US shift on trade driven by concerns about China, Trump

This piece was co-authored with Keith M. Rockwell, Global Fellow at the Wilson Center and a Senior Research Fellow at the Hinrich Foundation.

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The extraordinary message on international economic policy recently sent to US trade partners by the Biden Administration was noteworthy on many levels, not least the fact that the President chose Jake Sullivan, his national security advisor, as his messenger.

Normally the point person on international economics would be the Secretary of the Treasury, but the internationally respected Janet Yellen had delivered an important address on China the week before. President Biden might have chosen the dynamic Commerce Secretary Gina Raimundo or the lower profile US Trade Representative Katherine Tai.

Instead, President Biden chose Mr. Sullivan, whose speech to the Brookings Institution in late April must surely be the most significant speech on the economy thus far in the Biden presidency.

Mr. Sullivan modestly acknowledged the incongruity of a diplomacy and security man speaking to a room full of economists. But the selection of Mr. Sullivan was neither an accident nor an afterthought. Mr. Sullivan, who is only 46, has had a brilliant academic career and has served with distinction for more than decade for Barack Obama, Joe Biden and Hillary Clinton. More importantly, he served as Vice President Biden’s national security advisor in the second Obama administration and there is no one in his administration the president trusts more.

The speech made formal what observers had witnessed already for the past two years – a profound rupture of the longstanding US policy of multilateralism and open markets in favour of an industrial policy rooted in domestic politics.

The rationale behind this shift is rooted in two questions both of which the president believes are vital to the national security interests of the United States: keeping Donald Trump out of the White House and ensuring that the United States retains its position as the world’s pre-eminent economic and military power.

In his long career in politics, Mr. Biden has over the decades seen white, working-class people shift allegiance from Democrats to Republicans, becoming today the bedrock of Donald Trump’s support. To this segment of the electorate, Mr. Trump’s aggressive form of protectionism and government intervention in business and in the markets plays extremely well. Mr. Biden and his administration team are well aware of this which explains why, as they scrapped the bulk of Mr. Trump’s policies, they have kept in place protectionist trade policies pertaining to new trade agreements and even more so with respect to China.

Concerns about Mr. Trump run deep among Democrats. Those concerns only grew following Mr. Trump’s refusal to accept the fact of his defeat in the 2020 election and his subsequent role in influencing the storming of the Capitol on 6 January 2021. Given what the former president has said about Vladimir Putin (he’s a fan), Ukraine (not so much), climate change, defaulting on the national debt, firing tens of thousands of Federal civil servants and possibly pulling the United States out of NATO, it is no exaggeration to say that President Biden, his administration and his party see a second Trump term as a threat to the nation’s security.

Mr. Biden’s slew of industrial policy measures, from the Infrastructure Act to the Inflation Reduction Act to the Chips and Science Act, is predicated on winning over those voters whose background he shares. As a working-class kid from Scranton, Pennsylvania, Mr. Biden was the first member of his family to attend university and he takes pride in relating to the concerns of the working class.

A study from Georgetown University estimates that over 10 years the infrastructure plan will create or save 15 million jobs. According to Georgetown, 8 million jobs would be created for workers with a high school degree or less and 4.8 million jobs for workers with a high school diploma but no college degree. Currently, 90% of infrastructure jobs are held by men and many of the regions likely to benefit from the law are home to disgruntled supporters of the former president.  More jobs are likely to be created, in the United States anyway, through the Inflation Reduction Act and the Chips Act.

Which leads to the second national security factor behind the industrial policy – keeping ahead of China. The Chips Act and the IRA are also an effort to counter China’s rise by buttressing US technological know-how in semiconductors, green technology and artificial intelligence.

It is difficult to overstate the depth of distrust and animosity in Washington today towards China. This animosity is bipartisan, and it extends to every branch of government and every state in the union. There are no political points to be scored in bucking this trend – which explains why President Biden has not only kept in place the Trump applied tariffs on hundreds of billions of dollars of Chinese exports but continues the crackdown on inward foreign investment coming from China. The Biden administration seeks as well to devise a means of monitoring and possibly restricting US outward investment in China. Restraints are already in place on the transfer of AI, semiconductors or quantum computing technology. Washington has also persuaded its somewhat reluctant allies in Europe and Asia to toe the same line.

The proposed EU-US “Global Arrangement on Sustainable Steel and Aluminum“ is another example of the collaborative efforts designed to curb China’s rise. Ostensibly the plan, which Brussels and Washington hope to agree by October, is about reducing carbon emissions from steel production, but keeping Chinese steel out of the EU and US markets is very much at its centre.

Many elements of the Biden industrial policy are sound. Investment in infrastructure is long overdue, so too is a serious commitment to combating climate change even if it means prodding industry with government-led incentives or sanctions.

But some of Mr. Sullivan’s arguments – and of those in many corners of the administration –are fundamentally flawed.

The first is that somehow trade has led to “hollowing out” of the US manufacturing base and that jobs lost due to trade have set in train the gaping income inequality in America today.

“The prevailing assumption was that trade-enabled growth would be inclusive growth—that the gains of trade would end up getting broadly shared within nations. But the fact is that those gains failed to reach a lot of working people.  The American middle class lost ground while the wealthy did better than ever.  And American manufacturing communities were hollowed out while cutting-edge industries moved to metropolitan areas, “ he said.

In fact, according to the US Bureau of Labor Statistics, there are 1 million more jobs in manufacturing in America today than there were 10 years ago. According to the US Chamber of Commerce more than 40 million US jobs are linked to trade and these jobs pay far more than those with no connection to trade.  According to the St. Louis branch of the US Federal Reserve, US industrial production has risen by two-thirds over the past three decades.

Trade is a disruptor yes, and this means that jobs can be lost due to trade. But trade also creates jobs.

A far larger source of disruption today, and certainly tomorrow, is technology.  A March 2023 report from Goldman Sachs predicts AI automation could replace as many as 25% of current work in Europe and the United States.

Mr. Sullivan acknowledges in his own speech that income equality in the United States is not primarily about its commercial relations with its trade partners.

“Now, the drivers of economic inequality—as many of you know even better than I—are complex, and they include structural challenges like the digital revolution.  But key among these drivers are decades of trickle-down economic policies—policies like regressive tax cuts, deep cuts to public investment, unchecked corporate concentration, and active measures to undermine the labor movement that initially built the American middle class. And frankly, our domestic economic policies also failed to fully account for the consequences of our international economic policies,” he said. 

Exactly. Income inequality is about many things including unequal access to education, to job opportunities, to adequate health care and housing. It is also about a regressive tax system.

The second fundamental flaw with the Biden administration’s view is that it seems to postulate that the United States has not delved into industrial policy before and that, had the country done so, things might be better today. This glosses over the decades – in some cases centuries — of industrial policy implemented by the US government to prop up the steel industry, the automobile industry, the maritime industry, the textiles industry, the sugar industry and many more. On one level or another, those policies are still with us today.

The speech also projects a garbled – or at least incomplete – version of international trade policy over the last 30 years.  Mr. Sullivan says that “the main international economic project of the 1990s was reducing tariffs”.  This overlooks the conclusion of the Uruguay Round which was mainly focused on rule-making rather the liberalization.  The WTO was established, trade in services and TRIPS were brought into the global trading system, as were agriculture, textiles and clothing, alongside an array of updated GATT rules in other areas.

“Traditional trade deals” are derided by Mr. Sullivan for being centred on tariff reductions, but in fact there has been virtually no multilateral action on tariffs since the Uruguay Round, the exception being the Information Technology Agreement – in which the US was a prime mover.

It’s true that there has been some significant tariff liberalization through FTAs in the last 25 years.  However, these agreements have been promoted and implemented voluntarily by trading partners where they see mutual benefit.  The pace and content of these deals is dictated by the countries concerned and varies enormously.  There has been no rush for the exit door by countries regretting their participation.  Possibly the US could have turned the TPP into what it might regard as a more “modern” trade agreement if it had stayed the course.

The Biden administration’s aversion to trade liberalization has also played through into the negotiations on the Indo-Pacific Economic Framework (IPEF), from which the US excluded the subject of tariff reductions – to the frustration of not only many trading partners but also large swathes of the US business community.  In a May 26^th letter, many major business associations covering manufacturing, services, digital trade and agriculture regretted this decision.

These associations went further, pointing out that the negotiations even failed to address longstanding US concerns over non-tariff barriers, with the likely result that any outcomes from the talks would not be commercially meaningful.

Lastly, there is the fact that this shift in policy is straining the country’s more important alliances. Governments in virtually all countries – Russia being perhaps the noteworthy exception – are pleased to have Mr. Biden, rather than Mr. Trump, in the White House. But the self-centered nature of these programmes – buy American, picking and choosing which trading partners to favour – is not lost on these governments. Nor is the fact that the United State has thumbed its nose at its multilateral obligations in the World Trade Organization.

The sharp criticism from foreign capitals and journalists seems to have struck a nerve and Mr. Sullivan said Washington remains committed to the WTO and that the idea that US industrial policy “is somehow America alone, or America and the West to the exclusion of others, is just flat wrong.”

But on this, and much else that has been proposed in the name of industrial policy, the jury is still out.