Weighing the Pros and Cons of Global Trade Leadership
from Greenberg Center for Geoeconomic Studies and RealEcon

Weighing the Pros and Cons of Global Trade Leadership

REUTERS/Denis Balibouse

Under Biden and Trump, the U.S. has broken from its long-standing free trade policy. CFR trade experts assess whether the rules-based trading system is worth saving.

April 15, 2024 1:27 pm (EST)

REUTERS/Denis Balibouse
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Current political and economic issues succinctly explained.


A regular series on the choices faced by international economic policymakers

Should the U.S. Reform the World Trading System or Work Outside It?  

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Inu Manak 

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The future of U.S. leadership in today’s global economy rests on one major choice: Will the United States continue to conduct economic affairs in small groupings outside of the international rules-based framework, or will it lead efforts to design a new set of inclusive rules for the world trading system? The Joe Biden administration’s approach to trade suggests the former is more likely. 

That domestic economic security has become the central organizing principle of foreign economic policy under the Biden administration is telling. Export controls, sanctions, industrial policy, and friendshoring have taken center stage, while long-supported U.S. led and created international approaches to trade have largely been abandoned. In a now-famous speech in April 2023, National Security Advisor Jake Sullivan called for a new Washington Consensus, arguing that the postwar international economic order had cracks in its foundation and that growing geopolitical and security competition required a new approach. However, that new approach raises challenges that the administration is yet to acknowledge or meet. 

Take the Indo-Pacific Economic Framework (IPEF), an important component of that new approach and one of many tools the United States has employed to shore up economic security. While it is too early to tell if the initiative will yield its desired results, several aspects are clear. First, IPEF is not a trade agreement. In fact, last fall, Secretary of Commerce Gina Raimondo stated that “[it] is not and was never conceived to be a trade agreement.” Instead, IPEF responds to the administration’s foreign economic policy agenda by focusing on friendshoring through building trust and transparency in strategic supply chains, good governance, and cooperation on energy security and the green transition. Moreover, its trade pillar remains unfinished, and its exclusion of market-access provisions means that there is only so much U.S. trading partners will give for what they can get. That is a trade-off. If the United States will no longer use trade as a carrot, it will have to look for other ways to garner buy-in from other countries—such as through green finance—but that still could not be enough.  

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Second, for U.S. trading partners, IPEF does not represent the ideal form of economic cooperation because it lacks meaningful opportunities to deepen economic ties. Complicating the challenge, IPEF leaves out some important Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) partners, such as Canada, Mexico, Peru, and Chile. While the United States does have a separate initiative in the Americas, the extent to which it will replicate IPEF remains unclear. Similarly, the United States has been discussing some overlapping concerns with the European Union through the Transatlantic Trade and Technology Council. Meanwhile, the World Trade Organization, the only multilateral framework to negotiate new global rules, lacks the U.S. leadership that often generated strong results in the past. Not surprisingly, the last ministerial meeting was a flop

What all of this means, in practice, for U.S. trading partners is that there now seem to be different sets of rules for different groupings of countries. This contributes to rule fragmentation and limits the benefits of certain cooperative activities. For example, the United States and the EU have been negotiating a green steel carbon club, which would impact ever major steel producer in the world but practically lacks the broad base of support needed globally to decarbonize the steel industry. Other countries will pursue their own paths.  

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What the Biden administration needs to understand is that any new approach to trade comes, therefore, with significant trade-offs if the current international rules-based trading system does not sit at its core. New rules and frameworks are only durable if the biggest economies agree to play by them. When all countries are not held to the same standards, uncertainty becomes a feature of the system. Those trade-offs are particularly clear when it comes to countries that are not U.S. partners. For example, if China were to remain outside of the main grouping in which U.S. rules will proliferate, it will not be bound by new disciplines. Isolating China has consequences for U.S. interests, including losing leverage to compel China to change its economic strategy, such as its industrial overcapacity.  

The Biden administration’s current trade approach will result in a weaker and less relevant international trade regime over time. That could very well be their goal, but it will create a new set of challenges for the international economy. Regional frameworks will end up being more important than ever, which is why it is so critical to ensure that any new frameworks are of the highest standard, comprehensive, and durable. So far, the 21st Century Trade initiative with Taiwan is the only trade policy initiative that meets this standard.  

Working within the current rules-based system is difficult, and reforming it will be a challenge. By the same token, working outside of it presents its own limitations and challenges that will need to be grappled with.  

 

Is Leading on Global Trade Worth the Cost?  

Edward Alden 

Does the United States want to lead on writing and preserving the rules for global trade? For many decades, the answer to that question seemed obvious. U.S. leadership on trade enriched domestic companies, strengthened U.S. allies, helped keep inflation low, and created the basis for mutually beneficial global competition. 

But leadership comes with costs. A rules-based system can produce outcomes that are harmful, at least in the short run, to U.S. interests. And over the past decade, many political leaders in both parties have come to believe that the costs—losing manufacturing jobs, outsourcing strategically critical industries, strengthening the economies of adversaries like China and Russia—outweigh the gains. 

The United States today faces a core choice on trade policy: Should it again try to lead in writing new trade rules for a changing global economy, or should it embrace a more modest role as one economic player, albeit an important one, among many? For both the Donald Trump and Joe Biden administrations, the choice has mostly been the latter. While the Biden team has gone further in cooperating with allies such as Europe and Japan, it has done little to revive the moribund World Trade Organization (WTO) and has backed away from opportunities to advance new trade rules in the Asia-Pacific.  

The stakes are significant. Leadership in trade negotiations carries clear advantages. Through the WTO and various regional and bilateral deals, the United States has been able to create greater predictability for countries and for companies, and to encourage specialization on a global scale that has made the world much wealthier. The framework of rules also helps to constrain competition; while the use of protectionist tools is growing, trade remains surprisingly free, with tariffs around the world at or near historic lows. Many developing countries in particular are eager to access the huge U.S. consumer market, and trade arrangements strengthen ties to those countries. 

But trade agreements can also constrain the United States’ ability to protect domestic industries from foreign competition or intervene in the market to pursue national priorities. The United States was slow in the 2000s, for example, to respond to the huge surge in imports from China following its accession to the WTO in 2001, despite the costs to U.S. companies and workers. Dispute settlement through the WTO proved grindingly slow and largely ineffective in tackling trade-distorting practices like industrial subsidies.  

Both Trump and Biden have pursued trade policies that are more narrowly focused on U.S. advantage; that is, they are less concerned about rules than about outcomes. Trump slapped tariffs on China—which were illegal under the WTO—and then negotiated the largely unsuccessful Phase One trade agreement with China in which Beijing committed to increase purchases of U.S. goods; this was itself a clear violation of the WTO norm that the system should be rules-based, not results-based. Meanwhile, Biden has embraced the most ambitious industrial policy in decades, showering billions on favored industries such as semiconductors and clean energy—a violation certainly of the spirit, and perhaps the letter, of WTO rules intended to constrain subsidies. 

Those measures could pay big dividends; leadership in the industries of the future certainly matters, both for U.S. national security and its economic well-being. But such actions inevitably create countermeasures. China, the world’s largest offender on industrial subsidies, is doubling down in its efforts to one-up the United States and Europe, which itself is trying to catch up in the subsidy race. Dangers are growing of a greater trade war in which the European Union and the United States block imports of Chinese electric vehicles, solar panels, and other products, and China retaliates in kind. 

Writing trade rules creates greater certainty but comes with short-term economic costs; ignoring the rules could yield short-term benefits, but exacerbate long-term risks. Finding the right balance is a difficult, but important, task. 

 

Are Subsidies a Necessary Evil? 

Jennifer Hillman  

For more than half a century, global trade policy has been geared toward opening doors for more trade in the name of promoting economic growth, greater international cooperation, and peace. Today, the paradigms have shifted. The trading regime is now driven by national security, labor, and environmental concerns, including the fight against climate change. Take subsidies, for example. The trading world has been grappling with the trade-offs of subsidies for decades. While subsidies protect certain industries and can promote good social policy, at their core, they uphold unfair competition—benefiting some at the expense of others. The United States has been an outspoken critic of subsidies, particularly Chinese subsidies. However, as the threat of climate change looms larger and the United States begins to dabble in subsidies itself, the technologies and products needed to combat climate change will increasingly be in tension with the rules for fair trade. 

Electric vehicles (EVs) have become central to this debate as China’s production of EVs has skyrocketed, largely due to subsidies, with the Chinese auto manufacturer BYD surpassing Tesla as the global frontrunner in EV sales. Those cars are being built in record numbers, leaving China with overcapacity and increasing its desire to export those vehicles to larger markets. While the proliferation of EVs is a positive on the climate front, it is an economic threat to the United States. Chinese EVs are traveling the same road as renewable energy products: China dominates world production, making more than 80 percent of the world’s solar panels and more than two-thirds of all wind turbines and lithium-ion batteries. All of this production comes on the back of billions of dollars in subsidies. But those subsidies have made the renewable energy products the world desperately needs both readily available and much cheaper. 

The U.S. response to this glut of production has been twofold. First, the United States has sought to shield its renewable energy producers from Chinese competition through increased tariffs on solar and wind products, and is contemplating additional tariffs on Chinese EVs. Second, the United States has developed its own industrial policy in the form of subsidies through the CHIPs and Science Act and the Inflation Reduction Act (IRA). The IRA in particular demonstrates the United States’ strong commitment to combat climate change and focus on promoting climate-mitigating technologies. However, not everyone sees the U.S. response as a positive. In March, China initiated dispute-settlement proceedings against the United States at the World Trade Organization, arguing that the subsidies under the IRA were discriminatory. The EU, Japan, South Korea, and others have raised their own concerns over the implications of the IRA for their EV and renewable-energy producers. 

The problem with trade-offs is that to get one thing, another often needs to be given up. For now, it appears that the United States has chosen to forego access to cheaper EVs and renewable energy products and to set aside its long-standing commitment to global rules disciplining subsidies.  Whether that is the right choice for the planet will depend on how quickly the United States can catch up in the production of its own EVs, solar, wind, and battery products, and whether the underlying trade tensions break out into a full-scale trade war that impedes a quick and efficient green transition. 

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