Will Biden’s ‘Do as I Say Not as I Do’ Approach to Trade and Industrial Policy Help or Harm the US?

On June 15, United States Trade Representative Katherine Tai delivered a major trade policy speech advocating for the development of “resilient supply chains” to promote greater national and economic security. It is difficult to argue with such a goal; resilient supply chains are obviously beneficial for many U.S. businesses, as well as for consumers and workers. Governments and stakeholders around the world have learned in the past three years, often painfully, that long supply lines are dependent on pandemics, natural disasters, and the discretion of foreign governments, and that they are subject to changing restrictions based on national security. It has become clear that “just-in-time” operating procedures should be replaced with a more prudent “just-in-case” business model.

That being said, it will be difficult to implement such objectives without the U.S. broadly endorsing other nations’ right to promote their own “resilience” and “national security” — which many nations, including the United States’ major trading partners, see as simply a different way of describing the “buy American, invest American, employ American workers” protectionism that has been the hallmark of trade policies under President Joe Biden and the Donald Trump administration before him. The risk is that legitimate national and economic security concerns could morph into even more protectionist trade and industrial policies, with both subsidies and broad local content requirements.

Few in the U.S. would quarrel with the need to reassert American leadership in the development of innovative technologies and, as the global auto market shifts from combustion engine-powered vehicles to electric vehicles, the production of sophisticated chips and major EV components and batteries. As Tai observed in her speech:

[T]he United States faces new challenges to its economic standing in the world, including unfair competitive pressures from foreign monopolies and firms that are state-owned or state-sponsored, or whose market power is directly supported by foreign governments. We must act now to reverse these dangerous trends, which constrain the growth and dynamism of our economy, impair the creation of high-quality jobs, and threaten America’s economic standing in the world.

Moreover, protectionism in the U.S., and even its opposition by major trading partners, is not a new phenomenon. Pascal Lamy, former director general of the World Trade Organization (WTO), has noted:

In Europe and elsewhere, the adoption by the US Congress of the Inflation Reduction Act (IRA) was a thunderclap because of the protectionist nature of certain provisions allowing subsidies for vehicle electrification which are contrary to international trade law. ... After the Trump presidency and its tariff aberrations, the US under the Biden-Harris administration was expected to respect its multilateral commitments within the WTO. But this naive view ignored the fact that the shift began about 15 years ago, and that it is the product of structural forces whose actions have gradually modified the political balance in favour of trade openness that had prevailed in Washington, not without some lurching, since the 1950s.

Unfortunately, the administration will face many challenges to the effective pursuit of its goals, including the production of goods with domestic content requirements. In the case of EVs, for example, these requirements will increase production costs, making them a driver of domestic inflation and making EV producers in the U.S. uncompetitive with auto producers elsewhere in the world.

The administration’s domestic focus could also weaken the world trading system as it has developed over the past 75 years. After all, the United States has been a strong (and accurate) critic of China’s industrial policies, including its massive, WTO-inconsistent subsidies and the policies stemming from its “Made in China 2025” strategic plan. Through the plan, China openly seeks to establish world dominance in EVs, semiconductors, robotics, information technology, artificial intelligence, and other areas.

Current U.S. practices are different in degree but not in kind. This is particularly true for the EV and chip subsidies recently included in the Chips and Science Act and the poorly named and drafted Inflation Reduction Act (IRA), much of which also appear inconsistent with WTO rules —although it seems that this is no longer relevant to White House or congressional decision-making. (The U.S., of course, is not alone in having used subsidies in its industrial policies, today or in the past.) Among other things, current U.S. industrial policy makes it much more difficult to castigate flagrantly illegal Chinese subsidies or rules that give preference to domestic, rather than imported, components with any degree of credibility.

Moreover, as the U.S. moves further in this direction, other WTO members inevitably will imitate our policies and ignore any objections we raise on the grounds that the U.S. acted first. China, of course, is multiple decades ahead of the U.S. in its use of industrial subsidies and other protectionist measures and has learned to ignore WTO rules. More significantly, it seems inevitable that the EV, EV battery, and chip subsidies included in the IRA — the benefits of which exclude chip producers outside of the U.S. and trading partners that lack free trade agreements with the U.S., particularly the European Union (EU) and Japan — might encourage retaliation from other countries. In order to discourage domestic producers from moving their production to the U.S. instead of expanding at home, they might decide to enact similar programs.

Tai and National Security Advisor Jake Sullivan appear not to realize that when the White House emphasizes the overriding importance of restructuring supply chains for greater U.S. national and economic security, it is effectively forcing many other governments, including major trading partners and close allies such as the EU, South Korea, and Japan, to adopt similar policies to protect their own national and economic security (and their own producers and workers).

As trade expert Simon Lester wisely observed:

[W]here things get difficult is when you add foreign governments to the equation. What if these governments start worrying about ‘resilience’ and ‘economic security’ too? What if they decide to use domestic content requirements that keep U.S. products out? What if they ratchet up their subsidies and put U.S. producers at a disadvantage? What if they take actions that restrict U.S. agriculture exports, or digital services exports, or aircraft exports? If they do, U.S. producers are going to be harmed, and these producers will press the U.S. government to take action.

It is worth noting that the U.S. in recent decades has objected not only to protectionism in China, but also inter alia to the highly protectionist policies of major countries such as Brazil and India. U.S. manufacturing exporters and agricultural producers are both struggling with barriers to market access in dozens of countries. What happens when such governments as Mexico argue that their “national security” requires prohibiting imports of genetically modified corn in order to protect their food sovereignty?

Anyone knowledgeable about past U.S. trade practices, such as Lamy, would never suggest that the country’s past policies have been devoid of protectionism, given various restrictions on the imports of sugar, textiles and clothing, small trucks, steel, and peanuts, among other goods. At the same time, it could be argued that the U.S. has been less protectionist overall than other major developed countries, including Japan, South Korea, and the EU, particularly in recent decades. Meanwhile, it is clear that opening our markets to certain developing countries has caused American job losses, most significantly an estimated 3.7 million to China. Under such circumstances, an increase in U.S. protectionism is perhaps inevitable, and the best that can be hoped for — given the strong support of many members of Congress and the Senate, as well the current and most recent presidents — is that the policies will be administered with at least a modest level of good judgement. This should include an assessment of the risks for U.S. exporters, workers, and consumers, as well as for stakeholders in other countries.

If the risks become more evident in the medium term, as it seems almost certain they will, it may well be that the U.S. will need to draw back from its more extreme Buy American policies — cloaked in national and economic security — because they are not really achieving the desired goals and are causing problems which may or may not have been anticipated. As Lester posits:

U.S. trade policy is likely to end up where it has always been: Trying to achieve an international balance of protectionism that everyone can live with. The U.S. can try to influence that balance through unilateral measures, but that approach does not have a good track record. Where we inevitably [end] up instead is with a set of international rules — including bilateral, regional, and multilateral trade agreements — to govern things.

My principal concern is that by the time this realization occurs, climate change measures will have been delayed or partially abandoned, the U.S. economy will have been seriously harmed, and the global trading system will have been badly, perhaps irreparably, damaged. The WTO’s rules, including its dispute settlement mechanism, may have become irrelevant to members’ practices, not only for China and the U.S., but also the EU, Brazil, and India, among others. There is also a significant risk that the stricter and exceedingly complex Buy American rules will slow the adoption of EVs and clean power in the U.S., as well as increase their cost. A substantial recovery, even with the support of future U.S. administrations and other major trading nations, may require not years but decades, with adverse impacts for everyone and a decline in living standards worldwide — including the manufacturing workers in the United States that this administration is intent on protecting.

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