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The Next Treasury Secretary Will Have A Big Impact On Trade

November 19, 2020

By Kenneth Rapoza, CPA Industry Analyst

Will Steve Mnuchin remain as Treasury Secretary in a Trump second term? What about Joe Biden? Who are his top picks if he becomes President in January?

People don’t often think about the Treasury Secretary in terms of trade policy but they should. Leadership there has a big impact on currency policy and on customs protection at the ports.

The two names circulating the DC rumor mill for new Treasury Secretary under a potential Biden Administration won’t be any real departure from Stephen Mnuchin, so that means a new US Trade Representative is going to be crucial for the White House’s China trade roster.

If President Trump holds office, we might get Mnuchin again. For China, he was the good cop while Robert Lighthizer was the bad cop. Given that Lighthizer also had Trump on his side, and Peter Navarro, Mnuchin was outnumbered just enough to permit a serious pushback on the status quo in regards to China. 

If Joe Biden is declared the winner, it looks like Lael Brainard, a member of the Federal Reserve Board of Governors since 2014, and ex-Fed chair Janet Yellen are the candidates he might start in January 2021.

Yellen is believed to have a slight edge at the moment. Being from the Fed, both women are free traders. We are going to get a better sense of the next four years once we know who the counterweight will be on trade matters at the USTR.

In a perfect world, Lighthizer would stay at the USTR, or have a say in who takes his place.  

We know where Trump stands on China and would expect more of the same in a second term. But while Biden's USTR list is incomplete and unclear, his Treasury names are more in focus.

Gaming that out should he be sworn in as president next year, we see that Brainard has handled China issues before, though no one would call her a heavy hitter. She was Treasury’s undersecretary of international affairs under President Barack Obama, where she supported a tougher stance on China trade. She oversaw eight reports reviewing the currency practices of major trading partners; reports which cleared China of currency manipulation each time. The documents noted China’s lack of transparency and said the yuan was “significantly undervalued” but never called China a “currency manipulator.”

Bloomberg seems to believe she was in favor of labeling China a currency manipulator, but Brainard never said that herself on the record. 

At Treasury, Brainard forged a reputation as a savvy negotiator who tried to pressure China to allow market forces to guide its currency.  

“China’s persistent exchange rate undervaluation in the years following its admission to the WTO is a vivid example of the impact China’s policy choices have on the international system. From the time China joined the WTO to 2006, its trade-weighted exchange rate depreciated by 15 percent, adjusting for inflation,” she said in a speech back in 2012. ”The strains placed on the global economy sorely tested the legitimacy of the WTO and the IMF. From day one, we have stressed that this approach is bad for China and unacceptable to the United States.” 

The American Prospect’s Robert Kuttner wrote recently that Brainard has been more open to the progressive wing of the Democratic Party, at least in terms of the Bernie Sanders approach to an anti-free trade policy, one no longer geared towards keeping financial services and global corporations happy. Still, we are seeing her keep that wing happy primarily on matters of climate change. That has more to do with financial risk assessment, however, rather than trade protection against China polluters. 

Her husband, Kurt Campbell, is a former Obama-era Assistant Secretary of State for Asia and now CEO of The Asia Group, a consulting firm helping companies do business in Asia. In his role at State, Campbell was focused, too, on the RMB -- so we can imagine this DC power couple were on the same page.

But by 2015, the IMF blessed the RMB as part of its Special Drawing Rights, the IMF currency basket. Since then, despite President Trump arguing that the Chinese central bank would devalue the RMB to compensate for tariffs, the question of currency manipulation has become moot. Even China hawk Chuck Schumer in the Senate is done jawboning about China’s currency.

If it comes down to Brainard or Yellen, we'd prefer Brainard.

Since early 2019, Yellen has warned that Trump and Mnuchin should not pressure Beijing to keep the RMB stable. She also hates tariffs.

“The uncertainties created by the ups and downs in President Trump’s tariff wars with other countries — that’s having some negative, direct effects on the U.S. economy and on the global economy. But the most important impact around the globe is that it is creating huge uncertainty about what are the rules of the game,” she said in September 2019. 

If Mnuchin gets retired, his replacement will be in charge of enforcing sanctions, and in China’s case, enforcing the restrictions against Chinese companies on the Commerce Department’s Entity List. This includes major multinational corporations like Huawei. We doubt Trump would pick a replacement who is weaker on these matters than Mnuchin.

But if Biden goes with Yellen, the former Fed chief said she is not keen on starting a tech war with China and hinted back in January at a conference in Asia that she is against dividing the world along technological lines. At that conference, without naming the specific bans, she said the pace of technological advancement could slow and complicate the launch of new commercial applications.

"Losing synergies would be a very negative development. I hope we will not go there," Yellen said. 

Ultimately, come January, we will need a strong USTR to balance the pro-Wall Street tradition of the Treasury Secretary position. Moreover, the US will still struggle to build its manufacturing base and balance trade if the Treasury keeps the dollar flexing its muscles against the euro and every other emerging market currency.

The dollar's strength is largely due to Japan and European institutional investors pouring money into US stocks and bonds. The securities market is our biggest source of foreign inflows. A strong dollar makes it more interesting for companies to offshore because it gives companies here more purchasing power, and it increases labor arbitrage between the US and lower wage countries like Mexico, China, and all of southeast Asia. To keep manufacturing strong, and help it recover post-pandemic, we will need a Treasury Secretary that understands the dollar's role and a USTR that remains unrelenting in correcting the impact China has on American industry and its labor force.

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