I am generally always in agreement with Simon Johnson. But his argument in a recent article urging the US to use its trade policy to fight foreign exchange market interventions deserves to be refuted.
He advocates that the US should insist on making participation in the ongoing Trans-Pacific Partnership (TPP) contingent on refraining from currency market intervention. He claims that such intervention is "an unfair way to gain a trading advantage, with excessive negative effects on trading partners" and that "some Asian countries have overstepped the boundaries of reasonable behaviour", with "associated adverse effects on sectors and communities in the US". In simple terms, currency market intervention imposes adverse negative externalities on other countries.
I do not contradict this allegation. Currency market manipulation undoubtedly has a beggar-thy-neighbour dimension. But so do most other macroeconomic policies. Almost any industrial policy, including those supporting defense industries, where the US is the undisputed leader, would unfairly disadvantage similar industries elsewhere. Similarly, national trade policy interventions, even those not infringing WTO regulations, invariably involve decisions that favor one group over another, whose effects are felt within and across countries.
Further, it is not as though the "currency manipulators" are trying to weaken their currencies. It can be safely argued that in today's world no country can have the fire-power required to "manipulate" their currencies downward in any significant manner, leave alone consistently. At best, they can only try to prevent their currencies appreciating further, so as to arrest the erosion of their existing competitive advantage. And here too, there are significant limitations. The BoJ's attempt to hold down the rising yen in recent months is a case in point.
In fact, there are more pernicious forms of economic policy manipulations, which attract much less attention. The recent debate on tax avoidance highlights how differential taxation policies can harm other countries. The extraordinary quantitative easing policies followed by US, Japan, and European countries have generated massive capital flows, and has been the biggest contributor to global macroeconomic instability.
If the East Asian economies are being accused of "manipulating" their currencies to retain trade competitiveness, then by the same yardstick the central banks in US, Europe, and Japan would have to be accused on "manipulating" their monetary policy to restore economic growth. What is sauce for goose is also sauce for gander.
Or how about the negative externalities imposed by America's high fiscal deficit in a world where the US dollar enjoys the exorbitant privilege? It encourages (or atleast contributes to) other countries (say, China) to consume less and run up large surpluses; make them to park their savings in low yield US assets; amplify the risks arising from cross-border capital flows, and so on. More disconcertingly, irrespective of its economic fundamentals, it privileges America to print money and borrow very cheap, more than any other country, and at the cost of the savers in other countries.
One could go on about other such perceived "policy manipulations". After all, as we have seen, the negative externalities arising from many policies naturally lead to accusations of "manipulation". But the response to such policies in the form of a selective quest for harmonization betrays both naivety and hypocrisy.
In a world of such vast social and economic disparities, economies move forward in widely varying trajectories. It is therefore inevitable that they follow different, often conflicting, policies on the same issue. Most often, especially with external market policies, these policies generate undesirable negative externalities. This has been case all along the modern era of the nation state. In fact, these policies have underpinned the successful growth trajectory of all of today's developed economies.
In the circumstances, a selective quest for harmonization of policies in a manner that suits the requirements of a few is not only undesirable but also hypocritical. The adverse consequences of the European monetary union, which deprived peripheral economies the traditional option of restoring competitiveness by devaluing their currencies, is fresh in memory. Heterodoxy in policies and not harmonization has been the norm in all of history. Therefore, instead of seeking harmonization, economies should try to adjust their policies to mitigate the negative externalities arising from policies of others, as was being done for centuries.
He advocates that the US should insist on making participation in the ongoing Trans-Pacific Partnership (TPP) contingent on refraining from currency market intervention. He claims that such intervention is "an unfair way to gain a trading advantage, with excessive negative effects on trading partners" and that "some Asian countries have overstepped the boundaries of reasonable behaviour", with "associated adverse effects on sectors and communities in the US". In simple terms, currency market intervention imposes adverse negative externalities on other countries.
I do not contradict this allegation. Currency market manipulation undoubtedly has a beggar-thy-neighbour dimension. But so do most other macroeconomic policies. Almost any industrial policy, including those supporting defense industries, where the US is the undisputed leader, would unfairly disadvantage similar industries elsewhere. Similarly, national trade policy interventions, even those not infringing WTO regulations, invariably involve decisions that favor one group over another, whose effects are felt within and across countries.
Further, it is not as though the "currency manipulators" are trying to weaken their currencies. It can be safely argued that in today's world no country can have the fire-power required to "manipulate" their currencies downward in any significant manner, leave alone consistently. At best, they can only try to prevent their currencies appreciating further, so as to arrest the erosion of their existing competitive advantage. And here too, there are significant limitations. The BoJ's attempt to hold down the rising yen in recent months is a case in point.
In fact, there are more pernicious forms of economic policy manipulations, which attract much less attention. The recent debate on tax avoidance highlights how differential taxation policies can harm other countries. The extraordinary quantitative easing policies followed by US, Japan, and European countries have generated massive capital flows, and has been the biggest contributor to global macroeconomic instability.
If the East Asian economies are being accused of "manipulating" their currencies to retain trade competitiveness, then by the same yardstick the central banks in US, Europe, and Japan would have to be accused on "manipulating" their monetary policy to restore economic growth. What is sauce for goose is also sauce for gander.
Or how about the negative externalities imposed by America's high fiscal deficit in a world where the US dollar enjoys the exorbitant privilege? It encourages (or atleast contributes to) other countries (say, China) to consume less and run up large surpluses; make them to park their savings in low yield US assets; amplify the risks arising from cross-border capital flows, and so on. More disconcertingly, irrespective of its economic fundamentals, it privileges America to print money and borrow very cheap, more than any other country, and at the cost of the savers in other countries.
One could go on about other such perceived "policy manipulations". After all, as we have seen, the negative externalities arising from many policies naturally lead to accusations of "manipulation". But the response to such policies in the form of a selective quest for harmonization betrays both naivety and hypocrisy.
In a world of such vast social and economic disparities, economies move forward in widely varying trajectories. It is therefore inevitable that they follow different, often conflicting, policies on the same issue. Most often, especially with external market policies, these policies generate undesirable negative externalities. This has been case all along the modern era of the nation state. In fact, these policies have underpinned the successful growth trajectory of all of today's developed economies.
In the circumstances, a selective quest for harmonization of policies in a manner that suits the requirements of a few is not only undesirable but also hypocritical. The adverse consequences of the European monetary union, which deprived peripheral economies the traditional option of restoring competitiveness by devaluing their currencies, is fresh in memory. Heterodoxy in policies and not harmonization has been the norm in all of history. Therefore, instead of seeking harmonization, economies should try to adjust their policies to mitigate the negative externalities arising from policies of others, as was being done for centuries.
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