Revisiting the Secret of the TPP
By JC Collins
There is as much confusion and misinformation about the relationship between the Trans-Pacific Partnership (TPP) and the ASEAN Economic Community (AEC) as there has been regarding the integrated relationship between the International Monetary Fund and the Chiang-Mai Initiative Multilateral, and to a larger extent, the BRICS lead institutions.
Now that the TPP deal has been finalized, let’s revisit a post from back in May titled The Secret of the TPP – The Coming Interest Rate Increases and Dollar Depreciation. In that post I wrote the following explanation on what is to come:
Trade agreements of the past, such as NAFTA, have not particularly benefitted the average citizen of the United States, Canada, or any other country that has entered into FTA’s of any sort. With that being said, one of the main reasons for the continued disparity of past trade agreements is centered on the inability of authorities to address exchange rate manipulation and currency mismanagement.
This touches on the very real challenge of using the domestic USD as the global unit of account. The imbalances in trade deficits and trade surpluses has led to the financial crisis of 2008, as well as the Asian crisis back in 1997 and 1998, not to mention the ongoing threat of deflation which is growing by the day.
The accumulation of USD by all central banks has caused exchange rate disparity which broadly affects trade agreements and the overall flow of capital. This, more than anything else, is why a supra-sovereign multilateral unit of account is required, such as the SDR.
The post from May continues:
The Trans-Pacific Partnership cannot be understand in isolation from the rest of the multilateral framework which is being negotiated and implemented internationally. As such, the TPP will define the path forward for multilateral trade liberalization.
Trade agreements of the past have not addressed exchange rate management and currency disparity. The effects of this have largely been felt by the middle class, as exchange rates of foreign currencies have allowed for a flight of investment capital to emerging markets where goods could be produced for cheap and imported back into the domestic economy at exorbitant profits.
This passage captures the reality of requiring the USD to depreciate in value against the currencies of trading partners. This depreciation will allow for an increase in American exports.
The framework of the multilateral monetary system, which intends to correct the balance of payments deficits, will need to be coordinated with the negotiation and implementation of the Trans-Pacific Partnership, along with the AEC. The interest rate of the USD is directly tied to the TPP and the corresponding depreciation and multilateral exchange rate management.
With the AEC beginning on January 1, 2016, and the TPP waiting on Congressional approval before being fully ratified, much like the IMF 2010 Quota and Governance Reforms, we can only speculate on how this will exactly play out.
The leverage which the US exerted on the IMF to delay the effective start date of a new SDR basket until October of 2016, which would include the Chinese renminbi, is beginning to make more sense. This delay will allow for another American budget year with deficit spending funded by the rest of the world, and allow for more Republican delays in Congress on 2010 Reforms and TPP ratification.
The depreciation of the USD will correspond with these macro multilateral changes to the international monetary system, and how it functions. These changes are huge and will forever alter the way the world functions economically and geopolitically.
With the IMF and World Bank annual meetings beginning this week in Lima, Peru (see post On the Eve of a New Bretton Woods), and the building international momentum to bypass the United States on monetary reform, how further Republican Congressional delays on everything from the 2010 Reforms and TPP ratification plays out in the coming weeks and months will be very telling.
In addition, I find it interesting that Vietnam will benefit the most under both the AEC and TPP. Of all the countries signing up with both trade agreements, it is Vietnam which will see the largest GDP gains. This would suggest a positive outlook for a strengthening VND currency, even though the country will see an increase in imports but a decrease in exports.
The current exchange rate regime which the monetary system functions under is at the center of all agreements and reforms. This regime will change soon. – JC