trade promotion authority

Traveling with One “L” or Two? A Review of TPP Timelines

A former trade negotiator once told me that he spent over an hour of his time on Earth arguing over whether or not the word “traveling” should be spelled with one “L” (American style) or two (British style).  Such linguistic disputes are common in the final phases of trade agreements, as the legal texts get nailed down and then translated.

For the Trans-Pacific Partnership (TPP), the legal teams are holed up in Japan, confirming all the final details of the agreement.  In both legal and trade terms, language is extremely important.  There is a vast difference between a sentence that reads, “Members shall…” and “Members shall endeavor…”  The former requires the action by members while the latter merely urges action. 

Getting a dozen legal teams to comb out the final details on such a comprehensive agreement that runs to hundreds of pages is taking a long time.  Fortunately, the official language of the TPP is English.  This means that, although the final document will also be translated into Spanish and French, the legally applicable text is the English version only.  This dramatically cuts down on the time required between the completion of negotiations and possible release of final texts. 

While we all wait for the texts and associated schedules to be circulated (hopefully within another week or two), it seems a good time to review the timelines ahead for the TPP. 

In general, there are two critical sets of timelines that matter for the agreement.  The first deadlines are a whole set of complicated dates related to approval of the TPP inside the United States.  The second deadlines are those related to entry into force for the entire TPP agreement. 

To make matters more complicated, the US domestic procedures contain multiple timelines.  To try to summarize (and simplify slightly) the situation:

1.     President Obama, following Trade Promotion Authority (TPA) guidelines, has to notify Congress of his intention to sign the texts.  This triggers a 90 day procedure under which the texts must be formally released to the public for at least 60 days.  At the end of 90 days, the President is allowed to sign the agreement.

2.     The formal signature of the agreement by the President must be accompanied (within 60 days) with a list of legislative changes necessary for Congress to consider in order to bring domestic laws into compliance with TPP rules (wherever needed). 

3.     At some point, the President will need to deliver to Congress the official text of the agreement, a draft implementing bill, and a statement about how the agreement matches requirements of Congress under TPA.

4.     Once Congress receives the bill from the President, it must send the bill directly to relevant committees for expedited review.  There are specific time deadlines that apply again once the bill has been submitted.

5.     After limited floor debate, both houses of Congress must vote on the bill.  No amendments are allowed, so members must vote either yes or no.

Hence, one important issue inside Washington is figuring out when is the most auspicious moment to trigger some of the deadlines.  Most critical, of course, is the best opportunity for the final debates and reviews inside of Congress prior to final votes.

While many will feel particular urgency to get US approval for the TPP agreement, the implementation of TPP commitments across all 12 members remains some distance off.  New Zealand’s government has been releasing a series of helpful fact sheets.  One, on implementation and legal commitments, highlights the three options included in the TPP agreement for handling the entry into force deadlines.

The basic problem is that, while negotiations on the TPP agreement with the 12 members concluded on October 5, member states need to have domestic approval to move forward with implementation.  An agreement with a dozen participants may run into difficulties at the domestic level in getting approvals at the same time. 

Hence, the TPP has three possible methods for achieving entry into force.  The first and easiest method is to have all 12 countries finish domestic procedures within 2 years of signing the agreement.   Within 60 days of the last approval, the agreement automatically enters into force. 

Under option 1, entry into force could be much sooner than 2 years since it is triggered by the speed of domestic procedures alone.  Most TPP members have parliamentary systems, where the government usually has higher confidence that domestic legislators will follow government policy.  It is conceivable that many TPP members could put the matter before parliaments immediately after signature and be ready to move forward in a matter of weeks.

Except, as noted, the United States.  To add to the difficulties, as anyone following the United States knows, America is in the middle of a drawn-out electoral cycle in a bitterly contested, hyper-partisan environment.  It is not at all clear whether the TPP will get the 51% of votes needed in both houses of Congress or when this approval might be most likely.

This concern has given rise to the next option for TPP approval.  Under option 2, if all 12 parties have been unable to commit to the agreement at the domestic level inside of 2 years, the agreement can still come into force if at least 6 members are ready. 

However, this comes with a catch—because TPP officials have been worried that either the United States or Japan would not get the agreement through their legislators and bureaucracies for approval, option 2 also requires that both countries must be among the six (or more) countries ready to move ahead to implementation.   Hence, option 2 really means that, provided the United States and Japan can join up with at least 4 other good-sized members by the end of a two-year period, the agreement can proceed.

But what if either Japan or the United States are not finished with domestic procedures within 2 years?  Then Option 3 kicks in, under which the agreement can come into force within 60 days of the last one signing the agreement (along with the other major party and at least 4 more members). 

The TPP agreement, therefore, does give more weight to the Japanese and American approvals than the remainder.  This is a reflection of economic realities, where the payoffs are greatest if, and only if, the biggest markets are included.  Unless all 12 members are included at the outset, then members that collectively contribute at least 85% of the market size need to be ready to implement the TPP.  Any country that is not involved at the date of entry into force (other than the U.S. and Japan) can enter the agreement at any later time.

This complex set of entry into force conditions makes it difficult to predict with accuracy exactly how soon the TPP will take effect.  If all 12 parties moved at light speed, the soonest possible date could be fall 2016.  It is a pretty safe bet, however, that this will not happen so smoothly or so soon.  Instead, businesses might realistically be planning and pushing for TPP implementation in 2017.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Doing the Right Thing When All Else Has Been Tried: Congress Tries TPA Once More

WASHINGTON, DC: This week in Washington, more people than I can count have repeated a quotation attributed to Winston Churchill, “America will do the right thing only when it has tried everything else first.”  We are testing this theory right now on the trade front, as Congress grapples with how to undo the various “procedural snafus” that have bedeviled the votes on Trade Promotion Authority (TPA) and Trade Adjustment Assistance (TAA).

Yesterday, I wrote two different blog posts and had to toss them out and start over again this morning as events have been moving swiftly on the ground here in Washington. 

After the shock defeat of TPA/TAA in the House of Representatives on Friday, many of the folks in the city that care about trade spent the early part of this week trying to figure out a possible solution. 

Congressional leaders have opted for a risky strategy.  The House just passed a “clean” TPA resolution by 218-208.  This bill splits apart TPA from TAA. 

The hope now is that the Senate will re-vote next week on the new House-approved version of TPA.  Assuming the two bills match, TPA can quickly be passed along to the President for signature.

But this is a risky strategy because it requires Democrats in both parts of Congress to vote for TPA without TAA.  They must count on promises that Trade Adjustment will be up for another vote prior to its expiry in September.  Given the low levels of trust in Washington these days and the growing polarization of both parties, this is an interesting gamble. 

The goal is to complete the entire process prior to the July 4th recess in Congress.

Most likely, the chief negotiators for the TPP have shifted existing plans to meet until just after July 4.  They are likely to need two weeks to complete negotiations.  The ministers are likely to be penciled in for mid-July in the hope that they can sign the completed agreement by then (after some furious late nights of bargaining). 

If this near-death experience has had any upside, it may be that it has concentrated minds.  Partner countries and American negotiators will have to think carefully about any further delays in getting the agreement finished.  I believe that officials will be more ready to wrap this deal up than ever before.

Once the agreement is finished, under TPA rules, officials will have 30 days to finish legal scrubbing and any other associated technical details.  Fortunately, English is the official language of the TPP, which will reduce the amount of time needed for translations and the legal work on each translated version.

The document will then be published for 60 days before the President and other leaders can sign the agreement.  Hence, if all the deadlines line up, it is just barely possible to imagine the TPP finished and signed off in or around the next APEC Leader’s Meeting in Manila in mid-November. 

Given the issues around getting trade agreements through Congress, officials across government will be feverishly working to get any necessary implementing legislation worked out during the TPA review window period.  This ought to allow a Congressional vote on the TPP—just barely—by the end of this year.  

Hence, the TPP can still be completed in 2015.  (But note that entry into force will still be some distance away, likely in 2017, as countries will require some time to bring domestic rules and regulations into compliance with TPP rules.)

But what if the agreement is not done this year?  I have heard two opposite and distinct arguments about 2017.

First, lots of people here have suggested that approval of TPP should just be postponed until after the next president is in office in January 2017.

I believe this is deeply problematic. For starters, the lineup of participating countries in the TPP could be radically different by January 2017.  Canada faces a tough election in October.  The Prime Minister of Australia has already narrowly survived one no confidence vote from his Parliament.  The Prime Minister of Malaysia is struggling to maintain his office in the wake of a growing scandal over government funds as well as a softening economy. 

The Prime Minister of Japan has staked his entire reputation and government policy around radical shifts in the economic space.  If TPP does not succeed, he might well not survive either.   It is highly unlikely that any successor will be inclined to take the politically difficult steps needed to bring TPP into force in Japan.

The list could go on—Brunei might implement sharia law in a way that is deeply problematic.  Malaysia could find additional mass graves.  Between now and 19 months from now, all manner of issues could easily derail any agreement and any TPP government.

The assumption by many here seems to be that whoever wins office in Washington at the end of next year will be more enthusiastic about trade and the TPP and will be more able or willing to cajole, arm twist, charm, threaten opponents or reward supporters than the current occupant of the White House.  And that the next Congress will be equally keen to take on a big, fraught policy decision right after being seated in the Capitol building.  Even if the rest of the world somehow stood still, the picture in Washington is unlikely to be so rosy.

Deciding now to wait until 2017 to get the TPP approved is a poor idea.  Wishful thinking is not going to solve the problems of getting a high stakes trade agreement past 535 members of Congress and into the hands of the President for signature.

But this does conflict with a second argument I have heard in Washington regarding timing.  If the agreement cannot be ratified by late 2015 or very early in 2016 given the presidential election dynamics, the world will not end if domestic approval inside the U.S. slips slightly. 

We have precedent for this as the free trade agreements with Columbia, Panama and South Korea all sat for years waiting to be approved in Washington.  All three countries even had to go back to the negotiating table. 

It should not be a surprise that I am not at all in favor of this idea.  Most of the TPP member countries have put a great deal on the line domestically to get this far.  After more than 5 years of negotiations, any further delay can be quite problematic.  Businesses are already waiting for implementation and have started making investments and shifting production to account for TPP rules. 

The best strategy—by far—is to approve TPA by the end of next week.  TPA really ought to have been relatively uncontroversial, although past votes on the topic have also been fraught with challenges.  In any case, once TPA is finished, officials can quickly wrap up the TPP and prepare for the final battle over this agreement.  Hopefully, voting on TPP will be less nail-biting than the votes over TPA.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Defeated Again: Understanding The American Congress Votes on Trade

When the U.S. Senate first rejected the bills on Trade Promotion Authority (TPA), I wrote that it may have marked the day the Americans quit leading on trade.  Although the Senate subsequently managed to squeak through the necessary authorizations, the votes from the House of Representatives today suggests I was right.  Getting the United States to show leadership on trade is somewhere between a tough and an impossible task.

To recap where we are: although the United States has been negotiating multiple trade agreements for years, the U.S. Trade Representative (USTR or basically the trade minister) does not formally have trade authority as delegated from Congress.  Under what used to be called fast track and is now known as Trade Promotion Authority (TPA), Congress lets the White House lead on trade.  Congress sets up the parameters for negotiations and expedited procedures for final approvals. 

USTR went ahead with talks in the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Promotion (TTIP) “as if” the provisions of TPA were in effect.  The White House had opted not to try for renewal sooner (the last version expired in 2007) because they were not convinced that Congress would view the request favorably in the absence of information about what sorts of agreements were under negotiation.  Therefore, the executive branch decided to negotiate first and seek permission at a later date, when it would be more clear to the legislative branch what sorts of benefits and costs might be on offer.

With the TPP waiting for TPA to close the agreement, it was no longer possible to pretend that authorization was in place.  The other TPP member countries have refused to discuss the most sensitive aspects of the negotiation in the absence of clear authority from Congress to pass the final deal without amendment.

Hence the push to get TPA, starting with the Senate.  The original bill was defeated, only to be resurrected days later. 

The Senate votes set up the challenge for the House now.  If the House version of TPA does not exactly match the Senate’s bill, members from both sides would have to sit down and reconcile the inconsistencies.  The final, combined, bill would have to be voted on again by both bodies.

Given the difficulties in getting TPA, no one wants a situation where members of Congress are forced to vote twice.  Hence, the House version had to match the Senate version exactly.

Which leads us, depressingly, to today’s House votes.  The Senate bill had done two things—it renewed authorization of Trade Adjustment Assistance (TAA) and granted TPA.  (An earlier post discussed TAA in more detail.)

The House was reluctant to vote on a similar combined bill.  Thus, they split the bill into two halves—first a vote on TAA and then a vote on TPA. 

The TAA bill went down to defeat.  Even Democratic members of the House that are in favor of the idea of assistance for displaced workers voted against TAA renewal.  This bill, many argued, was insufficient for one reason or another.  Republicans that are not fans of TAA at all had to step up and try to push it over the finish line.  But it was not enough as 86 Republican and 40 Democrat yes votes lost to 303 no votes.

Once TAA was defeated, it also spelled the end to TPA.  This is because the House and Senate versions of the bill have to match.  The Senate authorized both TAA and TPA.  Therefore, the House must also have matching legislation in place. 

In a grim attempt to snatch victory from the jaws of defeat, House members then proceeded to vote—narrowly—in favor of TPA (219-212).  This looked, to people not familiar with the intricacies of Congress, like a success.

But it is not.  Hence, for the second time in weeks, Congress refused to show leadership on trade. 

What comes next is unclear.  It is possible that the House will figure out a solution to what is again being called a “procedural snafu.”  Maybe sufficient members on both sides of the aisle will reconsider their votes on TAA.  Perhaps the Senate will revote on TPA without TAA or with a different version of TAA that might be acceptable to the House. 

Even if this can be fixed, it means that the TPP may not close as planned.  Chief negotiators were expecting to meet on June 22.  This—at best—now looks optimistic.  The deadlines have always been perilously short. 

Once the immediate crisis is resolved one way or another, it is certainly worth thinking hard about why Congress has twice voted against trade.  (And against the President in spite of a full-court press the likes of which Washington has rarely seen in recent memory.) 

I am on my way to Washington DC and will write another blog post once I’ve had the chance to discuss issues with trade and business experts from the ground.  Perhaps only inside-the-Beltway naval gazers can make sense of what has been happening.  Because much of Asia (at least) has been watching in amazement as American legislators reject what most in this region see as common sense.  Cutting off your nose to spite your face does not seem a sensible policy.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Battle #2: Getting Trade Promotion Authority (TPA) Through the House

In the ongoing saga of American efforts to show leadership on trade, the battle has moved to the House of Representatives.  The House now needs to give its approval for Trade Promotion Authority (TPA). 

As previous posts have noted, TPA is necessary to conclude any major trade agreement.  TPA delegates authority to the White House to negotiate trade deals on behalf of Congress and subject to ongoing consultations.  At the end, Congress will either pass or reject a trade agreement negotiated under its terms without amendments and with no procedural maneuvering to stop or delay the vote like filibusters or allowing the bill to die in committees. 

TPA is needed most urgently for the Trans-Pacific Partnership (TPP) that is stuck on hold waiting for the Americans to sort out their domestic issues.  It will also be used for ongoing trade talks with the Europeans and with different groups in global trade under the general auspices of the World Trade Organization (WTO). 

TPA narrowly passed the Senate (62-37) on May 22.  [Note that the Senate needed 60 votes in favor to avoid a filibuster that could have blocked consideration of the bill at all.]  The Senate is considered to be the “easier” body for trade agreements, because each Senator represents an entire state with generally more diversified interests. 

Dealing with the House of Representatives

The House is more problematic.  Instead of two members per state like the Senate, representation in the House is based on population.  This means the House is much larger (435 members) and most officials represent narrower slices of the overall electorate.  While seven House members represent entire states (Alaska, Delaware, Montana, North Dakota, South Dakota, Vermont and Wyoming), California is split into 53 different districts.  Population of districts varies quite a bit—from Montana with nearly a million voters to Rhode Island’s 1st district with about half as many.

In general, the House tends to be more partisan on both sides with more Republicans that lean further right and more Democrats that lean further left than the Senate.  An electoral system that often pushes Senate candidates towards the center does not do the same in narrower House districts. 

In the Senate, TPA largely passed with Republican support and a small number of Democrats.  The House, by contrast, has a set of Republican members that have already said they will not support TPA (either because they dislike TPA or because they do not want to hand any victory to this president).  The number of House Democrats that have come out in support of TPA is quite small. 

The next week will involve furious lobbying by both sides with some extremely unlikely bedfellows developing.

The bill also faces some stiff procedural complications.  If the House does not vote on the same bill that was approved by the Senate, the final versions of both bills have to go to a conference committee.  Afterwards, members of both the Senate and the House will need to vote on the final, combined bill one more time.  Given the fraught nature of trade deals, no one is particularly keen to vote twice on a trade bill at this time.

Contentious Issues

Many of the same issues are being raised in the House that nearly derailed TPA in the Senate, including issues over currency and concerns over a possible rise in drug prices post-TPP.  The last concern seems particularly strange coming from the United States.  After the TPP is implemented, it is very likely that the United States will have to make no changes at all (or quite modest increases) in the length of protection provided to pharmaceutical products. 

In spite of strenuous negotiations, the Americans are unlikely to succeed in getting the other 11 member states to reach the farthest timelines under discussion.  Hence, the differences inside the United States around patent length and the timeline needed for generic medicines to appear in the market is likely to be modest.  The impact on domestic drug pricing is likely to be minimal and could, potentially, be positive as manufacturers have access to new markets overseas.  [Concerns over new, longer protections could be more pressing for other members who currently have shorter timelines for intellectual property protections.]

Just like the battle in the Senate, in the House opponents are bringing in additional issues and trying to tie them to the passage of TPA legislation.  Two key issues are extension of Trade Adjustment Assistance (TAA) for displaced workers and the renewal of the Ex-Im Bank.

Trade-Adjustment Assistance (TAA)

In any trade agreement, there are likely to be winners and losers.  TAA is intended to help retrain workers that experience job losses directly tied to trade.  Unfortunately, it is difficult to sort out whether a worker lost a job due to a trade deal or to globalization more broadly or to shifting technology or to some completely unrelated factor.  Only the first type of job loss is eligible for worker training assistance under TAA funding.

In the new economy characterized by global value chains and shifting patterns of production and consumption worldwide, individuals are likely to hold many different jobs over the course of a career.  These jobs may or may not even be in the same sector.  As a result, to stay competitive, workers are likely to need a lifetime of training and retraining options.  Training can provide people with new skills necessary for success in the future. 

This type of training is likely to be necessary with or without any new trade agreements.  After all, even if the United States never signs another trade deal, workers will still be faced with competition from overseas and still need upgraded skills to work with different types of technology.  Jobs of the future are likely to be quite different from many today and no person—white or blue collar, well educated or not—is likely to succeed without a lifetime of increasing investment in new skills and knowledge.

Thus a battle over the appropriate levels of support for working training is one worth having, although it need not be tied to a trade agreement.   Connecting the two unnecessarily burdens the latter while not giving sufficient scope to the former.

Ex-Im Bank Renewal

The other area of interest in both the House and the Senate is also tangentially connected to a trade agreement.  The fight has shifted to discussions of conditions needed for renewal of the Export-Import Bank.  The Bank has to be reauthorized every five years and the deadline is approaching at the end of June.

The purpose of the Bank is to provide money to firms that want to export more by either giving trade financing (especially to smaller firms) or providing a government loan guarantee (key for larger firms).   It also provides insurance for overseas firms that want to buy American products.  Commercial banks are often more expensive or loath to take on what they view as excessive risks (particularly in emerging or frontier markets). 

The U.S. taxpayer is on the hook only when the loan recipient defaults.  The record of Ex-Im since the 1930s shows that its loans contain very low risk and, in fact, the program overall puts money back into the U.S. government coffers. 

A focus on shutting down the Export-Import Bank looks extremely strange viewed from Asia.  The total U.S. funding for Ex-Im amounts to roughly $20 billion or 0.6 percent of the total U.S. budget.  What is so odd is that the scale of this assistance is, frankly, close to microscopic.  Governments in this region grasp the need for exports.  Without fetishizing exports at the expense of imports, it is clear that exports create jobs at home.  Exports have contributed strongly to the economic miracles in Asia that have lead to rapidly rising incomes and living standards across the region.

To continue to foster this kind of growth, Asian governments promote exports considerably more than America.  In fact, it could be fairly easily argued that American companies are at a strong competitive disadvantage given the lack of trade financing and loan guarantees available relative to their competitors.  Even the relatively small scale program in Ex-Im is meaningful for participating firms.

Just to take one example, Singapore has three different agencies tasked with building up and encouraging economic growth and development by getting smaller firms to scale up, helping firms find a niche in overseas markets and encouraging inward investment by some of the largest and most competitive global firms.  The government gives grants, loans and tax credits to companies large and small, foreign and domestic. 

Canada, Japan and China all have substantially larger entities that do many of the same things.  Each dwarfs the size of the American programs.  In fact, every country in the OECD (a collection of rich countries) has at least one export credit agency. 

Like the fight over TAA, it might be worthwhile to engage in a sustained discussion about supporting industry—the ideal level of support, the effectiveness of programs, the best methods for doing so, etc.  But the TPA ought not be torpedoed over Ex-Im Bank reauthorization.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The TPA Vote: The Day America Stopped Leading on Trade?

The U.S. Senate’s apparent inability to proceed with Trade Promotion Authority (TPA) may represent the day when the Americans conceded leadership on global trade. 

The vote that blocked consideration of TPA highlights to the rest of the world that the Americans cannot be counted on to get things done any more. The Trade Promotion Authority (TPA) bill is not just about the Trans-Pacific Partnership (TPP). 

TPA is meant to cover a set of extremely important, next generation, trade deals with: the 11 other parties in the TPP; up to 19 members in an expanded TPP by 2020; the Europeans in TTIP; more than two dozen countries in services (TiSA); a hugely important grouping of members in the information technology space (ITA2); with China and others over opening up government procurement markets in a clear and transparent manner (GPA2); more than 160 countries in implementing new rules to move goods faster and cheaper across borders (the WTO Bali deal on trade facilitation); and anything else that might begin negotiations in the next 5 years.

The Senate had an opportunity to outline their primary objectives and allow the Executive Branch to see what is the best possible deal that could be gained.  Afterwards, Congress will vote on each individual agreement after consultations along the way.

These ought to have been key objectives for every member of both parties.  Yet some members in the Senate have allowed misinformation to guide their thinking.  Most damaging has been a set of arguments about currency manipulation, disguised as a discussion about "enforcement" or "enforceable provisions."  The agreements currently on the table--all of them, but especially the TPP--already have extremely strong enforcement provisions built in.  These help to ensure that participating members in each deal follow the rules.

Currency manipulation is not about enforcement of a trade deal.  It is simply a bad idea.  It is not workable and will not address the supposed problem.  Even worse, the collateral damage might end up ensnaring the United States by preventing actions that the Americans may want to take in the future.  

But insisting on including this set of rules alongside the TPA debate just illustrates the nature of the debate in Washington.  It is not about creating helpful rules to guide trade in the next five years.  It is about following narrow, domestic partisan interests and using flawed arguments. 

In the end, it also shows the rest of the world that the United States cannot be viewed as a trusted partner because--no matter how much you bend to accommodate the Americans in a negotiation--they will always add one more bitter pill and insist that you swallow it.  Even then, passage of the final deal is never assured.  

The TPA legislative vote has been cast by the White House as a “procedural issue.”  It is true that the specific problem in voting was whether or not the TPA bill could be considered on its own, or in conjunction with three other bills.  One is presumably not controversial—to renew ongoing trade programs with Africa.  One is to provide worker training for workers harmed by trade (Trade Adjustment Assistance or TAA).  Finally, the worst idea on the table, of having something with currency manipulation as a key objective in (all?) trade agreements.

While Washington has gotten stuck in partisan battles over TPA, the timing for TPP has only gotten worse.  This agreement does not just include the United States.  Delays over TPA have held up the conclusion of the TPP.  If the Americans end up unable to pass the implementing legislation on the TPP until after the next election in 2017, other members may also face similar domestic challenges between now and then that permanently stop the TPP.

By 2017, who knows what will have changed in the other TPP members?  Canada votes in an apparently close election in October.  The Japanese Prime Minister has staked a great deal on the TPP and his tenure length is unknown.  Chile just reshuffled the cabinet.  The domestic scene in Malaysia is also uncertain.  The Australian Prime Minister has already been forced to survive one vote on his leadership.

This "procedural" issue in the United States Senate over TPA could end up like the proverbial butterfly flapping its wings.  The consequences of this delay could, indeed, reverberate for a long time to come.


Let me reprint part of an earlier post to explain again why currency manipulation should never have been an objective and certainly does not deserve to shut the Americans out of a responsible leadership role in trade:

Any sort of currency manipulation clause is unlikely to solve the problem it is ostensibly trying to address.  Worse, in order to ensure that American interests are not undermined, the provisions have to be carefully crafted such that they might never be triggered.  The final point of damage—even if there are virtually no circumstances under which such clauses might be used, America’s trade partners in the TPP might simply refuse to conclude negotiations at all.

So what is the problem so many backers of such legislation are trying to address?  In brief, governments can give a competitive advantage to their export industries if their currency is lower in value than their export partners.  The difference in currency values effectively makes imported goods cheaper in the foreign market, encouraging consumers and producers to buy more, relatively cheaper, foreign goods than relatively more expensive domestic items. 

How would a government go about making this happen?  If a government intervenes in currency markets, it can drive down demand for its own currency (or drive up demand for foreign currencies) by buying and selling currency.  

Another way to accomplish the same thing is to print more money domestically.  If there is more money in circulation now, the value of any given note is lower.  However, governments engaged in such behavior often argue that such policies are not aimed specifically at artificially depressing the value of the currency for the purpose of generating an unfair trade advantage. Therefore, such behavior is not considered currency manipulation, at least as members of Congress appear to want to define it. 

The purchase of assets by the government can also change the value of currencies, even if the objective is to stimulate the domestic economy.

Singapore loosened monetary policy recently in response to weaker oil prices and low domestic demand.  The government argued it was using one of the primary items in its tool kit to address low inflation, since it does not use interest rates as a tool. 

Thus, governments may have lots of legitimate reasons for adjusting currencies without the specific intention of getting a leg up for exports.

It may be important to note that not every country is able to manipulate currencies.  If the country is small, especially with limited demand, the value of the currency is more likely set by market forces.  A country with limited resources cannot intervene very much to buy or sell currencies.  And, finally, the United States has a unique position in the global economy.  Since the U.S. dollar functions as a reserve currency, it allows the United States to have different options than anyone else in the markets (for the moment, at least, but that is another story).   Let me also note that because of this position, the United States does not have to intervene in currency markets like anyone else.

Efforts to stop countries from “unfairly manipulating” their currency will not work

There are many reasons why not, but start with the fact that most countries in a position to manipulate currencies also have complex economies.  These economies rely on both exports and imports.  For many firms, exports can only be produced with imported content.  By depressing the value of the currency to make exports cheaper, imports become more expensive.  As a result, firms may not actually be competitive in the export market since the price of imported content of the final goods might be more than offset by whatever the discount on the export side might be.

Equally key, for the most complex products, the value of the benefit from a depressed currency is likely to be small.  Consider an i-Pod, for instance.  Imagine that China were, in fact, manipulating their currency to a massive extent—say 50% off the presumed “normal” value of the yuan.   In this hypothetical context, it might appear that Chinese intervention is dramatically affecting the price of the device in the American market.  But, in fact, the total amount of Chinese content in an i-Pod could be as little as $4 of the $150 sales price.  Thus, the extent of the “unfair” advantage of Chinese currency might make a whole $2 difference to the final buyer.

Recall that this example gives figures for a truly exceptional rate of currency intervention at 50%.  The actual extent of manipulation is likely to be considerably smaller.  This means that the total price difference could be literally pennies.

While other products may not show such dramatic figures, the point is that—in most complex, higher value items—the content is likely to be provided by multiple countries.  As a result, even crazy high manipulation is unlikely to affect the final price very much. 

The Big 3 auto companies are driving the issue of currency manipulation in Washington.  But a car in the modern, globalized economy is very much like an i-Pod.  Even if you could determine that a China or a Japan was intervening to depress currency prices by a lot, the total difference in the price of a finished car is still likely to be much more modest than people realize.

To make this pressure by the Big 3 auto companies more surprising, many of the cars sold in the United States today are actually manufactured in whole or part in the United States (or NAFTA countries).  Thus, the value of potential manipulation on the total cost of a car is small. 

Practically speaking, a currency manipulation clause has additional challenges.  How can the specific amount of currency tweaking be measured?  Currencies change regularly in the open market, so a trade agreement has to take this into account somehow.  Even in the alleged cases of Japanese or Chinese manipulation, few could agree on the extent of intervention—was it 10 or 45% or something in between?

What is the appropriate response to such intervention?  Even if a trade agreement could specify the triggers for determining manipulation, then what?  Many of the proposed “solutions” appear to run afoul of other laws and regulations.

The United States, clearly, does not want to become ensnared in its own rules either.  Depending on how defined, basic American policy in the independent Federal Reserve could be challenged by foreign governments.  Problems like this make whatever provisions that might end up in trade agreements so tightly restrictive that they can never be applied or it might mean that the United States breaches the rules and argues for non-intervention in its own affairs. 

Finally, none of the specific partners currently negotiating the TPP are keen to see rules on currency manipulation included.  This agreement has been under discussion for more than five years.  To add a controversial (to put it mildly) item so late in the game is to risk imploding the whole deal.

Some may argue that TPP partners have already accepted proposals and provisions that they do not like.  What is different about currency manipulation from other American ideas?  At some point, however, pushing too hard may make others snap.  This is likely to be that point.  Adding a very unpopular and unworkable idea like currency manipulation clauses into the TPP mix at this late day is a truly dreadful idea that should be discarded immediately.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***