Currency protectionism: the greatest trade impediment facing America.

• Author: Mastel, Greg

With growing intensity since the late 1980s, efforts have been underway in the United States to link international trade agreements to exchange rates. Since changes in exchange rates directly impact the prices of imports and exports just as do import tariffs and export subsidies--both core subjects of trade negotiations--the connection is obvious. It is also clear that many countries pursued policies aimed at undervaluing their currencies--known generally as currency manipulation--in order to discourage imports and encourage exports.

But the seemingly obvious connections were not enough to bring currency manipulation into the core of trade negotiations. The issues remained largely separate for a number of historical and institutional reasons. In the post-war economic world, trade was seen as the core of the General Agreement on Tariffs and Trade, later to become the World Trade Organization, while exchange rate issues were the province of the International Monetary Fund. In the United States, trade negotiations were carried out by the U.S. Trade Representative while exchange rate issues were jealously guarded by the Department of Treasury.

Conceptually, currency manipulation was difficult to define. All major countries took some measures to control exchange rates and the primary fiscal and monetary tools that could impact exchange rates also impacted all economic activity. It was difficult to clearly separate legitimate national economic policies from attempts to "beggar thy neighbor" through currency manipulation. National authorities were also not anxious to see their policy tools constrained by trade agreements or subject to meaningful second guessing by foreign governments.

U.S. CONGRESS AND CURRENCY MANIPULATION

Despite these reservations, by the 1980s it became difficult to ignore the fact that several mainly Asian countries--most notably Japan--were pursuing weak currency policies in order to boost exports and domestic employment. The rising U.S. trade deficit pushed international trade onto the front political burner in the late 1980s. Much of the attention focused on various import restrictions maintained by Japan and other trading partners, but the 1988 Trade Act also included a provision directing attention to the impact of exchange rates on trade. The most notable aspect of this provision was a direction that the Secretary of Treasury identify countries that were manipulating the value of their currency in order to "prevent effective balance of payments adjustments" while maintaining "a material global current account surpluses" and "significant bilateral surplus with the United States."

This provision could be seen as rather weak tea, as the Secretary was only directed to identify these countries in...