The Founded in 1981 with C. Fred Bergsten as its Director, the Peter G. Peterson Institute for International Economics is admired around the world for its expertise on trade and investment issues and for the dialogue it fosters.  Adam Posen is the President of the Institute, and on March 26 he weighed in - big time - on the hotly debated question of whether the United States should insist on currency language in TPP and other trade agreements. 

The occasion was a Peterson Institute conference on "Abenomics: Progress in Reforming Japan's Economy," which was put on with support from the Sasakawa Peace Foundation.  Dr. Posen more than got his audience's and the world's attention with the somewhat biting manner in which he began his comments on currency and trade. 

Identifying his topic as one that "starts with the U.S.-Japan aspect but becomes a general issue," Dr. Posen continued:

Really, this is all context, with just a little attitude thrown in.  Arresting as that last passage is, it is an attack of sorts, and we would have been inclined to pass on it but for two other considerations.  The first is that Dr. Posen followed it up with a fairly thorough and very compelling argument.  The second is that  his willingness to face the currency issue and its elements in unvarnished detail suggests that Washington may indeed be looking at near term decisions on the big issues: TPA and TPP.
 
We can't do justice to the full presentation, but there is a Youtube clip of it on line and an unedited (but very good) transcript of it on the Peterson Institute's website.  To whet your appetite further, here are some excerpts from Dr. Posen's treatment of some of the underlying issues.

The Value of the Chinese RMB.  In the past China had "egregiously" intervened in currency markets, Dr. Posen said, but the situation today is very different.  Changes in China's assessment of her own interests are part of the story, but Mr. Posen also gave high praise to successive U.S. administrations for their handling of the issue with China.  "What we have seen," he said, "is a succession of diplomatic initiatives that have led to China's changing its behavior, without a direct cost to the U.S. and without an escalation or spillover into other areas."

The Value of the Japanese Yen.  Yes, Dr. Posen said, "the yen has depreciated enormously over the last years."  He attributed much of that to quantitative easing and noted that a) Japan's overall trade balance has gone into deficit and b) "the bilateral surplus with the United States has barely moved."

The Effect on the U.S. Automobile Industry.  Where Japan and the yen are concerned, the debate about the effect of currency values in the U.S. tends to be focused on the auto sector.  "There is very little correlation between Japan's share in the U.S. auto market and the yen rate," Dr. Posen said.  Perhaps that is because, as he pointed out, "70 percent of the value of all [Japanese] autos sold in the U.S. is manufactured in the U.S."

Dr. Posen also took issue with the notion that Detroit has been greatly harmed by R&D subsidies to the Japanese car makers.  "When you sit on a cash pot of $5 billion," he said, "to complain [that] you can't keep up with a supposed R&D subsidy of $100 million seems a bit absurd."

The U.S. Has Been the Loser from Trade Negotiations.   This complaint, Dr. Posen said, doesn't square with the data, which suggests that the U.S. is in fact doing better than an analysis of the fundamentals would suggest it should.

We are tempted to add a comment.  Always looking ahead, trade negotiators habitually take the position that the other fellow got the better the deal.  It's a good posture for the next negotiation.  That's only true, however, if political leaders successfully play up the benefits of those same deals.  In the U.S., they have arguably failed on that score.   And so the myth of poor, swindled America persists.

The Likelihood that the U.S. Could Prevail on Currency.  As today's featured quote suggests, this is not an argument America can win.  A currency provision in an agreement like TPP would, Dr. Posen suggested, amount to imposing an onerous constraint on countries like Vietnam, one that could keep them from successfully riding out "the basic macroeconomic cycles in the world."  It's is not just a hard sell.  It is an impossible sell.

Don't let the bad idea of a currency mandate get in the way of good trade agreements, starting with TPP.  That was Dr. Posen's clear advice to Congress.  Separately, he also had some strong advice for Prime Minister Abe, who is due in Washington later this month.  We'll deal with that in a later entry.