The Obama administration is doing its full court press, pulling out all the stops to get Congress to approve the fast-track authority that is almost certainly necessary to get the Trans-Pacific Partnership (TPP) through Congress. One of the biggest remaining stumbling blocks is that the deal will almost certainly not include provisions on currency. This means that parties to the agreement will still be able to depress the value of their currency against the dollar in order to gain a competitive advantage. This is a really big deal, which everyone thinking about the merits of the TPP should understand.



The value of the dollar relative to other currencies is by far the main determinant of our balance of trade. We can talk about better education and training for our workforce, improving our infrastructure and better research, all of which are important for the economy.

But anyone who claims that improvements in these areas can offset the impact of a dollar that is overvalued against another currency by 15-20% is out of touch with reality. If the dollar is overvalued by 20% against another country’s currency, it has the same effect as imposing a 20% tariff on US exports and giving a government subsidy of 20% to imports.

This is the direct effect when other countries deliberately buy up US assets to prop up the dollar against their currency. This is the main reason the United States is currently running a trade deficit of more than $500bn a year.

This trade deficit creates a huge gap in demand. It has the same impact as if households were taking $500bn a year out of their paychecks and stuffing the money under their mattress. There is no obvious way to make up this gap in demand. In principle we could fill the gap with large budget deficits, but this is a political non-starter. Based on a dubious reading of the data from the second half of last year, some analysts had thought the economy was booming again, despite the large trade deficit.

More recently, reality and arithmetic have reasserted themselves and most economists now recognize that the economy is not growing fast enough to fill the demand gap. In fact, the only way we know to fill the sort of gap in demand created by the trade deficit is with an asset bubble like the stock bubble in the 1990s or the housing bubble in the last decade. Not many would advocate going down that path again, which means that we can look forward to the persistence of high unemployment and a weak labor market, unless we address the trade deficit.

If we recognize the need to address the trade deficit, and the centrality of the value of the dollar, then it is mind-boggling that the Obama administration would not have sought to include rules on currency in the TPP. After all, the Obama administration has been in office more than six years and allowed large trade deficits to persist. If they don’t address currency rules in the TPP, where exactly do they expect to do it?

Much of the discussion now has the same sort of children’s table character that is usually shown toward issues that primarily concern working people. The rules about investment, about environmental and safety regulation, and patent and copyright protection are all right there front and center in the trade agreement. These affect the adults, aka big business. But issues about currency and trade deficits, that can mean millions of jobs and trillions in lost output over the next decade, well that’s kids’ stuff. The Obama administration will promise to set up a little table and do a little dance to humor the people who care about such things. But they must be kept out of the TPP.

Finally, it is worth noting that sums at stake over currency issues are an order of magnitude larger than any potential gains from the rest of TPP. We already have very low barriers with most of the parties in the TPP. Removing the remaining barriers will have a very limited economic impact, which could easily be outweighed by the increase in barriers in the form of stronger patent and copyright protection.

Neither the Obama administration nor anyone else has a politically viable path back to full employment with a trade deficit equal to 3% of GDP. Full employment is incredibly important to ensure that those at the middle and bottom of the income distribution have the bargaining power needed to share in the gains from economic growth. If insisting on currency rules risks delaying or even destroying the TPP, it would be a risk well worth taking.