Successful horse trading got the US Senate closer to granting the President Trade Promotion Authority for the first time since 2002. Sixty votes needed to push the process to the next step and that is exactly what happened after a deal was worked out of the Export-Import Bank, whose authorization expires at the end of next month.
In exchange for a commitment that the Senate will take up the measure next month, a small group of Senators that included two Democrats and one Republican voted in favor of the procedural motion. The next step takes place today as the Senate considers amendments to the TPA. There are three amendments in particular that are key. The first involves retaliation for manipulation in the currency market. This is controversial. Treasury Secretary Lew has indicated that if the final TPA measure includes this amendment, he will recommend the President veto it.
The argument is two-fold. First, it is not needed. Bilateral discussions are more fruitful channel. Because China will not be an initial member of the TPP (many expect it to join over the next decade), concern over its activity will not be addressed in this legislation. South Korea, which has also been singled out in recent Treasury reports on the foreign exchange market is also not going to be a founding member of TPP, but is also expected to join later.
That leaves Japan as the obvious objective of such concerns. Yet Japan has not intervened in the foreign exchange market for several years. To the extent that the yen has weakened over the last couple of years, it is in response to its aggressive monetary easing to ward off deflation. Manipulating currencies is thought to be a zero-sum exercise. It borrows (or steals) aggregate demand from another country. Interest rate manipulation is not zero-sum. It supports an expansion in aggregate demand, and especially if it spurs others into easing monetary policy as well.
The second objection is on practical grounds. The inclusion of this controversial measure could potentially sabotage the entire negotiations. A few countries could potential leave the negotiations entirely and the TPP could share the fate of the Free-Trade of Area of the Americas (FTAA) that was successful derails.
Many American politicians and media reports also miss a key point. The biggest competitor to Detroit car markers is not Tokyo, but southern states, like Alabama, Kentucky and Mississippi. Most of the Japanese cars bought in the US today are made in the US. Moreover, there has been a continental re-division of labor that now has roughly 40% of the auto jobs in North America in Mexico.
Another amendment that will be considered today is to expedite the response to charges of dumping. Dumping is when foreign producers sell their goods at “unfairly” low prices. This amendment does not seem nearly as controversial as the currency manipulation measure. It is more about tightening the already existing measures rather than a new condition or power.
A third amendment that goes against an innovation of the Trans-Pacific Partnership that allows companies to legally challenge the laws of other countries. Many people and their elected representatives in the US are fearful of the implications–not what US companies challenge other countries’ rules, but if foreign companies challenge US rules. While it seems clear that the Obama would likely veto a TPA with the currency manipulation amendment, this one is not so clear.
Next month the House will take up TPA. The Senate amendments need to be approved by the House of Representative or there will have to be a reconciliation effort. As laborious as the process has been in the Senate, the House has long been perceived as the more challenging of the two.
Some observers fear that the lack of progress on trade liberalization leads toward backsliding and increased protectionism and fragmentation of the world trading system. The failure of successfully concluding TPP would undermine the US “pivot to Asia” and leave a vacuum that China, for example, would see as an opportunity. After the mishandling of the AIIB, the failure to achieve TPP, some argue, could be a significant geopolitical setback. It could also potentially stymie reform efforts in Japan under Prime Minister Abe.