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Op-ed: Trade agreements need rational provisions to end currency manipulation

June 5, 2015
in Blog

It’s a well-known fact among economists of nearly every stripe that global trade is an engine of prosperity, especially for developing nations with a crucial need for access to international markets. The proposed Trans-Pacific Partnership trade agreement has the potential to boost the economies of the 12 nations in the Asia Pacific region that are in negotiations to join, including the United States. The benefits of free trade should clearly win out over the fallacy of protectionism, but Atlas Network Senior Fellow Judy Shelton warns in a new analysis for the Weekly Standard that international currency manipulation may be a significant drawback to the current terms of the partnership.

“When currencies misrepresent the true value of goods and services, it skews the benefits of free trade and undermines the principles of free-market competition,” Shelton writes. “But we shouldn’t reject a historic opportunity to move toward an open global economy for lack of coherent monetary arrangements; we shouldn’t throw the baby out with the bathwater, so to speak—where the bathwater is the dirty float of the world’s current exchange-rate swamp. Instead, we should take this opportunity to begin discussing how to build a rules-based international monetary system to foster productive economic growth for a community of nations still reeling from the last global financial crisis.”

Shelton points out that, for nearly 30 years after the Bretton Woods system began in 1944, international price signals were largely accurate and immune from government manipulation — until Richard Nixon ended the link between the U.S. dollar and gold in 1971. Ever since, the reality has been “that governments would intervene massively in foreign exchange markets to strategically position their own currencies” and gain an engineered trade advantage.

“A watered-down amendment on currency manipulation that merely authorizes selective enforcement against targeted countries would only further compromise the ideal of an open global marketplace. And protocols that require trying to discern the intent behind central bank decisions that debase a currency—as if monetary policy decisions can be separated from their exchange-rate consequences—is likely to provoke more cynicism than clarity,” Shelton concludes. “It’s time to begin thinking on a grander scale. We need to evoke the rationality and the resolve of Bretton Woods if we are to meaningfully preserve America’s commitment to free trade.”

Read Judy Shelton’s full analysis, “The Currency of Commerce: Free trade needs sound money.”

3 Comments

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  3. vikingvista June 5, 2015 12:51 PM

    1. In a world of central bank fiat money, in what sense can currency manipulation be said to NOT occur?

    2. Manipulation with the intent of propping up export firms at the expense of all other users of the currency is never an act for the general welfare, and always an act of cronyism in the interest of export firms.

    3. Ending (2) suffers the problems of ambiguity with (1), and with the fact that cronyism is in the inherent nature of all governments.

    4. The best that might be done is to urge populations to oppose politicians’ rhetoric to commit (2) in retaliation for other governments committing (2), through economic education. But this diffuse interest is still unlikely to suppress the concentrated interest of export firms.