Sen. Charles E. Schumer (D-N.Y.) speaks to members of the media on May 14 at the Capitol, after the Senate approved a measure to crack down on currency manipulation by trading partners. (Alex Wong/Getty Images)
The following is a guest post by political science doctoral candidate Rob Galantucci of the University of North Carolina – Chapel Hill.
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As the United States negotiates two historically large trade agreements, the Obama administration’s trade agenda faces a hurdle concerning currency policy.
Several prominent members of Congress recently insisted that the controversial Trade Promotion Authority (“TPA”) legislation should be considered in tandem with proposals addressing currency manipulation. Despite the apparent support for currency-related action by Congress, there is reason to remain skeptical that these proposals will ultimately make it into law.
Currency realignment legislation has been brought up on a number of previous occasions, as exchange rates are an increasingly large part of the U.S. trade policy debate. This is not surprising: In many cases, the two policy areas are directly related. From the perspective of a export-oriented business, currency devaluation can improve the firm’s competitiveness by reducing the relative cost of its products compared to foreign producers; trade protection can have a similar effect. The connection between the two policy areas is well-established, as currency appreciations have been shown to increase demands for trade protection. But if currency manipulation by U.S. trade partners is detrimental to many domestic firms, why has so little been done to address undervaluation, in particular by China?
As it turns out, there are a diversity of preferences held by U.S.-based economic interests with respect to exchange rates. Research in political science has demonstrated that an industry’s preference for a weaker currency is most pronounced when the industry competes primarily on price, rather than through product differentiation. Firms that need imported inputs also prefer a stronger U.S. dollar. Other research has demonstrated that firms engaged in multinational production may be less likely to seek trade protection, notwithstanding currency misalignment.
Thinking more practically about the effects of potential currency legislation, many firms worry that an aggressive stance by the United States on the currency issue could lead to a broader economic conflict. In particular, these firms are concerned with provisions in recent currency legislation that would impose punitive tariffs on countries deemed to be “currency manipulators.” Such a step would result in increased costs for a variety of U.S. interests, such as retailers and consumers. Additionally, beyond any trade policy measures imposed by the U.S. government, China might very well retaliate with changes to its own trade and investment policy.
Accordingly, the politics of a potential currency bill are complex, with legislators’ positions on currency realignment shaped by the extensive and multidimensional interdependence between the United States and the presumptive target of such legislation, China.
A statistical analysis of legislators’ positions on currency bills suggests that the considerations highlighted above influence congressional behavior. Legislators with ties to business interests that are economically dependent on China often withheld their support for the legislation. For example, representatives from districts that export extensively to the Chinese market were far less likely to support the bills. Legislators who receive a large proportion of campaign contributions from retailers and the financial sector (who have an interest in a stable U.S.-China relationship) were also more likely to oppose such legislation.
In contrast, legislators representing economic interests that directly compete with China and are not heavily reliant on the Chinese economy were most likely to support the legislation. These findings highlight the wide range of considerations that shape the posture of firms and elected representatives towards exchange rate policy. They can also help to explain why two presidential administrations and some members of Congress have repeatedly declined to take a hard line on the currency issue.
Whatever the ultimate result of the various currency proposals now being considered, the controversy highlights the importance of understanding legislative behavior on the issue. As members of Congress hash out positions on this legislation, they will be considering how such proposals affect trade, exchange rate and investment policy. These issue areas are necessarily intertwined, and cannot be considered in isolation. Additionally, policymakers must (and do) consider how these policies might trigger responses from key economic partners.
Surely, many members of Congress have determined that currency undervaluation is detrimental enough to domestic producers that the United States must pass legislation to force trade partners to allow their currencies to appreciate. The question remains as to whether enough legislators are now sufficiently moved by the issue to make its resolution a precondition for future trade negotiations.
Even if currency provisions are not considered directly in conjunction with TPA, however, there are still major implications surrounding such legislation. A failure to address undervaluation could mobilize trade-skeptic constituencies and erode legislative support for trade agreements down the road, and — after all — these agreements must face a vote in Congress, regardless of the status of TPA.
