Political pressure to create jobs in a tough economy can sometimes push a government to do things it wouldn’t do in good times – or wouldn’t do for the sake of the global market economy.
On Tuesday, Japan demonstrated that by depressing the value of the surging yen in hopes of boosting the nation’s exports. Its finance ministry had not intervened in the currency markets for six years.
China, too, is into currency manipulation. It has long kept its currency undervalued as a way to flood global markets with inexpensive Chinese goods. The US, especially some members of Congress, want this practice to end, but Beijing steadily refuses.
These sort of market-defying acts – a modern form of old-style mercantilism – reflect a desperate economic nationalism that flies in the face of global rules on free trade, or at least the spirit of them. President Obama has rightly not responded in kind.
Tokyo’s move, however, does raise the prospect of more countries, including the US, succumbing to domestic pressures for high-paying jobs. It also threatens the kind of beggar-thy-neighbor actions that can set off a race to disrupt the playing field for export industries.
Keeping a consensus on what is fair competition is essential as the world recovers from the Great Recession. The Group of 20 nations are set to meet this November in South Korea. Their leaders must agree on not using certain tools like exchange rates to lift their economies.
Many nations are now looking to exports for growth, especially those that have relied on an export-led economic model, such as Japan. The fact that the Obama administration didn’t publicly object to Tokyo’s currency intervention hints at a certain US sympathy for Japan as that country tries to get out of a long-time stagnant economy. The yen has lately reached a 15-year high in value.
But the US silence could also be read as a green light for other nations to follow suit. So far, Mr. Obama, who appears to be a free trader, has shown leadership in the export game. Last January, he launched an initiative for better promotion of US goods and services overseas (99 percent of American companies do not sell abroad). He set a goal of doubling exports within five years.
US exports this year have been rising, helped mainly by a weak dollar (which makes them less expensive). The Obama initiative will be tested if nations resist US demands to open their markets further to American exports. Just how much pressure will the US bring to bear on such countries?
Obama can set an example for free trade by further pushing Congress to pass three pending trade pacts negotiated with South Korea, Panama, and Colombia. And rather than support punitive measures against China, as two bills in Congress would do, he must rally support from other nations to put pressure on Beijing to let its currency float on global markets.
Reasserting basic trade principles is essential as nations search for ways to recover from the economic downturn.
Rather than pushing more export subsidies or practicing currency trickery, they can boost export competitiveness through better research, education, and infrastructure. Big economies such as China, Japan, and Germany, must also look more to raising domestic demand as a way to spur economic growth.
The US, as the world’s largest exporter of goods and services as well as being the largest economy, must set the best example for other nations.