By Kenneth Rapoza, CPA Industry Analyst
New hires inside the USTR bode well for CPA view on trade, currency.
Joe Biden is filling new roles at the United States Trade Representative, led by Katherine Tai, whom we suspect will replace Robert Lighthizer. The new hires are interesting, including former Obama/Biden Treasury Department economist Brad Setser.
Setser has been critical of Ireland and Switzerland’s tax breaks to lure American multinationals. Putting him at the USTR gives CPA someone we can relate with. And while he is known as an outspoken critic of tax tricks used by foreign countries and multinationals to offshore, he is also knowledgeable of currency’s role in perpetuating trade imbalances. The overvalued dollar is a massive headwind for American exporters, but even more, it makes it cheaper for companies to source in countries with much weaker currencies, like Mexico and Vietnam.
The Trump USTR took the lead on Vietnam, which Treasury named a currency manipulator last year. It helps for USTR to have a currency economist like Setser so they don't have to rely on Treasury's view. Treasury tends to be more of the free-trader branch, and doesn’t like to rock Wall Street’s boat.
Setser replicated data used by Treasury to analyze their criteria for calling Vietnam, Switzerland and others a currency manipulator and said that they did indeed manipulate their currency based on Treasury standards in the first and second quarters of 2020.
He’s been on Vietnam’s case for at least two years. He called them, and Thailand, “currency manipulators” in 2018. Vietnam’s currency, worth less than a tenth of a penny in dollar terms, is now our fourth largest trade deficit, ahead of Germany, where we import most of our foreign pharmaceuticals and cars (after Mexico).
It’s been a longtime goal of CPA to marry, in the policy sense, exchange rates with trade imbalances. Lighthizer did it with the USMCA and now Vietnam. We advocated for currency to be considered as an unlawful export subsidy by the Department of Commerce with regards to anti-dumping and countervailing duties.
Most of the action on currency has come from Treasury which has authority over exchange rate policy and also releases bi-annual reports on whether foreign countries are manipulating. Thus far, the Treasuries reports have avoided naming manipulators and have had little effect. The USTR's role, under Lighthizer, expanded as currency provisions were included in the USMCA and Section 301 of the 1974 Trade Act has been invoked to classify currency undervaluation as “unduly burdening” US exports.
If we can get a Setser type thinker inside of Treasury, all the better because the typical Treasury officials of the past have prioritized freely floating exchange rates which, in practice, allow foreign investors to drive up the dollar and harm our real economy. Having an expert on currency and trade inside USTR keeps domestic manufacturers in the fight to make our case on currency during the Biden administration.
Setser is unique because he will be like “de facto Treasury” in the USTR. He will do all his current account and capital flow work in the Winder Building, rather than in the Treasury building.
“For years, the Treasury, like many at the Federal Reserve and the IMF, have preached the strong dollar line, afraid to rock the international currency boat even if they will admit privately the dollar is grossly overvalued. Brad is different. He brings creative thinking and a willingness to propose new solutions to the dollar currency dilemma,” said CPA Chief Economist Jeff Ferry.
Setser has written extensively on the role of both currency and taxation in trade, suggesting that the new administration could take a more expansive view on changing tax and currency policy to boost American exports and benefit workers, New York Times reporter Ana Swanson wrote on Monday.
Swanson also wrote that China critic Mark Wu, a Harvard Law professor with an extensive background in intellectual property and digital trade issues with China, was appointed as senior adviser to USTR. He is no stranger to the office, as he was the former director for IP at USTR in 2016.
Wu has been a solid critic of the World Trade Organization and China’s role in it, often saying that it has failed to deal with China’s non-market economy rise in the member organization that was geared towards market economies in the first place. He predicted a weaker WTO as recent as the spring of 2016, before the Trump era.
“The WTO faces a challenge: can the institution craft a predictable and fair set of legal rules to address new trade-distortive behavior arising out of China? If not, key countries may turn away from the WTO to address these issues,” he wrote.
We still hear the Biden administration talking about working with allies. While this may work with our Asian allies, we are doubtful that it will work with Europe, which has a different set of interests not entirely unlike our own, but not facing the same popular pushback as ours. We are pleased to see that the people filling the ranks of the new government realize we cannot possibly compete with currency manipulators and non-market economies whose goal it is to dominate supply chains in an effort to protect their own labor markets, while destroying ours.