In April 2023, White House National Security Advisor Jake Sullivan gave a speech at Brookings on the Biden Administration's international economic agenda, and I had some comments in response. Yesterday, Sullivan returned to Brookings to, as the event page describes it, "reflect on the progress and challenges of the past 18 months and respond to the variety of responses and criticisms of his April speech." I don't have as much to say this time, but I did have two reactions. The first relates to the money available for the administration's international industrial agenda; the second relates to whether there are alternative approaches that would achieves the administration's goals.
What happens when the money runs out?
In his remarks, Sullivan explained that the administration's industrial investment agenda was a cooperative one that could be implemented in conjunction with other friendly countries:
As more and more countries adopt this approach, we will continue to build out the cooperative mechanisms that we know will be necessary to ensure that we're acting together to scale up total global investment, not competing with each other over where a fixed set of investments is located. ...
All of this high tech investment and development hasn't come at the expense of our partners. We've done it alongside them. We're leveraging Chips Act funding to make complementary investments in the full semiconductor supply chain, from Costa Rica to Vietnam. ... Simply put, we're thinking about how to manage this in concert with our allies and partners and that will make all of us more competitive.
If I understand the administration's international economic policy agenda correctly, a central feature is to spend lots of money to subsidize advanced U.S. production, and then also to subsidize less advanced parts of the production process in certain allies. In this regard, you can read more about the semiconductor efforts with Costa Rica here, here, and here (the second link states that Commerce Secretary Raimondo "welcomed Costa Rica’s efforts to elevate the country as a key market for semiconductor assembly, testing, and packaging"; the Vietnam efforts use similar language).
Regardless of whether or not this is good policy, it is clearly dependent on the U.S. spending a lot of money, and for now that's still happening. But history tells us that the spending will come to an end. It may end through a new administration that has different priorities and approaches, but it may also just end because deficits/debt get too high and/or an economic downturn arrives. U.S. fiscal policy is strange, because basic economics tells us to balance the budget during a strong economy and then run deficits during a recession to stimulate the economy, but in recent decades U.S. politics has sometimes given us a pro-cyclical fiscal policy in which we increase deficit spending when the economy is doing well and try to rein in deficits during recessions. Right now we are in an expand deficit spending when the economy is doing well phase, but when the inevitable downturn comes, I suspect there will be some fiscal panic and a call to cut spending. In that event, what happens to the Biden administration's spending on these policies? Money given to production abroad is likely to be the first batch to dry up.
Are there alternative approaches?
In defending the Biden administration's policies, Sullivan says that critics should offer alternatives:
Anyone who says, well, this isn't quite the answer, I think, does have responsibility to come forward and lay out, how do we meet the challenges I laid out, which I think are basically indisputable. Challenges relating to the clean energy transition, to the rise of a massive non-market economy that distorts global economic integration, challenges of geopolitical competition, challenges of fractured supply chains and economic coercion. So those are all challenges we've seen, all challenges we need to deal with. So if this isn't the answer, you have to have an alternative answer. ... and that answer has to be sustainable economically, geopolitically, and politically, actually, also in this country and in many countries around the world. ...
I believe that what we have put forward can contribute to that, particularly to outcomes at a crucial moment of technological change and the clean energy transition. But I acknowledge the risks that come with it, and the need for us to be clear eyed and how we deal with them. The argument I would make is, people pose these questions and in posing these questions, I think they also need to develop an answer that says, if not this, then X. And to me, the X of let's just go back to the status quo in light of what we have seen is not going to work.
Challenge accepted! I would go with a carbon tax, non-discriminatory consumer subsidies, and trade liberalization of clean energy goods and services for the clean energy transition; and I would use WTO complaints to address non-market practices and economic coercion. On supply chains, strategic stockpiling probably makes the most sense. (Geopolitical competition is a foreign policy problem, and I'm not going to weigh in on that one for the moment.)
But wait, you might say, do those suggestions meet Sullivan's test of being politically sustainable? It's a fair point, but I may wait to come back to it until after we find out in a couple weeks if the Biden administration's approach has been sustained politically.
Sullivan also says he doesn't think we should go back to "the status quo," but I'm not sure which status quo he has in mind. What specifically does he not like about past eras of international economic policy? For the most part, I wasn't particularly happy with past U.S. international economic policy either, although probably for different reasons. So on that point, I think I'll just agree with him that we shouldn't go back to the status quo, although we probably disagree as to what it is we're not going back to.
