As international trade broadens, foreign currency exchanges play a greater role in the world economy. It is necessary to have exchange rates at fair market value in order for transaction costs of international trade to become more efficient.
For the past several weeks, Congress has been debating to include a provision in the Trans-Pacific Partnership agreement (TPP) that will allow the US to retaliate against China’s seemingly ongoing currency manipulation (Syracus.com 5/6/2015). While the TPP does not explicitly center on China, some in Congress wanted to use this trade agreement in a more aggressive means to keep China’s trade influence in check. Already, by excluding China from this grand trade agreement, the US wants to increase its economic influence in the Pacific region against the rising China’s global influence.
The US should continue keep a check on China’s rising influence, whether it be on trade or military might. However, on the issue of currency manipulation, US lawmakers ought to focus on a different set of actors, especially given that the IMF is planning to announce that the Chinese currency is just about fairly valued (Wall Street Journal 5/3/2015).
The LA Times reported recently that the Justice Department has announced a $5.7 billion settlement against Citi, Chase, Barclays, Royal Bank of Scotland Plc, and UBS AG (5/20/2015). The banks are accused of colluding to manipulate the foreign exchange market. Given that roughly $5 trillion is exchanged in the foreign currency market, there should be a public outcry on the meager $5.7 billion total settlement that is split among the five banks.
China has a history of depreciating its currency to gain advantages over the export markets, and US politicians rightly have called national attention on this issue. The recent settlement ought to be brought to public scrutiny, given the propensity of the crime and the disappointing settlement that favors the banks. While the Justice Department announced the settlement in a celebratory manner, the lackluster penalties imposed by the bank brings up the question to why the Justice Department did not push harder.
In the LA Times article, it is noted as the following: “‘I think it's a facade of justice,’ said Jimmy Gurulé, a University of Notre Dame law professor and former federal prosecutor and Treasury Department official. ‘It's an attempt to make it appear that the Department of Justice is really doing something serious about the culture of corruption in banks. But the actual perpetrators, the architects of the criminal scheme, are not held accountable.’”
Hopefully, someone in Congress can call attention on not only the issue of some banks being currency manipulators but also the Justice Department for setting a low bar of calling it a settlement successful.
This News Comment is updated on the bottom of the original article.
The United Nations Secretary General Ban-Ki Moon is expected to visit the Kaesong Industrial Complex to visit South Korean run factories and North Korean workers (Arirang News 5/19/2015). Kaesong, located about six miles north of the Demilitarized Zone, represents a rare economic venture between North and South Korea. According to the US Congressional Research Service, “The [Kaesong Industrial Complex] aims to attract South Korean companies, particularly small and medium-sized enterprises, seeking lower labor and other costs for their manufactured products as an alternative to establishing subsidiaries in China or other low-wage markets.” (4/18/2011) In exchange for providing low cost labor, the North Korean government is not only able to receive infrastructure support from South Korea but also receive US Dollars legitimately.
Given that Kaesong provides a steady stream of US Dollars, it is unlikely that North Korea would jeopardize the industrial project in the name of national pride. Even at the height of nuclear tension in 2013, it was North Korea asking South Korea to consider reopening the complex...after North Korea de facto temporarily shut the complex down a few month earlier (South China Morning Post 8/7/2015). After waves of criticisms and demands to never repeat the unilateral shutting down of the complex by South Korea, Kaesong Industrial Complex reopened (CNN 9/16/2013). Even at the most tensed times, North Korea caved in.
Kaesong Industrial Complex provides a tiny taste of capitalism for the North Korean workers as the North Korean government collects the workers’ wages.
Given years of North Korean cooperation to develop the Kaesong Industrial Complex, there is no question of North Korean government’s ideological tolerance to the capitalism in Kaesong. With limited options of attracting foreign direct investments, it is likely that North Korea’s future actions (including provocations that involve weapon firings to the sea) would be calculated such that it would not cause enough geopolitical destabilization that would jeopardize the Industrial Complex itself.
In a way, allowing the UN Secretary General to visit the Industrial Complex shows North Korea’s desire to get international legitimacy in providing low cost manufacturing options to other foreign investors.
Update: According to the BBC and other news outlets, North Korea has cancelled the UN Secretary General's visit without providing an explanation. The UN Secretary General said the cancellation was "deeply regrettable". Due to lack of information on North Korea's intention, it is difficult to provide analysis on the situation, but it is possible that some type of domestic instability resulting from an internal power change might have played a role in the cancellation (DS NETS 5/14/2015).
The debate on the progress of debating and voting on the Trans-Pacific Partnership agreement (TPP) shows a clear vulnerability of President Obama’s opponents. Several Democrats, including Senator Elizabeth Warren, voiced opposition by stating that the TPP would cost American jobs. (New York Times 5/9/2015)
It is absolutely true that any trade agreement that would decrease trade barriers could cost American manufacturing jobs, but that is one in a small part of the overall effects of any trade agreements in the first place.
The TPP is not merely economical but also political. Just like NAFTA, this agreement is an attempt by the US to create a free flowing economic zone to “counter” against a rising economic power. For NAFTA, the rising economic power was the European Union, and rising economic today is China (and India). Whether the upcoming transnational trade agreement would position the US at a long term geopolitical-economical advantage is still under debate.
Nevertheless, the TPP is also a trade agreement, and the main debate on the President’s fast track authority rests on the TPP’s impact on American jobs. The problem of focusing on the secrecy on the TPP negotiations and the TPP’s potential economic impact is that the agreement has not been fully hammered out by member nations. In fact, without providing a clear, smooth, and fast political means to accept or reject this proposal by all member states, there is no point in negotiating the fine details of the agreement, because the high cost of trade negotiations is not worth for any member states, given the current high uncertainty of the TPP’s future. If Congress does not give the President fast track authority, then TPP effectively is dead.
But if the debate focuses on protecting American jobs here in the actual territories of the USA, then the serious solution by Senator Warren and her supporters ought to focus on increasing trade barriers. One of the popular ways to criticize the TPP has been pointing out how NAFTA was a bad agreement for the average American workers due to American companies shipping most of their manufacturing capabilities abroad. Interestingly, most manufactured goods the average American sees in today's market is actually from China, which is not a member of NAFTA, but clearly there is a perception that a lot of our problems with the manufacturing jobs was caused by NAFTA.
Thus, the only logical solution for Senator Warren ought to focus not only on defeating the TPP but also withdrawing the US from pre existing trade agreements, and have the US enter into an age of trade isolationism. This would inevitably increase prices for almost everything for the American consumer, and economic growth would be severely impacted. But if trade agreements are causing the loss of American manufacturing jobs, then shouldn’t we simply increase trade barriers?
Of course, this is a straw man argument, but even a fair assessment on Senator Warren's position actually weakens her position even more. Defeating the TPP but supporting the status quo on trade agreements (as in, let the US keep the existing trade agreements but stay out of new ones) while criticizing those previous trade agreements implies that manufacturing jobs cannot be brought back from trade agreements. Then, somehow, supporting hypothetical trade agreements in which the US gets to protect its manufacturing jobs while allowing US companies to access untapped markets might be the next proposed step for Senator Warren and her supporters. Such hypothetical trade agreements could be achieved by tough trade negotiations and allow manufacturing jobs to stay home while selectively decreasing trade barriers to improve the US economy. Unfortunately, the competing interests in the global trade market guarantees that such hypothetical, grand trade agreement would never come to fruition as other countries are guaranteed to protect their own domestic markets. What does that leaves with us?
Ultimately, what Senator Warren and her supporters want is a seat at the negotiating table, where they can make sure that American manufacturing jobs and other domestic interests are protected from the trade agreement. The problem is that this will never happen. Trade agreements are time consuming to formulate, and there is no possibility that other countries would allow a US Senator a seat at the negotiating table. In the end, Senator Warren is trying to get direct influence of the TPP that she never will get, so she is attacking this unfinished agreement from outside the negotiating table to try to indirectly influence the TPP negotiations.
Perhaps, proposing increasing trade barriers under the banner of populism might be more effective than continuing her direct attack on the TPP.
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