Janet Yellen Seems to be Rethinking Globalization, Too

Over the last few weeks, a rash of thought leaders, from Larry Fink of BlackRock to the editorial pages of The New York Times, have done vast rewrites of globalization. It’s finally over, was the takeaway, after years of hand-wringing on the subject by the likes of The Economist. At best, it will never be the same. Treasury Secretary Janet Yellen seems to have joined the chorus.

In a speech at The Atlantic Council on April 13, Yellen said, “Our objective should be to achieve free but secure trade. We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage.”

This isn’t necessarily a slight against China. In fact, Yellen only mentioned China with respect to its support for Russia, calling on Beijing to act as a moderator of sorts to convince Moscow to end the war.

But on issues of key raw materials, China is an important player. No other country has majority positions in U.S. supply chains like China does. It is the OPEC of American manufacturing needs, and that includes rare earth metals that are used in advanced manufactured goods, like fighter jets.

She also did not mention the recent lockdowns in Shanghai which have upended shipping from the world’s most important port. This will surely lead to massive and serious supply chain disruptions in the weeks ahead. This is all due to allowing countries to have an oversized market position in the United States.

Yellen spoke of reshoring, though she called it “friend-shoring”, a term that of course means nations in Southeast Asia, Mexico, and Europe, where most of our trade deficit is situated.

We should favor “the friend-shoring of supply chains to a large number of trusted countries, so we can continue to securely extend market access,” she said, adding that it would “lower the risks to our economy as well as to our trusted trade partners.”

Yellen’s comment here squares with Washington’s approach to collaborating with allies. The previous government had similar aims, discussing trade relations that were given special tariff rates if they were democratic nations.

China has Permanent Normal Trade Relations status with the U.S., as do most countries. Russia was recently removed from PNTR due to its war in Ukraine. Washington moved swiftly on this. China has tariffs due to the Section 301s imposed by the Trump administration, but since the Biden administration has taken over, hundreds of new exemptions were recently authorized.

What has PNTR meant for China?

China entered the World Trade Organization in 2001 and was allowed to keep its 25% tariffs on cars as it built out its own automotive sector. The U.S. allowed for a 2.5% tariff, giving Chinese-made vehicles a 10x price advantage. That only changed in the Trump years, when he imposed an additional 25% tariff on Chinese cars and trucks.

Moreover, Section 201 solar safeguard tariffs were removed on double-sided solar panels, mostly all of them made in Asia by Chinese companies.

Yellen said, “a modernized trade system will also require the ability to effectively enforce trade policies and practices, both multilateral and bilateral.” Most of this was in relation to digital services.

“This is good rhetorical movement by Yellen. But it’s not clear whether her 20th Century globalist beliefs have changed,” said CPA CEO Michael Stumo.  “Just last week she said that U.S. must work hard with China to avoid a bipolar global financial system. Before that she advocated cutting Section 301 tariffs on China. We must increasingly decouple from China to stop funding its regional and global domination aspirations, so we can grow industries and jobs here.”

Global Tax Policy & Enforcement

The Treasury Secretary is supportive of a unified corporate tax system, a move that would make it harder for companies to offshore their taxable revenue to fiscal paradises like the Caymans and even Ireland.

“We should implement last year’s global tax deal,” she said.

Some 137 countries accounting for 95% of global GDP have already agreed in theory to reconfigure international tax rules and impose a global minimum tax on corporate foreign earnings and to partially reallocate taxing rights from countries where companies are headquartered to those where they sell goods and services.

“This tax deal is necessary to end the race to the bottom in corporate taxes and to reform profit reallocation rules that, by demanding a physical nexus to a taxing jurisdiction, no longer reflect modern economic realities,” Yellen said about the Organization for Economic Cooperation and Development’s tax agreement “By ensuring that profitable corporations pay their fair share and operate on a living—level playing field, the deal will provide governments around the world the resources they need to invest in their people and economies.”

That OECD agreement associates some taxing rights based on sales or revenue location. This tax right is a limited form of the idea of Sales Factor Apportionment promoted by many American domestic companies.

Yellen also spoke about supply chain disruptions.

Bottlenecks and delayed shipments caused by the pandemic lockdowns, coupled with the 8-weeks long war in Ukraine, should force countries to “build on and deepen economic integration and the efficiencies” that work better for American workers, she told The Atlantic Council.

She continued to make the case for integration and interdependence rather than a more independent domestic supply chain, where plausible, saying we should integrate “with the countries we know we can count on.”

Yellen is not making the case for reshoring critical supply chains to the U.S.

“We need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials,” Yellen said.

The transcript of her speech can be found here.