There weren’t many lines in President Obama’s State of the Union that Republicans applauded. But the GOP did get behind the President’s insistence that Congress countenance an expedited approval process for a free trade deal—called the Trans-Pacific Partnership (TPP)—his administration is negotiating with 12 other Pacific Ocean nations, including Australia, New Zealand, and Japan.
The TPP was supposed to be the one issue that the President and Congressional Republicans could agree upon, but the odds don’t look so great anymore. In recent weeks, Senate Republicans have expressed reservations about the deal, specifically its failure to address concerns that American trade partners are manipulating their currencies to boost exports.
In a paper released Wednesday by the Economic Policy Institute, economist Robert E. Scott quantified these concerns, estimating that the U.S. economy has lost hundreds of thousands of jobs to countries like Mexico and South Korea because free trade agreements with those nations did not include provisions that prevented currency manipulation. Of the nations participating in the TPP negotiations, Japan is by far America’s biggest trading partner. And according to Scott’s analysis, the U.S. trade deficit with Japan has cost America $125.3 billion in GDP and “displaced 896,600 U.S. jobs” in 2013 alone.
The causes of the U.S. trade deficit are multifaceted, but Scott argues they are primarily driven by differences in currency policy. He points out that while in recent years both the U.S. and Japanese central banks have purchased large quantities of their own government debt to drive down interest rates and stimulate growth, Japan has also bought a massive amount of dollar-denominated assets. This has driven down the value of the yen and inflated the value of the dollar, making it harder for U.S. exporters to compete. He argues that the 55% decline in the dollar-value of the yen from 2011 to today has had a direct relationship to Japanese purchases of foreign assets, which have increased from $400 billion in 2011 to $1.7 trillion today, or 35.4% of Japanese GDP.
Scott’s logic has convinced many in Washington that new trade deals should not be struck unless they take into account our trade partner’s monetary policy. As Michigan Senator Debbie Stabenow, a Democrat, said in a press conference announcing the release of the report, “I want to export our products, not our jobs. Our business and workers lose when other countries cheat.”
It might not be surprising that the left-leaning EPI and Democrats in Congress are skeptical of the trade deal, but the Republican Party is also taking note of of Scott’s arguments. In a speech to the right-leaning American Enterprise Institute last week, Republican Orin Hatch, the Senate finance committee chair, said, “Our job creators and workers also need to have confidence that their hard work is not being unfairly harmed by currency manipulation.”
Hatch argued that the Obama Administration has dropped the ball on this goal. “The Obama Administration has done such a poor job here that many members of Congress simply don’t have confidence that this problem is being properly addressed,” he said.
Trade Representative Michael Froman said in a Congressional hearing last month that the fight against currency manipulation should be done by the Treasury Department, rather than through free trade treaties, and the President reportedly told Congressional Democrats in a recent closed-door meeting that the negotiations are too far along to include provisions barring currency manipulation.
Hatch submitted a bipartisan bill to the Senate last month that would refuse to grant the President negotiating powers for the treaty without greater consultation with Congress and a promise to include such provisions. In other words, it appears the the TPP, a free trade deal which would cover roughly 40% of global GDP, might come undone because of the esoteric issue of currency manipulation.