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February 10, 2015 7:08 pm

US Congress threatens trade deals with currency debate

Obama must head off alliance of unions and Tea Party Republicans
 
WASHINGTON, DC - SEPTEMBER 29: An American flag waves outside the United States Capitol building as Congress remains gridlocked over legislation to continue funding the federal government September 29, 2013 in Washington, DC. The House of Representatives passed a continuing resolution with language to defund U.S. President Barack Obama's national health care plan yesterday, but Senate Majority Leader Harry Reid has indicated the U.S. Senate will not consider the legislation as passed by the House. (Photo by Win McNamee/Getty Images)©Getty Images
 
 
We have seen this film before. The US Congress is threatening a trade war to punish “currency manipulators”, those it deems to be boosting their trade balance artificially at the expense of America.
 
Ordinarily, a threat of legislative action like this folds in the face of a presidential veto. In the past this has resembled a good cop-bad cop routine. The White House would point to anger on Capitol Hill in order to persuade the likes of China and Japan to curb manipulation against the dollar.
 
This time, however, the number of Democrats and Republicans pledging their support for legislation looks unusually potent. President Barack Obama rightly insists that dealing with currency devaluation should be separated from matters of trade. He must hold firm both on the Trade Promotion Authority he seeks from Congress — that enables him to submit “fast track” deals to an up-or-down vote — as well as the Transpacific Partnership talks that are in their final stages. Both Atlantic and Pacific trade deals are at a crossroads. It would be a setback to global growth prospects if they were sabotaged by politics in the very country that initiated them.

However, Mr Obama should take nothing for granted. John Boehner, the Speaker of the US House of Representatives, has said he needs at least 50 Democratic votes to pass TPA. Yet 150 of the 188-strong Democratic caucus have already signed a petition opposing it. Unlike on previous rounds, they are joined by a growing number of Republicans who object to anything that increases Mr Obama’s authority.

Their motives may be different. The left smells a multinational rat that would gnaw at US labour and environmental standards. The right wishes to poke Mr Obama in the eye. Combined, they are an unholy alliance capable of wrecking global trade negotiations.

The main problem is that such a measure is unworkable. It would slap duties on imports from countries deemed to be manipulators, this being defined as central bank interventions aimed at providing a currency subsidy. In practice these are hard to prove. One person’s devaluation is another’s monetary policy.

It could also rebound on the US. Many, including China, objected to the US quantitative easing programmes on precisely such grounds. The US is now complaining about the impact of the European Central Bank’s QE. Both actions were launched to stimulate demand but also boosted exports. Deciding which are manipulations is not a precise science, as the IMF has made clear.

Shunting adjudication to the World Trade Organisation would not alter that objection.

The second problem is that it would ruin any chances of a trade deal. The 13-member TPP talks are nearing conclusion. If Congress inserted a currency clause into the final deal it would prompt Japan to abandon the process — and possibly others.

The same applies to the Transatlantic Trade and Investment Partnership talks, which are at an earlier stage. Germany’s record export growth is partly helped by the euro’s recent depreciation. Any measure that punished the eurozone for its currency’s downward drift would only hasten the protectionism US lawmakers say that they are trying to stop.

The dollar is currently riding high because US growth outpaces most of its partners. If the recovery has returned fewer middle class jobs than hoped to US shores, it is because of automation, not competitive devaluation. In any case, trade is not the forum with which to address US currency concerns. Mr Obama knows this. So do cooler heads in Congress. Let us hope they prevail.

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