BERGSTEN WARNS OF CURRENCY WARS IN PETERSON VALEDICTORY SPEECH / THE WALL STREET JOURNAL

May 16, 2013, 4:39 PM ET

Bergsten Warns of Currency Wars in Peterson Valedictory Speech

ByIan Talley

In his valedictory speech as the head of one of the most respected economic think tanks in the world, Fred Bergsten was tempted to triumph the competitive liberalization of the global economy he championed for the last half century, including nearly two decades in the U.S. government.

Instead, the former assistant U.S. Treasury secretary issued a clarion call about “a clear and present danger” that continuing “currency wars” represent to the U.S. economy, global trade and the international monetary system.

“Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs,” he said in prepared remarks to the Peterson Institute of International Affairs Thursday afternoon. Mr. Bergsten officially stepped down as the director of the institution last year, replaced by former Bank of England board member Adam Posen.

Those currency tensions, and the policies that are fueling them, are costing the U.S. economy millions of jobs and threatening to create the kind of global problems that contributed to the Great Depression, he said.

The International Monetary Fund plays down the threat of currency wars, where countries across the globe devalue their exchange rates for a trade advantage. But Mr. Bergsten says it’s already widespread.

“Much more seems quite possible in the near future,” he said. “The economic damage that has already resulted is immense and could become much worse,” he added.

The heart of the problem, he argues, lies in the fact that there is no way to penalize countries that run trade surpluses at the expense of other countries, sanctions that would deter them from competitive currency manipulation.

“It’s the single greatest flaw in the entire international financial architecture,” he said, essentially ensuring that the problem will continue in the years ahead.

The biggest culprit in Mr. Bergsten’s accounts is China, despite Beijing’s significant appreciation of the yuan against the dollar in recent years. But he points to others, including Hong Kong, Denmark, Korea, Malaysia, Singapore, Switzerland and Taiwan.

If all the major currency delinquents were forced to stop their intervention, Mr. Bergsten calculates the impact would be comparable to the near $1 trillion 2009 stimulus or all three rounds of the Federal Reserve’s special monetary easing.

“Eliminating excessive currency intervention would narrow the trade deficit by 2% to 3% of gross domestic product and move the economy much of the way to full employment,” he said.

The two institutions that might be able to police currency practices — the IMF and the World Trade Organization — don’t have a legal weapon to wield.

Mr. Bergsten proposes that the victims of currency manipulation — largely the U.S., Europe, Brazil and a few other countries — should start to push for changes to the WTO and the IMF, giving them the power to stop exchange-rate intervention.

Many economists say that’s either a Herculean or quixotic task given the power that China has now accumulated on the world stage. The U.S. no longer has the geopolitical might to make it happen by itself, Mr. Bergsten concedes, as its global share of trade has shrunk and its dependence on other countries growth.

But Washington could still act unilaterally, applying special duties for intervening countries, he said. Other countries might join the effort, and while the WTO may ultimately rule against the action, the years needed for adjudication would act as a deterrent.

Time, he warns, isn’t on Washington’s side, all the more reason for the administration to act now.

In fact, Congress might force the issue when the administration seeks approval for pending new trade agreements across the Pacific and Atlantic, or for trade promotion authority.

“Congress, encouraged by the auto industry and perhaps others, will raise the currency issue in these contexts, and especially if it remains dissatisfied with the administration’s performance, insist on including relevant chapters in these and future trade agreements,” he said.

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