A Worker-Centered U.S. Dollar Policy

The Biden administration has repeatedly emphasized that it will pursue a “worker-centered” trade policy, one that benefits the middle class and not just corporations. This point has been a centerpiece of statements from U.S. Trade Representative (USTR) Tai, Secretary of State Blinken, and National Security Advisor Sullivan.  

Trade policy debates frequently veer into the realm of exchange rates, given many Americans’ belief that some foreign countries engage in harmful currency practices to undervalue their currencies and prop up exports, with the effect of hurting U.S. jobs and workers. Treasury Secretary Janet Yellen has stated that intentional targeting of exchange rates to gain commercial advantage is unacceptable and that she’d oppose attempts by foreign countries to manipulate currency values to gain such an advantage.

The United States is right to focus on harmful currency practices abroad. (This commentary uses the term “harmful currency practices” rather than “manipulation” because currency undervaluation, deemed short of manipulation, can still have unfair adverse impacts.) The “China shock” in the 10 to 15 years following the entry of the People’s Republic of China (PRC) into the World Trade Organization (WTO) coincided with a highly undervalued currency, hurting U.S. workers. To this day, currency practices, especially elsewhere in Asia, raise legitimate questions about their impact on the U.S. economy.

Thus, this discussion begs the question: What would a worker-centered U.S. dollar policy look like? Here’s a five-point agenda.

First, the Biden administration should carefully diagnose the problem. Harmful currency practices—such as currency manipulation and actions that foster persistent undervaluation—are a reality and the United States should forcefully counter them. 

But currency dynamics extend beyond the realm of trade. Currency values are driven by macroeconomic forces such as fiscal and monetary policies, capital flows, and political developments, not just trade. The volume of capital flows can easily swamp trade flows. Blaming exchange rates for trade problems when the underlying problem may lie elsewhere would be akin to shooting the messenger and could undermine the credibility of U.S. efforts to tackle harmful currency practices.

When the Trump administration pursued fiscal expansion and threatened protectionism, it boosted the dollar. The tightening of U.S. monetary policy in 2018 did the same. That meant some surplus country currencies fell and became more undervalued. Disruptions can also arise, for example, from technological change, changes in comparative advantages, and terms of trade, globalization, and value chains. 

Second, the United States should vigorously push back on excessive global imbalances and large current account surpluses, not only foreign exchange policies. U.S. workers can be hurt not only by harmful currency practices, but also by foreign growth models that rely excessively on exports rather than domestic demand. For example, Germany has a current account surplus of 7 percent of its GDP. But it uses the euro and has no currency of its own. Its whopping surplus is attributable to inadequate domestic demand.

Third, the Biden administration should support currency flexibility, minimal intervention, and transparency. Some surplus countries undertake large ad hoc interventions and build up excess reserves, persistently undervaluing currencies. They intervene more heavily to curb appreciation than they do to limit depreciation. According to long-standing International Monetary Fund (IMF) principles, countries are only to intervene to counter disorderly market conditions. Alas, Asian countries with already excessive reserves often continue intervening, cloaking their actions in terms of arguments—which have some merit—about self-insurance or the need to guard against a global financial cycle. The IMF often turns a blind eye, putting a premium on good country relations. 

The United States should advocate for flexible exchange rates with minimal intervention. It should continue to press countries to enhance transparency on foreign exchange market practices and interventions. Market-determined exchange rates are not a panacea. Yet on the whole they are better at guarding against harmful currency practices.

Fourth, the United States should strengthen diplomatic engagement to tackle harmful currency practices. The legislation underpinning the Department of the Treasury’s foreign exchange report calls for enhanced bilateral engagement with countries with harmful practices. The Treasury reports should continue to provide crisp analysis and call out those countries that merit monitoring. That should be followed by even stronger behind-the-scenes Treasury diplomacy.

Asian countries’ currency practices warrant special attention. Chinese currency practices raise far fewer issues than they did a decade ago. But economies such as Thailand, Taiwan, and South Korea have a history of large current account surpluses and intervention. Recently, U.S. efforts have targeted Vietnam.

Finally, Treasury diplomacy is no guarantee for success, and U.S. tools to tackle harmful currency practices are less than ideal. Hence, the administration should judiciously associate currency issues with trade deals and use currency trade remedies only as a very last resort. 

Over the last decade, responding to congressional concerns, associating trade deals with currency provisions has become a political reality in the United States. But, insofar as exchange rates respond to fiscal and monetary policies—for example, as with the case of the Trans-Pacific Partnership macroeconomic group—currency provisions should preferably not lie within the confines of the trade deal but independently and alongside it. 

Further, the Trump administration gave the Department of Commerce the power to use countervailing duties against currency undervaluation and USTR the ability to launch Section 301 investigations. Both actions immediately focused on Vietnam, and there are now reports that the Biden administration is considering imposing tariffs for undervaluation on Vietnam. The Department of the Treasury designated Vietnam last December for currency manipulation.

The United States is fully correct in pressing Vietnam to let its currency appreciate. But Vietnam only in recent years began running modestly sizable surpluses and building up strong reserve buffers. Its surpluses and reserve build-up fall short of others. Vietnam’s rising surpluses also in part reflect a shift in production away from China, a development that the United States encouraged. Any U.S. “undervaluation” tariffs on Vietnam would run the risk of not being seen as credible or evenhanded and could well harm efforts to strengthen ties to Asia while limiting China’s reach. 

Using trade remedies to address currency woes is potentially fraught with unintended consequences and side effects, given the potential to foster protectionism and harm consumers and the United States’ global standing. Still, the threat of deploying trade remedies could give teeth to diplomatic efforts.

Hence, the use of trade remedies such as countervailing duties (CVDs) and Section 301 investigations should be a last resort. The Department of the Treasury, which has the lead and expertise on currency and macroeconomic policy, should fully call the shots in so doing, after hearing from the Department of Commerce and the USTR. The United States should be mindful that actions such as CVDs for currency undervaluation may likely be inconsistent with the WTO.

Other remedies have been proposed as well. For example, capital controls and taxes on inflows would be harmful to U.S. financial markets and not easily targeted on offending countries. Countervailing currency intervention is conceptually elegant but would encounter serious operational and practical constraints.

Alongside the Biden administration’s worker-centered trade policy, the United States should stand ready to carefully consider the implications for U.S. currency policy and the dollar.

Mark Sobel is a senior adviser (non-resident) with the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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