Biden’s Turn Against Trade Makes It Hard to Win Friends

The danger of a major policy change is that, in correcting for past errors, governments commit the opposite ones. The Biden administration is in danger of doing just that with its ambitious new industrial policy. In particular, by rejecting the model of trade negotiations that the United States championed for decades, the administration risks adopting an approach that excludes much of the world.

Thirty months into U.S. President Joe Biden’s first term, he is well along in carrying out the most dramatic revolution in U.S. economic policy since the 1980s, when then-U.S. President Ronald Reagan declared government to be the problem, slashed taxes, and launched the most comprehensive free trade negotiations in U.S. history. Biden can rightly claim historic accomplishments in bringing government back into the economy, working with a divided U.S. Congress to pass legislation to rebuild U.S. infrastructure, subsidize domestic production of semiconductors, incentivize new manufacturing jobs in left-behind communities, and turbo-charge the United States’ transition to cleaner energy sources.

But the administration has struggled to figure out how the rest of the world fits in. The Reagan model of cutting tariffs and reducing regulatory obstacles had the virtue of letting the chips fall where they may. Countries could compete for investment not only by offering a better workforce or more efficient infrastructure, but also by holding down wages, cutting taxes, and weakening regulations. Developing countries saw their share of global manufacturing rise sharply over the past three decades as China, Mexico, Vietnam, Poland, and other countries became vital to global supply chains. These countries, not surprisingly, mostly liked the trade regime originally pushed by Washington—according to a poll conducted by IPSOS, more than 80 percent of people surveyed in major developing economies say trade expansion has been beneficial.

In championing a different model, the Biden team has struggled to address the concerns of trading partners who fear private investment will now flow away from their economies to the United States as companies around the world chase the enormous new subsidies on offer. The administration is pursuing two goals that, while not mutually exclusive, are in tension: Biden wants to build more resilient global supply chains to reduce dependence on China—which requires diversified trade—while also trying to lure investment and manufacturing jobs back to the United States. Devising a trade policy that addresses both goals has so far been elusive.

U.S. Trade Representative Katherine Tai did not help last week in what was billed as a major speech on U.S. trade policy. “A key part of my approach is to put the U.S. back into USTR [the Office of the U.S. Trade Representative],” she said, a line that will reinforce trading partners’ fears about their place in the new order. The United States, she said, should pursue a trade policy that “revitalizes U.S.-based production at high, middle, and low ends, and puts workers back at the center because they are the foundation for resilience.”

Her critique of past U.S. trade policies, which focused more on efficiency than equity, have merit, especially in the long failure by previous administrations to counter China’s aggressive mercantilism. But she went well beyond this critique into a full-throated denunciation of the Reagan free-market model. “When efficiency and low cost are the only motivators, production moves outside our borders,” she said, calling it a “race to the bottom, where exploitation is rewarded and high standards are abandoned in order to compete and survive.”

Her alternative, however, is one that will be unpopular with much of the world. She suggested that countries wishing to expand trade with the United States should all adopt much higher labor and environmental standards, much like those contained in the new U.S.-Mexico-Canada Agreement (USMCA), in which she played a big role as a top congressional staffer working with Robert Lighthizer, the Trump administration’s USTR. Past trade deals, she said, had erred in allowing “significant content to come from countries that are not even parties to the agreement—free riders, who have not signed up to any of the other obligations in the agreement, such as labor and environmental standards. That means these rules benefit the very countries that have used unfair competition to become production hubs.” Trade deals usually require some minimum percentage of the content of a traded product—say, an automobile—to be produced in the country or region covered by the deal to qualify for tariff elimination. In the USMCA, for example, that minimum is 75 percent  of a car’s value. One reason the United States walked away from the Trans-Pacific Partnership trade deal was that U.S. labor unions objected to that treaty’s much lower content requirements on autos, fearing this would largely benefit China.

The United States has, at times, restricted trade with countries that failed in egregious ways to meet labor or environmental standards, but it has never before suggested that countries outside the U.S. network of free trade agreements are “free riders.” If rigorously enforced, such a litmus test would reduce U.S. trade with the developing world, much of which is unlikely to meet advanced-economy standards any time soon. And strangely, the administration has so far made no effort to extend the USMCA model to other countries. The current Central America-Dominican Republic Free Trade Agreement between the United States and six Central American and Caribbean countries, for example, would be an obvious choice for renegotiation. An enhanced agreement might help these countries—which cause political headaches for the administration as a continued source of migrants to the United States—become more attractive investment destinations as companies look for alternatives to China.

The looser consultations that Washington is now leading—the Indo-Pacific Economic Framework and the Americas Partnership for Economic Prosperity—do include discussions on higher labor and environmental standards. But in these negotiations, the Biden administration has rejected all calls to further open the U.S. market, which limits any incentives these countries might have to commit to more stringent obligations.

Tai’s speech is unlikely to be the last word on the administration’s still-mysterious agenda for trade. Biden shares her strong sympathy for organized labor; at a campaign rally in Philadelphia last week, he once again touted himself as “the most pro-union president in American history.”

U.S. unions remain staunchly opposed to any revival of traditional trade negotiations. But other senior officials have sketched out a more inclusive vision in recent weeks, presumably because they realize that Biden’s rejectionist stance on trade is in sharp conflict with attempts to revitalize U.S. alliances and partnerships for geopolitical competition. U.S. National Security Advisor Jake Sullivan, who has played a more hands-on role in economic policy than any previous occupant of the job, said in April that “it isn’t feasible or desirable to build everything domestically. Our objective is not autarky—it’s resilience and security in our supply chains.” He also added that “we have to—and we intend to—dispel the notion that America’s most important partnerships are only with established economies.” He promised to “prove it” by engaging on trade with India, Indonesia, Brazil, Angola, and other countries. None of these nations have agreed, or are likely to agree, to uphold labor and environmental obligations of the sort contained in the USMCA.

The confusion over trade will continue unless Biden himself clarifies the new U.S. approach. But that is unlikely to happen in the run-up to the 2024 presidential election, as Biden is determined to maintain unity in the Democratic Party. Domestic U.S. politics therefore requires the administration to maintain ambiguity for now: U.S. workers can be told that the new industrial policies are all about serving their interests, whereas allies and trading partners can be vaguely reassured that they will benefit too. 

But the dilemma cannot be wished away. The old free trade model, for all its flaws, was globally inclusive. Most countries could find a place in a system that at least promised (and mostly delivered) faster growth inside than outside. Industrial policy—because it involves governments using taxpayer dollars to actively shape investment decisions—raises tougher questions about which countries should share those benefits and which should be left out. Until the Biden administration can clarify its direction, the anxiety in foreign capitals will remain.