Currency Devaluation and the Threat of Global Currency War

moneyThe rapid devaluation of the Japanese yen has created fresh fears of global currency instability. Citing perennially slow economic growth, Shinzo Abe—the newly elected Prime Minister of Japan—decided to crackdown on deflation through aggressive monetary policy easing that would significantly devalue the yen. However, policy-makers from the EU and the US have decried Japan’s move as an attempt to gain a competitive trade advantage by cheapening its currency so that its goods and services cost less, thereby increasing export trade. The Euro in particular has seen a marked rise that may hurt the EU’s economic recovery if growth and demand for European goods were to slow down.  Japan has stressed that it is not deliberately trying to devalue its currency, saying the yen’s decline has more to do with a market correction following a period of strength. Nevertheless, there has been heated rhetoric demanding that Japan halt, or at least slow down, yen devaluation.

In order to diffuse tensions, the G7 (Group of Seven) countries—comprising the US, the UK, France, Germany, Italy, Canada, and Japan—said they would “consult closely” on any action in foreign exchange markets. Furthermore, the G7 avoided criticizing Japan and stated that “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” Japanese policy-makers were reassured by the announcement and according to Taro Aso, the Japanese finance minister, the statement “properly recognizes that steps we are taking to beat deflation are not aimed at influencing currency markets.”

The statement by the G7 comes ahead of a meeting of G20 finance ministers and central bankers in Moscow on Friday. It is expected that Japan will come under scrutiny for its currency policy. Hopefully, the members of the G20 will be able to reach some sort of agreement to regulate and resolve tensions that have arisen from exchange rate discord in order to avoid a potential currency war.

Posted by: Matthew Goldberg

Sources: New York Times, Reuters, Financial Times, CNN Money, Finance Enquiry

Photo Credit: Forex Money for Exchange in Currency Bank courtesy of flickr user epSos. de

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Live Webcast August 8:The Trans-Pacific Partnership and the Future of International Trade

The Program on America and the Global Economy(PAGE), the Asia Program, the Canada Institute, the Kissinger Institute, the Latin American Program (LAP) and the Mexico Institute with the Support of Wilson Center Senior Scholar William Krist Presents:

 The Trans-Pacific Partnership and the

Future of International Trade

Wednesday, August 8, 2012

2:00 – 5:00 pm

2:00 pm – 2:40 pm KEYNOTE:  Ambassador Demetrios Marantis, Deputy U.S. Trade Representative

2:50 pm – 3:50 pm PANEL 1: New and Future Participants
Canada: Laura Dawson, President of Dawson Strategic and a Former Public Policy Scholar, Woodrow Wilson Center
China: Jeff Schott, Senior Fellow, Peterson Institute for International Economics
Japan: Edward Lincoln, Professor, George Washington University
Mexico: Luz Maria De La Mora Sanchez, Professor of CIDE, former Public Policy Scholar, Woodrow Wilson Center
Moderator: Kent Hughes – Program on America and the Global Economy

4:00 pm – 5:00 pm PANEL 2: Key U.S. Interests
Jim Grueff, Trade Consultant and former trade negotiator for the Foreign Agricultural Service
Linda Menghetti, Vice President, Emergency Committee for American Trade
Celeste Drake, Trade Policy Specialist, AFL-CIO
Stephanie Burgos, Senior Policy Advisor, Oxfam America
Moderator: Kent Hughes – Program on America and the Global Economy

Watch the live webcast here.
Posted by: PAGE Staff

Guest Contributor William Krist: Negotiations for a Trans-Pacific Partnership Agreement

The only major current trade negotiation that the U.S. is engaged in at this time is the negotiation for a Trans-Pacific Partnership (TPP) Agreement with eight other nations in Asia and the Americas.  And Canada and Mexico are expected to join the negotiations in December.  If successful, the resulting free trade area would include Australia, Brunei Darussalam, Canada, Chile, Mexico, New Zealand, Peru, Singapore, and Vietnam, as well as the U.S.  With multilateral negotiations in the WTO now stalled, the TPP offers the best opportunity for additional trade liberalization.  More importantly, if done right, this agreement could provide a template for future WTO negotiations and for a broad agreement with the 21 member nations in Asia Pacific Economic Cooperation (APEC) forum, a group of 21 Pacific Rim countries that includes China, Indonesia and Russia.

Negotiators made progress in the most recent round of negotiations held in San Diego from July 2 to 10, although there are a number of controversial issues that remain.  The next negotiating round is scheduled for September 6 to 15 in Leesburg, Virginia, although it is unlikely that negotiators will resolve the critical issues until after the U.S. presidential election.

Click here to view a background paper on the TPP and key issues.

 

 

William K. Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment.  Anthony Gausepohl is his Research Assistant at the Woodrow Wilson Center.

The Global Economy’s Missing Piece

With China’s growth stalling and Europe fighting to stay afloat, the world economy is in desperate need of a superhero that will help it stabilize and prosper. In tough times of the past, markets could always rely on the monetary toolbox and the fiscal leadership of United States to prevent global catastrophe. However, in a recent article in Foreign Policy Journal, the German Marshall Fund’s Kati Suominen explains why this time the U.S. will not be there, and what implications that has for future global governance and economics.

Suominen discusses how following World War II, the United States was the global economy’s “quarterback,” leading the offensive with the Bretton Woods summit and the creation of the groups of five, seven and eight who would later establish the World Trade Organization (WTO). During that time, the U.S. dollar became the standard for much of the world’s reserve currency, and the effects of the Federal Reserve Bank’s decisions spanned far beyond Constitution Avenue. She deduces that globalization didn’t just appear out of thin air, but was rather a “U.S.-led order that generated prosperity unimaginable only a few decades ago.” And it was from this “American-led order” that the Asian Tigers boomed and G-5 became the G-20, with “emerging nations such as China and India demanding greater power at the table.”

Suominen notes that while this “U.S.-made” system brought prosperity it also brought more challenges and America saw its credibility around the world chip away facing great fiscal uncertainty and a massive trade deficit. While she does not blame this all on President Obama, she does criticize his administration for deflecting the responsibility of Europe’s debt crisis to Germany and leaving any promise of economic recovery in the BRIC’s hands. From her criticism, she makes four critical recommendations: impose fiscal discipline and promote long-term policy, better integrate the world marketplace with a freer exchange of ideas and resources, equip the IMF with the tools to solve financial risk, and incentivize the international community to enforce many of regulations and protections already in place. Suominen concludes that the “new world order arouse because of American strength, vision and leadership…today, American leadership is again essential.”

Posted By: Jonathan Sherman

Sources: NPR

Photo Credit: G-20 Summit in Pittsburgh courtesy of Flickr user International Monetary Fund

The Tangible Effects of Austerity

One of our recent blog posts discussed the debate about austerity in Europe and here in the United States.  But what specific components of the economy will be affected by austerity measures and what effect would those measures have on the U.S. economy as a whole?

Both Europe and state economies within the U.S. have tried their hand at significant budget cuts so it’s worth examining the fallout in both cases.  Budget cuts have been heavily focused on areas like public education (both higher and lower), infrastructure, and research and development.  This is not by coincidence.  These areas, especially education, along with social welfare programs usually make up the majority of discretionary spending in state governments (particularly in large states like FL and PA) and state legislators and many governors have made public promises to not raise taxes under any circumstances.  Without the prospect of raising revenue through taxes, austerity (i.e. reducing deficits) can really only come in the form of budget cuts, and those cuts are most likely to come from those sections of the budget listed above.

Unfortunately, spending in education, infrastructure and manufacturing, and innovation is necessary for American competitiveness in a global economy and many have argued, most notably President Obama and his economic team, it is a surefire way to stimulate the economy.

The macroeconomic effects of the austerity experiment in Europe and at the state-level are muddled enough in terms of growth and job creation that it has been declared both a success and failure.  As such, the debate is still in full swing at the federal level as the U.S. approaches its so called “fiscal-cliff” at the end of this calendar year.

The cliff, and the debate itself, will have several components.  The first is whether or not to extend the Bush tax cuts and if so, to whom?  Similarly, programs for payroll tax deduction ($120 billion) and extended jobless benefits ($40 billion) will expire at yearend unless they are renewed.  And lastly, the types of budget cuts that have occurred in state and European governments discussed above are set to go into effect with mandatory 10% cuts on all discretionary spending beginning January 2013– reducing federal expenditures by $85 billion.  The mandatory cuts are part of the Budget Control Act that was passed last year after the debt-ceiling fiasco; the compromise that ended the standoff mandated that the cuts begin in January 2013 if Congress had not agreed to a debt reduction plan by that time (which of course, they have not).

With that date approaching, the austerity debate will become as prominent in Washington as it is in Brussels and in state capitols across the country.  If the mandatory cuts and tax increases occur, the nation’s GDP will likely lose several percentage points.  But even if there is a resolution, budget debates will continue and education, infrastructure, and R&D will all be on the chopping block.  The budget proposed by Rep. Paul Ryan (R-WI), the Chair of the House Budget Committee, has become the de-facto fiscal platform of the Republican Party and proposes significant cuts to all the areas discussed above.  Meanwhile, President Obama continues to insist that spending in such areas is a national priority.

The role of things like education, innovation, and infrastructure are central to America’s economy in a globalized market.  Policy makers would do well to carefully consider and debate any cuts to those areas and not simply sacrifice them for politically harder issues like defense spending and tax reform.

Posted by: Sean Norris

Sources: The New York Times, Forbes, CNN, The Guardian, The Telegraph

Photo Credit: Paul Ryan courtesy of flickr user Gage Skidmore