This is How the Trade Pact Escalates the Currency War

When negotiators from 12 nations and hundreds of lobbyists from around the world, after years of horse-trading, agreed on a “trade deal” on Monday – a deal that remains secret except for the sections that have been leaked – President Obama gushed that it “reflects America’s values.”

The Trans-Pacific Partnership (TPP) pries open markets for American goods and services and impose rules on our trading partners that give “our workers the fair shot at success they deserve,” he said.

Similar praise ricocheted around the Pacific from Prime Minister Stephen Harper in Canada, and from politicians and heads of state in Australia, New Zealand, Japan, and the other participating countries. China isn’t part of the deal, but what the heck.

The free trade deal isn’t actually about “free trade.” Many provisions that have been leaked deal with reshuffling the power structure between corporations and democratic states at the expense of citizens and taxpayers.

So now this thing has to be ratified in the 12 countries involved. There might be one or the other hiccup – for example, Hillary Clinton has just come out against it to gain points in her battle to the presidency. “As of today, I am not in favor of what I have learned about it,” she told PBS, thus flip-flopping beautifully from when she, as Secretary of State, had backed the deal.

Despite these potential hiccups, delays, flip-flops, and re-flip-flops, I expect it to get ratified eventually by all 12 countries. Too many deep pockets have lined up behind it to let some elected politician screw it up.

Alas, there remains a little problem: does it really promote exports, which is what they all claim it does, or is that just hype?

That’s the question Krishen Rangasamy, Senior Economist at Economics and Strategy, National Bank Financial, in Canada asked in a note – and then provided the answer: um, no.

He used trade data for countries with which Canada has free trade agreements to see if Canada was exporting more to them after trade agreements had been signed. It found that there would be, of course, “winners and losers” in Canada, but “there’s no guarantee net benefits will be positive.”

Previously protected industries will be under siege from foreign imports, while our exporters will only be able to take advantage of the TPP’s lower tariffs if they are offering better value than the competition.

But he hasn’t seen the actual TPP text either, which remains secret. And if he has seen it, he’d get in big trouble disclosing its contents. Instead, he is looking at actual trade data – the aftermath of prior trade agreements, including NAFTA.

And here is what he found:

[B]enefits from a trade deal become apparent when the currency weakens, i.e. the share of exports going to countries with which Canada has a trade deal tends to rise when the C$ depreciates. And as the 2003-2011 period illustrates, the opposite is true when the loonie appreciates.

This is his chart with data through Q2 2015 that shows this relationship between the loonie (dotted red line, right scale) and the share of Canadian exports to “free trade” partners (blue line, left scale):


So exports to those countries increased as a portion of total exports only when the Canadian dollar was devalued against these other currencies. And the share of those exports fell when it gained in value.

Total exports to all countries are also expected to move this way with the currency – but the trick here is that the proportion of trade-agreement exports moves within that total, thus multiplying the impact of currency fluctuations on exports.

To get any export benefits from the free trade agreement at all, the currency has to be devalued against the currencies of partners in these deals. And that would be a redoubling of the incentive to escalate and win the currency war by devaluing one’s own currency faster and more steeply than other countries are devaluing their currencies.

But these trade partners are looking at the same charts, and they see the same redoubled incentives to devaluing their currencies faster and more steeply to benefit from the trade deal on their end. Thus, the race to the bottom is built into these trade deals.

And if, by a miracle, currencies remain largely stable to each other, the promised uptick in exports – the benefit Obama has offered American workers – will be exposed as plain hype designed to cover up whatever the real purposes of these deals may be.

Left out of the deal, China isn’t sitting still, as the yuan gains “staggering momentum as major currency,” according to SWIFT. And it comes out of the hide of other currencies. Read… Not the “Death of the Dollar” but “Death of the Euro?”

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  17 comments for “This is How the Trade Pact Escalates the Currency War

  1. Sgt Milstar says:

    So the whore with the cheapest price will be the winner here. The starving other whores will have to lower their prices to compete. Am I missing something here?

  2. VegasBob says:

    Not one trade agreement since Ronald Reagan signed CBERA (Caribbean Basin Economic Recovery Act) in 1983 has been a net benefit to American workers. Not one. Rather, I’ve watched as millions of decent-paying manufacturing jobs have left the USA since the mid-1980s, only to be replaced, if at all, by low-wage service sector jobs.

    Every one of these trade agreements is beneficial only to the already wealthy – specifically corporate executives and shareholders. I ought to know since I worked in Fortune 500 Corporate Finance for many years.

    Everything we do seems to benefit only the wealthy at the expense of the formerly middle class. It’s a tossup between the Federal Reserve and America’s politicians as to which has caused more damage to the country’s economy.

    I wonder how much longer it will go on before the people decide they have finally had enough…

    • Nick says:

      You can’t fight the future. Robotics and automation are increasingly replacing those previously ‘low cost’ Chinese factory workers. Those manufacturing jobs are never coming back, because soon they won’t exist anywhere. The only solution is invest in education and prepare people for the new economy.

  3. Jonathan Vause says:

    you can’t have a free trade agreement with any country that doesn’t allow the value of its currency to be determined on a free FX market. or at least, you can, but you’re probably going to get screwed

  4. Nico says:

    Yes the This trade pact is so good the contents must be kept secret from us,the citizens and in Australia we have plain packaging on cigarettes,the American cigarette companies hate this.Under this TTP
    These same companies can now effectively sue Australia for loss of earnings.How is this a great deal.
    Vegas Bob you summed it up beautifully.

  5. Dan Romig says:

    The mere fact that this deal is being kept secret tells the truth as to what is is. It “reflects America’s values.”? Obama’s American values seem to be drone strikes, regime changes (Libya & Syria) and a ruthless attack on truth-telling whistle blowers.

    Obama is quite talented at making speeches and painting pictures for those who want to believe him, but this TPP is not good for the citizens he swore an oath to protect when inaugurated. He and the NSA have used the Bill of Rights as if it was toilet paper, and the TPP is just another piece of liberty and sovereignty being taken away from our nation.

  6. Petunia says:

    Mrs. NAFTA doesn’t support a trade deal she helped to negotiate. Let’s see how long this lasts before she flip flops again. I voted for Bill Clinton the first time he ran and I am still SORRY I didn’t vote for Perot instead.

    • Red Flag says:

      Dieboldt would make sure Perot didn’t win, not matter who voted for him. There are no elections, just electronic votes. Watch the movie, it will end your illusions about any voting. They showed “audited” machines tallying negative voting records!

  7. Vespa P200E says:

    All the free trade pacts US negotiated resulted in countless eliminations of better paying mfg jobs with benefits. Winners are all kinds of corporations, farmers and especially the drug companies who are influenced by their lobbyist handlers.

    And trade pact with countries who don’t play by the game rule set forth by WTO and currency manipulators are meant to kill more US middle classes.

  8. merlin says:

    Middle-class America is departing the station on the entitlement train to complete government dependency.

  9. d'Cynic says:

    I could add another statement on TPP from Obama: “We can’t let countries like China write the rules of the global economy.” So that’s what it’s about as far as the US is concerned, AND because the US is concerned. But is it too little too late? The previous effort to contain China dates back to the Clinton presidency, and involved fast tracking China’s entry into the WTO – and it has worked marvelously for China. It has developed it’s own rules regarding foreign investment, and managed to suck the West dry of it’s technology.

    • Red Flag says:

      US govt and elites GAVE the US manufacturing and all its intellectual capital to the Chinese. They sold the US out. Now, TPP wants to retain control of the field they ceded. Today, Obama’s military announced it wanted to retreat in Syria. How stupid are the elites? For all their clever plans, we all know who they are now and what they plan. I was a foolish idealist ten years ago, thinking the Clinton’s were ok. I even voted once for O. Now? I’m a complete “Close the Federal Reserve” supporter. It’s way too late to save the economy they wrecked here…it will be rebuilt when they are gone, by the small business people who built the US at its start. Notice all the empty stores? The big ones are empty and the tiny ones are hiring.

  10. markjones says:

    The Uk signed up to a Common Market in 1975 , that became the EEC European Economic Community , that became the EC European Community that became The EU the European Union. Now we are trying to get a Referendum to get out of the EU . I think with the might of the Politicians and the Media against us we will fail . Dont you Asian countries
    fall for the same scam it was the aim of gaining Political Control over all involved all long , the politicians that signed us up admitted they lied to us after it was too late.
    Monumental deceit: How our politicians have lied and lied about the true purpose of the European behemoth

  11. Duane Snyder says:

    I like Hilary’s little qualifier, “as of today, I am not in favor…..”. “As of today”, “which could mean she could change her mind it later when it’s convenient.

Comments are closed.