The Biden Administration Tries a New Strategy on Trade
A Trade Policy that Acknowledges American Workers
In a recent speech by National Security Advisor Jake Sullivan, the Biden Administration signaled a shifting strategy on trade. The core of this shift is supporting American leadership on global trade while acknowledging the needs and concerns of American workers.
Fracturing the Free-Trade Consensus
In the first decade and a half of the 21st century, there was a fundamental failure by policymakers to adjust trade policy to the needs of working-class Americans. They assumed everyone was behind free trade, simply because it was good and supposedly aligned with American values.
They failed to consistently communicate these benefits to American voters or address the obvious downsides to anyone living in a community based around manufacturing and heavy industry. The result was obvious during the 2016 election.
Donald Trump largely won the Republican nomination by channeling populist rage against elites who weren’t perceived to be acting in their interests. He directly challenged America’s trade policy for shipping jobs overseas and overthrew the free trade orthodoxy of his party.
On the Democratic side, Hillary Clinton endured a strong insurgent challenge for the presidential nomination from Senator Bernie Sanders. Sanders identified as a democratic socialist and came from the pro-labor, anti-corporate tradition in American politics. He was openly hostile to trade deals that reduced American wages and hollowed out blue-collar communities.
Due to this, Hillary Clinton came out against the recently negotiated Trans-Pacific Partnership (TPP) to head off Sanders’ primary challenge. Donald Trump opposed it as well, but more to consolidate his base of supporters. The result was the first significant challenge to free-trade orthodoxy since it became the dominant approach in trade policy during the Reagan presidency.
In my opinion, it was one of the great geopolitical miscalculations in this early part of the century, in the same league as the invasion of Iraq. Why do I say this?
The Geopolitics of Free Trade
Ostensibly an international trade pact, the TPP was primarily about geopolitics, specifically the emerging great power competition between the United States and China. Ten years of negotiation had produced a complex trade treaty that normalized economic policy across multiple economic sectors, removed trade barriers and united 12 countries of the Pacific Rim in a powerful trade bloc that accounted for 40% of global trade.
China was conveniently left out.
Similar to the way Euro-Atlantic integration was used to contain the Soviet bloc during the Cold War, the TPP had similar goals respecting China and its emerging aspirations for hegemony in East Asia. But it did so with trade relations absent security cooperation, which would have been overly provocative at that time.
What would have been the result of ratifying the TPP? As early as 2016, it would have facilitated diplomatic cooperation among the signatories in the security and geopolitical spheres. With control of the shipping lanes connecting the Chinese mainland to the Pacific and Indian Oceans, it would have been significant leverage to alter China’s exploitative trade behavior.
It also would have been a powerful signal to Russia and China that America was serious about building, extending, and upholding an international order based broadly on liberal principles. It would have reduced the temptation for China and Russia to team up as a block of revisionist powers.
But instead of preventing a direct challenge to the world order, we invited it by calling our commitments in East Asia and Europe into question. Now, we must rebuild the open trade policy that TPP sought to implement, but in much less favorable conditions.
The first step is shoring up support at home, which was the goal of Jake Sullivan’s recent speech. The core of his approach was to reframe free trade around the goal of maximizing the economic well-being of Americans. This means, in some instances, deviating from free-trade orthodoxy in certain limited areas. But this is a necessary trade-off to uphold the broad outlines of the policy.
Critics deride this as an example of industrial policy, which it is to an extent. But it’s necessary to undercut the Trumpian narrative of global free trade at the expense of the American worker. The story Sullivan tells exaggerates the downsides and uses them to justify a strategy of building a fairer, more durable global economic order. This is a good and noble goal, and this high-level strategic approach may mitigate the downsides of industrial policy.
The Four Challenges
Challenge 1: Deindustrialization
“First, America’s industrial base had been hollowed out.”
Sullivan began his speech by outlining the four challenges America faces that create headwinds for trade policy. The first challenge is primarily domestic and is the one that figured so centrally in 2016. And it’s our philosophy of being overly deferential to markets in all cases. This is why the plight of the American worker is now so lamented.
While the hollowing out of American manufacturing is often discussed, it is oversold. America is still a manufacturing powerhouse, but it’s for capital-intensive goods that require highly skilled technicians and specialized technical knowledge. Everything else has been outsourced to places where labor is abundant and cheap.
Communities that relied on less capital-intensive manufacturing and the jobs they provided have been disproportionately affected with little acknowledgment or compensation. Additionally, the globalization of supply chains left many communities vulnerable when COVID hit. The need for resiliency in the face of crisis must be factored in.
Challenge 2: Geopolitical Competition
“The second challenge we faced was adapting to a new environment defined by geopolitical and security competition, with important economic impacts.”
We must now account for geopolitical factors while setting economic policy. As mentioned previously, the TTP and the new Indo-Pacific Economic Framework (IPEF) are just as much geopolitical documents as they are trade documents. The fact that some powers are hostile to the existing order and would like to revise it to better fit their interests must be considered.
China was one of the great success stories of integrating a closed society into the global system. However, our approach to China has created a mismatch. We’ve allowed China, which is now an advanced economy, to continue to operate under the rules of a developing economy. Economic integration and growth did not result in a China more amenable to the liberal international order.
In fact, this approach may have encouraged China to simply bide its time and build power until it could challenge the world order. It was certain that the world would continue to follow free-market orthodoxy and not stand up for itself. The time to change that perception is now.
Challenge 3: Climate Change
“The third challenge we faced was an accelerating climate crisis and the urgent need for a just and efficient energy transition.”
Climate change is an issue that affects everyone, not just Americans, and requires global coordination and governance that transcends economic self-interest. American economic leadership must involve mitigating the incredibly costly impacts of climate change.
The global economic system must assist the green energy transition by supporting emerging technologies and providing access to financial instruments to invest and deploy them. Treaties need to be structured so that individual countries are making equitable contributions to fighting climate change.
Essentially, the world’s worst carbon emitters must bear most of the burden for mitigating the impacts of climate change. Additionally, the countries that bear the highest costs from climate change must be given assistance. A global cap and trade system with carbon credits sold in auctions would help with this.
“Finally, we faced the challenge of inequality and its damage to democracy.”
Challenge 4: Populism
Social turmoil creates domestic political risk for the American system. Our policy of growth and free markets at all costs increased income inequality and social resentment, which manifested itself most dramatically on January 6, 2021.
However, this was simply the culmination of a long-simmering populist rebellion. Without justifying the more violent aspects of this rebellion, we can adjust economic policy to try to mitigate these types of political problems. We also must be aware of how the economic policies we push in trade deals affect the domestic situation for countries on the other end.
Foreign Policy for the Middle Class
How does Sullivan propose we build a global economic policy that can overcome these four challenges? Rather than being prescriptive, he lists a series of steps and a general blueprint for getting us there.
“The first step is laying a new foundation at home — with a modern American industrial strategy. “
The crux of this is identifying key economic sectors with implications for national security and future competitiveness and directing public investment there. This led to the creation of the internet, and more recently has fostered the growth of the American semiconductor and green energy industries.
These sectors must be protected from intellectual property theft, and the United States and sympathetic countries must maintain a technological advantage. We want a coalition of aligned nations creating a unified economic block around similar policies.
What he is pointing towards is not so much a continuation of previous American trade policy with a nod to populism. It’s fundamentally rethinking how we approach trade and economic partnerships that considers them in the context of geopolitical competition and transnational challenges.
“moving beyond traditional trade deals to innovative new international economic partnerships focused on the core challenges of our time.”
Rather than define 21st-century economic policy goals based on a pure free-market orthodoxy, we should identify goals and challenges first, then identify solutions that align with our values and protect American interests.
This means focusing on the interests of the American middle class not only to head off the domestic pressures that led to shuttering the TPP, but also because it’s the right thing to do. The lesson is the American government must be seen as acting on behalf of Americans and must pursue strategies crafted to advance their interests.
It truly is a balancing act, and in the context of international trade policy involves trade-offs in the well-being of all the countries party to a negotiation. But the American government must represent Americans first, with an understanding that the well-being of the world is also in their interests.
Part of ensuring American interests are safeguarded in the growing international economic order is that developing countries do not fall into the orbit of our competitors. However, rather than lecturing them about why aligning with Russian or Chinese interests is bad, we should demonstrate that aligning with an American-led order is in their interests.
This means making trillions of investment dollars available to developing countries. It means offering financing without predatory terms and without the expectation of pledging significant national assets as collateral. Essentially, it’s a matter of offering more money on better terms than the other guys.
“mobilizing trillions in investment into emerging economies — with solutions that those countries are fashioning on their own”
This is meant to be an explicit counter to the emerging China-Russia block and their effort to build economic ties in the developing world. Many countries are insolvent on poorly structured loans offered through China’s Belt and Road initiative, and now find they must turn over valuable infrastructure.
These loans seem attractive on the surface since neither China nor Russia make demands on the domestic policy of debtors up front. They also do not lecture these countries on internal practices. While America should never give up its commitment to human rights, it must also recognize that developing countries want to see the money and the commitment first.
In addition to countering revisionist powers in the developing world, we also must consider the overall balance of power in the global system. For America to maintain an advantage, it cannot allow innovations in emerging key technologies with military implications to escape beyond America and her allies.
“Finally, we are protecting our foundational technologies with a small yard and high fence”.
One goal of the sanctions on the Chinese semiconductor industry is to prevent China from developing AI capacity. It also keeps a potentially hostile power from having control of key supply chains that it can leverage to assert its interests. It also helps us reinforce the Great Firewall that China built in the first place to ensure that digital technology is not used to export Chinese surveillance around the world.
Conclusion
The second decade of the 21st century saw the rise of a significant domestic challenge to American free-trade orthodoxy. This led to the abandonment of American engagement in international trade policy and reinforced a perception of American disengagement with global issues.
The Biden administration is now making a significant effort to restore American leadership on this front by fundamentally rethinking our strategic framework. Rather than pursuing ideological orthodoxy, they are formulating an approach that considers the needs of the American middle class as well as geopolitical and transnational challenges.
Hopefully, what comes out of this is an enduring framework for American trade policy that can ensure American economic leadership around the globe far into the 21st century.
Sources
McBride, James and Andrew Chatzky. “What Is the Trans-Pacific Partnership (TPP)?” Council on Foreign Relations. Date unknown. Accessed May 19, 2023. https://www.cfr.org/backgrounder/what-trans-pacific-partnership-tpp.
Solomon, Howard J. “Strategic Consequences of U.S. Withdrawal from TPP.” RAND Corporation. March 2, 2017. Accessed May 19, 2023. https://www.rand.org/blog/2017/03/strategic-consequences-of-us-withdrawal-from-tpp.html.
Sullivan, Jake. “Remarks by National Security Advisor Jake Sullivan on Renewing American Economic Leadership at the Brookings Institution.” The White House. April 27, 2023. Accessed May 19, 2023. https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/04/27/remarks-by-national-security-advisor-jake-sullivan-on-renewing-american-economic-leadership-at-the-brookings-institution/
Wong, Ee Lyn and Ritsuko Ando. “U.S.-led Indo-Pacific talks produce deal on supply chain early warnings.” Reuters. May 27, 2023. Accessed May 19, 2023. https://www.reuters.com/markets/asia/us-led-indo-pacific-talks-produce-deal-supply-chain-early-warnings-2023-05-27/.