Peter Harrell has a piece in Foreign Affairs entitled "How to China-Proof the Global Economy: America Needs a More Targeted Strategy." Harrell was the Senior Director for International Economics and Competitiveness on the White House National Security Council in the Biden administration, and I think of him as a moderate, mainstream Democrat who occupies a position somewhere in between the progressives and the (few remaining) traditional pro-trade Democrats. He is the kind of person Biden could be listening to in a second term, and that means it's helpful to understand how he sees international economic policy.
I, on the other hand, have a more market-oriented, pro-trade perspective, and it may be a challenge to convince a second term Biden administration, if it comes to be, to listen to what I have to say. But that's not going to stop me from trying! So, here are some comments on Harrell's piece that I hope will be useful or interesting to someone.
What to do about China
China is a big part of Harrell's piece. It's in the title and then he has a lot to say about the issue. Read the whole piece to get the full picture, but one point he makes is the following:
... Through the early years of this century, many in Washington assumed that this logic was prevailing: China was becoming successfully integrated into the world economy, and it was sustaining extraordinary economic growth at home. At the same time, China’s comparatively technocratic leadership in the 1990s and 2000s promoted private enterprise, and there were hopeful signs that it would allow Chinese society to gradually open up.
By the early 2010s, however, this progress had stalled. ...
An argument I've made before is that the decade or so after China joined the WTO in December 2001 was a crucial period for China's economic and political integration with the rest of the world. That period would have been the best time to press China on economic and other reforms. And in the summer of 2001, it looked like China would be the focus of U.S. foreign policy going forward, and these issues might have been at the forefront. But after 9/11, the U.S. focus shifted to the Middle East, and pressing China on these issues to the fullest was a path not taken. In a number of instances, the U.S. had to cater to China's demands in order to get China's support on other issues. How would China's internal economic and other policies have developed if the U.S. had made them a priority from 2001 to the early 2010s? There's no way to know for sure, of course, but it could have had an impact.
In making this point, I'm not just hung up on the past, but rather I am thinking about the future as well. Harrell also says: "Rather than pursuing economic policies intended to change China, the United States should accept that the Xi regime will not change." Putting aside what did not happen in the past in relation to China, my sense is that like Harrell, many people in Washington have decided that China can't be influenced on issues such as economic policy or human rights. I disagree with this view, and I think there are opportunities for incremental progress here (probably not on democracy issues though). As to how to accomplish this, it should be clear by now that significant change won't happen through unilateral tariffs under Section 301, but there is room for progress if people are willing to think about constructive approaches and make it the focus of U.S. foreign policy. On the trade and economic front, for example, there are a wide range of WTO rules that could be helpful here, and the U.S., working with allies, could take advantage of them.
How to trade more with allies
Harrell also emphasizes the importance of cooperation with allies, although more along the lines of what the Biden administration has been doing than the approach that existed before Trump:
In response to rising competition from China, much of the U.S. foreign policy community has urged the United States to strike new trade deals with international partners. ...
Yet the domestic implications of such trade agreements are challenging. Already, Biden’s industrial policy, including subsidies for manufacturing semiconductors and clean energy technologies, has raised tensions with existing U.S. trade commitments, and the policy is continuing to evolve. ...
Instead of seeking broad accords, Washington should adopt a narrower, more targeted approach to trade by pursuing deals in sectors where interests clearly converge. One example is the critical minerals agreement that the United States has begun to negotiate with Japan and other countries, as well as the European Union: in the coming years, the United States will face a staggering increase in demand to support the clean energy transition; mineral-producing countries seek greater access to the U.S. market. In reaching a deal with these countries, Washington can also negotiate higher environmental and labor standards.
My sense is that U.S. allies are willing to go along with these types of sectoral deals, but that the deals are not ideal from their perspective. Regardless of whatever sectoral deals the U.S. is pushing, these allies still believe in trade liberalization, and are going to keep pressing forward with bilateral and regional deals of this sort. If the U.S. doesn't want to be part of that, no one can make us join, but it will put U.S. businesses at a disadvantage and at some point this could lead to enough pressure on the U.S. government to force a change in approach.
As to the concern about the impact of trade liberalization on U.S. domestic politics, I am skeptical, based on the polling, that trade is a big issue for most voters. It's also worth noting here that after four years of Trump's protectionist policies, he lost to Biden -- who was critical of Trump's trade policies during the campaign -- pretty badly. So, I think people may be overestimating the domestic sensitivities here. In my view, there are ways to structure trade liberalizing agreements so that you don't lose the votes of the demographic in swing states that both sides spend so much time courting.
The WTO framework and WTO dispute settlement
Harrell says the following about the WTO:
Although sectoral trade deals should be the main emphasis of U.S. policy, Washington is also under pressure from allies to revive the languishing World Trade Organization. In recent years the United States has downplayed the WTO and blocked the appointment of judges to its appellate body—effectively gutting its ability to issue binding decisions on global trade. This approach reflects the widespread view in Washington that the WTO suffers from conceptual problems at its core: WTO rules, for example, were designed to require member countries to generally treat one another equally for trade purposes, meaning that the U.S. should treat China no differently than it treats allies such as Germany. This approach reflects the optimism of the early post–Cold War era, when policymakers envisioned a new global economic order, but it makes little sense in an era of geopolitical rivalry. Moreover, the Biden administration’s subsidies for semiconductors and clean energy technologies may well violate WTO rules, although to date, the United States has persuaded its allies to refrain from bringing a legal challenge against them.
For the WTO to remain relevant, its other members will have to agree on new mechanisms that allow it to respond to geopolitical tensions and the now pressing need for green industrial policies. One option is to update the text of WTO rules to allow greater flexibility for national industrial policy and to encourage amicable dispute resolution. Another option—potentially more realistic given that rule changes require unanimous agreement from WTO members—is for the G-7 countries to reach an informal agreement that forbids them from using the WTO to challenge certain policies or requires them to appoint judges committed to more flexible interpretations of the existing WTO rules.
It's worth noting that WTO rules are more flexible than some people seem to realize. Among other things, tariff commitments can be renegotiated; discrimination through FTAs is permitted; tariffs can be -- and frequently are! -- imposed in response to "unfair trade" concerns; and governments can accept retaliation rather than comply with dispute settlement rulings. Going even further, at the moment the U.S. is ignoring the rules in its treatment of China, which illustrates that there are limits to enforcement even in a relatively enforceable international system like the WTO's.
As to the functioning of WTO dispute settlement, I find the idea of looking for "judges" -- for those who hate this term in the WTO context, he said it, not me! -- open to more "flexible interpretations" interesting. It would be a challenge for governments to have those conversations with each other and with prospective Appellate Body Members, but I suppose it's possible something could be achieved here. Of course, whatever results were achieved would have an impact in both directions: The U.S. might have an easier time defending its measures, but its challenges to other governments' measures would also be more difficult to win. (It's also worth going back to the point about allies here. Harrell seems to think it's important to have good relations with allies. Dispute settlement is an area where U.S. actions are undermining that. If we want better relations with allies, there are plenty of compromises that could be made on dispute settlement to unblock the system.)
And as another example of changes having an impact in both directions, as to whether to "update the text of WTO rules to allow greater flexibility for national industrial policy," I'm not sure how well that would go over with U.S. producers that compete with foreign producers. If foreign governments take advantage of this, as they almost certainly will, these U.S. producers are sure to voice complaints about unfair competition.
Tariffs
Harrell also says that he wants to use tariffs differently:
Tariffs are ripe for innovation. Rather than using them to gain leverage over Beijing, Washington should design them to promote specific U.S. strategic interests. For example, Washington could impose higher tariffs on resources and products for which the United States and its allies have developed strategic dependence on China such as critical minerals, batteries, and electric vehicle parts—not to mention China’s EVs, which have already begun to flood Western markets. The reality is that without protectionist measures, mines and green technology manufacturing facilities in the United States and partner countries often cannot compete with low-cost Chinese-owned counterparts, which receive subsidies from Beijing and are subject to few environmental regulations.
Washington also needs to better integrate tariffs with the Biden administration’s industrial policy. Take semiconductors. As the United States has put pressure on China’s advanced chip industry, China has ramped up production of older types of semiconductors that remain critical for U.S. defense, industrial, and automotive applications. The United States may need tariffs and other tools to ensure that China does not establish a monopoly on these chips. Meanwhile, Washington should cut tariffs on Chinese products, such as clothes and furniture, that raise prices for U.S. consumers while providing little strategic benefit. In the long run, a smarter policy will also require restrictions on Chinese components and Chinese companies involved in critical international supply chains, even if the final products are made in a country other than China.
I think Harrell is focused here on the existing Section 301 tariffs. In response to this, let me just note that policy discussions often overlook an important form of tariff: AD/CVD tariffs. As people in the field know, there is a set of statutes/regulations that provide for tariffs to protect domestic industries from foreign competition, and these tariffs are widely used, especially in relation to Chinese imports. For some reason, a lot of of policy people ignore these, and instead look for other ways to impose tariffs to protect domestic industries. I understand that the Section 301 tariffs on Chinese products are in place and removing them will be difficult politically, and perhaps it does make sense to think about how to configure them better in relation to U.S. industries. But when it comes to protecting these industries from Chinese competition, it's important to be aware of the built-in protectionist rules that U.S. industries can and do use. There are teams of lawyers and economists out there looking for opportunities to do so, and they don't miss much.
Funding foreign infrastructure
Harrell says the following about U.S. financing of infrastructure in developing countries:
... To bring developing countries closer into alignment with the West, the United States also needs to find more ways to provide economic and infrastructure support to its partners. New forms of international financing will be especially important, not only for driving the clean energy transition and promoting sustainable development but also for offering countries a more attractive alternative to partnering with China.
...
Over the past year, Washington has responded to the financing problem by pushing the World Bank, the International Monetary Fund, and other multilateral institutions to expand their lending capabilities and create new tools to address climate change. But Washington must appropriate enough funds—a step only the U.S. Congress can take—to ensure that the World Bank and IMF reforms are successful, and it needs to overhaul its bilateral investment and development tools. To better compete with Beijing, Washington should make more creative use of the U.S. Development Finance Corporation and the Export-Import Bank, which promote U.S. private sector investment in the developing world. For example, the government could direct these programs to offer concessional lending—loans offered on more favorable terms than prevailing market rates—so they can close deals more quickly in foreign countries.
The Biden administration has been publicizing its DFC/Ex-Im spending a great deal recently, but I wonder if there is actually more spending than there was in the past. I'd love to see some experts in this area try to quantify this.
Also, this approach may not be available at the same levels for much longer. With the U.S. economy strong right now, I can see how people think that U.S. financing of these projects is a good strategy. But inevitably there will be an economic downturn, at which point I suspect this spending will be substantially reduced.
And finally, while infrastructure is nice, I would imagine that developing countries want to develop their own industries, but the Biden administration seems opposed to helping with this, which is a problem for relations with these countries.
Misunderstandings about EU/U.S. carbon reduction measures
Finally, Harrell says the following about clean energy:
In contrast to the old model of global trade, which did little to promote the clean energy transition, U.S. trade policy also has to address climate change. And since China is the world’s largest greenhouse gas emitter, generating twice the quantity the United States does, any climate-oriented trade policy must address China. There are several ways to do this. The EU is already moving forward with a carbon border adjustment mechanism, which will use tariffs to protect lower-carbon, but higher-cost, European producers from carbon-intensive foreign competitors, including China. The United States should join with partners in Europe and elsewhere to develop a polluter import fee on greenhouse-gas-producing goods to ensure that domestic efforts to reduce emissions do not simply result in offshoring to China and other countries that have laxer emissions rules. Indeed, climate-focused trade policies can give China economic incentives to decarbonize even if geopolitical tensions make it otherwise reluctant to do so.
I have a couple points here:
-- International comparisons of carbon emissions should be based on per capita emissions. By this measure, the U.S. does not do very well, and this is part of why it does not have much credibility on these issues in many parts of the world.
-- There's a common misconception in the U.S. that the EU CBAM is, in essence, a tariff. But that characterization is misleading. As I understand it, the CBAM is designed to mirror domestic carbon pricing, with the overall policy therefore acting as a non-discriminatory charge (I'm not totally sure they will achieve that immediately, but I think it's likely that's where it will end up after some refinements).
-- There's also a misconception that "polluter fee" proposals in the U.S. are (1) similar to the EU measures and (2) that they would reduce carbon emissions. On #1, there isn't a domestic component, so the U.S. proposals are not similar to the EU measures. I don't see how the U.S. is going to be able to "join with partners in Europe and elsewhere" if it takes an approach that imposes import charges on foreigners but does not take equivalent action against domestic carbon emissions. On #2, it's not clear to me that these fees would reduce imports from China much, as many of the products in question are already heavily restricted by AD/CVD tariffs; and if China (or India or anyone else) actually reduced carbon emissions in response to these fees, they would still face restrictions on selling in the U.S., so I'm not sure what their incentive to make these reductions is.
Conclusions
What direction might U.S. trade policy take in a second Biden term? It's certainly possible that the views outlined by Harrell in the Foreign Affairs piece will guide things. But I can imagine there will be an internal debate about all this, and I hope people will consider the option of working with allies on (1) trade deals that offer some degree of liberalization and (2) restoring WTO dispute settlement so that it is fully functional again; and then also (3) using WTO dispute settlement to push China in a market-oriented direction.
