USMCA currency provisions set a new precedent

Just before midnight on September 30, the United States and Canada announced they had “reached an agreement, alongside Mexico, on a new, modernized trade agreement for the 21st Century: the United States-Mexico-Canada Agreement (USMCA).” Although much of the USMCA builds on the existing NAFTA, a significant difference is the addition of a chapter on macroeconomic and exchange rate policies. This could serve as a precedent for future US trade agreements with other trading partners.

What was agreed in the USMCA on currency?

Chapter 33 of the USMCA, Macroeconomic Policies and Exchange Rate Matters, affirms the three countries’ commitment to market-determined exchange rates and adherence to the International Monetary Fund’s (IMF) Articles of Agreement to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.”

The Chapter’s transparency and reporting requirements call for public disclosure of monthly data on international reserve balances and intervention in foreign exchange markets, quarterly balance of payments data—including exports and imports—and other public reporting via the IMF.

In addition, it establishes a Macroeconomic Committee among the three countries that will meet at least annually to monitor implementation. If one party believes the policies and measures of another violate policy and reporting commitments, it can initiate a bilateral consultation process, and the IMF can be invited to engage if parties in dispute fail to agree.

Finally, the agreement specifies that parties have recourse to the USMCA’s dispute resolution mechanism for any alleged failure to meet Chapter 33’s transparency and reporting obligations (but not for substantive matters such as market intervention or alleged manipulation of foreign exchange rates).

How does Chapter 33 of USMCA compare with what was agreed in the Trans-Pacific Partnership (TPP)?

The addition of a chapter on macroeconomic and exchange rate policies explicitly acknowledges the relevance of such policies to trade. Chapter 33’s structure and much of its language echo the Joint Declaration of the Macroeconomic Policy Authorities of Trans-Pacific Partnership Countries, a side agreement that was released at the same time as the full text of the Trans-Pacific Partnership (TPP) and was to take effect when the TPP entered into force. For instance, the USMCA’s transparency and reporting requirements differ from the Joint Declaration’s in only minor respects — both mandate the establishment of a macroeconomic committee for annual multilateral discussions of the parties’ policies and designate the IMF as an independent arbiter.

However, a significant difference between USMCA’s Chapter 33 and TPP’s Joint Declaration is that Chapter 33 is included within the core text of the USMCA itself, which means that certain commitments under the agreement are legally enforceable. In contrast, the Joint Declaration was a side agreement, which omitted reference to the TPP enforcement framework altogether. (The Joint Declaration appears to have fallen by the wayside during talks on the TPP’s successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP.)

What are the implications of these new commitments?

The United States, Mexico, and Canada already have floating exchange rate regimes and currently meet the transparency and reporting requirements under Chapter 33, so the practical impact of Chapter 33 on current policies and practices of the three countries is limited.

However, with the inclusion of Chapter 33, the USMCA explicitly covers macroeconomic and exchange rate policies for the first time in a trade agreement. Previous US administrations have resisted this linkage in order to avoid any threat to macroeconomic and exchange rate policy independence. In practice, the agreement tries to have it both ways by including the new chapter but narrowing the scope such that it “does not apply with respect to the regulatory or supervisory activities or monetary and related credit policy and related conduct of an exchange rate or fiscal or monetary authority of a Party.” It’s notable that the agreement would allow the Macroeconomic Committee to consider amendments to any provisions of Chapter 33 except with regard to its scope—meaning there is little appetite to expand the very limited scope of the chapter.

By setting a precedent, the Trump administration is likely to insist on similar commitments in future trade negotiations. The Treasury Department had already reached an “understanding” with South Korea on similar currency commitments to update the U.S.–Korea Free Trade Agreement (KORUS), although in the case of KORUS, the agreement was not formally re-opened and no enforceable provisions on currency have been added.

One should expect the United States to raise the issue in upcoming trade negotiations with Japan, which President Trump has periodically accused of currency manipulation in public statements and tweets, not to mention any future trade discussions with countries that have appeared on the U.S. Treasury Department’s Monitoring List of “major trading partners that merit close attention to their currency practices and macroeconomic policies,” e.g., China, Korea, and Germany.

The Trump administration is likely to find support for such an approach in Congress where concerns about currency manipulation have been a constant refrain. For their part, trading partners’ fiscal, monetary and financial authorities are likely to strongly resist binding currency commitments in future trade agreements.

James Smyth, CSIS Simon Chair research intern, contributed to this piece which first appeared as Critical Questions on csis.org.

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