Ford Is Right About Trade for Wrong Reasons

(Originally published here.)

Obvious forms of protectionism, such as import quotas and subsidies for exports, were eliminated by the World Trade Organization in the 1990s. No matter, states have many other ways to favor domestic businesses over foreign ones, such as discriminatory environmental and safety regulations, selective enforcement of intellectual property rules, and rigged government-procurement contracts. The WTO was supposed to deal with these questions in its Doha Round, which started at the end of 2001, though little progress has been made. That’s why the U.S. and the European Union have been working on the Transatlantic Trade and Investment Partnership while the U.S. and a variety of countries such as Australia, Japan and Vietnam have been negotiating the Trans-Pacific Partnership.

What’s missing from these new trade deals is a prohibition on one of the biggest roadblocks to free trade: exchange-rate manipulation. Fortunately, Ford Motor Co. is pushing U.S. negotiators to give it a try. We should hope it’s successful, even if Ford’s particular arguments are somewhat dubious and self-serving.

According to Ford and other U.S.-based automakers, Japanese manufacturers have unfairly benefited from the Bank of Japan’s asset purchases, which have supposedly been responsible for the yen’s 24 percent decline against the dollar since the end of September 2012. I’m skeptical. For one thing, the declining yen has gone hand-in-hand with soaring energy costs and the advent of a Japanese trade deficit, which isn’t what you would expect if the goal were increased international competitiveness. Besides, the yen is still more expensive relative to the dollar than it was in 2005, 2006 or 2007 — and the BOJ wasn’t increasing the size of its balance sheet during that period.

Ford’s criticism is also odd when you consider that the BOJ’s purchases have focused on Japanese assets rather than securities denominated in dollars. That isn’t how currency manipulation normally works. In fact, by Ford’s standard, the Federal Reserve should be penalized for spending trillions of dollars to buy U.S Treasury and mortgage bonds, even though there is little evidence that this buying has suppressed the value of the dollar.

Even so, currency manipulation is a serious issue. For instance, the Chinese government has purchased trillions of dollar-denominated assets to maintain a favorable exchange rate. This has been costly for many Americans, in part because artificially cheap Chinese manufacturing destroyed many U.S. production jobs and pushed many men into permanent unemployment.

This hasn’t stopped. According to data compiled by Bloomberg, the Chinese government’s foreign currency assets grew by about $500 billion in 2013 and now total more than $3.8 trillion. Meanwhile, data from the International Monetary Fund’s Direction of Trade Statistics show that the U.S. trade deficit with China is still widening and is now responsible for about two-thirds of the total U.S. trade deficit. China would actually be running a sizable trade deficit with the rest of the world if not for the enormous surpluses it runs with the U.S. China isn’t unique in that respect.

Bottom line: Ford may be wrong about Japan, but it’s right to want a global trade standard that penalizes currency manipulation that distorts capital flows.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at

To contact the editor responsible for this article: James Greiff at


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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