William Krist's Blog, page 8

Majority of Americans Take a Dim View of Increased Trade With Other Countries

When considering the costs and benefits of increased trade with other countries, a 59% majority of Americans say the United States has lost more than it has gained, according to a Pew Research Center survey conducted in April.

Overall, the public’s attitudes about trade have changed little since 2021. However, Republicans’ views have become more negative.

Nearly three-quarters (73%) of Republicans and Republican-leaning independents now say the U.S. has lost more than it has gained from increased trade. That is 8 percentage points higher than in 2021.

Democrats and Democratic leaners remain divided on this question. Half of Democrats say the U.S. has gained more than it has lost, while 47% say the opposite. Democrats were similarly divided on this question in 2021.

Demographic, educational differences in views of increased trade

Americans with at least a four-year bachelor’s degree are more likely than those with less formal education to say increased trade with other countries has more benefits than costs for the U.S.

Nearly half of college graduates (47%) say the U.S. has gained more than it has lost from increased trade, compared with about a third of those with less education (31%). These differences are evident in both parties.

There also are differences in both parties by race and ethnicity as well as family income. And Republicans differ by age on this issue.

Among Democrats

60% of Asian and 53% of White Democrats say the U.S. has gained more than it’s lost from more trade. Hispanic and Black Democrats are less positive about the impact of greater trade (45% and 42%, respectively, say the U.S. has gained more than it has lost).




Upper-income Democrats (62%) are more positive about the impact of increased trade than are middle- (52%) or lower-income Democrats (42%).

Among Republicans

White Republicans are particularly critical of the growth in international trade: Just 22% say the U.S. has gained more than it’s lost. About a third of Black and Hispanic Republicans also say this (35% and 33%, respectively), as do 49% of Asian Republicans.




There are relatively modest differences among Republicans by income, but upper-income Republicans are somewhat more likely than middle- and lower-income Republicans to view increased trade positively.




Younger Republicans are more likely than older Republicans to say the U.S. has gained more than it has lost from increased trade.

Trade is a low-priority issue for most Americans

While trade with other nations is an issue in the 2024 presidential campaign, it is not a top concern for most Americans. In our 2024 policy priorities survey, dealing with global trade ranked near the bottom of 20 policy goals asked about.

In our April survey, we asked respondents to weigh the benefits of more trade (“it has helped lower prices and increased the competitiveness of some U.S. businesses”) against the drawbacks (“it has cost jobs in manufacturing and other industries and lowered wages for some U.S. workers”).

Another recent survey by the Center found considerable public skepticism about the benefits from U.S. trade with China, but not with Canada. Nearly half of Americans (47%) said China benefits more from the U.S.-China trade relationship than America does. Only 14% said the same of U.S. trade relations with Canada.

When asked about free trade agreements generally – without context – Americans are more supportive: In July, 65% of Americans say that, in general, free trade agreements between the U.S. and other countries have been a good thing. But there are wide partisan differences in these opinions. Roughly eight-in-ten Democrats (79%) say free trade agreements have been good for the U.S., compared with only about half of Republicans (53%).

Shanay Gracia is a research assistant at Pew Research Center.

To read the full short read as published by the Pew Research Center, click here.

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WTO Members Seal Plurilateral E-Commerce Deal – US Opts Out

WTO members concluded a plurilateral agreement on e-commerce after five years of negotiations.

If and when the agreement comes into force, it will represent the first set of global ground rules for digital trade.

A statement released by the three co-convenors of the so-called ‘joint statement initiative’ – Australia, Japan and Singapore – confirmed that participants had “achieved a stabilised text”.

The new agreement “recognise[s] the importance of global electronic commerce and the opportunities it creates for inclusive trade and development, and the important role of the WTO in promoting open, transparent, non-discriminatory and predictable regulatory environments in facilitating electronic commerce,” the co-convenors said.

“The agreement is set to benefit consumers and businesses involved in digital trade, especially MSMEs. It will also play a pivotal role in supporting digital transformation among participating members,” their joint statement adds.

United States wants stronger security exceptions

Nine of the 91 participants in the negotiations – including the United States – declined to be associated with the declaration.

A footnote stated that “due to ongoing domestic consultations and considerations, this statement is circulated on behalf of joint statement initiative participants, except for Brazil, Colombia, El Salvador, Guatemala, Indonesia, Paraguay, Taiwan, Türkiye and United States”.

The US government said the text released today represented “an important step forward for the WTO in a sector of growing importance to the global economy while demonstrating the supportive role that JSIs can play in revitalizing the WTO’s negotiating function”.

But it added: “As the United States has repeatedly communicated to the co-convenors and participants, the current text falls short and more work is needed, including with respect to the essential security exception”.

“We look forward to working with interested members in finding solutions to all remaining issues and moving the negotiation to a timely conclusion.”

Dissenters focus on permanent ban on import duties on e-commerce transactions

The other eight dissenters primarily have issues with the article which commits its signatories to a permanent ban on the imposition of import duties on digital transactions.

This clause is subject to a review five years after the agreement enters into force. But the text of the agreement may only be amended by unanimity: this makes a reversal of the commitment not to impose duties highly unlikely in practice.

Countries such as Indonesia, Brazil and Türkiye have repeatedly expressed concerns about being compelled to give up the option of applying import duties on digital products.

A global moratorium on the imposition of duties on digital products has been in force since 1998 and renewed at the WTO every two years.

The future of the moratorium hangs in the balance. At the MC13 ministerial conference in February, WTO members said deal will lapse in 2026 unless extended by unanimity once again.

The threat of a lapse gives added significance to a plurilateral commitment by a group of WTO members who encompass between them around 90% of global digital trade to keep digital cross-border transactions duty-free.

What’s in the agreement

The ‘Agreement on Electronic Commerce’ as it is now officially called, runs to 38 articles, plus a two-page annex on telecommunication services.

The provisions are classified under five broad themes.

Enabling electronic commerce: This section includes provisions on maintenance of an electronic transactions framework, electronic authentication and e-signatures, electronic contracts, electronic invoicing, paperless trading, the creation of ‘single windows’ for data submission, and electronic payments.

Openness and electronic commerce: This part includes an article banning customs duties on electronic transmissions, as well as provisions on open government data and access to the internet.

Trust and electronic commerce: This section includes articles on online consumer protection, unsolicited commercial messages (i.e. ‘spam’), and personal data protection.

Transparency, development and cooperation: This part contains articles on each of these three themes in turn. The article on development specifies that developing countries and LDCs may have a grace period of up to 7 years to implement provisions which they may find tricky, and that financial support should be made available to them.

Telecommunications: The agreement states that “each party shall ensure that its telecommunications regulatory authority does not hold a financial interest or maintain an operating or management role in a supplier of public telecommunications networks and services”.

The accord consists of a number of firm legal commitments interspersed with looser expressions of intent. The word ‘endeavour’ appears 32 times in the text, while the word ‘encourage’ makes 11 appearances.

In many cases – such as personal data protection – the agreement does little more than require participant countries to apply and maintain legislation to govern this topic.

Attempts to reach agreement on basic principles to govern such regimes foundered in the negotiations, given the very differing approaches taken in jurisdictions such as the EU and US.

Nevertheless, even the minimalist principles set out in the accord are viewed by most observers of being of value, given that some of the developing countries involved in the negotiations do not currently have such regimes in place.

Review within two years

The agreement is designed to grow and evolve, in recognition of the rapidly-developing digital trade environment.

Signatories are due to review of the agreement “no later than two years after the date of entry into force of this agreement, and periodically thereafter,” the text says.

“Taking into account the evolving nature of electronic commerce and digital technology, and recognizing the importance of establishing global rules for electronic commerce […] the parties recognize that further negotiations may include outstanding issues […].”

This gives the participants the option of returning to questions which were left out of the final agreement because of failure to reach consensus.

These include provisions relating to data transfers, localisation of data storage, or transfers of source code.

India likely to oppose incorporation into WTO law-book

The agreement would be governed by the general WTO dispute settlement process, which would give the non-optional elements of the accord some teeth.

But access to dispute settlement will be dependent on whether or not the agreement is ultimately incorporated into the WTO’s treaty architecture, as its proponents would like.

Earlier this week, a small group of countries led by India and South Africa blocked a second attempt to have a similar plurilateral agreement, covering investment facilitation, accepted as a full WTO agreement.

The objections of these two countries – who were not among the 91 participants in the talks – are expected to extend equally to the new e-commerce agreement.

Governments and business welcome deal

The deal has nevertheless been welcomed by governments around the world, and by business organisations.

The European Commission said it “proudly supports” what it described as “the first-ever set of global digital trade rules”, while the UK government said that “global adoption of digital customs systems, processes and documents could significantly grow the UK economy”.

The Global Services Coalition and Asia Pacific Services Coalition said that the deal “will be the defining 21st century moment for the multilateral trading system and not a minute too soon for global economic development, MSME revival and jobs growth.”

“Today’s announcement demonstrates that the WTO negotiating function can deliver through a plurilateral process,” said Annette Meijer, president of the European Services Forum.

“This deal has the potential to deliver benefits for European businesses in every sector of the economy and to reduce the cost and complexity of international commerce and support trust and security for European consumers” added Pascal Kerneis, the Forum’s managing director.

To read the full article as it was published by Borderlex, click here.

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Using Trade to Tackle Climate Challenges

Annual temperatures are at the warmest levels since record keeping began, bringing urgency to government, business, and individual efforts to stem the climate crisis. At the same time, the transition away from fossil fuels and towards more sustainable and renewable sources of energy is upending economies, requiring transformations of manufacturing industries and investments in new industries such as batteries and other “green” technologies. Against these trends, policymakers are juggling their climate mitigation efforts while still encouraging current and future economic growth.

As the U.S. government advances its goals at home using a range of domestic economic tools, trade policy provides an avenue to expand decarbonization efforts globally. John Podesta, President Biden’s climate envoy, spoke at Columbia University earlier this year and acknowledged the fundamental nexus between trade and the environment, calling for the creation of a task force to look at how trade policies can contribute to solving urgent climate challenges. “The stakes couldn’t be higher,” Podesta said. “But I believe if we make the right choices, we can create and maintain millions of good-paying jobs in the clean energy economy of the future. We can mobilize billions in private investment in countries around the world. We can accelerate technological innovation and position nations to overcome the challenges of today and tomorrow. And we can do it while protecting our planet for ourselves and our children.”

Since 2020, the World Trade Organization (WTO) has also taken a more expansive view on the range of topics where trade could help address climate and environmental challenges. On July 4th, WTO Deputy Director General Paugam stated, ”…(W)e are at a crossroads in the multilateral system, with an opportunity to shape a global win-win approach for trade and the environment. We can combine green transition, green industrialization and trade cooperation. This is what “reglobalization” is about. And the time to act is now.”

The U.S.’s most ambitious environmental trade commitments are in the U.S.-Mexico Canada Agreement (USMCA), which allows countries to continue with domestic climate initiatives while encouraging cooperation on environmental goals and calling for a level playing field in these efforts. The work is ongoing, but separate and siloed from the other aspects of USMCA. Moving forward, there is an opportunity to incorporate climate as a core consideration in all aspects of future agreements, adding an additional priority to the existing goals of reducing barriers to U.S. exports, protecting U.S. interests competing abroad, and enhancing the rule of law.

Imagine if U.S. trade negotiators asked “Will this help (or hurt) climate change” for each issue in their negotiation and then used all aspects of trade, supply chain or economic security agreements to create positive (or negative) incentives to accelerate climatemitigation efforts. Topics such as subsidy rules, market access (tariffs), and non-tariff barriers could be recast to tackle climate concerns in new and more aggressive – and possibly more effective – ways. New mechanisms like carbon border taxes and other “domestic” policies with international implications could also be used to accelerate efforts to both reduce carbon and ensure a level playing field for countries with stringent rules. But such a focus may need to be balanced with other politically important priorities, such as development, economic growth, and employment.

Penelope Naas is the Lead, Allied Competitiveness Initiative, German Marshal Fund, and an Advisor to the Trade Experettes

Trade+&+Climate+Paper+

To read the full paper as published by the American Leadership Initiative, click here.

To read the full paper, click here.

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The European Union’s Proposed Duties on Chinese Electric Vehicles and Their Implications

The European Commission can take a better route than imposing countervailing duties on Chinese electric vehicles.

European Union countervailing duties (CVD) on certain types of electric vehicles (EVs) from China went into effect provisionally on 5 July. The duties are being imposed based on a European Commission finding that China’s EV subsidies represent potential injury to EU industry as it transitions away from the internal combustion engine. EU imports of EVs from China are surging, but still represent a small share of EU car sales. Most imports from China originate from joint ventures of EU and Chinese manufacturers, and from Tesla, which is the largest importer. 

In the meantime, China is starting its own investigation into some EU exports, such as cognac. The EU has initiated consultations with the government of China to resolve the dispute, as it must do under the World Trade Organisation Subsidies and Countervailing Measures Agreement. Under WTO rules, China cannot retaliate unless it challenges the EU measure and a dispute settlement panel rules in its favour.

The CVDs range from 17.4 percent to 37.6 percent of the import price, on top of the EU’s 10 percent tariff on imported vehicles. They represent a formidable barrier in an industry where average profit margins are typically in the range of 4 percent to 8 percent. The CVDs will affect all EVs imported from China regardless of whether the original equipment manufacturer (OEM) is Chinese, American or European. Here, we offer an economic and political (as opposed to legal) analysis of the CVDs.

Methodology behind the CVDs

The Commission methodology for identifying subsidies and countervailing them is well established. Reflecting the importance of the EV sector, the regulation implementing the CVDs is the result of a comprehensive investigation, encompassing extensive consultations with Chinese firms, EU firms, the Chinese government and Chinese trade associations. Identifying subsidisation in China’s opaque system is challenging, especially since, as the regulation documents repeatedly, the Chinese government and several of the Chinese entities covered were uncooperative. 

The regulation details how the Chinese government has prioritised the EV value chain (materials, batteries, vehicles) since 2010. Of course, the EU and the US are also prioritising EVs in their quest for decarbonisation. However, the Chinese state and Communist Party hold large sway over the Chinese economy, including state-owned and private corporations and powerful industry associations. Thus, the Chinese government adopts a ‘whole of society’ deployment of plans and instruments, including subsidies, as part of its industrial policy.

To determine whether imports from China are subsidised, the Commission chose a sample of three Chinese OEMs to conduct its investigation, namely BYD, Geely and SAIC. It set the CVD for all other cooperating firms at the average of the three. Curiously, Tesla, the largest exporter from China to the EU, was not chosen and has asked for a separate investigation.   

We assess how the four main sources of countervailable duties –below market supply, preferential financing, grants and land usage – are calculated. Though it is evident that that various forms of non-market incentives in the Chinese EV sector exist, they may be significantly less than suggested by the Commission’s methodology. 

Below market provision of batteries and their inputs. The reference used to compute the subsidy are the differences between the export and domestic prices of batteries (for SAIC and Geely) and of lithium iron phosphate (a key battery input, relevant for BYD which produces its own batteries). But many exporting firms price to market (Parker, 2016), and the fact that the export price of these inputs is higher than the domestic price is not necessarily because of subsidies. The markets for EVs, batteries and minerals in China are known to be exceptionally competitive and in a price war, while in the EU car prices and consumer purchasing power are much higher.


Preferential financing. Using its standard methods to try to establish a market-based rate as a counterfactual to the preferential financing received, the Commission assigned a credit rating of B to the three sampled Chinese firms and attributed a correspondingly higher spread compared to prevailing market rates to their borrowing and equity. The B rating, far below investment grade, is extremely low for large, modestly profitable firms, such as the sampled Chinese OEMs. For example, almost no firm in the S&P 500 is rated B or below. Moreover, credit ratings are available for Geely from the major international agencies, and they are higher than B.


Preferential financing. Using its standard methods to try to establish a market-based rate as a counterfactual to the preferential financing received, the Commission assigned a credit rating of B to the three sampled Chinese firms and attributed a correspondingly higher spread compared to prevailing market rates to their borrowing and equity. The B rating, far below investment grade, is extremely low for large, modestly profitable firms, such as the sampled Chinese OEMs. For example, almost no firm in the S&P 500 is rated B or below. Moreover, credit ratings are available for Geely from the major international agencies, and they are higher than B.


Grants. The government of China provides a subsidy to manufacturers for each vehicle sold. In economic terms, both consumer and producer subsidies have the effect of increasing the incentive to produce. However, the Chinese subsidy, unlike the EU subsidy, is not available to importers and the Commission is correct in arguing that it is countervailable for that reason. Still, the scheme was discontinued as of December 2022, and even though some benefits continue to accrue to Chinese producers because payments are staggered, its distortive effects are fading by now. The Commission Regulation states that some Chinese provinces are introducing their own schemes but does not provide evidence of this.


Land use. Land in China is owned by the state. Provinces subsidise EV producers by allowing them use of land at below market price. The Commission uses the price of land use – rent – in Taiwan as the reference point. However, Taiwan is far more densely populated than China and its income per capita is three times higher. Land prices tend to be correlated with income and density, so the reference price appears too high.

The risk of injury

Adopting a kind of ‘infant industry’ argument normally associated with developing countries, the Commission Regulation argues that the EU EV sector is too young to withstand Chinese competition. But while some of the key success factors in EVs (eg battery technology) are different from the combustion-engine vehicle sector, the value chains of the two sectors have many common elements. This is most evident in the popularity of various types of hybrid vehicles. It is well known, of course, that the EU’s OEMs are among the world’s most successful.

To make a historical analogy, in the 1970s and 1980s, Japanese and then Korean OEMs appeared to threaten the European automotive industry, but they became established in the EU market only over decades and after large investments. European OEMs adjusted to them by greatly increasing productivity and quality and by adding innovative features. Chinese OEMs still have a minuscule share of the EU automobile market, while EU OEMs are in the process of rapidly developing their own lower priced EVs and investing in battery technology and manufacture, often in joint ventures with Chinese producers.

Some implications of the CVDs

The CVDs apply to about €10 billion in annual imports (in 2023), a minuscule amount relative to the €17 trillion EU economy, implying that their macroeconomic effect will be imperceptible. However, if approved, the CVDs, which apply for five years and will be difficult to reverse, will have significant consequences for the automobile industry. Because of the large price difference between similar or identical models in China and the EU, where prices can be 50 percent higher, the CVDs will capture a large part of the profit made by firms exporting from China. EU OEMs and Tesla account for the lion’s share of these profits since, unlike Chinese suppliers, they have already established distribution networks and brands. EU OEMs will see profits decline sharply as CVDs are applied, but their imports from China may remain marginally profitable (Barkin et al, 2024). In contrast, Chinese OEMs may well be deterred completely, causing their exports from China to the EU to drop sharply. 

Both sets of exporters are likely to react by raising prices. The biggest effects of tariffs are to raise consumer prices (Fajgelbaum et al, 2019) and, over time, to divert imports to more expensive third-party suppliers. In this case, higher prices for EVs will cause additional damage by directly slowing the green transition and by garbling the Commission’s message about its urgency and overwhelming importance. Lower-income EU consumers who need a car and are already struggling with high prices will be especially affected.

The CVDs will reduce pressure on EU OEMs to increase productivity and innovate. They will also reduce the incentive to operate value chains that span the EU and China, which is by far the largest producer and consumer of EVs and batteries. China has established a clear technological lead across the EV value chain, one that may no longer depend on subsidies.

Chinese OEMs may respond to the CVDs by establishing production in the EU, but that option will also entail higher costs and prices, and in any event will only be open to the biggest producers. Some Chinese producers of EVs and batteries may prefer instead to establish their largest facilities in lower-cost locations with access to the EU market, as is already happening in Morocco and Turkey. Within the EU, Hungary – which maintains close relations with China – may turn out to be the preferred EU location for Chinese OEM investment, which some EU capitals will see as an undesirable outcome. 

The Commission Regulation adheres to WTO procedures and internal EU due process, in sharp contrast to the United States’s unilateral approach to the issue under its Section 301 (‘unfair trade’) provisions. However, the CVDs are bound to be seen as another sign that world trade is fragmenting into hostile blocs, adding to the trade policy uncertainty across the world and heightening geopolitical tensions. Steps that are seen to directly or indirectly weaken the open trading system on which the EU relies endanger all the EU’s largest export sectors.   

Policy 

While CVDs at some level may be appropriate, the benchmarks and methods applied to calculate them may lead to levies that are too high. More importantly, better policy alternatives are available.

A first-best solution is to deal with the underlying problem of Chinese subsidies. We believe it is possible in this case, considering the importance of the EV sector for the green transition and the pressure exerted by the United States’ own prohibitive tariffs on Chinese EVs. The EU and China may be able to reach agreement as follows: a) the domestic price of batteries and lithium in China should be allowed to rise nearer to the world market price (assuming of course that it is being artificially depressed now); b) the interest rate charged to Chinese OEMs should reflect international credit ratings; c) China’s producer subsidy for EVs should be definitively terminated and not replaced at the national or provincial level; and d) land use will be allowed at a market price established in each province. Closing such a deal would probably require a critical examination of the EU’s own subsidy schemes and whether and to what extent they are distortive of trade.

Another preferable approach would be to impose a WTO-compatible temporary safeguard tariff on all EU imports of EVs (not just Chinese imports), but only when and if it becomes evident that EV imports are big enough and rising rapidly enough to endanger the overall viability of EU OEMs (Dadush, 2024). We believe this is not the case at present.

To read the analysis as it was published on the Bruegel webpage, click here.

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How ‘Economic Security’ is Re-shaping Presidential Power

The Biden administration’s recent decision to raise tariffs on Chinese goods ranging from electric vehicles and advanced batteries to medical equipment came as little surprise in an election year. The White House described the move as one that would create “good jobs in key sectors that are vital for America’s economic future and national security.” This latest development followed the Trump administration’s original imposition of tariffs on other products from China in an effort to stop Beijing’s theft of sensitive technologies and intellectual property. Now, several years on, it is clear that imposing tariffs was only one exercise of the executive branch’s foreign commercial power – and one of an increasing number of tools that the executive branch justifies by linking foreign commerce issues to U.S. security.

Indeed, officials from both the Trump and Biden administrations have invoked economic security as a reason for action across a wide range of policy issues. In addition to tariffs on goods from China and on steel and aluminum, take the proposed outbound investment screening mechanism, the Trump administration’s efforts to force a sale of TikTok, or the extensive new export controls, as obvious examples. The justifications reflect a broader conversation on security that is now pervasive in trade policy circles. Compare the U.S. Trade Representative’s Annual Report published in 2016 to the version published this March. The 2016 report mentioned security 25 times, frequently in the context of food security. The 2024 report mentioned security 129 times. And the 2024 Report added a section on “enhancing economic security,” just one example of the securitization of U.S. foreign affairs, especially in Washington’s relationship with Beijing.

In a forthcoming article, we argue that this linking of “foreign commerce” to “economic security” in U.S. policymaking has had the effect of dangerously, and often erroneously, intermingling authority that Congress has delegated to the executive branch with the president’s constitutional powers to oversee foreign affairs. The Constitution assigns plenary authority over taxes, tariffs, and commerce – including, explicitly, foreign commerce – to Congress. The Constitution assigns other kinds of foreign affairs powers, such as the role of commander-in-chief of the armed forces or the power to negotiate treaties, to the president. The executive branch’s authority over foreign commerce began as a statutory authority, but over time the executive, with some backing from the courts, has increasingly claimed that such authority has constitutional dimensions. Constitutional claims over the president’s non-commercial foreign affairs authority have begun to engulf understandings of Congress’s plenary authority over the regulation of commerce with foreign nations – from the perspective of both the executive branch as well as the courts. 

Assertions of Executive Branch Power in Foreign Commerce

Officials from both the Biden and Trump administrations have advanced novel arguments before the courts asserting this point: foreign commerce is part of security, and therefore the president has his own constitutional foundations for action in the domain of commerce. In a case concerning the Trump administration’s tariffs on steel and aluminum, the government argued that “[t]he President’s coexistent constitutional foreign affairs and national security responsibilities compel the conclusion that Congress did not enact an unconstitutional statute.” In the context of a case about tariffs, this claim is extraordinary. The text of the Constitution expressly allocates the power to tax, as well as the power to regulate foreign commerce, to Congress exclusively. It makes no difference that the statute in question – Section 232 of the Trade Expansion Act of 1962 – invites the president to evaluate a threat to national security as a predicate to exercising purely delegated power to impose taxes. Such an exercise of delegated power does not open the door to his constitutional authority; rather, it draws on his expertise. 

The idea that statutory interpretation – which, as the Supreme Court has emphasized, is the crux of nondelegation analysis – would be different because the president has constitutional authority over other kinds of foreign affairs issues represents a significant effort to expand extra-textual presidential foreign affairs powers into areas reserved to Congress. And this argument was not a one-off. Although courts have not embraced the executive branch’s most expansive arguments, they have usually upheld challenged action that the executive branch has defended in these terms. For example, in Transpacific Steel LLC v. United States, the government defended the president’s decision to impose additional tariffs under Section 232 after the statutory deadline for presidential action by arguing that the president has inherent authority to modify his actions “when the President is exercising powers that are quintessentially executive in nature” such as “foreign policy and national security.” Although the Federal Circuit did not embrace this expansive argument explicitly, it interpreted Section 232 to allow the president to modify his actions after the statutory deadline. In this way too, disputes over foreign commerce are coming to resemble those over national security, where the president (almost) always wins.

Congress Can Restore the Balance

Given that the courts usually have not been willing to course-correct in this area, it falls on Congress to restore the balance in its favor. And rightly so; the complex geopolitical problems of today may require more guidance from our elected leaders. Existing delegations to the executive branch – which, like Section 232 and Section 301 of the Trade Act of 1974, often date from the Cold War – are imperfect instruments for the set of geoeconomic challenges currently facing the United States. Congress should reconsider these authorities with attention to the domestic, economic, and foreign policy challenges of this century, not the last. To the extent “economic security” is a central element of U.S. foreign and domestic policy, the many constituencies in that policy space should press for Congress’s attention. Our article outlines three potential paths to serve that end. 

First, we argue that Congress should amend a variety of statutes (such as Section 232 and Section 301) to sunset the president’s economic security actions after 90 or 180 days without the possibility of renewal unless Congress authorizes their extension. As the cases discussed above illustrate, the president has used his constitutional authority over foreign affairs to push the limits of broadly-worded delegations, and to deflect efforts to persuade courts to read such delegations narrowly for separation of powers reasons. A clear statutory withdrawal of tariff authority would blunt the president’s efforts, in effect, to constitutionalize control of foreign commerce and to wage trade war. It would still enable the president to act quickly in the face of an emergency, but without sacrificing Congress’s role. During the Trump administration, a number of bills were introduced that would have curtailed the president’s authorities in ways similar to those we propose, but none made it out of committee. Given the uncertainty created by this year’s presidential election – in which former President Trump has promised even more expansive uses of executive authority, including an across-the-board 10 percent tariff on imported products if reelected – Congress may be more disposed to enact such legislation in 2024, regardless of which candidate occupies the White House in 2025. 

Second, Congress should prohibit the executive branch from relying on an international agreement it has negotiated as the legal basis under which any good or service is imported into the United States, exported from the United States, or regulated while in the United States, unless Congress has either explicitly authorized the agreement in advance or approved it after its conclusion. Trade agreements and their negotiations have increasingly become a flashpoint for tension between the executive branch and Congress. In recent decades, the executive branch has concluded hundreds of commercial agreements – often with significant geopolitical and foreign affairs implications – that were neither authorized nor approved by Congress. Congress should clarify and reform the executive branch’s trade agreement authorities by imposing bright-line rules via statute. While the executive branch might object that such a statute interferes with its constitutional authority to negotiate with foreign countries, our proposal is carefully drawn to limit only the domestic effects of agreements, not the president’s authority to negotiate the agreements in the first place – an approach that falls well within Congress’s plenary constitutional authority over commerce.

Third, and finally, Congress should eliminate the U.S. Court of Appeals for the Federal Circuit’s exclusive jurisdiction over appeals in most trade cases and transfer that jurisdiction to the U.S. Court of Appeals for the D.C. Circuit. At present, the Federal Circuit is the appellate court for final decisions from the U.S. Court of International Trade. In that role, it has been responsible for the decisions we discuss above upholding broad exercises of authority by the executive branch. But the Federal Circuit is primarily an intellectual property court. Indeed, one member of the court has estimated that intellectual property cases consume more than half the court’s docket and more than 80% of its time. Given that international trade law cases in federal court are primarily statutory interpretation and administrative law cases, the D.C. Circuit makes more sense as a forum for appeals. As the premier administrative law circuit in the country, running appeals through the D.C. Circuit would force the bar and the Court of International Trade to approach these administrative law cases in the same manner as other administrative law cases – and that would enhance review of the executive’s activities in a way that is currently lacking. 

Judicial Review Without  Chevron

A shift to the D.C. Circuit would be especially well-advised in light of the Supreme Court’s recent line of cases cutting back on administrative agencies’ authority. The most recent such decision is Loper Bright Enterprises v. Raimondo, which eliminates “Chevron deference.” Under the “Chevron doctrine,” courts deferred to an agency’s reasonable interpretation of an ambiguous statute. The Chevron framework applied generally, not specifically to trade statutes, but agencies administering trade statutes regularly relied on Chevron deference to defend their interpretations. Chevron’s demise leaves the scope of deference to agencies up to the federal courts to determine going forward. 

The Supreme Court’s opinion suggests that lesser deference, such as when a court uses an agency interpretation as an aid in the court’s decision as to a statute’s correct interpretation, might continue to be appropriate. In trade cases, however, the government is almost sure to double down on its constitutional arguments, invoking “foreign affairs exceptionalism” – “the belief that legal issues arising from foreign relations are functionally, doctrinally, and even methodologically distinct from those arising in domestic policy” – to try to shield its interpretations of trade authorities from judicial review. The Federal Circuit’s record in trade cases suggests that it may be open to these arguments, creating special deference for trade statutes (over which, again, it often has exclusive jurisdiction), while other circuits develop a less deferential standard based on Loper Bright for other kinds of regulation. 

An early test of how the Federal Circuit will handle the Supreme Court’s new administrative law doctrines in these foreign commerce contexts is likely to come in HMTX Industries v. United States (in full disclosure, one of us has filed an amicus brief in HMTX in support of the challengers). That case asks whether Section 301 – which authorizes, and sometimes mandates the U.S. Trade Representative to take a variety of measures to counter unjustifiable, unreasonable, or discriminatory actions by foreign countries that burden U.S. commerce – allows the executive branch to increase the tariffs on products from China without the investigation usually required by the statute. The government asserts that a new investigation is unnecessary because these new tariffs address the tariffs China imposed on U.S. goods in response to the Trump administration’s Section 301 tariffs, which were designed to combat China’s intellectual property theft. Despite the Supreme Court’s recent change of direction with regard to agency authority, the government has continued to argue that the decision to expand the tariffs without a new investigation is subject to only limited review. 

As “economic security” has become an organizing concept for U.S. foreign commerce policy, the executive branch has drawn on this blurry policy space to argue that statutory limits on its foreign commercial authority do not bind it. Instead, it has buttressed its delegated authority with claims of independent constitutional authority over commercial matters like tariffs. And unlike Founding Era courts, today’s judiciary has often accepted these claims. Clearly, some members of Congress have different views on how to address economic security concerns. Congress has grabbed some low-hanging fruit by enacting legislation that reclaims some of its authority over trade agreements and there are signs of bipartisan interest in other trade actions. But whether Congress will intervene to address the executive’s efforts to use economic security to expand its control over commerce remains to be seen.

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To read the full article published by Just Security, click here.

To read the authors’ original source paper, click here.

The post How ‘Economic Security’ is Re-shaping Presidential Power appeared first on WITA.

U.S. Engagement in the Indo-Pacific: Don’t Trade Away Trade

A different approach to trade in Asia could represent a middle way between the Biden administration’s current approach and the so-called Washington Consensus of old.

 

International trade has been a pillar of U.S. foreign and domestic policy for most of the post–World War II era. Policymakers from both major parties have treated strong international economic relationships built on expanding international trade as central to advancing economic growth at home and achieving American goals on international development and security abroad. Secretary of the Treasury Janet Yellen captured the old consensus position well in an April 2023 speech explaining that “our economic power is amplified because we don’t stand alone. America values our close friends and partners in every region of the world, including the Indo-Pacific. In the 21st century, no country in isolation can create a strong and sustainable economy for its people.” Her words echoed those of one of her predecessors, Henry Paulson, who remarked sixteen years earlier on the benefits of open economic exchange that “countries that weren’t afraid of competition, that opened themselves up to trade, competition and trade, investment and finance, benefited, [whereas] the rest of the world, others were left behind. And opening . . . up to this competition leads to innovation, it leads to better jobs, more jobs, it leads to a higher standard of living.”

But in a very different April 2023 speech, U.S. President Joe Biden’s national security adviser, Jake Sullivan, laid out the administration’s case against globalization as it had been pursued in the past and argued for a new economic approach. While acknowledging that international economic cooperation “lifted hundreds of millions of people out of poverty” and “sustained thrilling technological revolutions,” he also argued that it all came at a price. To wit: “A shifting global economy left many working Americans and their communities behind.” The inexorable push for scrapping trade barriers had other costs, too, he continued—among them, the hollowing out of America’s industrial base, inequality that has threatened U.S. democracy, increasing environmental consequences, and geopolitical risks created by dependence on rivals such as China.

According to Sullivan, the Biden administration was forging a new path: not one that entirely rejected trade liberalization, but also not one that embraced traditional free trade agreements or tariff reductions as the main destination. He framed the approach as a middle ground, focused on advancing economic cooperation by pursuing nontrade priorities such as supply chain resilience, secure digital infrastructure, sustainable clean energy transition, and job creation. Sullivan described a new economic model that would be worker-centric, combining industrial policy to support high priority sectors with efforts to harmonize labor and environmental standards and integrate supply chains with close allies and partners—but without offering new market access.

Admittedly, Biden has achieved a measure of success in working toward this vision. Domestically, there were important wins included in the Bipartisan Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act. Appropriated funding is being doled out to boost semiconductor production and spark investment in other cutting-edge technologies. Money in these bills will also support infrastructure development that creates manufacturing jobs and helps to rebuild parts of the industrial base, including those that support national defense.

On the other hand, success abroad has been more limited, even if not absent. The Biden administration has improved coordination with European allies in areas such as green technologies and artificial intelligence, supply chain integration, and critical minerals, for example. In Asia, Biden’s team has advanced the Indo-Pacific Economic Framework (IPEF) with thirteen other participants and reached agreements on issues such as supply chains, clean energy and infrastructure, and tax and anti-corruption efforts.

But there is a larger story. Whatever the intention of these narrow efforts, Biden’s economic approach has resulted in a doubling down on the harder turn away from relatively free trade that began under former president Donald Trump’s administration—a set of outcomes different from what Sullivan’s speech appeared to imply. The promised middle ground has remained elusive. Although Biden’s team has not officially “sworn off” market liberalization, expanded market access appears to have been almost completely shelved as a foreign policy tool—even when it would have significant benefits or could serve as an incentive to push progress toward key security and geopolitical objectives.

Nowhere has this been clearer or more consequential than in Asia—home to many of the fastest-growing economies in the world. Though the administration has signed trade “mini-deals” based on executive orders with Japan and Vietnam in limited sectors and encouraged continued U.S. leadership in private investment, it has relied on the IPEF as the main vector of U.S. economic policy in the region. The IPEF has explicitly excluded market access from negotiations across all four pillars, a decision that has limited its scope and durability. For example, without trade as an incentive, IPEF members have been hesitant to commit to costly reforms related to issues like climate change or worker protection, resulting in a set of agreements that are mostly aspirational and without credible enforcement mechanisms. The evolution of the IPEF’s trade pillar is also telling. Not only did the trade pillar’s draft framework agreement exclude tariff reductions but the United States pulled out of negotiations on this agreement in November 2023, leaving the pillar stalled indefinitely.

Washington’s reliance on the IPEF as its main economic lever in Asia has magnified other risks as well, including lost opportunities to consolidate geopolitical influence and strengthen relationships with allies and partners. Though the United States remains a major economic force in the region, private investment and executive trade agreements cannot replace a more expansive approach to trade in Asia when it comes to integrating the United States more deeply into the region’s multilateral economic networks.

Without a more robust trade agenda, Washington misses out on economic opportunities. For example, the United States has limited leverage to shape the rules for economic exchange in Asia while they are being rewritten to incorporate new global realities like the economic power of India, Japan, and South Korea, the spread of fast-evolving technologies and digital trade, and the pressures of climate change and global migration. Even U.S. security goals in Asia are compromised by American policymakers’ decision to eschew trade policy as a foreign policy tool. U.S. allies and partners, who are heavily dependent on trade with China and lacking many economic alternatives, are limited in how closely they can align with Washington in the security domain for fear of economic retaliation from Beijing.

A different approach to trade in Asia—and globally—can exist in the space between past policies and those of the present, one that would truly represent a middle way between the current approach and the so-called Washington Consensus of old. Such a strategy would amount to a more reflective version of global integration that attends carefully to domestic realities alongside interests abroad while retaining trade as a key foreign policy tool that links the economic and security domains.

The new approach would allow for some heterodoxy in economic policy across regions and sectors and would aim to revitalize the Biden administration’s current industrial policy with a series of trade innovations, such as mini-lateral and sectoral trade agreements with key partners, efforts to integrate key Asian allies more deeply into existing multilateral agreements, or modifications to attach some limited market access to the IPEF. Each expansion of market access would be narrow and tied to clearly defined criteria, but together these moves would be enough to reestablish trade as a foreign policy lever in a crucial region. These trade innovations would not replace government protection for strategic industries, and a substantial and immediate increase in federal spending on government training and assistance for dislocated workers would still be required.

With this type of approach, the United States could better communicate its economic and geopolitical commitment to the region, diversify its economic role in Asia, and position itself to compete more effectively with China, even as it protects key U.S. industries. The United States would still need to manage some risks, of course, including finding the balance between engagement and competition with China, relative and absolute economic gains, and national prosperity and security. Even with these challenges, the pursuit of this true middle ground should be a top priority in Washington.

Economic Integration and Its Discontents

In the early twenty-first century, questions for U.S. policymakers about how best to approach the intertwined issues of cross-border trade, migration, flows of information, and political ties in Asia occur alongside a broader backlash against “globalization.” At a time of major geopolitical upheaval and technological change, policymakers and the public are vigorously debating the merits of domestic policies suitable for an interconnected world. They are exploring new trade and migration rules, reviving strategies for national industrial and technological development, and reflecting on the lessons of globalization for international law and institutions substantially influenced by the United States. Discussions of “reshoring” supply chains and U.S.-China economic “decoupling” or “de-risking” are just a few examples of rising concerns in Washington about cross-border ties.

Despite occasional protestations from policymakers about the need for balance, the debate thus far has been mostly concentrated on the extremes: globalization that pushes for ever more economic cooperation or industrial policy that focuses inward to protect domestic jobs. Often lost in this debate, however, is that both of these approaches have substantial benefits and significant costs. This is true both globally and narrowly in Asia.

The U.S. commitment to comprehensive free trade has always been qualified. Even the World Trade Organization (WTO) embodies a contingent—not absolute—form of free trade. In this conditional form, globalization has had clear advantages for the United States. Most significantly, it has been responsible for tremendous domestic economic growth. The U.S. per capita GDP (in constant 2010 dollars) was about $19,000 in 1960 and $61,000 in 2021 (four times the global average per capita GDP, considerably higher than any other country with a large population)—a feat that would not have been possible without trade and international economic cooperation. Trade with Asia specifically has and continues to provide the United States with significant economic gains. As of 2019, for instance, exports to Association of Southeast Asian Nations (ASEAN) member states alone accounted for over 500,000 jobs in the United States.

Though domestic economic growth has been the primary driver of Washington’s long-running support for free trade, the United States has also profited in other ways from its perch atop a cooperative international economic order. Adam Posen, president of the Peterson Institute for International Economics, argues that “as creator and enforcer of international economic rules,” the United States gained “maximum economic traction while minimizing the need for direct conflict” and “could even occasionally flout the rules, or tweak them in its favor.” International economic integration also allowed for specialization, faster innovation, higher returns on capital investments, economies of scale, and other efficiencies that benefited the American economy and U.S. workers.

The United States has also accrued international influence through economic cooperation. Much U.S. soft power, globally and in Asia, depends on the fact that billions around the world consume the ideas and technologies produced in major metro areas around the United States—metro areas that have evolved into the key pillars of U.S. global leadership in science and medicine, media and culture, education, civic life, and digital technology. Often, they encompass diasporas from South Asia, East Asia, and elsewhere, and depend on constant influxes of new visitors and residents—including students and workers from other states and countries—who bring new ideas and investment. International economic cooperation contributes to this mobility of capital, people, and ideas.

Globalization as it was pursued and implemented over the past several decades, however, has also had costs––some real and some imagined or overstated. Most importantly, the benefits from global trade are rarely evenly distributed and contributed to a sharp drop in U.S. manufacturing jobs over several decades as corporations shifted production to countries with cheaper labor. One National Bureau of Economic Research (NBER) estimate, for instance, finds that between 1980 and 2017—a peak period in globalization—the United States lost 7.5 million manufacturing jobs, with trade being one of several drivers. Not only did this loss of manufacturing erode the U.S. industrial base, it also disproportionately affected workers with only a high school diploma. Many were left dislocated when government-promoted retraining and assistance programs were underfunded and insufficient.

These economic costs may have had political ramifications as well. Some analyses suggest that Trump’s 2016 victory was made possible by voters on the losing end of the inexorable press for trade liberalization, who had voted for former president Barack Obama in 2012 but were won over by Trump’s promise to bring back U.S. manufacturing jobs by reducing trade with China and pulling the United States out of the ambitious Trans-Pacific Partnership (TPP)—which he ultimately did.

That said, questions persist about just how much trade liberalization alone contributed to what Sullivan called the “hollowing out” of U.S. manufacturing or to Trump’s 2016 victory. A 2021 analysis by the Center for Strategic and International Studies, for instance, shows that increasing worker productivity, not trade, accounts for the greatest share of the decline in U.S. manufacturing jobs. This is supported by research from the Ohio State University that found trade was only responsible for a third of manufacturing job losses in that state. Of this total lost to trade, only a relatively smaller percentage can be linked directly to trade with China specifically—estimates of this percentage vary but most fall between 10 and 25 percent. Moreover, there is evidence that negative effects of the “China shock” occurred largely before 2010 and did not persist afterward, suggesting that fear of continued manufacturing job losses to China and elsewhere may be misplaced.

The argument that economic costs from trade drove the societal implications many observers ascribe to cross-border commerce also lacks clear support. Even if trade effects are understood to play some role in rising political tensions within the United States, a close examination of voting trends from the 2016 election recognize cultural factors—rather than purely economic hardship—to be the key factors behind changes in partisan politics.

The economic and political costs of globalization may be somewhat more measured than expected, but unchecked economic integration can raise material national security questions. Many in Congress and the executive agencies caution that too much trade creates dependencies that would turn into vulnerabilities in a conflict. These fears are especially acute, and at least partially justified, when it comes to trade in Asia and with China specifically, given the critical imports that this trade includes, the rising risk of conflict in the region, and what many view as unfair trade practices employed by Beijing. The United States remains heavily dependent on China for some critical minerals, for example, including those necessary for advanced military systems. China’s military-civilian fusion also creates the potential for U.S. exports to China to end up supporting the development of its People’s Liberation Army. And China has shown a willingness to use economic retaliation as a tool of coercion and to manipulate its currency and markets in ways that disadvantage U.S. firms.

These challenges are all reasons that the United States may need to manage trade with China carefully, including restricting certain types of exports and protecting some domestic industries. They are not, however, a reason to entirely give up further trade integration with the rest of Asia or elsewhere. In fact, geopolitical competition makes the development of a strong trade agenda globally, and in Asia especially, more important for the United States, not less. This is true for two reasons.

First, by turning away from market access as a foreign policy tool in Asia, Washington cedes much of the trade domain to Beijing, leaving its partners with fewer economic alternative and undermining U.S. influence in Asia. Second, some additional trade integration with countries across Asia (and outside of it) could help the United States build a more diversified and resilient supply chain and trade network itself, reducing its dependence on China in key sectors. Achieving this outcome would require intentional choices about how and where to increase trade access, but it cannot be achieved when trade liberalization is not an option. Biden’s economic strategy in Asia, and the IPEF in its current form especially, is not up to the job, either at the institutional level or its basic orientation to the role of trade in U.S. foreign policy.

The Risks of Biden’s Approach to Trade in Asia

The Biden administration’s reluctance to use market access as a foreign policy tool has global ripple effects but the risks are biggest in Asia, both because of the region’s high and growing economic importance across sectors and because it is home to the most important U.S. strategic and economic competitor: China. As a result, when thinking about the future of U.S. trade policy, it makes sense to start in the Indo-Pacific.

The administration’s economic strategy in the region has included a few key pieces: “mini-deals” signed at the executive level to increase bilateral trade in specific sectors with close allies and partners; initiatives to advance regional supply chain cooperation, especially in the defense sector and for technologies like semiconductors; economic incentives to spur private business investment in the region; export controls and industrial policy to protect domestic industry and national security; and, at the center, the IPEF, which is intended to unite these different initiatives.

As conceived by the Biden administration, the IPEF was loosely intended to offset the U.S. decision not to join the TPP and its successor organization, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The IPEF focuses on reducing nontariff barriers to trade, especially harmonizing standards. The IPEF’s largest successes thus far have been in establishing an agreement to support supply chain integration and resilience among the thirteen other participating members and acceptance of a set of standards to advance climate goals and fight corruption.

However, the IPEF’s first set of agreements leave much to be desired. For the most part, they include only nonbinding commitments and high-level ambitions, rather than clear and actionable targets for cooperation. The IPEF’s pillars also remain weakly institutionalized, making it unclear how standards will be monitored or enforced. At this point, it remains uncertain whether the three agreements signed thus far—in the climate, tax and anti-corruption, and supply chain pillars—will advance U.S. economic integration in the region. Moreover, the trade pillar lacks a path forward after the United States pulled out of negotiations, much to the dismay of other participants. The IPEF has also failed to win the confidence of constituents across Asia. A 2024 survey of Southeast Asian states found that respondents appear to be growing more skeptical and critical of the IPEF over time, resent the high cost of achieving U.S.-promoted standards with few benefits in return, and identify China as the economic leader in the region while questioning U.S. staying power and commitment.

Beyond these institutional shortcomings, the IPEF-led approach to trade in Asia and the failure to find a real middle way in the trade domain come with three types of risk, each with potential economic and geopolitical costs. Notably, even if more pronounced in Asia, these challenges are not entirely unique to the region and exist elsewhere as well.

First, by remaining outside of all of Asia’s major trade agreements, the United States is likely to face losses in terms of GDP and domestic economic growth. In this case, much (but not all) of the U.S. economic loss is likely to translate into gains for China. As the United States has moved away from free trade, China has leaned into it. With its involvement in the ASEAN+3, ASEAN+6, bilateral trade agreements, and now the new Regional Comprehensive Economic Partnership (RCEP), China’s trade with Southeast Asia has quadrupled since 2009 (compared to a smaller but still sizeable tripling of its global trade). A study by the United Nations Conference on Trade and Development found further that the RCEP arrangement would reduce U.S. exports to Asia by over $5 billion due to trade diverting away from the United States and toward RCEP partners where tariffs are lower.

Membership in the CPTPP would have placed the United States on more equal footing and offered benefits that far exceed any RCEP-induced losses. By choosing not to join this organization, the United States misses out on billions in economic gains. A 2018 Peterson Institute report found that joining the CPTPP would have resulted in net $131 billion added to U.S. GDP by 2030, while the decision to pull out will result in a $2 billion loss. By expanding market access to Asian partners—at least in some sectors and to some partners—the United States could lay claim to some portion of this windfall. The narrow bilateral executive agreements signed under Biden move in the right direction but are too limited to offset the deficit created by the weakness of other aspects of Biden’s trade and economic strategy.

None of these observations imply that the United States should mirror China’s approach to trade in Asia or elsewhere. After all, the two countries face quite different dynamics when it comes to international trade’s inherent trade-offs. China sees in free trade agreements a way to gain access to new export markets and a solution to its large trade surpluses. The United States, in contrast, often finds itself as what economist and Carnegie Scholar Michael Pettis calls the “absorber of last resort” for its own trade partners, hence its reluctance to sign on to large multilateral trade deals. It is for this reason that a return to the more aggressive embrace of free trade seen in previous decades is not the right approach for the United States today. The Biden administration’s current strategy may go too far in the other direction, however, where a more balanced approach might capture some economic gains while still protecting relevant domestic interests.

Second, Washington’s position outside Asia’s major economic organizations undermines its efforts to increase and consolidate influence with regional allies and partners. At one level, the mechanism for this loss of influence is straightforward. Limits on market access that slow the diffusion of U.S. goods and raise prices on U.S. technology and other products limit U.S. soft power gains and constrain its geopolitical leverage at the same time.

These missed opportunities to garner greater geopolitical sway with regional allies also arise at a deeper level. For countries across Asia, the unwillingness of the United States to join the CPTPP or to offer meaningful expansion of market access through bilateral agreements signals a lack of serious commitment to the region. Many of these states are already skeptical of the durability of the U.S. focus on Asia, seeing it is as a distracted and unreliable partner. The constraints the United States has placed on the IPEF only exacerbate this perception and lead many countries in the region to look elsewhere for economic opportunities. For instance, because its framework agreements are signed at the executive level only, the IPEF lacks the longevity that would promote long-term U.S. investment. The U.S. decision to withdraw from the trade pillar negotiations did further damage to regional perceptions of U.S. credibility.

What’s more, for countries in the region, the more limited U.S. integration into the region’s trade networks and economic groupings is not just an economic concern (though many have chafed under the new U.S. protectionism and unilateralism). Because it leaves them more beholden to an increasingly aggressive Beijing, less U.S. trade engagement in Asia becomes an important security challenge as well—a manifestation of the often-cited link between economic well-being and national security. Countries in Asia seek to diversify their economic partnerships to reduce their dependence on China and would readily welcome more involvement from the United States to increase their resilience and economic options. Under Biden, however, even those who are members of the IPEF have been left disappointed as the United States has refused to extend any sort of market access. Countries across Asia have been left with little choice but to remain dependent on China as its primary trade partner.

These economic pressures can have real security consequences. Countries like Indonesia and Malaysia, for example, tread carefully in territorial disputes with China for fear of upsetting their trade relationships. Even countries for whom the threat from China appears more existential, such as Japan and Vietnam, are pragmatic in their dealings with Beijing to preserve economic ties. Recognizing the liability this economic dependence creates, even allies and partners that support U.S. efforts in Asia’s security domain in principle may be forced to stay on the sidelines of a U.S.-China conflict to protect their economic well-being. This could have serious implications for U.S. efforts to rally a coalition to contain Chinese aggression.

Finally, by forgoing a more robust approach to trade in the region, the United States gives up an opportunity to participate in the writing and updating of Asia’s rules on economic exchange to include things like labor and digital trade standards or climate mitigation. These issues have an outsized effect on the Indo-Pacific region, and sensible responses to all are affected by trade integration and related questions about cross-border flows of investment, technology, and people. For example, years after an American objection to WTO Appellate Body appointments threw a wrench in the gears of the global trade organization, the WTO dispute resolution process remains paralyzed. In the face of this obstacle, other WTO members have developed work-arounds. The EU and key Pacific countries and emerging powers have strung together one interim alternative that Japan just joined, and Europe is pursuing a broader trade settlement with Asian countries extending to subsidies and related issues. By standing aside, American policymakers forfeit their influence over the resulting mechanisms and reinforce the message that the United States is not the one driving Asia’s economic or diplomatic future.

Asia’s climate crisis offers another illustrative example. Its average temperature is rising at about three times the global rate, exacerbated by rapid industrialization. Elevated sea levels threaten coastal areas, putting pressure on farmland and major cities. The mining of critical minerals found in abundance in parts of Southeast Asia—in high demand by the United States and countries around the world—is of particular concern because the processes used to extract these minerals can severely damage surrounding ecosystems. While the increasing trade volumes that result from trade liberalization are not the sole or even the most prominent driver of climate disruption, the increase in economic activity and manufacturing that accompany rising trade do absorb more natural resources and contribute to air and water pollution, making an already bad situation worse. Collective solutions will be needed to balance economic demand and these environmental challenges, but the United States can only shape resulting outcomes if it is a participant in the region’s trade and economic networks.

For policymakers in places like Singapore, Hanoi, Manila, and Jakarta, the long list of looming challenges—including but not limited to climate change—also serves as a reminder that all politics are primarily local and regional. The competition between the United States and China—however important to understand and manage—ought not eclipse the broader range of security and economic questions facing the region as a whole. Addressing these challenges will require some degree of international cooperation and a new set of rules of the road for regional economic exchange that take collective costs into account. Governing the remarkably fast-evolving technologies and the rapid growth of the digital economy will also prove to be part of that story.

To have a say in this process and a seat at this table, the United States must be more active in the region’s expansive web of trade networks. In 2022, these networks accounted for about 40 percent of global exports and imports and trillions of dollars in global commerce. The United States is a country of unique global power and sway. Its unusual history of outsized influence has left an indelible mark on the frameworks for global cooperation and integration, and it was the principal architect of the post–World War II economic order. As that order confronts the reality of forced adaptation, it is not a stretch to think that Washington can and should play a role as those frameworks are updated for the realities of Asia today and contemporary global economic and political challenges. Other countries in the region are not sitting idly by waiting for the United States to engage more seriously on these issues, however. China, South Korea, Japan, India, and others are already building their own rules and standards, sometimes together but often independently.

Achieving an Authentic Middle Way

Even if the United States and China find reliable ways to cooperate on elements of that emerging order—on matters ranging from climate change to AI safety—the two countries have differing values and strategic priorities. The resulting geopolitical competition with China makes the development of a more robust U.S. trade agenda in Asia desirable despite the risks. New military partnerships, investments in allied capabilities, deployments of advanced technologies, and multilateral exercises are necessary but not sufficient for the United States to remain a counterweight able to balance Chinese power in the region. A change in the administration’s trade policy will be required as well. Countries in Asia would benefit from a more active U.S. trade presence but a shift in trade strategy would not be charity project—it would be directly aligned with U.S. interests and could inform efforts to make better use of trade as foreign policy tool in other regions as well.

Whatever course is chosen in Asia and elsewhere will need to balance domestic adjustments (across job types and economic sectors) with the gains from a greater degree of economic cooperation. Addressing these costs will require holistic strategies and more nuanced approaches that, for example, reflect distinctions in the educational opportunities suitable for people at different points in their life, reliably reduce a measure of economic risk, and open new employment and civic opportunities. Policymakers likely already understand these requirements but are also searching for ways to make some degree of trade liberalization more politically palatable and to ensure that promised educational and economic support does not fall through as it has in the past. By better understanding the long-simmering conflicts over global cooperation, policymakers and civil society can further develop the ideas, institutions, and coalitions necessary to create a stable foundation for a more sustainable form of global integration.

Nothing about this challenge means that U.S. policymakers should walk away from once again using market access as a tool to keep American interests relevant in one of the world’s most important regions. The task at hand is to create pathways for the exchange of information, ideas, and culture, while policymakers retain at least a limited set of tools to address imbalances that arise if considerable movements of goods and capital coexist with completely inflexible migration policies. Indeed, policymakers with influence over the international system should always bear in mind the costs of coercive limitations on the movement of ideas, goods, information, and people across borders, even if such constraints are also necessary for national-level experimentation and the functioning of countries as currently configured.

In that vein, the preservation of rules that enable international trade—even as policymakers tolerate somewhat more heterodox economic policies—would benefit the United States and its allies, resulting in trade rules of narrower application to countries’ domestic policies but reliably enforced and written with an eye toward more equitable global development. This would mean, in part, pursuing many pathways to expanded economic cooperation, including some reform of the WTO and the rules governing global, multilateral trade, alongside domestically focused initiatives to compensate and offer viable retraining opportunities to those that are displaced. To this end, U.S. leaders should focus on several promising levers as first steps.

First, policymakers should take a lesson from U.S. advances in Asia’s security domain and turn to mini-laterals—groups of three to five countries focused on a narrow set of issues with shared interests as a way to achieve the gains of cooperation with less risk. Without entirely casting aside the prospect for more ambitious deals, this approach would avoid making the perfect the enemy of the good. The intent would be to work with a limited group of partners in targeted sectors—building off the administration’s mini-deal approach, but with significantly wider participation, more heft, and the consistent message that the goal is to recapture momentum on market access rather than cast aside entirely the prospects for more comprehensive deals.

Regional mechanisms like mini-laterals are far from perfect, but they offer a degree of interconnectedness that can enhance deliberation across borders and make policy responses more appropriately nuanced. Working with just a small group of like-minded partners, the United States would have greater leverage to set and enforce high labor, climate, and other standards. Picking and choosing sectors to focus on would allow the United States to avoid areas of political sensitivity and seize on opportunities to advance other strategic objectives.

Supply chain diplomacy, for instance, can indeed result in progress, as evident in the agreements the United States has recently signed on coproduction and technology with India, Australia, and Japan.

Expanding these areas of growing cooperation into the trade domain and adding new tailored agreements with countries across Southeast Asia should be high on the list of priorities for those guiding U.S. trade policy. Although there is some value in pursuing such deals, as Peter Harrell has argued in Foreign Affairs, “in sectors where interests clearly converge,” it will be important to remember that other countries get a vote, too. They will often prefer more comprehensive agreements that will require U.S. policymakers to take on a measure of responsibility for garnering political support and designing suitable mechanisms to mitigate the impact on affected communities.

Indeed, relying on a mini-lateral approach comes with risks. While reaching agreements with a smaller number of partners can be comparatively easier than achieving the consensus needed for a large multilateral agreement, transaction costs are still involved. Too many of these small, overlapping groups can create a crowded international economic architecture, which can be costly and difficult to manage. Washington will therefore need to be judicious in selecting the partners and sectors where it invests in building new institutions for cooperative economic exchange. The tendency will be to lean toward partners like Japan and South Korea where higher levels of economic development may make agreements with high standards easier to reach. But this may have downsides, too, in that it will constrain pathways to economic integration across other parts of Asia—especially Southeast Asia, where much of the region’s growth potential is located. To guard against this, the United States should aim to diversify its partners and explicitly focus on building mini-lateral agreements with countries who are not already U.S. treaty allies.

The United States will also need to pursue trade reengagement through other channels to achieve the desired diversity in economic cooperation. One option might be to find ways to add some limited market access to a more institutionalized IPEF, tied to strict technology standards, for example, with clear mechanisms for enforcement and monitoring. Bringing close Asian partners like Japan into existing free trade agreements like the United States-Mexico-Canada Agreement (USMCA) if they are willing to adhere to its higher standards and requirements is another option. Ways to expand and leverage existing bilateral agreements, especially with nontraditional partners who are strategically important or show high potential for economic cooperation, should also be explored. The bottom line is that policymakers will need to be creative to find varied opportunities with the right balance of economic gains and domestic safeguards.

Alongside the pursuit of a modest and controlled market liberalization abroad, Washington must also carefully attend to associated domestic costs. It can do this in two ways. The first is to continue to rely on industrial policy to protect sectors of high strategic importance to the United States. As under the Biden administration thus far, this would likely include semiconductors, green technologies, and several others. That said, policymakers should develop far clearer metrics or criteria to determine which sectors require protection and subsidies to support U.S. interests. This list would likely be somewhat shorter than the set of industries that receive this type of support today. Second, policymakers will need to redouble their efforts to compensate and retrain workers who suffer due to trade’s distributional effects. This is an area where governments have fallen short in the past, and more robust commitment and better outcomes will be essential to the success of any reengagement with trade. Significant federal funding and coordination will be required and should be allocated. Moreover, programs would need to be aimed at more diverse audiences with more flexible types of assistance.

For U.S. policymakers, engaging with a more ambitious trade agenda can contribute to greater security and shared growth across Asia and in the United States. Policymakers can advance that agenda without ignoring the potential for trade-related economic displacement to affect communities in the United States—a challenge that persists even if many of our most dynamic regions grow stronger because of economic relationships with Asia. With the right carve-outs and attention to supply chain resilience as well as the situation of Asian trading partners, a more vigorous trade agenda can also fit with American national security goals and reasonable domestic needs. Congress and the executive have multiple tools to meet the moment without neglecting the role of market access in strategy and standard-setting: from savvy use of existing bilateral trade relationships to new mini-lateral groups that can expand trade across sectors, market-oriented reforms to the IPEF, and efforts to piggyback off existing free trade agreements such as the USMCA. Greater attention to workers and communities adjusting to new economic realities is also likely a sensible response. So, too, is the targeted use of industrial policy alongside carefully calibrated efforts to reform multilateral trade rules to make international trade more compatible with domestic needs. Closing off any serious near-term prospect for greater access to the American market is not.

Jennifer Kavanagh was a senior fellow in the American Statecraft Program at the Carnegie Endowment for International Peace. Mariano-Florentino (Tino) Cuéllar is the tenth president of the Carnegie Endowment for International Peace

Kavanagh_Cuellar_Trade in Asia

To read the full paper published by the Carnegie Endowment for International Peace, click here.

To read the full paper, click here.

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International Trade Policy Under Biden: The “New” Washington Consensus and Its Discontents

The Biden administration is abandoning the rules-based international trading system in favor of a self-proclaimed New Washington Consensus that redefines trade policy. Can it work?

 

After four years of President Trump’s slash-and-burn trade policy, the bar for the incoming Biden administration could hardly have been lower. Trump’s “America First” bravado was an ungainly amalgam of tax hikes (against foes and friends alike), bilateral power plays (for example, Trump ordered the “renegotiation” of the Korea-US Free Trade Agreement [KORUS], otherwise threatening termination of what he termed “a horrible deal”), and a retreat from international trade cooperation (among others, spurning the megaregional Trans-Pacific Partnership [TPP] and undermining the World Trade Organization [WTO]). Trump’s trade policies not only ruffled the feathers of many of America’s closest trade partners, but they were also economically ineffective. Notably, they failed to benefit even those sectors and locations that his tariffs were supposed to protect. Ironically, the Trump tariffs did not change China’s behavior one bit.

A “New” Washington Consensus

It came as no small surprise when President Biden, despite calling Trump’s trade actions “disastrous” and “reckless,” not only failed to repudiate those policies, but actually amplified them. This is not to say that Trump’s and Biden’s versions of economic nationalism are equivalent. Trump’s style was all sticks and no carrots—belligerent, scattershot, and ad hoc. Biden’s version, albeit no less fervent, is soft-footed and polite—more carrots than sticks; commentators have called it “polite protectionism” or “pragmatic unilateralism.” Most notably, Biden provides a coherent intellectual superstructure that ties his administration’s trade policy to its overall international economic strategy.

In a scarcely noticed but consequential speech in July 2023, National Security Advisor Jake Sullivan outlined the Biden administration’s economic ideology. Sullivan blamed the United States’ most pressing challenges—namely, a hollowed-out industrial manufacturing base, dramatic economic inequality between rich and poor and between coast and heartland, the economic and military rise of China, and the climate crisis—on a number of factors including hyperglobalization, unfettered deregulation, naive beliefs in trickle-down economics and market efficiency, and trade liberalization as an end in itself. Drawing a sharp contrast to the 1990s-era policy package known as the “Washington Consensus”—championed by the US Treasury, IMF, and World Bank—that according to Sullivan encapsulates the idolatry of free markets and liberalized trade, he declared that the Biden administration stood for a “New Washington Consensus.” To address the above-mentioned challenges, the administration’s novel paradigm is aimed at achieving supply-chain resilience in strategically important sectors, a return to former manufacturing grandeur, more equitable growth that benefits American workers, rapid decarbonization and a successful transition to green technologies, and a containment of China’s military and economic might.

Few Americans would disagree that these are worthy goals. It is, however, the implementation of these goals that warrants scrutiny: Sullivan stated that this “New” Washington Consensus was to be effectuated by a policy bundle including (1) a “modern American industrial strategy,” (2) selective partnerships with economic allies, and (3) various policies aimed at curbing the ascent of China. In the following, I argue that each of these three strategies is fraught with peril. In addition, I show that this alleged new “consensus” does not reflect unanimity between the United States on the one hand and its trade allies on the other, but rather constitutes a unilateral move to undo over six decades of trade liberalization. In the final section, I propose an alternative to the so-called “New” Washington Consensus—an alternative set of policies that achieves better results for the United States and remains in the four corners of a rules-based global trading order.

Biden’s Industrial Policy: Subsidies on Steroids

Let us start with the first pillar of the “New” Washington Consensus, Biden’s industrial policy. It is a mix of muscular government interventions that consist of the following:

direct subsidies and tax credits, enacted through the Inflation Reduction Act (IRA), the Creating Helpful Incentives to Produce Semiconductors Act (CHIPS Act), and the Research and Development, Competition, and Innovation Act—all targeted at industries deemed especially critical or strategic, mainly semiconductors and green technologies;
“Buy America” provisions for government procurement;
favorable loan terms; and
protectionist trade policies, including continuation of many Trump-era tariffs, domestic content requirements, and so-called trade defense measures (intended to punish alleged foreign dumping and—irony of ironies—to counter foreign subsidies that affect exports to the United States).

True to its promise, in mid-May of this year the administration slapped new tariffs up to 100 percent on Chinese electric vehicles, advanced batteries, solar cells, semiconductors, steel, aluminum, and medical equipment, thus affecting imports of green and clean tech goods in excess of $18 billion. (These new tariffs, notably, are imposed on top of the still active across-the-board import tariffs on some $350 billion in Chinese goods originally imposed by the Trump administration, which cost US consumers and downstream industries $48 billion annually, and that entail welfare losses of at least $1.4 billion per month caused by reconfigurations of US supply chains and an overall reduction in the availability of imported varieties.)

While industrial policy done right can be useful, all indications are that Biden’s version is poised to cause significant domestic and international damage. This is not the place to offer a fulsome critique of the risks that Biden’s industrial-policy package poses for the domestic economy. Suffice it to say that the package is costly (experts expect IRA subsidies to be $1.2 trillion over the next decade—three times more than initially forecast), which in and of itself is not fatal if the returns are adequate. However, the returns may not be adequate.

First, there is the challenge of getting industrial policy right. It is difficult for any administration, let alone that of the world’s biggest economy, to pinpoint the precise industry targets and provide the appropriate amount of incentives. The range and depth of knowledge that the Biden administration must possess in order to implement successful industrial policy is extraordinary. It not only must know and understand the relevance of broad-ranging and complex questions, but it must also undertake weighing alternatives and prescribing an adequately supported policy mix. These are skills rarely found in the private sector, let alone in the civil servantry. Even highly trained (and remunerated) portfolio managers who specialize in single industry stocks, as well as industrial conglomerates themselves, oftentimes founder at even a fraction of the tasks required to design successful industrial policy.

Second, there is the difficulty of achieving the objectives of the industrial package. It is not at all clear how Biden’s policies will undo 30 years of lost manufacturing edge, out-subsidize Chinese production of semiconductors and green technologies, and re-shore entire value chains for these sophisticated technologies. In fact, it appears that even evaluating applications and distributing approved funds already strain the system. For example, well over a year after passage of the CHIPS Act, many recipients are still awaiting funds. (Worse still, a significant chunk of the promised funds are unavailable: the Federation of American Scientists reports an appropriations gap of $8 billion for the R&D portion of the CHIPS Act, thus leaving core national and regional science, research, and education projects underfunded.)

Third, even if Biden were to overcome these nontrivial roadblocks, it is the unintended consequences of industrial policy that are the most troubling aspect of the administration’s industrial policy package: For one, industrial policy creates numerous distortions in those industries that receive subsidies and trade protections. These distortions include anything from monopolization (or oligopolization) in protected markets to favoritism and political horse-trading, inadequate supervision of policy implementation, entitlements (once granted, subsidies tend to stick around long after the policy objectives have been achieved), and cascading protectionism. These unintended consequences more often than not result in growing complacency, reduced productivity, and less innovation in subsidized sectors.

More critically, strategic support of some industries and not others crowds out resources otherwise allocated to export-oriented firms and industries in which the United States has an international comparative advantage (i.e., lower costs or superior quality). Apart from not getting handouts, unsubsidized industries also face higher relative costs—for employees, capital, and raw and intermediate materials. Notably, the unsubsidized export-oriented firms are the ones that are most agile, productive, and innovative, and thus most able to bring about decarbonization, supply chain resilience, national security, and better wages.

In the end, Biden’s industrial policy tied to specific industries and localities is unlikely to create jobs (instead, it merely shifts them from export industries to protected industries), let alone unionized jobs in the heartland (a region that already suffers from a crippling dearth of skilled labor). It is furthermore unlikely to boost overall US economic growth beyond the initial spending bump. It is, however, likely that the real results of Biden’s industrial policy are higher consumer prices, accelerating inflation, and an overall loss of US competitiveness.

Domestic effects aside, Biden’s industrial policy also has negative international repercussions. First, many of the industrial policies violate the very trade principles the United States championed when it helped form the WTO. In a way, the United States therewith forgoes its privileged position in promoting and developing trade rules abroad (and legitimately enforcing those rules). It certainly forgoes any legitimacy in disciplining behavior abroad that the United States itself has implemented at home.

Second, Biden’s industrial policy is essentially self-dealing. It is designed to draw investment, production, and raw materials away from other countries. This zero-sum logic will almost definitely provoke an international backlash. Let us start with those countries that can afford to pay subsidies to domestic industries. Powerful countries will retaliate, emulate, or, in rare instances, negotiate. None of these responses are good news for the US economy, as is obvious in situations where countries retaliate against US exports of goods and services (recall, for example, China’s reaction to the Trump tariffs). When other countries emulate our discriminatory industrial policies, the harm to the US economy may be particularly pronounced, because it again shuts out US exports and may easily trigger lose–lose subsidy wars in which too-big-to-fail national champions compete on the world stage. In addition to being costly to the supporting countries, subsidy wars also tend to stifle innovation and technological diffusion, which would be particularly bad for accelerating a green energy transition. Losses to the US economy are smallest in cases in which powerful trade partners manage to negotiate preferential access to the US market (for example, the European Union [EU] managed to extract concessions for its electric vehicles to benefit from certain IRA subsidies). Yet, imports still risk being more expensive, and potentially of lower quality compared to imports entering under a nondiscriminatory policy alternative.

Next, consider the reaction of poorer countries that cannot afford costly subsidy programs. These countries will see shrinking export markets and inward investment, and thus less developmental progress. They will find themselves hat in hand, begging for access to the US market, to become part of US supply chains, or at least to be able to export raw or processed materials. This is guaranteed to breed mistrust and resentment against the United States and may draw these poorer countries toward other trade alliances.

Biden’s Strategy for International Cooperation: Milquetoast

Let us now turn to the second policy prescription of the “New” Washington Consensus: Biden’s strategy for cooperating with trade partners and allies. The good news is that the Biden administration, as opposed to its predecessor, actually sees virtue in international cooperation. That said, it is instructive to note what Biden’s trade cooperation strategy does not include: it entails no aspirations to pursue either traditional trade agreements (such as rejoining the TPP or finalizing the Transatlantic Trade and Investment Partnership [T-TIP] with the European Union). It entails no ambition for a revitalization of the multilateral trading order. On the contrary, Biden has continued Trump’s expansive assertion of national security exceptions to justify trade restrictions and has dialed back US ambitions for ongoing trade negotiations in key areas such as digital trade.

The United States under Biden has championed sectoral partnerships (such as the critical minerals agreement negotiations initiated with allies Japan and the EU) and so-called framework agreements (such as the Indo-Pacific Economic Framework for Prosperity [IPEF]). What is common to these types of agreements is that the United States is not willing to make concessions, particularly market access concessions, to foreign goods and services. Rather, the sectoral partnerships championed by the United States are solely based on areas of common interest. Some sectoral partnerships deal with financing infrastructure projects in the region, others with developing secure supplies of minerals needed to make advanced electronics or writing agreements to facilitate digital commerce. Some are mutual accords to exclude, or induce behavior changes of, third parties (as with the planned Global Arrangement on Sustainable Steel and Aluminum [GASSA] with the EU that limits access to US and EU markets for “dirty” Chinese and Indian steel). While these sectoral agreements can be quite effective, they may not always be WTO compliant.

As for the negotiations of framework agreements, the US strategy largely involves the attempt to extract commitments on environmental or labor standards from trade partners. In addition, the Biden administration aims at negotiating mutual recognition of existing procedures or standards.

All of this is weak tea, because the United States is not willing to give something to get something. There is no incentive for other countries to adopt proposed principles (besides those that are in their interest anyway). The last IPEF summit in November of 2023 predictably collapsed because the United States asked developing countries to give up comparative advantages (cheaper labor and laxer environmental rules) for nothing in return. Under the current mindset, one may reasonably expect that future “trade” agreements will be less about trade and more about forging political and security relations and thus may easily become subject to political whims and maneuvers. Trade agreements motivated by politics, rather than economics, may jeopardize, rather than strengthen, supply-chain efficiency and resilience. Moreover, they risk being fair-weather accords—purely transactional bargains that can be violated or revoked at no cost at any time. While those weak accords help further Biden’s domestic agenda that shields US industries from global competition, it is anyone’s guess how such trade deals will ultimately benefit US workers, make supply chains more resilient, or result in decarbonization.

Moreover, the US disinterest in reciprocal trade liberalization drives countries that still believe in liberalized trade and the efficiencies it entails into the arms of US rivals. Case in point, while the United States is sitting on the sidelines, the EU is in the process of finalizing a trade deal with Mercosur, while the United Kingdom is engaged in negotiations with eight countries in parallel. China is also aggressively pursuing new trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), TPP’s new name after the United States’ exit.

Biden’s China Strategy: Go It Alone

Finally, arguing that China pursues aggressive economic policies and has flouted international trade rules, either in letter or in spirit, the Biden team has set an objective of slowing down China’s economic and military ascent. Yet the United States cannot single-handedly take on China, even if the US objective is not decoupling but derisking, as Sullivan claims (although some commentators have questioned Washington’s derisking stance in light of the administration’s latest tariff escalation affecting Chinese clean tech). If the United States acts alone, China itself may decide to decouple, racing to find different markets for its exports, to develop different sources for critical imports, and to push technological advances at home to reduce dependency on the United States. Needless to say, a decoupling that goes too far too soon would be to the detriment of US companies, could jeopardize Biden’s green revolution, and could potentially even affect US military and intelligence capabilities. Focusing on export controls against China (only one policy in the US trade toolkit), a recent paper by the New York Federal Reserve estimates that US firms affected by export controls face declines of revenues by 8.6 percent, profitability by 25 percent, and employment by 7.1 percent (while, unsurprisingly, China substitutes US imports for non-US suppliers and domestic firms).

To be effective in pursuing its objectives vis-à-vis China, the United States needs to deepen relations with key allies and present a united front against violations of the international trading system. It is then all the more puzzling that the Biden administration continues to weaken, rather than strengthen, important alliances it relies on to effectively pursue its China objectives with minimal economic blowback. Examples abound: the “pause” on US liquefied natural gas exports that sent shockwaves through the EU; the quiet shelving of a US–UK trade agreement; or President Biden’s opposition to the nonhostile acquisition of US Steel by Japanese market leader Nippon Steel, stating that “it is vital for [US Steel] to remain an American steel company that is domestically owned and operated.”

“New” Washington Consensus, or “Washington Consensus 2.0”?

It is not clear whether President Biden’s trade stance is owed to political exigencies or personal conviction. It may also be that Biden is simply unable to stave off a seismic shift toward economic populism and nationalism in US economic policy that is bigger than either Trump or Biden. Be that as it may, it is not an exaggeration to note that the Biden administration’s “New” Washington Consensus is nothing short of a challenge to at least five decades of economic orthodoxy. It is exclusionary and anti-export. It weaponizes trade to achieve domestic and security goals. It is also a rejection of a rules-based international economic order in which the United States used to have a leading role and that served it well for decades. The “New” Washington Consensus no longer represents the belief that international trade is a win-win for all countries. Instead, it espouses a zero-sum logic whereby one country’s gain is the other’s loss and cooperation is ad hoc and transactional—cooperation is pursued if and when it suits US interests. This new strategy is myopic short-term thinking—it risks precipitating the disintegration of global trade into rivaling blocs, with the United States and China in opposing camps and other countries in the uncomfortable position of having to pick sides. And given the US protectionist stance, what is the incentive for third countries to join the United States?

International trade currently is unpopular with Americans from the nationalist right to the progressive left (35 percent of Americans see international trade as a threat to the economy, while only 61 percent see it as an opportunity). Advocates for international trade certainly are not blameless here: In the past, they have overhyped the gains from trade agreements while underestimating distributional costs on lower-skilled labor, and they failed to anticipate localized recessions resulting from international competition. However, instead of yanking the pendulum toward neo-protectionism and techno-nationalism, one may consider updating and improving the existing rules-based order—call it Washington Consensus 2.0.

What would a Washington Consensus 2.0 look like? Domestically, it would capture the gains of liberalized trade, while offering effective protection from the downsides of globalization. The focus thereby would be on workers, not jobs. Rather than trying to save uncompetitive facilities and declining industries, the Washington Consensus 2.0 would promote job creation in distressed areas and improve transition assistance for those who have lost their jobs to international competition and technological advance. The Nordic countries and New Zealand teach us that an economy can be open and egalitarian at the same time. A Washington Consensus 2.0 would foster (WTO-compliant!) investment in infrastructure, R&D, education, and talent attraction, rather than bet on handpicked industries (one step in the right direction is the Bipartisan Infrastructure Law, passed under Biden’s watch in late 2021, though it remains diffuse and incongruous). Comparative advantage cannot be compelled with handouts and protection, but it can grow organically given the intellectual and infrastructural fertilizer. A Washington Consensus 2.0 would mean focusing on technology adoption, not technology production: Diffusion and adoption of the best available technologies (even if imported) is more likely to create long-lasting economic benefits and larger innovative breakthroughs than a government trying to pick winning technologies (on that issue, recall France’s irrational, and costly, attachment to the telex at a time when the rest of the world was already using the internet).

Internationally, a Washington Consensus 2.0 would mean more and deeper trade agreements since it is better to coordinate, not compete, with allies on public investments in complex areas such as high tech and decarbonization. This cooperation would remove commercial conflict and facilitate the spread of the best technologies. The United States should seek out comprehensive and enforceable trade agreements with a large membership, such as the TPP and T-TIP, not only to provide a veritable counterbalance to China’s heft—as originally intended by the Obama administration—but also to help promote technological diffusion and adoption of common international technical standards (including on labor, the environment, and AI). A Washington Consensus 2.0 would mean an immediate deblocking of WTO dispute settlement and a redoubling of efforts to engage in (an, admittedly, overdue) WTO reform that takes on rule flaunting by developed and developing countries alike. And if any WTO member were to block meaningful WTO reform, the United States should assemble the largest possible coalition in a future-oriented club of the willing (e.g., climate club).

International trade is here to stay. The question is to what degree the United States will participate in it and whether the US will resume its leading role in defending the ground rules of global trade. Historical evidence shows that expanding trade has delivered tremendous value to the US economy. A Washington Consensus 2.0 could convince Americans that being protrade is neither unpatriotic, nor antiworker, anticlimate, or hypercapitalist. Being protrade means being in favor of a system that rewards innovation, efficiency, and dynamic growth; that makes the distributable pie larger; that actually attempts a fairer distribution of the spoils of trade; and that advances US diplomatic, security, and economic interests in the long term.

Simon Schropp is a managing economist at the global law firm Sidley Austin LLP. He previously worked for the World Trade Organization (WTO) Secretariat.

To read the full policy brief as published on the website of George Mason University’s research center, the Mercatus Center, click here.

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Comparing Trump’s Haphazard $2,500 Tax Increase to Biden’s Targeted Tariffs

President Joe Biden’s strategic approach to rebuilding the country’s industrial base with targeted tariffs and national investment stands in stark contrast to Trump’s arbitrary, imprecise tariff and tax cut-only approach.

 

Both President Joe Biden and former President Donald Trump have touted trade policy proposals they say will help rebuild the country’s industrial base. But the difference between their approaches could not be clearer.

The Biden administration’s strategy of coupling federal investment with strategic tariffs has already yielded enormous investments, including unprecedented growth in factory construction and a surge in manufacturing employment, which now stands above prepandemic levels. The administration’s strategy is creating quality jobs in states across the country and demonstrates what is possible when all the tools for boosting American competitiveness are employed together, including national investment, regulation, procurement, and trade.

Biden’s recently announced tariffs, for example, were specifically targeted to protect key industries of the future—including semiconductors and clean energy technologies—from China’s predatory export policies and were the result of a calculated, strategic review process that stands in stark contrast to the chaotic, knee-jerk approach to trade policy demonstrated by former President Donald Trump. It is no wonder that allies from North America, Europe, and Latin America have or are expected to follow suit and announce similar actions against China to those that President Joe Biden already announced.

Trump is doubling down on the brash, imprecise approach from his first term that sullied alliances and delivered little in terms of new manufacturing or job creation. But this time, Trump’s plan would rely on far larger and even less targeted tariffs that would raise taxes for families and contribute to inflation. New analysis from the Center for American Progress Action Fund finds:

The combination of his 10 percent tax on all imports and a 60 percent tax on all imports from China would raise taxes for a typical family by $2,500 each year. This includes a $260 tax on electronics, $160 tax on clothing, a $120 tax on oil, and $110 tax on food.
The tax revenue from Trump’s taxes on imports would help finance Trump’s proposals to extend his expiring tax cuts. This would cut taxes for the wealthy while raising taxes for everyone else: The net tax cut for the top 0.1 percent of Americans would be $325,000 while a middle-income family would receive a net tax increase of $1,600 even after extending the expiring 2017 tax cuts.
Trump’s tariff proposals would create a one-time inflationary burst that could add up to 2.5 percentage points to the inflation rate according to Wall Street analysts.
Trump’s latest idea to replace all income taxes with tariffs is mathematically impossible, but even if it were feasible, it would dramatically increase income inequality and raise taxes for the bottom 90 percent of households. It would raise taxes for middle-income households by $5,100 to $8,300 while cutting taxes for the top 0.1 percent by at least $1.5 million annually.

A smart, pragmatic approach to making things in America

The Biden administration has taken a nuanced, targeted approach to handling the challenge that China’s nonmarket practices present. It is no secret that the U.S. relationship with China will be one of this generation’s defining foreign and economic policy challenges. There are few historical parallels of great powers as deeply integrated as the United States and China. But that economic integration—both bilaterally and through third-country markets—means that rash, imprecise actions that may sound forceful on the campaign trail are likely to result in collateral damage that could be avoided with more sophisticated, targeted actions.

As an example, China’s vast overcapacity in sectors such as steel and aluminum—and its willingness to exploit the global trading system to maintain its market dominance—has resulted in a series of “China shocks” that hollowed out communities through manufacturing job losses.

The Trump campaign’s imprecise, flawed approach is to counter China’s nonmarket practices with high tariffs on all goods imported from China. It would result in higher prices paid by Americans for all items coming from China,—not just those of strategic value or those that have been unfairly dumped in the U.S. market.

The Biden administration’s strategy is different. It focuses trade remedy actions on precisely those goods where it is in the national interest to maintain or build industrial competitiveness and then to align those actions with significant investment in American manufacturing. Moreover, the tariffs are just one part of a larger reindustrialization strategy designed to rebuild the country’s productive capacity and sustain American competitiveness well into the future.

The Biden approach was exemplified clearly a few weeks ago, when the president announced increases in Section 301 tariffs on select Chinese goods, including steel and aluminum, solar cells, semiconductors, electric vehicles, and medical products—all goods where domestic production is expected to increase dramatically as a result of investments made through the Infrastructure Investment and Jobs Act (IIJA); the CHIPS and Science Act; and the Inflation Reduction Act (IRA). In industries such as steel and aluminum, federal investments are also backstopped with Buy America procurement policies and other policies that are driving investment in domestic industries.

The results of the Biden administration’s trade approach speak for themselves: The investment agenda has helped spur the creation of 800,000 new manufacturing jobs, pushing the total number of manufacturing jobs above prepandemic levels. New factory construction has doubled after adjusting for inflation. Both of these metrics—manufacturing job creation and factory construction—fell during the Trump administration.

Trump seems to be resorting to bellicose rhetoric to cover up the near complete failure of his trade policy to deliver results. A Peterson Institute study, for example, found that Trump’s trade deal with China delivered none of the extra $200 billion of U.S. exports that it had promised. By contrast, under President Biden, the U.S. trade deficit with China has fallen to its lowest level in a decade. Put simply, Trump’s go-to solutions for any economic problem—tax cuts and tariffs—did not lead to a manufacturing renaissance, as he claimed it would.

The Trump campaign’s tariff plans would amount to a $2,500 tax increase for a typical family—and, based on his track record, would not increase manufacturing investment

Trump’s proposed across-the-board tariff on all U.S. imports—which would tax imports from allies and adversaries alike—would amount to a $1,500 tax increase in 2026 for a family in the middle of the income distribution, according to a previous CAPAF analysis. That number did not include the 60 percent tariff on all Chinese imports that Trump has proposed, which would be an additional $1,000 tax increase for a typical family.

Altogether, Trump’s tariff plan amounts to a $2,500 tax increase for a typical family.

Based on projected import data for 2026, it is possible to estimate how Trump’s import taxes would raise taxes for a typical household:

The tax on electronics would be $260
The tax on clothing would be $160
The tax on toys and other recreational items would be $140
The tax on imported oil and petroleum products would be $120
The tax on pharmaceutical drugs would be $120
The tax on food would be $110

This estimate is similar to that of economists Kim Clausing and Mary Lovely, who estimate a 2.7 percent reduction in average after-tax income ($1,700) for the middle 20 percent of households, with differences in the allocation of the tax between household income and GDP driving most of the difference between these two numbers.*

Trump’s latest unworkable proposal is a $5,100 to $8,300 middle-class tax increase

Trump recently went a step further in in a closed-door meeting of Republican lawmakers, where he reportedly floated an “all tariff policy” where import tax revenue would enable to the U.S. to eliminate the income tax.

No tariff on the $3 trillion of goods imports entering the country each year could raise enough revenue to replace the $2 trillion the individual income tax raises annually. The tariff tax rate would have to be so high that it would cause the volume of imports to drop dramatically. Economist Paul Krugman estimated that replacing income taxes entirely would require a 133 percent tax rate on imports, and even that number included favorable assumptions, such as taxing service imports and limited behavioral response.

Nevertheless, an analysis that ignores the proposal’s mathematical impossibility shows that it would be one of the most regressive tax changes ever proposed. The income tax code is progressive and generally requires higher income Americans to pay a greater share of their income than lower-income Americans. Tariffs, on the other hand, are one of the least progressive sources of revenue meaning that the tax burden as a share of income is even higher for low-income families. And this is a lower bound for the regressivity of the proposal since it follows the Treasury Department assumption that producers—not consumers—pay the tariff.

The net effect of this swap—implausibly assuming that the new tariffs raised as much revenue as the income tax—is that it would raise taxes for each income group in the bottom 90 percent of families (those earning under $220,000 for a family of two) while cutting the taxes for the top 10 percent. The result would be a 25 percent reduction in the income of the bottom 20 percent of households and 20 percent increase in the income of the top 1 percent.

Another way to see the proposal’s regressivity is that it would create a net $5,100 to $8,300 tax increase for the middle 20 percent of households depending on the analytic assumption about whether U.S. producers pay the tariff ($5,100) or U.S. consumers pay it through higher prices ($8,300). The top 1 percent, on the other hand, would receive a net tax cut of at least $290,000, and the top 0.1 percent would receive a net tax increase of at least $1.5 million.**

While we do not have the data that would allow us to calculate the net tax cut for the highest income families—the roughly 1,500 families in the top 0.001 percent of families with annual reported incomes above $75 million in 2024—they pay an estimated average of $41 million in income taxes that Trump’s proposal would wipe away. While the very wealthiest pay a low income tax rate as a share of a more expansive definition of income, they likely consume a very low share of their annual income. The tax increase from the tariff is, therefore, likely much smaller than the $41 million average income tax cut.

While the sheer impracticality of Trump‘s scheme may cause some to discount it, it nevertheless reveals Trump’s tax and trade policy goals. His other proposals to use tariffs to offset tax cuts for the wealthy—while less extreme—are steps in this direction and would still cost middle-class families thousands of dollars.

Trump would use taxes on imports to help finance tax cuts tilted to the wealthy and corporations

These two import taxes would raise $2.7 trillion over 10 years, according to Clausing and Lovely. Taken on its own, this would make it the second-largest tax increase, as a share of the economy, in about 75 years.***

But it is important to place this tax increase on Americans families in the context of Trump’s larger tax plan: Trump has also proposed cutting taxes for the wealthy and corporations. This includes extending major portions of his 2017 tax cuts, including the individual tax cuts (a cost of roughly $3.9 trillion over 10 years) as well as reverse budget gimmicks involving business taxes used to reduce the cost of his tax law (roughly $800 billion).

In other words, Trump’s proposed tariffs would help offset the cost of his proposed tax cut extension by making middle- and working-class Americans pay more for groceries, gas, and clothes. He may couch his policies as a plan to rebuild American manufacturing, but in reality, he would be pushing a shift from income taxes to far-more regressive consumption taxes, increasing the burden for working families. Clausing and Lovely showed that this would be a net tax increase for every income group outside of the top 20 percent of households, with the largest net tax increase for the bottom 20 percent.

Moreover, Trump has called for other policies that would benefit the wealthy at the cost of working families. He has proposed eliminating the Affordable Care Act, which would repeal key taxes on the wealthy, paid for by cutting low- and middle-income Americans’ health care.

Putting the pieces of his tax plan together shows that a middle-income family could expect to experience a net $1,600 tax increase as a result of Trump’s plan to extend the individual portions of the 2017 tax law; repeal the Affordable Care Act’s taxes on the wealthy; and enact broad-based tariffs. The 120,000 households in the top 0.1 percent—a group making more than $4.5 million in 2026—on the other hand, would receive a net $325,000 tax cut each from these provisions using similar assumptions to those made by Clausing and Lovely.****

In contrast, President Biden, has stated that he will not extend the expiring tax cuts for households making more than $400,000 and that he would pay for extending the expiring tax cuts for households making under that amount through tax increases on the wealthy and corporations.

Trump’s tariff plans would add up to 2.5 percentage points to the inflation rate

Several Wall Street analysts have estimated the effects of Trump’s tariff plans on overall consumer prices and inflation. All of these analyses suggest that these plans would produce a one-time inflationary burst, which are just one piece of Trump’s larger inflationary agenda.

For example:

The Capital Group has estimated that Trump’s 10 percent across-the-board tariff and 60 percent China tariffs would lead to a 2.5 percent increase in prices in 2025. It predicts that the across-the-board tariff alone would trigger a resurgence in inflation (as measured by the Consumer Price Index) to between 3 percent and 4 percent by the end of 2025.
Bloomberg Economics similarly estimated that both sets of Trump-proposed tariffs would ultimately raise consumer prices by 2.5 percentage points, pushing up the inflation rate (as measured by core Personal Consumption Expenditure inflation) up to 3.7 percent by end of 2025. This is compared to expected inflation of 2.1 percent in 2025 according to a Bloomberg survey of economists.
Goldman Sachs has estimated that each percentage point increase in the overall U.S. tariff rate increases core consumer prices by 0.1 percent. Ed Gresser at the Progressive Policy Institute estimated that Trump’s proposed tariffs would increase the U.S. tariff rate by about 12 percentage points, suggesting a 1.2 percent increase in consumer prices when combined with the Goldman estimate.
Even a former chief economist of the Trump White House Council of Economic Advisers, Casey Mulligan, estimated that just the across-the-board tariff would add 1 percentage point to inflation. He also admitted “there’s going to be a cost to that in the system, and then the consumer is paying more.”

It is important to note that all of these analyses assume a one-time inflationary burst and not a permanent increase in the inflation rate. Nevertheless, American families would continue to pay those higher prices each year even after the tariffs are no longer reflected in the annual inflation rate.

Conclusion

The contrast between the candidates’ trade policies could not be clearer: President Biden’s combination of strategic tariffs and investments in manufacturing is leading to an industrial renaissance, creating good paying jobs for Americans across the country. Former President Trump’s wanton, untargeted tariff—and-tax-cut approach would double down on trade policies that have already proven ineffective while raising taxes for families squeezed by inflation.

Methodology: The $2,500 tax increase

The authors used the same methodology as in our previous analysis to calculate the tax increase from the 10 percent across-the-board tariff and the 60 percent tariff on Chinese goods projecting the analysis to 2026 to make it comparable to the tax cut from extending the expiring portions of the Tax Cuts and Jobs Act. The analysis assumes that the 60 percent tariff on Chinese goods is essentially a 50 percent tariff in addition to the 10 percent across-the-board tariff.

As in CAPAF’s previous analysis, the authors followed the methods used by from tax modelers at the U.S. Treasury Department and the Tax Policy Center to assume no behavioral response to tax policy changes for the purposes of estimating costs, as opposed to applying a revenue estimate approach that would incorporate those responses. Trump’s additional tariff on Chinese goods could elicit more avoidance than the across-the-board tariff if Chinese producers route goods through other countries, but that behavior would have costs for American consumers as well. Moreover, Clausing and Lovely argue that multiplying the tax increase by the number of imports is a lower bound of the tariffs’ burden on consumers because domestic producers will use the tariffs to raise their own prices.

*Authors’ note: Clausing and Lovely calculate a similar tax burden to consumers ($500 billion or 1.8 percent of GDP), though the dollar figure is somewhat smaller because it is for 2023 as opposed to 2026. Their analysis mostly focuses on after-tax income so they multiply the consumer burden equal to 1.8 percent of GDP by total household income from the U.S. Treasury Department’s Office of Tax Analysis, which is smaller than overall GDP. This is somewhat more conservative assumption. Clausing and Lovely also distribute the tax to income groups based on consumption excluding housing, pensions, and personal insurance, which somewhat reduces the share of the tax increase that goes to the middle quintile.

**The $8,000 figure uses the same methodology as the $2,500 calculation. The $5,000 figure as well as tax cuts for the top 1 percent and top 0.1 percent were calculated using the Treasury Department’s  distribution of current customs and excise taxes , which assume producers pay the tax. Tax cuts for the top 1 percent top 0.1 percent using a similar assumption that consumers pay the tax as the $8,000 figure  would be even higher .

***Authors’ note: Clausing and Lovely calculate that the revenue effect (not the consumer burden) would be $242 billion 2023, which is 0.83 percent of GDP. Jerry Templaski from the U.S. Treasury Department’s Office of Tax Analysis  estimates  revenue effects of major tax bills as a share of GDP from 1940 to 2006. The 0.83 percent of GDP revenue increase from Trump’s tariffs is larger than every “full-year” tax increase recorded in Templaski’s analysis after the Revenue Act of 1951 until 1968. After 1968, Templaski provides two-year average and four-year average revenue effects. The four-year average revenue effect is larger than every tax increase from 1968 to 2006 except for the Tax Equity and Fiscal Responsibility Act of 1982. The two-year revenue effect of the tariffs is larger than that bill’s, but smaller than the Revenue and Expenditure Control Act of 1968’s which has no four-year effect because it was one-year legislation. Therefore, the tariffs would be the second largest since 1951 whether measured as two-year or four-year averages.  CBO tables  current through February 2024 indicate no subsequent tax increases after Templaski’s analysis that are larger as a share of GDP.

****Authors’ note: Clausing and Lovely assume that the burden of the tariff for the top 1 percent as a share of income is half of that for the top quintile, as a whole. We assume the same about the top 0.1 percent. We use their method for calculating the tax as a share of after-tax income but distribute the full static tax increase instead of multiplying the consumer burden as a share of GDP by household income.

To read the full article as published by the Center For American Progress Action Fund, click here.

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The EU Chooses Engagement, Not Confrontation, in Its EV Dispute With China

The European Commission’s decision to impose new provisional tariffs on electric vehicles (EVs) imported from China came after nine months of investigation into China’s practice of subsidizing EV exports. Three Chinese producers were hit with three different anti-subsidy duties; BYD was hit with 17.1 percent; Geely, 20 percent; and SAIC, 38.1 percent. But the tariffs should be seen as the beginning of a process, not the end. A careful look at the European Union’s actions indicates its lack of desire to escalate trade tensions for political reasons and perhaps even willingness to find a negotiated settlement with China.

In addition to the three EV manufacturers mentioned, other EV producers in China that cooperated with the EU investigators received a weighted average duty of 21 percent. All other producers that did not cooperate were hit with the top 38.1 percent. These anti-subsidy duties come on top of the European Union’s regular 10 percent tariff on EV imports from China.

These new EU anti-subsidy tariffs are on par with those imposed following previous EU anti-subsidy investigations concerning imported goods from China. Rhodium Group estimates that collaborating Chinese firms in earlier investigations have faced new duties of an average of 19.7 percent. Meanwhile, in earlier EU anti-subsidy investigations, the exports of non-cooperating firms, such as coated organic steel products, received new duties of 44.7 percent, while Chinese exported truck and bus tires to the European Union in some cases were subjected to new duties of over 50 percent.

Imposing the lowest tariff on BYD, a leading firm that is opening a production facility inside the European Union, gives the company an advantage in the EU market. Its stock price has predictably benefitted. Similar circumstances pertain to Geely, which also has EU production facilities and enjoyed a relatively low additional tariff. By contrast, SAIC, which is the largest Chinese owned EV exporter to the European Union via its MG brand, has no current or planned EU production location. Its tariff will probably encourage it to locate EV production inside the European Union. As discussed in a previous blog, these circumstances add up to something functionally akin to Japan setting up auto production in the United States to avoid tariffs threatened in the 1980s.

Assuming that all EU-owned EV producers in China, as well as Tesla, cooperated with the EU investigation, they too face relatively low additional tariffs of 21 percent for EV exports to the European Union. And as researched by Rhodium, some China-based EV producers will suffer commercially from tariffs at this level. Rhodium estimated approximate differentials in profit rates for sales of EVs produced in China in both the Chinese and German EV markets, relying on available EV model manufacturer suggested retail prices. China-based EV producers like BMW, Tesla, and probably other foreign EV producers operating in China, as well as the Chinese company that makes the Nio, will face significant challenges for their future export profitability relative to their sales in China. The 21 percent tariff exceeds these firms’ estimated profit margin for sales in the German market, making exports from China unprofitable. However, these producers, of which most have EU-located production facilities, now instead have a commercial incentive to relocate EV production to Europe. It should here be noted, though, that the Commission in its announcement made clear that Tesla “may receive an individually calculated duty rate” later, and hence possibly face lower future commercial headwinds from these tariffs.

All told, the Commission has acted carefully after mounting a substantial anti-subsidy investigation, involving over 100 location visits and dozens of Commission staff, as discussed in an earlier blog post. New tariffs signal the political willingness—within World Trade Organization (WTO) rules—to confront Chinese EV trade practices while providing incentives for Chinese EV producers to locate production inside the European Union. And applying the lowest tariffs on BYD, the EV market leader in China and clearly the biggest commercial threat to EU car companies, points to the Commission following the facts of the case rather than being guided by crude protectionist instincts. This approach could set the stage for further cooperation in the future.

The Commission’s tariff announcement was for “provisional tariffs” on EV exports from China to the European Union, while “definitive tariffs” must now be set within four months. Definitive anti-subsidy tariffs, however, must be approved by a majority of the EU member states in the EU Council. Some member states may try to get the Commission to revoke or alter the proposed tariff levels to promote smoother trade relations with China in the auto sector. The final political review of the tariffs will also provide individual EV producers in China with the opportunity to seek their own (like Tesla) individually calculated (lower) definitive duty rate.

But the Commission’s cautious and fact-driven approach fostering more investment in Europe will make it harder for EU member states to challenge its decision. Perhaps the scope of the application of the top 38.1 percent tariff to non-cooperative firms can be negotiated at the margin, but it seems unlikely that the lower tariffs around the 20 percent level will be altered.

Will China respond to the European Union’s careful approach? Some retaliatory action against specifically targeted EU exports to China may be inevitable. These actions could affect EU agricultural imports as well as internal combustion engine (ICE) vehicles with large engines, or even aircraft, although given the global duopoly of Airbus and Boeing, the European Union is unlikely to punish the former to the benefit of the latter. China will also not want to antagonize German and other European car manufacturers that are among its allies in the fight against these new EV tariffs. Targeting the EU car industry for retaliation might be self-destructive. Various politically sensitive agricultural products hence seem a more likely trade outcome. China has now initiated an investigation into EU exports of pork and pork by-products to China.

Obviously, China has various other political and financial tools to retaliate. It could delay or redirect planned investments selectively to European countries backing the tariffs. Beijing is likely to take its time before responding to measure various countries’ reactions.

For China, the commercial bottom line is that the European market is important, especially because the US market has been closed off by the Biden administration’s tariffs, while Turkey (40 percent) and Brazil (35 percent by 2026) have recently introduced new EV tariffs that are even higher than EU levels. Beijing has every incentive to avoid an escalatory trade war with the European Union in the EV sector.

Finally, because the European Union followed WTO rules in its investigation of Chinese subsidies, it is signaling that it is not following the “rogue” path of the Biden administration justifying its EV tariff action on national security grounds. So perhaps Beijing will hold its fire also for political reasons.

The Chinese government might take this dispute in the EV sector to the WTO, perhaps as part of its Multi-Party Interim Appeal Arbitration Arrangement, to which both China and the European Union are parties. Such a move would help China to be seen as playing by the rules, unlike the United States, and it could even signal a potential settlement of the EU-China dispute on EVs.

To read the full blog piece as published by the Peterson Institute for International Economics, click here.

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Behind Japan’s U.S. Steel Bid: An Aging, Shrinking Home Market

When Japan’s industrial titan Nippon Steel sought to acquire U.S. Steel late last year, it set off a chorus of American opposition.

Union leaders and lawmakers railed against the deal in language reminiscent of the U.S.-Japan trade wars of the 1980s and 1990s. President Biden — nodding to swing state votes in steel country — said U.S. Steel must remain “domestically owned and operated.”

Leave aside the election year politics — and how it tests the ability of an American company to pursue what it sees as the most logical strategy for itself. The bid reflects Japan’s rise to the largest foreign investor in American businesses. And this investment surge is unlike those of years past when Tokyo’s overseas expansion was part of its rising economic clout. Today, the opposite is true.

Japan’s relentless population decline is causing its market to shrink. So Japanese companies are turning to the U.S. for growth, thereby setting a precedent for other foreign companies facing similar demographic challenges in their home markets.

It is a precedent Washington policymakers would do well to note. The Nippon Steel bid illustrates how, in the coming years, more foreign companies with declining populations are going to seek to invest in the U.S.

This is a trend the U.S. should welcome and seek to leverage while making sure investments come from trusted allies, not from strategic rivals, including China, to avoid leakage of technology.

Foreign investments — particularly those in manufacturing — create both jobs and fresh opportunities for local businesses. Rural areas such as midwestern factory towns will be beneficiaries.

Allied investments bring capital and innovation that allow the U.S. to better compete against China. The Biden administration, through “friendshoring,” is already working with allies and likeminded nations to strengthen and secure supply chains for critical products. That strategy should include embracing U.S.-bound investments from those same close allies, starting with Japan.

Big beneficiaries of this approach will be American workers, especially those without college degrees, who tend to gain from good manufacturing jobs.

DEMOGRAPHICS AND NATIONAL SECURITY

Major economies in Europe and Asia are facing the same demographic challenges that have long haunted Japan. Plummeting fertility rates and growing cohorts of elderly citizens sharply reduce consumer demand. The result is a huge incentive to seek growth in the U.S., the world’s largest market where immigration has softened the burdens of the global aging phenomenon.

For many foreign companies, the U.S. remains the most attractive investment destination. The Inflation Reduction Act and the CHIPS and Science Act have offered businesses tax benefits and subsidies, luring tens of billions of dollars in new investments from Asia and Europe. A right mix of policies would attract even more foreign money, spurring job creation, innovation, and more prosperity.

In Japan, meanwhile, domestic steel demand is down by some 40% from its 1990 peak. So the leading Japanese steelmaker has sharply expanded its overseas capacity, snapping up factories in countries from India to Brazil.

The proposed U.S. Steel deal would make Nippon Steel the world’s third largest steelmaker measured by crude steel output, producing more metals abroad than in Japan. Japanese steel production capabilities are world-class, and Nippon’s bid is a testament to an attractive U.S. market and investment targets.

In major foreign investment transactions, it is natural to think about issues beyond those strictly related to business. Few can argue lawmakers and federal agencies are wrong to raise national security concerns. U.S. Steel is a “critical piece of America’s defense industrial base,” said Sen. J.D. Vance, Republican of Ohio. Now, he fumed, the Pittsburgh company is “being auctioned off to foreigners for cash.”

Japan, however, is a staunch U.S. ally, one that sits on China’s doorstep. The two countries’ economies and national interests are so closely intertwined that the U.S.’s efforts to fend off competition from China inevitably involve Japan’s cooperation.

Japanese manufacturers loom large in global supply chains. Companies like Tokyo Electron build machine tools essential for semiconductor manufacturing, making them critical players in Washington’s effort to limit China’s access to high-end chips. Boeing has for decades relied on components made in Japan, which make up more than a third of the 787 aircraft. Apple’s iPhones contain numerous Japanese components.

Japan is also a huge — and growing — buyer of U.S.-made military equipment, while owning a big chunk of America’s national debt through its Treasury securities holdings, currently worth $1.2 trillion.

All of which raises questions for U.S. policymakers: Might the U.S. better withstand Chinese competition with a bit more of its industrial production in the hands of Japanese managers? The question is particularly relevant in the steel industry, where Chinese companies, with their subsidies-fueled overcapacity, have threatened the viability of their competitors globally with floods of cheap products. Last year, China accounted for 54% of the world’s crude steel output. Six of the world’s 10 largest steelmakers are Chinese.

A final decision on Nippon Steel’s bid will come in the months ahead, an outcome that makes Japan a test case of U.S. commitment to its free market principles and its allies: Will the U.S. embrace the exceptionally fortunate position it occupies in the world as the prime investment destination? Or will protectionism — often tied to short-term political gains — undermine those advantages?

Yuka Hayashi is a senior fellow at the Progressive Policy Institute. She was a journalist at the Wall Street Journal for two decades, most recently covering U.S. trade and economic policy from Washington. Previously, she was a Journal correspondent in Tokyo, where she wrote about Japan’s economy and East Asian geopolitics.

PPI-U.S.-Steel-Japan

To read the introduction as it is published on the Progressive Policy Institute’s website, click here.

To read the full report, click here.

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