WASHINGTON (MarketWatch) — Although the Obama administration is doing its best to ignore the problem, currency manipulation is not going away and threatens to torpedo the pending trade agreements not only with Asia but also with Europe.
As the administration tries to finalize the Trans-Pacific Partnership (TPP) with 11 other Pacific Rim countries, the absence of any provision to ban currency manipulation is proving to be a stumbling block to lawmakers of both parties, who may deny the White House the fast-track authority it seeks to approve the pact.
An artificially devalued currency enables the devaluing country to run up a large trade and current-account surplus, which has deleterious effects not only for those countries forced into deficit by the practice — namely, the U.S. — but for the global economy as a whole.
China, long the congressional whipping boy on the subject, has taken significant steps to reduce its current-account surplus and align its currency USDCNY, +0.10% with its market value.
In any case, China is not a party at the moment to TPP. But, Baker notes, JapanUSDJPY, -0.26% and Malaysia USDMYR, +0.73% , who are, as well as South KoreaUSDKRW, -0.25% have also been identified as engaging in currency manipulation.
“It would be possible to crack down on this practice by limiting large-scale purchases of foreign currency in the TPP,” Baker suggested. “But the Obama administration seems totally uninterested in getting this done. President Obama has been in office six years and has done nothing to curb currency manipulation.”
As economic policy makers from around the world convene in Washington next week for the spring meeting of the International Monetary Fund and World Bank, however, the focus is now shifting to the other big source of global imbalances — the eurozone, and specifically, Germany.
The euro EURUSD, -0.50% — the joint currency for 19 of the European Union’s 28 nations — has been chronically undervalued for Germany, boosting that country’s exports and surplus, and the disappearance of offsetting deficits in the southern periphery countries as a result of austerity and recession has made the problem worse.
And now the European Central Bank’s steps to stimulate growth in the region through monetary expansion will further exacerbate the problem.
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