TPP and Currency Manipulation
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Transcript of TPP and Currency Manipulation
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Topline
Currency exchange rates, as the medium in which trade occurs, can be asimportant a determinant of trade outcomes as the qualities of the goods orservices themselves.
Some governments work with their central banks and other partners tomanipulate their currencys value in order to provide their exporters an unfaircompetitive advantage.
While the International Monetary Fund (IMF) and the World Trade Organization(WTO) have rules against these practices, no steps have been taken to stop them.
Korea and Japan have engaged in currency manipulation that favors theirautomakers, with harmful effect on American manufacturing and Americas jobmarket.
Unless the Trans Pacific Partnership (TPP) Agreement prohibits this kind ofcurrency manipulation, it will fail to achieve its objectives (including growing U.S.exports). In fact, a poorly negotiated TPP Agreement i.e., one that allows Koreaand Japan to continue to undermine trade agreements by manipulating theircurrencies could harm the U.S. economy and diminish American exports.
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How Manipulation Affects the U.S.Currency manipulators effectively protect jobs in their homecountry at the expense of jobs and economic growth in their
trading partners economies.A December, 2012 Peterson Institute study, CurrencyManipulation, the U.S. Economy, and the Global Economic Order,explains that:
1. A buildup of official assets mainly through intervention inthe foreign exchange markets keeps the currencies of theinterveners substantially undervalued, thus boosting their
international competitiveness and trade surpluses2. (t)he largest share of the loss centers on the United States,
whose trade deficit has increased by $200 billion to $500 billionper year as a result. The United States has lost 1 to 5 million
jobs due to this foreign currency manipulation.
3. (t)he United States must eliminate or at least sharply reduceits large trade deficit to accelerate growth and restore full
employment. The way to do so, at no cost to the US budget, isto insist that other countries stop manipulating their currenciesand permit the dollar to regain a competitive level.
4. Eliminating excessive currency intervention would narrowthe U.S. trade deficit by 1 to 3 percent of GDP and would thusmove the U.S. economy much of the way to full employment,with an even larger effect possible
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The current account of
the United States may
have been pushed downby about 4% of GDP
because of currency
manipulation [and is]
responsible for millions
of lost jobs in the United
States.Peterson Institute, Combating Widespread
Currency Manipulation, July 2012.
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Multilateral Disciplines
The charter of the International Monetary Fundprohibits members from manipulating theircurrency. The IMF charter states that membersshould avoid manipulating exchange rates in orderto gain an unfair competitive advantage overother members and defines such manipulation asprotracted, large-scale intervention in onedirection in the exchange market.
The World Trade Organization also prohibitscurrency manipulation- linking to IMF.
However, neither organization has taken actionagainst currency manipulators.
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International Monetary Fund & World Trade Organization:
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Source: Global Insight
11.1
8.9
4.8
0
2
4
6
8
10
12
Capacity Production Sales
JAPAN AUTO PRODUCTION(2012, in millions)
5.3
3.9
1.4
0
1
2
3
4
5
6
Capacity Production Sales
Industrial Overcapacity
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Why would a nation manipulate its own currency in a way that makes itharder for its citizens to afford imported products? Because its economy
depends substantially on the exports of one or two of its biggest industries
In Korea and Japan, governments have taken dramatic steps to maintainproduction capacity in auto plants by subsidizing the exports of vehicles toother markets. Therefore avoiding the need to right-size their industry, andinstead push off that burden on to their trade partners
KOREAN AUTO PRODUCTION(2012, in millions)
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$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
Japan Reserves (x $1 million)
$1.274
trillion
$314 billion
Source: Bank of KoreaSource: Bank of Japan
Foreign Currency ReservesA clear sign a country is manipulating (weakening) its currency is a substantialincrease in its foreign currency reserves, which occurs as it buys and holds
foreign currencies (in large part $ & ).
Korea Reserves (x $1 million)
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Because cars, trucks and auto parts are its largest export, Japan has used direct
intervention in currency markets and the threat of intervention to gain a
competitive export advantage.
2. Currency
manipulation
3. Exporting overcapacity1. Aggressive
One-Sided FTA Strategy
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Japans Trade Tactics
IndustrialOvercapacity,Dependence on
Exports
One-sidedFTA Strategy
Currency
Manipulation
At the same time, Japan seeks
admission into multilateral
free trade agreements (FTAs),like the Trans Pacific
Partnership, which would
grant it preferential treatment
in trade with the U.S. and
other participants.
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75
80
85
90
95
100
105
110
115
120
1-Oct-12 1-Nov-12 1-Dec-12 1-Jan-13 1-Feb-13 1-Mar-13 1-Apr-13 1-May-13
In anticipation of a new Japanese government putting in place a
weak yen policy, and subsequent policy actions by that government,
the yen has weakened by 30% since October 1, 2012.
78 (yen/$)
101 (yen/$)
3. Exporting overcapacity1. Aggressive
One-Sided FTA Strategy
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Recent Weak Yen Policy Impact
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Weak Yen Subsidy Per Car
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
78 80 82 84 86 88 90 92 94 96 98 100 102
Yen to Dollar Ratio
* Assumes a 77 yen/$ equilibrium rate. Source: Updated Estimates of Fundamental Equilibrium Exchange Rates,
Peterson Institute, November 2012.
Benefit from each Yen drop on a $25K vehicle
At 101 Yen to the dollar (May 13,
2013), the Yen is underpriced by
approximately 30%. That means a
$25,000 car imported from Japan
into the U.S. can receive a more
than $8,000$subsidy* from theweak yen policy.
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Japanese Automakers Two Views
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When Japanese OEMs enjoy large exchange
rate windfall
When exchange rate corrects itself
"We've been begging to remove the headwinds
of the exchange rate since 2008. Five yearslater, it's happening so we applaud it. Carlos
Ghosn, Nissan CEO, May 10, 2013
*T+his tale of the manipulated yen is far more
spectral than, say, Casper, our friendly ghost
Toyota, Open Road Blog, January 8, 2008
So, as the yen falls *t+he net result is no
advantage to Japanese automakers seeking to
sell more cars abroad Toyota, Open Road
Blog, January 8, 2008
Our competitors are jealous of our success.
President of Toyota's North Americanproduction group, Feb 15, 2007
We don't see a serious impact on our business
from current exchange rate levels, Fujio Cho,
Toyota President, May 28, 2002
[E]very one-yen gain against the dollar cuts 20
billion yen ($228 million) from operating profit andthat 100 yen to the dollar is optimal. - Carlos Ghosn,
Nissan CEO, Jan 11, 2013
So unless the rate reaches 100, theres no doubt
that Japans auto production and monozukuri are in
crisis. - Akio Toyoda, Toyota CEO, Jan 11, 2013
"Under the current exchange rate of 80 yen per
dollar, our export business doesn't make any profit.
- Fumihiko Ike, Honda CFO, June 11, 2012
"Some say that they cant feel any real substance in
the whole Abenomics phenomenon, but as a
result, its weakened the yen and boosted stockprices." - Toyota Senior Managing Officer Takahiko
Ijichi, Feb 5, 2013
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Japanese Officials Singular View
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(Soon-to-be Prime Minister) Shinzo Abe
has vowed to weaken the nations currency
and boost government spending to stimulatethe economy. That has spurred speculation
carmakers will see rising profits from exports
Bloomberg, Nov 26, 2012
(T)he yen will inevitably strengthen. It's vital to
resist this. Prime Minister-elect Shinzo Abe, WSJ,
Dec 23, 2012
I will act (to weaken the yen) when I find it
necessary, and I mean it. Former JapanFinance Minister, Jun Azumi, WSJ, July 24,
2012
Even though weve tried our best, and put our
hearts into our efforts, the strong yen makes usunable to be competitive. Prime Minister Shinzo
Abe, Jan 11, 2013
It is "completely different" for Japanese
companies if the dollar is in the 80-yen range,
as it is now, as opposed to the 90s, Mr. Abe
said. If the dollar "is above 85, companies
that haven't been paying taxes until now
*because they don't have profit+can pay
taxes. Japan Prime Minister-elect Shinzo Abe,
Dec 23, 2012
The yen "is making headway toward the
appropriate level" and that the government
"must ensure that this movement will take hold. -
Minister in charge of Economic Revitalization,
Akira Amari, Dec 27, 2012
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Yen Value Benefit for Japans OEMs TOYOTA: A one-yen decline against the dollar adds about 35 billion
yen ($377 million) to Toyotas operating profit, the carmaker
estimates. Toyota makes about 45 percent of its cars in Japan and hasvowed to maintain domestic production of at least 3 million vehiclesa year. Bloomberg, Feb. 5, 2013
HONDA: According to Honda, its operating income gains by 16billion yen ($172 million) annually for every one-yen drop in thedollar rate...Bloomberg, Feb. 1, 2013
NISSAN: Nissan CEO Carlos Ghosn has said that every one yen gainagainst the dollarcuts 20 billion yen ($228 million) from operatingprofitand that 100 yen to the dollar is optimal.Nissan Report, Jan.
11, 2013
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101 yen per dollar represents an annual unearned windfall benefit of more
than $9 billion for Toyota; $4.1 billion to Honda; and $5.4 billion to Nissan.
Assumes a 77 yen/$ rate. Source: Updated Estimates of Fundamental Equilibrium Exchange Rates,
Peterson Institute, November 2012.
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What Others Are Saying About Currency & FTAs
Coalition of 10 US Business Assoc. - May 22nd 2012 letter to Treasury Sec Geithner & USTR Kirk:
we strongly recommend that the United States government pursue, as a leading priority,inclusion of strong currency disciplines in all future free trade agreements, including theTrans-Pacific Partnership (TPP) agreement.
Peterson Institute, Currency Manipulation, the US Economy, and the Global Economic Order:
Efforts should be made to include the *currency+ manipulation issue in future tradeagreements at all levels (multilateral, regional, and bilateral).
Woodrow Wilson Center, Negotiations for a Trans-Pacific Partnership:If the TPP negotiations are to fulfill this promise, however, it is critical that the rules beright. This means that they must deal with the major gaps in the World Trade Organizationrules, such asaddressing currency manipulation, an issue that is not currently on the TPPnegotiating table.
Economic Strategy Institute, The Trans-Pacific Partnership and Japan:
Although the TPP is being touted as a Twenty First Century agreement, it is, in fact,nothing of the sort in terms of substance.In order to become a truly 21st century tradeagreement, the TPP must be expanded to include provisions barring currencymanipulation
Canadian Imperial Bank of Commerce, Free Trade, Free Currencies:
So let the negotiations continue, not just on trade, but on currencies, other distortionarypolicies, and their implications for global imbalances. Free trade, but free currencies as
well. 13
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What Congress Has Said About Currency & FTAs
Senators Baucus and Hatch and Congressmen Camp and Levin in aNovember 8, 2011 letter to the President:
New disciplines on non-tariff barriers, as well as other rules, such asrestrictions on the operations on the operation of state-ownedenterprises, being proposed for TPP, could, if sufficiently robust, beapplied to address some of these concerns...
24 Senators in a November 30, 2012 letter to the President:To prevent the artificial suppression of job-creating American exports,the TPP should explicitly allow countries to respond to and offsetcurrency manipulation.
Senator Hatch, Ranking Member of Finance Committee, in a January 18,2012 letter:Addressing currency manipulation in the TPP becomes particularlyimportant as the Administration considers the possibility of new TPPparticipants, such as Japan, who have demonstrated a pattern ofcurrency interventions.
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Proposal: FTAs & Currency Manipulation
Free Trade Agreements (FTAs) are negotiated between countries
that agree to provide preferential access to each others markets,and are carefully negotiated to be mutually beneficial.
Currency manipulation can completely undermine the UnitedStates expected benefits of a FTA, and have an adverse impact onthe US economy and jobs.
Multilateral, organizations such as the IMF and the WTO have nottaken action to address this problem.
Given this, many have come to the conclusion that prohibitionson currency manipulation need to be included in future US FTAs.And, if a FTA partner manipulates its currency, therebyundermining its expected benefits of the FTA, it would lose the
benefits of the agreement. Many in the U.S. business community and in the US Congress are
now calling for the TPP agreement, and all future FTAs thatinclude the United States, to include disciplines on currencymanipulation.
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