White House National Security Adviser Jake Sullivan gave a speech last week on the Biden Administration's international economic agenda, with follow-up questions from a Brookings senior fellow and the audience. The video and transcript of the whole event are here (a transcript of the opening remarks is also here).
In his remarks, Sullivan tried to put forward a coherent explanation of the Biden administration's approach to international economics. In doing so, I had the sense he was trying to persuade various listeners that the approach was a good one: Members of Congress, U.S. trading partners, U.S. policy wonks, among others. The dominant view within the administration seems to be something along the lines of the following:
- the long-standing U.S. approach to trade was heavily tilted towards liberalization;
- that approach became untenable at a certain point as a matter of policy;
- also, it was bad politics;
- U.S. trade and economic policy needs to shift towards a more interventionist approach;
- the administration can do this in a way that brings allies on board.
As set out below, I have doubts about a lot of these steps in the administration's thinking. I'm not sure how coherently and comprehensively I can address all of this, because he covered a lot of ground, but here goes.
The big picture: Was the old approach flawed?
One point Sullivan made was that the traditional U.S. approach to trade policy had many successes, but in recent decades showed some flaws:
After the Second World War, the United States led a fragmented world to build a new international economic order. It lifted hundreds of millions of people out of poverty. It sustained thrilling technological revolutions. And it helped the United States and many other nations around the world achieve new levels of prosperity.
But the last few decades revealed cracks in those foundations. A shifting global economy left many working Americans and their communities behind. A financial crisis shook the middle class. A pandemic exposed the fragility of our supply chains. A changing climate threatened lives and livelihoods. Russia’s invasion of Ukraine underscored the risks of overdependence.
The "international economic order" he references is a big thing, covering a lot of issues outside of trade policy. I don't know enough about the World Bank, the IMF, etc. to incorporate those issues into my analysis, so I'll focus here on trade policy. With that in mind, I'm going to put aside the financial crisis and climate change as issues to be considered here. I understand that some people like to blame the trading system for these issues, but those arguments are a real stretch.
As to fragile supply chains, if you think about a counterfactual in which countries didn't trade much with each other, I can imagine that a lot of people around the world would have actually been worse off during the pandemic. What we've seen in the baby formula sector in the U.S. is that relying almost exclusively on domestic production for an important product leads to just as much, if not more, fragility than having an international market for key products.
Could "overdependence" be a problem? Sure. I think people tend to exaggerate the circumstances in which it is, but certainly there could be situations where we are too heavily dependent on a foreign adversary. We just have to make sure to approach that issue with some objectivity, though, rather than relying on the word of domestic industries who are trying to come up with arguments to restrict foreign competitors.
As to the impact on American workers and their communities, there's no question that exposing domestic industries to international competition is going to disrupt people's lives. But so is protecting American companies from foreign competition. You may have to look more closely to see it, but it's still there. The question should be, how do specific trade policies affect Americans throughout the economy? During the entire era we are talking about, certain well-connected companies have been able to convince the U.S. government to protect them from foreign competition. That helped their profits and their workers, but on the whole, it has made Americans worse off. Having said that, it is true that particular companies and workers are hurt by foreign competition, and just like when people are hurt by advances in automation, there should be some government role in helping them adjust. That could take the form of job retraining, removing constraints on moving for a new job, etc. But thinking about this only as a trade issue doesn't make much sense, because trade isn't the main reason people lose their job.
How much tariff liberalization was there?
Sullivan then talks about tariffs:
The main international economic project of the 1990s was reducing tariffs. On average, applied U.S. tariff rates were nearly cut in half during the 1990s. Today, in 2023, our trade-weighted average tariff rate is 2.4 percent—which is low historically, and relative to other countries.
Of course, those tariffs aren’t uniform, and there is still work to be done bringing tariff levels down in many other countries. As Ambassador Tai has said, “We have not sworn off market liberalization.” We do intend to pursue modern trade agreements. But to define or measure our entire policy based on tariff reduction misses something important.
Was "[t]he main international economic project of the 1990s" reducing tariffs? I would have thought the 1990s was when we saw a shift away from reducing tariffs, moving instead to IP protection, regulatory standards, services, labor, and other issues.
And while he's right that average U.S. tariffs are low these days (putting aside the recent Section 301 tariffs of course), there's a big caveat: trade remedy tariffs can be quite high. (To be honest, I'm not sure the current trading system can make much progress until we deal with anti-dumping. Back in the early 1990s, there were serious discussions about this, but recently it hasn't gotten any traction.)
In addition, as Sullivan notes, tariffs outside the U.S. are still fairly high. I often wonder how U.S. trade politics would look these days if the U.S. had pushed for lower tariffs over this time period, rather than for strong IP, labor, and environment provisions in trade agreements. Could lower foreign tariffs have helped U.S. manufacturers? And going forward, would a good way to boost U.S. manufacturing be to push for lower foreign tariffs? It does not seem like this is the focus of the Biden administration's trade policy efforts, even though Sullivan's remarks acknowledge that there is an issue here.
Is the U.S. working with others?
Turning to how the U.S. is engaging with other countries, Sullivan says:
That’s why the United States, under President Biden, is pursuing a modern industrial and innovation strategy—both at home and with partners around the world. One that invests in the sources of our own economic and technological strength, that promotes diversified and resilient global supply chains, that sets high standards for everything from labor and the environment to trusted technology and good governance, and that deploys capital to deliver on public goods like climate and health.
Now, the idea that a “new Washington consensus,” as some people have referred to it, is somehow America alone, or America and the West to the exclusion of others, is just flat wrong.
I would say this issue is one of degree. There have been limited efforts to work with others, but arguably they are not at the level they should or could be. If you take the Inflation Reduction Act as an example, the Congressional version was much more America alone, and the Biden administration has been trying to interpret it in a way that works more closely with certain allies.
Sullivan also says:
At the same time, it isn’t feasible or desirable to build everything domestically. Our objective is not autarky—it’s resilience and security in our supply chains.
Now, building our domestic capacity is the starting point. But the effort extends beyond our borders. And this brings me to the second step in our strategy: working with our partners to ensure they are building capacity, resilience, and inclusiveness, too.Our message to them has been consistent: We will unapologetically pursue our industrial strategy at home—but we are unambiguously committed to not leaving our friends behind. We want them to join us. In fact, we need them to join us.
...
So we are leveraging the Inflation Reduction Act to build a clean-energy manufacturing ecosystem rooted in supply chains here in North America, and extending to Europe, Japan, and elsewhere.
This is how we will turn the IRA from a source of friction into a source of strength and reliability. ...
When I think of working with others, I think of a relatively equal partnership. By contrast, "leveraging" your economic power to get others to do what you want is a very different approach. And if you talk to people outside the U.S., the friction here is real. People do feel like they have to accommodate the U.S., but at the same time, I think this approach is also steering some of them towards making sure they are not too reliant on the U.S.
What role for the developing world?
In terms of the role of developing countries, Sullivan says:
Fundamentally, we have to—and we intend to—dispel the notion that America’s most important partnerships are only with established economies. Not just by saying it, but by proving it. Proving it with India—on everything from hydrogen to semiconductors. Proving it with Angola—on carbon-free solar power. Proving it with Indonesia—on its Just Energy Transition Partnership. Proving it with Brazil—on climate-friendly growth.
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This brings me to the fourth step in our strategy: mobilizing trillions in investment into emerging economies—with solutions that those countries are fashioning on their own, but with capital enabled by a different brand of U.S. diplomacy.
We’ve launched a major effort to evolve the multilateral development banks so they are up to the challenges of today. 2023 is a big year for this.
As Secretary Yellen has outlined, we need to update the banks’ operating models—especially the World Bank but the regional development banks as well. We need to stretch their balance sheets to address climate change, pandemics, and fragility and conflict. And we have to expand access to concessional, high-quality finance for low income and for middle-income countries as they deal with challenges that span beyond any single nation’s borders.
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At the same time as we are evolving the multilateral development banks, we’ve also launched a major effort to close the infrastructure gap in low- and middle-income countries. We call it the Partnership for Global Infrastructure and Investment—PGII. PGII will mobilize hundreds of billions of dollars in energy, physical, and digital infrastructure financing between now and the end of the decade.
A big question for U.S. relations with the developing world is, do we see them as a source of natural resources to be extracted, or can they be industrialized partners whose manufactured goods we will purchase? If it's only the former, I'm not sure how well this will go. (And my sense so far is that it's the former).
How much does the current system rely on markets?
With regard to the role of markets, Sullivan says:
The vision of public investment that had energized the American project in the postwar years—and indeed for much of our history—had faded. It had given way to a set of ideas that championed tax cutting and deregulation, privatization over public action, and trade liberalization as an end in itself.
I hear the "trade liberalization as an end in itself" line quite a bit from critics of the existing system, and I'm not sure where it comes from. I've never met anyone who thinks it's an end in itself. Rather, people think trade liberalization means more competition, greater efficiency, higher economic growth, consumer benefits, etc.
Sullivan also says:
There was one assumption at the heart of all of this policy: that markets always allocate capital productively and efficiently—no matter what our competitors did, no matter how big our shared challenges grew, and no matter how many guardrails we took down.
Now, no one—certainly not me—is discounting the power of markets. But in the name of oversimplified market efficiency, entire supply chains of strategic goods—along with the industries and jobs that made them—moved overseas. And the postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept.
One reason why industries moved overseas is because of gaps in the rules and their enforcement -- subsidies have long been used to lure investments, but responses such as AD/CVDs aren't likely to stop the subsidies. So what we ended up with under the current trading system was not so much market efficiency, but rather a significant degree of policy space that was used to distort markets. To address this, what would be most helpful is stronger trade disciplines. Instead, the approach we are taking seems to be to copy the subsidies others have been using. Will that lead to more investment in the U.S.? We'll see how it all plays out after a few years, but my concern is there won't be significantly higher levels of investment, but rather corporations will just receive subsidies for the investments they would have made anyway.
Are some sectors better than others?
As many other people seem to believe these days, Sullivan thinks the U.S. should focus more on manufacturing:
Another embedded assumption was that the type of growth did not matter. All growth was good growth. So, various reforms combined and came together to privilege some sectors of the economy, like finance, while other essential sectors, like semiconductors and infrastructure, atrophied. Our industrial capacity—which is crucial to any country’s ability to continue to innovate—took a real hit.
In the past, we favored agriculture, IP-based industries, and aircraft (we still support those). Now it's semiconductors and clean energy. Are those the right sectors? What will the next administration favor? Is this more about a particular ideology or which interest groups (domestic industries, labor unions) lobby most effectively?
Does trade bring peace?
Just as Katherine Tai has done recently, Sullivan questions the idea that trade brings peace:
Much of the international economic policy of the last few decades had relied upon the premise that economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative—that bringing countries into the rules-based order would incentivize them to adhere to its rules.
It didn’t turn out that way. In some cases it did, and in lot of cases it did not.
Just to be clear, there is an argument that trade contributes to peace, but I don't think anyone believes that trade alone will bring peace. Foreign policy has to be the driving force on these issues.
What will be the impact of the IPEF?
And finally, Sullivan touts the IPEF:
And we have designed the elements of an ambitious regional economic initiative, the Indo-Pacific Economic Framework, to focus on those problems—and solving those problems. We’re negotiating chapters with thirteen Indo-Pacific nations that will hasten the clean-energy transition, implement tax fairness and fight corruption, set high standards for technology, and ensure more resilient supply chains for critical goods and inputs.
Let me speak a bit more concretely. Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly— companies and governments together— pivoting to new options for sourcing and sharing data in real-time. That’s what a new approach can look like on that issue—as on many others.
Sullivan makes a very specific claim here: "Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly." It's hard to evaluate that claim without seeing the actual text of the IPEF, but I would like to see the Biden administration walk us though how the IPEF would have allowed us to react more quickly on supply chains and idle factories. More generally, it's not clear to me what impact the IPEF will have on economic activity or behavior. As I've heard them described, the rules sound like they will mainly be aspirational, and they won't be enforceable (at least in the traditional way, and it's not clear what the alternative way might be).
