But Treasury has failed and has no credible argument to protect its turf.
Currency manipulating countries will oppose this. Like Japan and Singapore. But they need only to stop manipulation and its ok.
You cannot be a free trader without supporting a currency fix. Or a smart trader. Or a fair trader.
Currency manipulation is on the rise in the world in the past 10 years. Not decline. And not just China.
So the Finance Committee and Ways and Means Committee need to get over their ideological knee jerk reaction for “more trade agreements no matter what they say or accomplish” and thing about how to make them work.
Article XV, Section 4, of the GATT (now the WTO), to which both China and Japan are parties, provides that signatories “shall not, by exchange action, frustrate the intent” of the GATT (WTO) to promote free trade “nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.” Similarly, Article IV, Section I, of the Articles of Association of the IMF requires members to “avoid manipulating exchange rates … to gain an unfair competitive advantage over other members.”
Regrettably, the WTO refers allegations of currency manipulation to the IMF, but the IMF does not have the kind tools to sanction manipulators the way the WTO does.
Douglas Irwin of Dartmouth has proposed that WTO sanctions be applied to IMF rules that prohibit currency manipulation. But doing so would require political will and leadership from large economies like the USA and the EU.
That leadership has not been forthcoming. In the case of the US, how could it? China’s blatant currency manipulations are regularly given a pass.
One way to apply WTO sanctions to IMF rule violations is to enact H.R. 1276, the Currency Reform for Fair Trade Act, that is pending in the House. It applies a WTO-consistent remedy — countervailing duties — to offset the export subsidy generated by persistently undervalued currencies. If a country chooses to ignore its IMF obligations to reduce surpluses, then other countries should exercise their legitimate right under the WTO to apply countermeasures. The US and other countries use this remedy in response to every other subsidy, why not currency subsidies, too?
Tell you elected officials to stop fiddling, to enact this law, and to ensure that it is enforced with vigor and determination by the weak-kneed administration.
Well, now Japan is devaluing their currency.