International Economic Law and Policy Blog

A Few Trade Policy Items from the Howard Lutnick Hearing

The Senate hearing for Howard Lutnick's Secretary of Commerce nomination was held yesterday. The Commerce Department does a lot of things, so much of the discussion involved issues outside of trade policy. I'm going to go through some of the items that jumped out at me as of most interest to this blog's readers: The CHIPS Act; the IRA; tariffs and unfairness; tariffs for non-trade purposes; opening foreign markets; and digital trade. I'll go through them one by one.

CHIPS Act

Trump has been critical of the CHIPS Act subsidies, and says he wants tariffs instead, so there's a real question about what will happen to these subsidies going forward. Several Democrats raised this issue with Lutnick:

Sen. Maria Cantwell (D-WA): ... Do you believe that the investments that we've made in the Chips and Science Act should be preserved?

Lutnick: I think they're an excellent down payment. As a structure, I think we need to get it right. I think we need to review them and get it right. But as the way the Congress has said it, it's an excellent down payment in our ability to bring semiconductor manufacturing back to America.

Cantwell: Okay, that's good to hear, because the President has said a little differently on that point. So good to hear.

...

Sen. Amy Klobuchar (D-MN): Senator Cantwell asked you about ... groundbreaking investments in chips and semiconductors ... And so I just want to follow up on her question ... if you are going to continue to operate the CHIPS program?

Lutnick: It is vital for America that we bring semiconductor manufacturing to the United States of America. We need domestic manufacturing. The CHIPS Act was an excellent down payment to begin that process. We need to study it, but we need to make sure that you get the benefit of the bargain and domestic manufacturing of semiconductors happens in America.

Klobuchar: Got it, but are you going to keep operating this because, as the Senator mentioned, there are funds that have to be distributed. There's work that has to be done coming out of that law.

Lutnick: Oh, I expect to do enormous work to make sure you get the benefit of the bargain, and we get the money out appropriately, correctly, and we build in America, that is vital. You've done it bipartisanly and I'm going to help execute that.

...

Sen. Ed Markey (D-MA): On the CHIPS Act, over the past several years, the Commerce Department has worked quickly to issue grants under this program. Mr. Lutnick, will you commit to honor the CHIPS grant contracts that have been finalized?

Lutnick: I would have to read them and analyze them and understand them to commit to that.

My takeaway from these exchanges is that it is very unclear what the Trump administration will do with the CHIPS Act program. Their approach could turn out to be anything from "eliminate it entirely" to "slight tweaks."

IRA EV tax credits

Next up is the IRA EV tax credits. On this issue, you had a Republican Senator bashing it and Lutnick joining in the bashing:

Sen. Bernie Moreno (R-OH): Imagine a scenario in which you're a European car manufacturer, and you ship that car into America completely tariff free. It's a car that's extremely expensive, targeted at very wealthy people, but it happens to be an electric vehicle. I'll give the example of a Rolls-Royce Spectre, I'm sure you have lots of friends that have those. Fully electric Rolls-Royce vehicle. Can you imagine that the United States government subsidizes that car on leases to the tune of $7,500. Is that a good deal?

Lutnick: Are you joking?

Moreno: True story.

Lutnick: Okay, we have to end that. How about we end that now? How about we end that as fast as we possibly can. They should pay America an extra 7,500 bucks just for being that rich.

Moreno: Well, all of my Democratic colleagues voted for that bill. The inflation Reduction Act allows luxury European automobiles that aren't even remotely made in America to get $7,500 of their lease. Now imagine a Cadillac with a big, good old American V8 engine gets tariffed on the way to Europe, let alone being given a subsidy. Do you consider that to be a good example of tariff reciprocity with our allies?

Lutnick: Right? That is the example of the failed industrial policy of the United States of America. It's a failed industrial policy that needs to be changed, and needs to be changed now.  

Based on this exchange, I don't think the future of IRA EV tax credits looks very bright. But we'll see how things play out. It's possible they will just undo the Biden administration's regulatory tweaks that let foreign manufacturers get the benefits through leasing, which would keep most of the program in place, while irritating many U.S. trading partners.

On another point, I've heard various complaints from Trump and others around him that Europeans won't buy American cars. One part of the problem -- although it is broader than just this -- is that some U.S. producers don't seem to want to tailor their products for foreign markets. Cadillacs with V8 engines are never going to be big sellers in Europe, so if they want to export U.S. autos there, they will need to make products Europeans want to buy.

Tariffs and fairness

On the issue of tariffs generally, Lutnick seems like a big fan, noting in particular that they should be used to counter the tariffs and similar measures of other countries:

Klobuchar: We talked about tariffs briefly, targeted or across the board. I gave you my preference toward targeted tariffs for our economy. Weigh in on that.

Lutnick: I prefer across the board. I think when you pick one product in Mexico, they'll pick one product. You know, we pick avocados, they pick white corn, we pick tomatoes, they pick yellow corn. All you're doing is picking on farmers, which is just not going to happen. My way of thinking, and I've discussed this with the President, is country by country, macro. Let America make it more fair. We are treated horribly by the global trading environment. They all have higher tariffs, non-tariff trade barriers and subsidies. They treat us poorly. We need to be treated better. We need to be treated with respect, and we can use tariffs to create reciprocity, fairness and respect.

It's interesting to hear U.S. officials point to the high tariffs, non-tariff trade barriers and subsidies of foreign governments. Over the past several decades, the U.S. has focused a lot of its trade negotiating attention on other issues, such as labor, environment, IP, and investment protection. If you made lower tariffs, NTBs, and subsidies a priority -- through negotiations and formal WTO/FTA complaints -- could you make progress here? I think you probably could. I'm not sure Lutnick is interested in this idea though, as he seems to want to achieve reciprocity by raising U.S. tariffs.

It's also worth noting that, just as there are people in the U.S. who think the world trading system is unfair to the U.S., there are lots of people (probably even more) in other parts of the world who think the system is unfair to them. Barriers to selling in the U.S. market are higher than many people in the U.S. realize, and some of the U.S. demands on foreign markets are considered to intrude too far into domestic sovereignty.

Tariffs for non-trade purposes

Just as Trump does, Lutnick appears to see tariffs as an all-purpose tool to pressure other countries on non-trade issues:

Sen. Gary Peters (D-MI): I know that tariffs are certainly a powerful and a positive tool that can be used, but they need to be used strategically. They need to be used thoughtfully, And that's why I called for 100% tariffs on Chinese vehicles last year, and why I'm going to continue to fight for aggressive trade policy when it comes to our relations with China. As a Senator for Michigan, I'm particularly focused on manufacturing. We know how to make things in Michigan, and I don't think you can be a great country if you don't actually make things. And that's what we do in my state. And I want to work with the administration to make sure we're growing that sector, as well as creating good paying jobs that result from manufacturing.

However, I am concerned that President Trump's plan to impose tariffs on on Canada and Mexico, or the rest of the world, in fact, it could be in a matter of days, is what what we are hearing, could hurt our manufacturers who do considerable trade back and forth, as we discussed in the office. Michigan is the home of two of the top three border crossings in North America. We're two of them. And a lot of our auto parts will go back and forth. It's a highly integrated industry, and our auto companies are very concerned about what those tariffs might mean to cost, particularly to the cost of vehicles. Already, something we discussed, I'm concerned about the high cost of vehicles. Many families can't afford them now, and if tariffs are put in place, that deal with that seamless trade that goes on with Canada, in the short run, could definitely have an impact on prices and make cars even more unaffordable. I don't think that's something the American people want to see, but I'm afraid it would hurt consumers as well as also hurt those workers.

So my question is, talk me through how those tariffs will be implemented, what you're thinking will happen there, and how it's going to have an impact on prices, particularly in the short term. I know what you're going to go on the long term, but all this stuff takes time, especially when it comes to manufacturing. It's not an industry that can turn on a dime. It's much more complicated, as I know you know.

Lutnick: So the big tariff view is going to be studied. And the President launched that in an executive order where he asked the Commerce Department and the USTR to study the tariff model long term. The short term issue is illegal migration, and worse even still, fentanyl coming into this country and killing over 100,000 Americans. There's no war we could have that would kill 100,000 Americans. The President is focused on ending fentanyl coming into the country. You know that the labs in Canada are run by Mexican cartels.

So this tariff model is simply to shut their borders, ... respect America, if we are your biggest trading partner, show us the respect. Shut your border and end fentanyl coming into this country. So it is not a tariff per se. It is an action of domestic policy, shut your border and stop allowing fentanyl into our country, killing our people. So this is a separate tariff to create action from Mexico and action from Canada. And as far as I know, they are acting swiftly. And if they execute it, there will be no tariff. And if they don't, then there will be, but it's an action oriented model, that's not the ordinary tariff. The ordinary tariffs need to be studied and examined. And that would start, as the EO said, in April.

Peters: So that's a separate tariff. After that study, what would be the timeline of that?

Lutnick: I think that's sort of in April. Those studies will come out in the end of March and April, and then you'll hear about those at that time. So big macro issues with tariff are being studied, but the micro issue is Canada and Mexico and the precursors from China, they need to end and we need to protect our Americans from fentanyl and our trading partners in Canada and Mexico. They should end it and stop disrespecting us and allowing this come through our borders.

How well do tariffs and tariff threats work for these sorts of demands? I am skeptical of  their effectiveness, but it seems like we will be accumulating a lot of data over the next couple years, and should be able to come to some firm conclusions.

Opening foreign markets

The Biden administration put relatively little effort into opening foreign markets. How will the Trump administration approach this? Lutnick sounded like he would be aggressive:

Sen. Tammy Duckworth (D-WI): If confirmed, how will you work to advance America's agricultural and manufacturing industries, both at home and abroad?

Lutnick: I think our farmers and ranchers and fishermen are treated with disrespect overseas. Europe, for example, comes up with all these sort of policies that our ranchers can't sell steak. If you saw  European steer and an American steer, it's laughable. The American steers are three times the size. The steaks are so much more beautiful. But they make up this nonsensical set of rules so that our ranchers can't sell there, our farmers can't sell there. It's nonsense, they don't like our fertilizer a little bit. We need to change those rules. We need to end the disrespect that our farmers, ranchers and fishermen have to suffer with. And that's one of the things that I am just really excited about. I am going to help our farmers, ranchers and fishermen be successful around the world. We are the best. Our farmers are the best, it is clear, and they need to be able to sell their wares around the world, and they need to help end the disrespect that they get elsewhere.

These issues have been going on for decades, of course, so it would be surprising to see a resolution now. With regard to European regulations, my suggestion here is for U.S. farmers and ranchers to focus their export goals on products tailored for the European market.

Digital trade

Lutnick said only one word in his digital trade answer:

Sen. Todd Young (D-IN): Let me turn to digital trade. Despite the strength of U.S. digital services, the previous administration abandoned U.S. leadership on digital trade. They reversed decades of bipartisan policy that promoted our digital exports. This includes withdrawing support for key digital trade provisions at the WTO, ignoring bipartisan congressional directives and leaving American companies vulnerable to discriminatory trade barriers and digital protectionism abroad. Mr. Lutnick, if confirmed, will you commit to restoring U.S. leadership and digital trade by advancing strong digital trade rules and prioritizing support for U.S. digital exports?

Lutnick: Yes.

The Biden administration seemed reluctant to press foreign governments on these issues, whereas I think the Trump administration is likely to be aggressive. But how exactly they will be aggressive remains to be seen. Will they participate in international fora? Or will just go unilateral?

Some Questions for Howard Lutnick

Howard Lutnick is Trump's nominee for Secretary of Commerce, and he will have a Senate nomination hearing on January 29. In anticipation of the hearing, I came up with some questions for Lutnick. Any Senators participating in the hearing are welcome to adopt these questions, or a variation thereof, as their own:

1. How do you see the Commerce Department's role in U.S. trade policy in relation to the role of the U.S. Trade Representative's Office? What is the scope of your mandate at Commerce in relation to the mandate of USTR?

2. One of the biggest Commerce Department responsibilities in trade policy is administering certain aspects of the anti-dumping/countervailing duty laws. In your view, are AD/CVDs intended to induce changes to unfair foreign trade practices such as subsidies? If that is their goal, have they been successful in achieving this?

3. The UK Trade Remedy Authority recently imposed anti-dumping duties on Suspension Poly(vinyl chloride) from the U.S. The duties range from 38.43% to 56.01%. How would you help U.S. exporters fight the anti-dumping duties imposed by foreign governments?

4. In a Section 232 investigation, the Commerce Department examines the effect of imports on national security. In a case before the U.S. Court of International Trade a few years ago that heard a constitutional challenge to Section 232, one of the CIT judges raised questions about the scope of the Section 232 statute, and asked whether the President could determine that jobs in the peanut butter industry were vital to national security, and on that basis restrict imports of peanut butter pursuant to Section 232. How broadly do you see the Section 232 statute? Could peanut butter imports -- and maybe jelly too -- be covered? Are there any limits to the scope?

5. If the U.S. invokes national security to restrict imports, do you worry that other governments will invoke national security to restrict U.S. exports?

6. In your view, would increasing the private and public savings rates in the U.S. help lower the trade deficit? If so, is increasing savings a policy you think the Trump administration should consider?

7. At the confirmation hearing for Scott Bessent, he mentioned optimal tariff theory. Do you have any views on the practical relevance of this theory? Can you point to any real world "optimal tariffs" that have affected the terms of trade to the benefit of the U.S. economy?

Katherine Tai on "Discrimination" against U.S. Companies and National Security Capture

Katherine Tai is no longer the U.S. Trade Representative, but I missed this podcast interview that took place while she was still in office, so I'm going to submit this blog post about her trade policy views a few days late. I only have two brief comments, and they are both positive.

First, she talks about non-discrimination standards, with big tech in the background:

The risk that you have when you are so closely aligned with the biggest companies is that you lose sight of the fact that, for example, at my office, which is the Office of the U.S. Trade Representative, the job is to represent the interests of the entire U.S. economy, not just of the biggest companies.

Now, what I’m trying to get towards is we’ve had a tradition of defending the interests of the biggest American companies and engaging with foreign governments and our trading partners to make sure that our companies are not discriminated against. Those are some of the founding principles of the trading system is fairness, that you don’t discriminate between your companies and your trading partners’ companies, and you don’t discriminate as between companies from one trading partner versus another.

One of the challenges that we have had in recent years is the growth of some U.S.-based companies to become so powerful and so dominant, not just here in the United States, but in the global marketplace, that efforts to regulate those companies or those sectors start to run into this dynamic where if they are foreign companies attempting to regulate, that they could appear to be discriminatory because these companies are almost all exclusively U.S. ­based.

And so, that’s been actually quite a large part of the conversation here over the course of the last couple of years, especially in light of, for example, the tech sector, where European attempts to regulate, they might have discriminatory overtones, or they might not. But attempts to regulate at all, because the affected companies tend to be only U.S. companies, we here at USTR have had to build in additional levels of examination, analysis from a governmental perspective to try to engage with our trading partners and to really try to suss out, are the governmental measures, that our companies are complaining about, are they actually discriminatory and therefore something we need to really push back on from a trade discipline perspective? Or are they instead legitimate attempts to regulate that we need to make room to have conversations about and we can’t just assume are discriminatory because the affected companies happen to all be U.S.-based?

So, this has been one of the most interesting aspects of the way we’ve been evolving the perspective here at USTR, which has really put us in conversation with our competition authorities to create that space to say that not every foreign government regulatory measure is necessarily discriminatory when you look at the dynamic in the domestic and the international marketplace, where you have a set of dominant players that happen to be U.S.­ based.

She has mentioned this issue before. I'm sympathetic to what I think her view is here, which is that we should look beyond just disparate impact when accusing other governments of discrimination (we wouldn't want a disparate impact standard applied to us either). My sense is that her view will not be carried over to the new administration, but we'll see how things play out.

Second, she raises an issue related to the role national security is playing in economic policy discussions:

So, one of the ways of understanding the China challenge from an economic, and maybe even a national security perspective, is to understand that with the backing of the state, that many of these Chinese economic players present as monopolies and monopolistic challenges.

When we turn that mirror around on ourselves — and I think that this was really the thrust of your question. It just took me a really long time to establish the first part. The first part of the landscape I wanted to cover is that for us, I think, one of the challenges that we have, that we should continue to work on understanding and figuring out from a policy perspective, is the degree to which American companies, companies that look like American state champions, are infused into the perspectives of our government and especially the national security establishment.

So, in a way, the question that I am posing from this chair that I occupy at USTR is when it comes to national security and U.S. companies, U.S. champions, are we reflecting kind of the other side of the coin, which is not companies that are difficult to compete with because they have the backing of the government, but instead companies that are difficult to compete with because they are driving governmental positions and governmental perspectives.

So, we’ve got a state capitalism challenge in China. You’ve got companies that are susceptible to direction and control by the government. My question here, for us, is the degree to which our government national security establishment may or may not be captured by industry interests. And I think that is a question that I have had for a long time. But I think that is a question that will be called into even sharper relief going forward these next couple of years.

If I'm reading her correctly, she is saying we should be wary of the private sector using national security arguments to drive government policy in a direction that benefits it financially. In my view, this has been a long-standing problem, and she may be right that it could intensify.

Would the U.S. Join a Version of the MPIA?

I have a new piece for the Japan Economic Foundation that asks "Would the United States Join the MPIA?" This is from the conclusion:

The Appellate Body appointments crisis has dragged on for years now. The MPIA represents a solution for any WTO member that wants to ensure that binding dispute settlement is available, and many members have taken advantage of it. However, without US participation in the MPIA, WTO dispute settlement loses some of its luster and effectiveness. Trying to glean US intentions and goals from its various public statements is a challenge, but there do seem to be some key elements that can be inferred, with the avoidance of the “institutional” problems it saw in the Appellate Body at the core.

The chances of the US joining a version of the MPIA may not be high at the moment, as Trump and his likely trade policy team are among the biggest skeptics of WTO dispute settlement and will not be interested in making it more effective. Nevertheless, it is worth laying the foundation for a future US administration to join. The best approach may be to demonstrate the utility of the MPIA over the next several years by using it to help resolve WTO disputes when the opportunity arises. To this end, convincing a few of the holdouts – such as the UK, South Korea, and India – to join would be of great value, so that the MPIA gets more use. On the basis of a strong MPIA record, a case could be made to the next US administration that, if it still objects to having an institution such as the Appellate Body hear appeals from panel reports, the MPIA could serve as an alternative.

The title of the piece is a little misleading, because I'm not imagining the U.S. joining the current MPIA. Rather, as laid out in the paper, I think there might be a version of the MPIA that, along with several other changes to WTO rules, could entice the U.S. to sign on at some point in the (distant?) future.

Here's more from the paper about some things to think about in constructing a version of the MPIA that the U.S. could accept:

With regard to the current version of the MPIA, there might be some features that would raise the same concerns about institutions for the US as it has with the Appellate Body, and therefore might need to be tweaked in a number of ways.

First, as noted, there is a standing pool of 10 MPIA arbitrators, and it may be that the US cannot accept a standing pool of this sort. Having a named set of adjudicators may feel too much like an institution. By contrast, something that looks more like ad hoc arbitration, with the parties selecting the arbitrators in each case without the constraint of a standing pool, might be more acceptable to the US.

Second, once appointed, MPIA arbitrators can meet regularly to discuss the operation of WTO dispute settlement and the arbitration mechanism, which the MPIA arbitrators have done. In this regard, paragraph 5 of the current MPIA rules states:

... In order to promote consistency and coherence in decision-making, the members of the pool of arbitrators will discuss amongst themselves matters of interpretation, practice and procedure, to the extent practicable.

Given US concerns about the institutional nature of the Appellate Body, this provision might not make it into a US-friendly version of the MPIA.

Third, given the experience with the Appellate Body, where there were accusations that the Appellate Body Secretariat played too strong a role in deciding cases, the role of the WTO Secretariat in providing support to any appellate mechanism will be particularly sensitive. The current MPIA rules state:

7. The participating Members envisage that appeal arbitrators will be provided with appropriate administrative and legal support, which will offer the necessary guarantees of quality and independence, given the nature of the responsibilities involved. The participating Members envisage that the support structure will be entirely separate from the WTO Secretariat staff and its divisions supporting the panels and be answerable, regarding the substance of their work, only to appeal arbitrators. The participating Members request the WTO Director General to ensure the availability of a support structure meeting these criteria.

In the only MPIA case that has been heard so far, two Secretariat officials assisted the arbitrators. The US is unlikely to accept this as part of an appellate review process. It would probably prefer having arbitrators hire assistants on an ad hoc basis, with no role for the Secretariat at all beyond administrative tasks such as arranging hearing rooms.

 

 

 

Trump's Trade Policy, Day 1: Just a Memo

There was a great deal of anticipation about what tariffs Trump might impose on his first day in office, but ultimately we just got a memo. (In response to a question from a reporter, Trump did say "We're thinking in terms of 25 percent [tariffs] on Mexico and Canada ... I think we'll do it February 1.")

The memo has a number of items worth noting.

First, there are going to be investigations of trade deficits and reviews of unfair trade practices:

Sec. 2.  Addressing Unfair and Unbalanced Trade.  (a)  The Secretary of Commerce, in consultation with the Secretary of the Treasury and the United States Trade Representative, shall investigate the causes of our country’s large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits.

...

(c)  The United States Trade Representative, in consultation with the Secretary of the Treasury, the Secretary of Commerce, and the Senior Counselor for Trade and Manufacturing, shall undertake a review of, and identify, any unfair trade practices by other countries and recommend appropriate actions to remedy such practices under applicable authorities, including, but not limited to, the Constitution of the United States; sections 71 through 75 of title 15, United States Code; sections 1337, 1338, 2252, 2253, and 2411 of title 19, United States Code; section 1701 of title 50, United States Code; and trade agreement implementing acts.  

It's worth mentioning that there were similar initiatives at the start of Trump's first term in office. There was Executive Order 13796—Addressing Trade Agreement Violations and Abuses, April 29, 2017; and there was Executive Order 13786 - Omnibus Report on Significant Trade Deficits, on March 31, 2017. (Apparently they are getting things going more quickly this time.)

They also talk about creating a new office to handle tariff matters:

(b)  The Secretary of the Treasury, in consultation with the Secretary of Commerce and the Secretary of Homeland Security, shall investigate the feasibility of establishing and recommend the best methods for designing, building, and implementing an External Revenue Service (ERS) to collect tariffs, duties, and other foreign trade-related revenues.

I'm curious what the DOGE folks will say about this idea in terms of its efficiency.

There is also this about the USMCA:

(d)  The United States Trade Representative shall commence the public consultation process set out in section 4611(b) of title 19, United States Code, with respect to the United States-Mexico-Canada Agreement (USMCA) in preparation for the July 2026 review of the USMCA.  Additionally, the United States Trade Representative, in consultation with the heads of other relevant executive departments and agencies, shall assess the impact of the USMCA on American workers, farmers, ranchers, service providers, and other businesses and make recommendations regarding the United States’ participation in the agreement.  The United States Trade Representative shall also report to appropriate congressional committees on the operation of the USMCA and related matters consistent with section 4611(b) of title 19, United States Code.

That one may be the least surprising, given the upcoming 2026 USMCA review.

Then there's this one on the currency practices of foreign governments:

(e)  The Secretary of the Treasury shall review and assess the policies and practices of major United States trading partners with respect to the rate of exchange between their currencies and the United States dollar pursuant to section 4421 of title 19, United States Code, and section 5305 of title 22, United States Code.  The Secretary of the Treasury shall recommend appropriate measures to counter currency manipulation or misalignment that prevents effective balance of payments adjustments or that provides trading partners with an unfair competitive advantage in international trade, and shall identify any countries that he believes should be designated as currency manipulators.

There have been occasional rumblings over the past year about dollar devaluation, but I'm not sure I see anything strong enough in here to suggest this is coming.

And there will be a review of the "general level of reciprocal and mutually advantageous concessions" in existing trade agreements:

(f)  The United States Trade Representative shall review existing United States trade agreements and sectoral trade agreements and recommend any revisions that may be necessary or appropriate to achieve or maintain the general level of reciprocal and mutually advantageous concessions with respect to free trade agreement partner countries. 

And a push for market access through bilateral or sector-specific agreements:

(g)  The United States Trade Representative shall identify countries with which the United States can negotiate agreements on a bilateral or sector-specific basis to obtain export market access for American workers, farmers, ranchers, service providers, and other businesses and shall make recommendations regarding such potential agreements.

This was something we didn't get much of with the Biden administration. Interestingly, while the Trump administration is likely to be trying to close the U.S. market, it may also be pushing hard to open foreign markets.

Ratcheting up of AD/CVD (maybe bringing back "zeroing"?):

h)  The Secretary of Commerce shall review policies and regulations regarding the application of antidumping and countervailing duty (AD/CVD) laws, including with regard to transnational subsidies, cost adjustments, affiliations, and “zeroing.”  Further, the Secretary of Commerce shall review procedures for conducting verifications pursuant to section 1677m of title 19, United States Code, and assess whether these procedures sufficiently induce compliance by foreign respondents and governments involved in AD/CVD proceedings.  The Secretary of Commerce shall consider modifications to these procedures, as appropriate.

An investigation of discriminatory or extraterritorial taxes imposed by foreign governments:

(j)  The Secretary of the Treasury, in consultation with the Secretary of Commerce and the United States Trade Representative, shall investigate whether any foreign country subjects United States citizens or corporations to discriminatory or extraterritorial taxes pursuant to section 891 of title 26, United States Code.

Maybe the discriminatory tax part will focus on digital taxes?

Looking into ratcheting up Buy American procurement:

(k)  The United States Trade Representative, in consultation with the Senior Counselor for Trade and Manufacturing, shall review the impact of all trade agreements — including the World Trade Organization Agreement on Government Procurement — on the volume of Federal procurement covered by Executive Order 13788 of April 18, 2017 (Buy American and Hire American), and shall make recommendations to ensure that such agreements are being implemented in a manner that favors domestic workers and manufacturers, not foreign nations.

Then there's a big section on China:

Sec. 3.  Economic and Trade Relations with the People’s Republic of China (PRC).  (a)  The United States Trade Representative shall review the Economic and Trade Agreement Between the Government of the United States of America and the Government of the People’s Republic of China to determine whether the PRC is acting in accordance with this agreement, and shall recommend appropriate actions to be taken based upon the findings of this review, up to and including the imposition of tariffs or other measures as needed.

(b)  The United States Trade Representative shall assess the May 14, 2024, report entitled “Four-Year Review of Actions Taken in the Section 301 Investigation:  China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation” and consider potential additional tariff modifications as needed under section 2411 of title 19, United States Code — particularly with respect to industrial supply chains and circumvention through third countries, including an updated estimate of the costs imposed by any unfair trade practices identified in such review — and he shall recommend such actions as are necessary to remediate any issues identified in connection with this process.

(c)  The United States Trade Representative shall investigate other acts, policies, and practices by the PRC that may be unreasonable or discriminatory and that may burden or restrict United States commerce, and shall make recommendations regarding appropriate responsive actions, including, but not limited to, actions authorized by section 2411 of title 19, United States Code. 

(d)  The Secretary of Commerce and the United States Trade Representative shall assess legislative proposals regarding Permanent Normal Trade Relations with the PRC and make recommendations regarding any proposed changes to such legislative proposals.

(e)  The Secretary of Commerce shall assess the status of United States intellectual property rights such as patents, copyrights, and trademarks conferred upon PRC persons, and shall make recommendations to ensure reciprocal and balanced treatment of intellectual property rights with the PRC.

With regard to enforcing the U.S.-China Phase One deal, I never heard about any enforcement actions under this deal during the Biden administration, and it's not totally clear how this would work in practice and how much transparency there will be. (Article 7.4.1 says: "The Appeal and any information and matters related to it are confidential and shall not be shared beyond the Bilateral Evaluation and Dispute Resolution Office, absent the agreement of the Parties.")

There's a broad section on "economic security," which says:

Sec. 4.  Additional Economic Security Matters.  (a)  The Secretary of Commerce, in consultation with the Secretary of Defense and the heads of any other relevant agencies, shall conduct a full economic and security review of the United States’ industrial and manufacturing base to assess whether it is necessary to initiate investigations to adjust imports that threaten the national security of the United States under section 1862 of title 19, United States Code. 

(b)  The Assistant to the President for Economic Policy, in consultation with the Secretary of Commerce, the United States Trade Representative, and the Senior Counselor for Trade and Manufacturing, shall review and assess the effectiveness of the exclusions, exemptions, and other import adjustment measures on steel and aluminum under section 1862 of title 19, United States Code, in responding to threats to the national security of the United States, and shall make recommendations based upon the findings of this review. 

(c)  The Secretary of State and the Secretary of Commerce, in cooperation with the heads of other agencies with export control authorities, shall review the United States export control system and advise on modifications in light of developments involving strategic adversaries or geopolitical rivals as well as all other relevant national security and global considerations.  Specifically, the Secretary of State and the Secretary of Commerce shall assess and make recommendations regarding how to maintain, obtain, and enhance our Nation’s technological edge and how to identify and eliminate loopholes in existing export controls -– especially those that enable the transfer of strategic goods, software, services, and technology to countries to strategic rivals and their proxies.  In addition, they shall assess and make recommendations regarding export control enforcement policies and practices, and enforcement mechanisms to incentivize compliance by foreign countries, including appropriate trade and national security measures. 

(d)  The Secretary of Commerce shall review and recommend appropriate action with respect to the rulemaking by the Office of Information and Communication Technology and Services (ICTS) on connected vehicles, and shall consider whether controls on ICTS transactions should be expanded to account for additional connected products.

(e)  The Secretary of the Treasury, in consultation with the Secretary of Commerce and, as appropriate, the heads of any other relevant agencies, shall review whether Executive Order 14105 of August 9, 2023 (Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern) should be modified or rescinded and replaced, and assess whether the final rule entitled “Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern,” 89 Fed. Reg. 90398 (November 15, 2024), which implements Executive Order 14105, includes sufficient controls to address national security threats.  The Secretary of the Treasury shall make recommendations based upon the findings of this review, including potential modifications to the Outbound Investment Security Program.

(f)  The Director of the Office of Management and Budget shall assess any distorting impact of foreign government financial contributions or subsidies on United States Federal procurement programs and propose guidance, regulations, or legislation to combat such distortion.

(g)  The Secretary of Commerce and the Secretary of Homeland Security shall assess the unlawful migration and fentanyl flows from Canada, Mexico, the PRC, and any other relevant jurisdictions and recommend appropriate trade and national security measures to resolve that emergency.

Item (g) seems like it is what could trigger some IEEPA tariffs, so it's a big deal. Item (b), if it revisits the Section 232 steel and aluminum tariffs, could be significant too. And item (f) might mirror the EU's Foreign Subsidies Regulation, which is interesting.

And finally, there's a section which tells the agencies when the results of their reviews, investigations, findings, identifications, and recommendations are due (between April 1 and April 30, depending on the issue).

The Optimal Tariff Argument at the Scott Bessent Hearing

At his confirmation hearing last week, Treasury Secretary-nominee Scott Bessent mentioned "optimal tariff theory," which is something that always triggers me (although as I'll say later, I'm not sure he meant what he seemed to):

Senator Ron Wyden: On the tariffs, Donald Trump, with no plan and no strategy, says he's going to put across the board tariffs, blanket tariffs, on all imported goods, which means that our workers and our small businesses are going to get clobbered with additional taxes on practically everything they buy from other countries. My question here is, who would pay these tariffs? Americans or foreign countries?

Bessent: Senator Wyden, just to understand so I can frame the answer correctly, do you believe that these tariffs are a consumption tax increase?

Wyden: I believe these tariffs, you can call it whatever you want in terms of trying to gussy it up, they're going to be paid for by our workers and small businesses. All through the campaign, we heard they weren't, that foreign countries were going to pay it. I think that's baloney. It's going to be paid for by workers and small businesses. So, your response.

Bessent: Yes, Senator, I would respectfully disagree. And the history of tariffs and tariff theory, optimal tariff theory, does not support what you're saying. Traditionally, we see that the currency -- if we were to say, use a number that has been thrown around in the press of 10% -- then traditionally the currency appreciates by 4%. So the 10% is not passed through. Then we have various elasticities. Consumer preferences may change. And finally, foreign manufacturers, especially China, especially China, which is trying to export their way out of their current economic malaise, they will continue cutting prices to maintain market share.

Wyden: That's an academic view of it, but what I know is the history of this is, it clobbers people of modest means. They're the people who are going to get hit. And all through the campaign, there was a big show that it was going to be paid for by foreigners -- not so.

(emphasis added)

When "optimal tariffs" come up in the public discourse, I sometimes get the sense that people are using the term just to mean "really good and effective" tariffs. "Optimal tariff" has a more specific meaning, though, which you can check out here and here, but also I'm going to dust off my bookshelf for some Samuelson/Nordhaus (Economics, 1989) and Krugman/Obstfeld (International Economics, 1991) explanations.

Samuelson/Nordhaus give the idea of optimal tariffs some credibility as long as you focus only on the impact of the optimal tariffs themselves, but then they point out that other countries will retaliate and therefore everyone is worse off overall:

The "Terms-of-Trade" or "Optimal-Tariff" Argument

One valid argument for a country's imposing tariffs on its trade is that it will "shift the terms of trade in its favor and against foreign countries.'' Recall that terms of trade represent the ratio of export prices to import prices. To shift the terms of trade against foreigners means that levying tariffs on imports will reduce the world price of imports while increasing the prices of our exports. By shifting the terms of trade in our favor we can export less of our wheat and aircraft in order to pay for imports of oil and cars. The set of tariffs that maximizes our domestic real incomes is called the optimal tariff.

... We can understand it in a simple case by considering an optimal tariff on oil. Mill would note that the optimal tariff on oil will raise the price above the foreign price. But with out demand now curtailed, and because we are a significant part of the world demand for oil, the world market price of oil will be bid down. ...

...

Have we not therefore found a theoretically secure argument for tariffs? The answer would be yes if we could forget that this is a ''beggar-thy-neighbor" policy and ignore the reactions of other countries. But other countries are likely to react. After all, if the United States were to impose an optimal tariff of 30 percent on its imports, why should the European Community and Japan and Brazil not put 30 or 40 percent tariffs on their imports? In the end, as every country calculated and imposed its own domestic optimal tariff, the overall level of tariffs might climb to 30 or 50 percent.

But such a situation would surely not in the end represent an improvement of either world or individual economic welfare. When all countries impose optimal tariffs, it is likely that everyone's economic welfare will decline as the impediments to free trade become great. ...

Krugman/Obstfeld are even more skeptical. They start out by noting the possibility of an optimal tariff leading to overall benefits in the case of large countries:

One argument for deviating from free trade comes directly out of cost-benefit analysis: for a large country that is able to affect the prices of foreign exporters, a tariff lowers the price of imports and thus generates a terms of trade benefit. This benefit must be set against the costs of the tariff, which arise because the tariff distorts production and consumption incentives. It is possible, however, that in some cases the terms of trade benefits of a tariff outweigh its costs so there is a terms of trade argument for a tariff.

Then they provide the following useful clarification:

... (By convention the phrase ''optimum tariff" is usually used to refer to the tariff justified by a terms of trade argument rather than to the best tariff given all possible considerations.) ...

This makes my point about about "optimal tariff" not meaning just a really good and effective tariff.

Finally, they pile on the criticism:

The terms of trade argument against free trade has some important limitations, however. Small countries have very little ability to affect the world prices of either their imports or other exports, so that the terms of trade argument is of little practical importance. For big countries like the United States, the problem is that the terms of trade argument amounts to an argument for using national monopoly power to extract gain at other countries' expense. The United States could surely do this to some extent, but such a predatory policy would probably bring retaliation from other large countries. A cycle of retaliatory trade moves would, in turn, undermine the attempts at international trade policy coordination described later in this chapter.

The terms of trade argument against free trade, then, is intellectually impeccable but of doubtful usefulness. In practice, it is emphasized more by economists as a theoretical proposition than it is used by governments as a justification for trade policy.

(Krugman has noted elsewhere that the optimal tariff argument "plays almost no role in real-world disputes over trade policy.")

Over the years, when this subject has come up, I've asked people to point me to a tariff out there in the real world that they think constitutes an "optimal tariff," in the sense of affecting the terms of trade so as to make the country better off. No one has taken me up on it yet, which leaves me skeptical that the term has any practical relevance. But given that, as noted, the term kind of sounds like it just means "really good and effective tariff," we may not have heard the last of it from tariff proponents.

USTR's Model Negotiating Texts: Non-Market Practices and More

Last week, USTR released what it referred to as "Model Negotiating Texts" on a number of issues:

• Competition Model Text
• Inclusive Economy Chapter Model Text
• Non-Market Policies and Practices (NMPPs) Model Text
• Public Enterprise Model Text
• Standards Model Text

There's a lot to take in here, and I'm going to focus on just two things for the moment.

First, in its press release, USTR says: 

As this cover note explains, over the past eight years the United States has reevaluated the laissez-faire approach to globalization, and the Biden-Harris Administration has stressed the importance of building the economy from the middle out. 

And then in the Cover Note USTR adds the following on this point:

The version of globalization that has prevailed for the past three decades has been laissez-faire in orientation, tracking the broader shift in economic governance toward trusting markets to make optimal sourcing decisions. This approach empowered corporate actors to, for example, put downward pressure on wages, as jurisdictions competed for investment based on providing the lowest possible cost structure. That bred race-to-the-bottom globalization -- and that is the version of globalization that is experiencing backlash around the world.

In the past 8 years, the United States has reevaluated that neo-laissez-faire approach. ...

Everyone has already heard my "actually we were never anywhere close to laissez-faire" complaining, so just refer to my earlier posts for that. What I want to mention here is the reference to "eight years." To me, that suggests the authors of these documents see themselves as more aligned with Trump's views on trade than with what came before. If I'm reading that correctly, it's something I'd like to discuss further with Katherine Tai if I ever get a chance to talk with her.

Second, there are some aspects of the NMPPs text that puzzle me, in particular in terms of how they see the scope of this category and what international constraints they think should apply to it.

The cover note says the following about NMPPs:

Non-Market Policies and Practices (NMPPs): The pandemic exposed the extreme nature of our supply chain dependency on the People’s Republic of China (PRC). The PRC’s supply chain dominance is in part due in significant part to non-market policies and practices that are fundamentally anticompetitive in nature. Government intervention on behalf of Chinese companies is designed to facilitate global dominance across a range of sectors, including steel, aluminum, solar, and electric vehicles. Market-oriented economies, and in particular market-oriented democracies, must work together to tackle these NMPPs as part of a broader effort to
promote more resilient supply chains, reduce dependencies on geopolitical rivals, and mitigate the risks of economic coercion. The model text articulates shared values of market-oriented economies and provides tools, including through cooperative measures, to tackle NMPPs.

The text itself then sets out a number of illustrative examples of NMPPs:

3. The Parties affirm that non-market policies and practices of concern include:

(a) adopting and pursuing a non-market industrial plan that targets a specific industry for domestic or global market dominance by domestic enterprises;

(b) directing or pressuring public enterprises engaged in commercial activities or private enterprises to achieve capacity, production, or export levels or market share targets in accordance with a non-market industrial plan;

(c) creating or maintaining non-market excess capacity in industrial sectors through public enterprises or private enterprises;

(d) directing, pressuring, or otherwise interfering with commercial decision making by public enterprises or private enterprises;

(e) placing public officials or officials of the governing political party in private enterprises to monitor, direct, pressure, or otherwise influence commercial decision making;

(f) deploying subsidies in pursuit of non-market industrial policy objectives, including via policy banks, state-owned commercial banks, and government investment or guidance funds;

(g) promoting and sustaining domestic companies as national champions through financial support and regulatory and other preferences;

(h) providing special preferences and competitive advantages to public enterprises engaged in commercial activities;

(i) directing or allowing public authorities to exercise their authority in a discriminatory manner, including by treating domestic enterprises more favorably than foreign or foreign-invested enterprises;

(j) using selective or arbitrary application or enforcement of competition law to achieve industrial policy objectives;

(k) failing to maintain laws and regulations governing insolvency and bankruptcy, or preventing or otherwise interfering with the restructuring according to those laws and regulations, of insolvent or bankrupt enterprises, including through liquidation, in pursuit of the objectives of an industrial plan;

(l) measures that require or pressure the transfer or disclosure of technology, intellectual property (including trade secrets), or confidential business information such that the transfer or disclosure is not consistent with principles of fair competition, including measures that direct or support the theft of technology, intellectual property (including trade secrets), or confidential business information in furtherance of non-market industrial targeting;

(m) engaging in economic coercion, whether through public authorities, public enterprises engaged in commercial activities, or private enterprises;

(n) directing the judiciary to render decisions that serve industrial policy objectives;

(o) pursuing unique national standards when international standards already exist in order to leverage the economic power of the domestic market to promote or compel the adoption of those standards in global markets;

(p) failing to respect labor rights, including by failing to adopt, maintain, and effectively enforce labor laws that protect those rights, which can artificially lower costs for domestic enterprises;

(q) lack of effective enforcement of environmental laws and regulations, which can artificially lower costs for domestic enterprises;

(r) failing to publish final central level and regional level laws, regulations, and other measures that provide subsidies or other financial support to enterprises;

(s) failing to publish all central level and regional level laws, regulations, and other measures that impact the rights and obligations of persons; and

(t) preventing free access to and sharing of relevant information on which to base commercial decisions.

Clearly, these examples are targeted at China. But some of them are broad enough that I wonder if Biden's economic policies could get caught up here. For instance: "deploying subsidies in pursuit of non-market industrial policy objectives, including via policy banks, state-owned commercial banks, and government investment or guidance funds." Aren't the CHIPS Act subsidies, for example, being deployed in pursuit of non-market industrial policy objectives?

I get the sense that they want to allow NMPPs to some degree, but then set a limit which they cannot go beyond. Perhaps it is something along the lines of, "subsidies are OK if they promote domestic industries, but not if they promote them too much." The practical impact seems to be that they are not opposing non-market policies and practices per se. Rather, they are opposing what they see as excessive non-market policies and practices, and trying to draw a line beyond which something is excessive. But it can be very hard to say where that line should be.

The Latest on Appeal/Review in WTO DS Reform

I've been posting about official WTO documents related to appeal/review in dispute settlement reform. The latest one, from the heads of delegation meeting on November 21, is now available. There were no exciting new revelations, but just for the sake of completeness, I'm providing excerpts below of the appeal/review sections:

2.1. Mr. Joel Richards (Saint Vincent and the Grenadines), speaking on behalf of the Co-Convenors, made the following report:

"Our work has entered an even more intense phase, and this is discernible from the sheer number of meetings that we have had since October – six full-day plenary meetings, a workshop and many drafting group meetings. As always, we try to be very deliberate in trying to balance the need to deepen and intensify our work with the circumstances of capacity constrained delegations. In this regard, we must also commend experts for their collaborative and constructive engagement in the process. We are very pleased to confirm that we have made substantive progress on some sub-topics. Since our last meeting, the following elements have moved to drafting:

a. Under the sub-topic Scope of Review:

i. Limiting reviewable claims to those with material impact on implementation (MII) obligations – zero draft expected early next week and will first be discussed by plenary on 27 November.

ii. Clarifying adjudicators' roles in assessing panel facts under Article 11 of the Dispute Settlement Understanding (DSU) – zero draft completed and will be first discussed at plenary on 25 and 27 November.

b. Under the sub-topic Reducing/Changing Incentives to Appeal:

i. Making changes to the existing interim review stage of the panel process such that it provides a more meaningful opportunity for the panel to correct factual or legal errors – zero draft completed and will be first discussed at plenary on 25 and 27 November.

c. Under the sub-topic Clarifying Members' Expectations of Adjudicators:

i. Clarifying Members' expectations with respect to adherence to timeframes – drafting group established and having its first meeting on 22 November.

ii. Clarify that adjudicators should focus on assessing the panel's interpretations, findings and conclusions based on the claims of error put forward by the Parties This element was moved to drafting during our plenary session on Tuesday, 19 November and we are in the process of establishing the drafting group.

...

In terms of Access to the Mechanism, almost all Members consider automatic access to such a mechanism is essential to meet their interests. With respect to Form of the Mechanism, the majority of Members continue to support a standing body. This notwithstanding, we have been continuing a constructive exchange of views on interests and concerns, as well as exploring some interesting ideas based on the practices of some other international adjudicative bodies.

...

Concerning Standard of Review, as stated already, we have moved to drafting an idea to clarify the standard of review applicable to adjudicators' review of a panel's objective assessment of the facts of the case. However, the majority of Members do not consider that having a higher or more limited standard of review for other legal issues would meet their interests. Nonetheless, in the spirit of the constructive and collaborative manner of our work, experts continue to discuss ideas so as to address the interests and concerns of all Members.

Unfinished Business: Bringing China Into the Club of Market-Oriented Countries

Given where U.S. trade policy is at the moment, this doesn't seem like the best time for my latest piece, which is called "Unfinished Business: Bringing China Into the Club of Market-Oriented Countries." But sometimes all you can do is lay the groundwork for the future, which is what I was trying to do here. This is from the conclusion:

The goal of integrating China into the club of market-oriented countries is still worth pursuing. Both China and the rest of the world would be better off if China moved in this direction. While the way things played out after China's accession to the WTO was a missed opportunity, if we make China's economic structure a priority now, as it was in the 1990s, we might see some progress. 

The current political environment may not support this approach, as keeping China out of the U.S. market has become the primary trade objective. And the best opportunity for pushing market-orientation may have been in the years immediately following China’s WTO accession in 2001. Nonetheless, completing the unfinished business of integrating China into the world trading system would still be of value today. It looks as though U.S. trade policymakers are in the midst of trying all other options at the moment, but if and when those do not succeed, the foundation exists for a more productive approach.

In terms of the reaction from China, some of the actions and rhetoric coming out of Washington these days could be characterized as “anti-China.” But establishing and applying a set of rules about market orientation should not be seen as punitive. Rather, it simply reflects what China and other WTO Members agreed to as part of China’s WTO accession. Everyone has an interest in, and benefits from, this system of rules. If approached diplomatically, a renewed effort to push for China to be more market-oriented could actually be part of an improvement in relations between China and the West.

It doesn't come out clearly just from the conclusion, but the core of my argument is that WTO complaints provide the best overall chance of encouraging China to become more market-oriented.

One thing I'm unsure of is how the various China trade hawks think about the structure of China's economy. Many of them focus very heavily on keeping Chinese products out of the U.S. market. For this group, what I've wondered is, would they event want to see China become more market-oriented? Or do they worry that this shift would make Chinese companies harder to compete with? I tried asking this of someone once on social media but didn't get a response.

Katherine Tai on "The Real Purpose of Trade Policy"

As we close in on the end of the Biden administration, I may have fewer opportunities to react to Katherine Tai's thoughts on trade policy. My Katherine Tai tag now has over 60 entries. I've enjoyed writing them, and I hope she has enjoyed -- or at least not been too annoyed by! -- reading them. After she leaves office, I hope for two things: (1) I get a chance to ask her what she thought of all my posts; and (2) she takes a job in which she continues to weigh in publicly on these matters, in which case I can keep the tag going and maybe reach 100 some day. (Maybe she would even consider posting something here?)

Her latest trade policy thoughts are in a new piece in Foreign Affairs entitled "The Real Purpose of Trade Policy." There's a lot in there, and of course as always you should read the whole thing, but I'm going to focus on these passages:

The year 2024 witnessed a number of meaningful anniversaries for the United States and its allies: the 80th anniversary of D-Day, when Allied forces landed on the beaches of Normandy, heralding the beginning of the end of World War II; the 80th anniversary of the Bretton Woods conference, which began less than two months after D-Day and resulted in the creation of the World Bank and the International Monetary Fund; and the 75th anniversary of the founding of NATO, the alliance that eventually enabled Washington and its partners to triumph in the Cold War.

Marking these anniversaries offered an opportunity to reflect on a familiar list of triumphs—not just the defeat of fascism but also the creation of a U.S.-led postwar order built on the NATO alliance and the United Nations, as well as a global financial system that paved the way for an era of economic growth, including through trade liberalization. But the last item is often misunderstood. The victors believed that the path to a durable peace was grounded not in trade liberalization itself but in a broader vision of global governance designed to provide economic security for working people.

... 

World War II globalized the risk of totalitarian dominance, and Roosevelt recognized that similar threats existed at home, from fascism on the right and communism on the left. In his January 1941 State of the Union address, Roosevelt famously identified four essential freedoms: freedom of speech, freedom of worship, freedom from want, and freedom from fear. That summer, he and British Prime Minister Winston Churchill signed the Atlantic Charter. Recognizing freedom from want, they stated that international economic cooperation was for the purpose of securing “labor standards, economic advancement, and social security.”

By the 1980s, the liberal dream of freedom from want had devolved into a neoliberal quest for freedom from regulation. The United States had almost completely lost sight of Roosevelt’s original postwar vision of shared prosperity. The Biden administration set itself the task of recapturing it. The three pillars of the president’s economic agenda—targeted investments, the empowerment of workers, and the promotion of competition—have also been core aspects of his trade agenda. By working to build the U.S. economy “from the middle out and the bottom up,” President Joe Biden moved the country closer to Roosevelt’s vision of durable peace and prosperity.

...

By the mid-1980s, when the Reagan administration launched the negotiations leading to the World Trade Organization, the original postwar vision, which had linked democracy with economic security for working people, had been lost. The safeguards of the ITO charter had fallen by the wayside, and the so-called Washington consensus imposed a doctrine of rigid trade liberalization on developed and developing countries alike. Economics came to be dominated by thinkers such as Milton Friedman and other adherents of the so-called Chicago school. The more pro-democratic approach to capitalism, much of which had been embraced by President Dwight Eisenhower, fell out of favor. The laissez-faire ethos of the 1920s—the model that led to the 1929 crash and the Depression—came roaring back.

The effects of those trickle-down policies have become all too clear. They have left working people behind all over the world, pitting those in one economy against those in another as the private sector prioritizes short-term profit over inclusive, sustainable, durable growth. Along the way, the private sector has been able to exploit labor and environmental rules internationally, as inequality widens and the world experiences a global democratic recession.

...

In the 1970s, industrial policy enjoyed bipartisan support in the United States. The postwar project of rebuilding economies in Europe and Japan had succeeded so well that the United States needed to plan in order to compete. But the demise of the New Deal economic paradigm at home and President Ronald Reagan’s assertion that “government is the problem” made industrial policy a taboo topic.

While the United States abstained from pursuing an affirmative industrial policy, China did not. ... A second China shock is in the offing, and the Biden administration has pursued an investment agenda to prevent that outcome.

Part of that agenda has been creating well-paying jobs at home and supporting a just transition to clean energy. Those opportunities help correct for decades of deindustrialization resulting from trickle-down globalization and seek to begin the process of repairing American democracy by demonstrating that economic governance can deliver for working people. Many U.S. trading partners already have industrial strategies or are developing them. A shared recognition of the need for diversified supply chains, including in clean energy sectors, has created opportunities for Washington to work more closely with them.

I have three reactions here.

First, while the title of the piece refers to the purpose of "trade policy," I'm going to quibble with this characterization and say that I think Tai is talking about something bigger than just trade policy. In the piece, she mentions "a broader vision of global governance designed to provide economic security for working people"; she notes that when Roosevelt and Churchill signed the Atlantic Charter, they recognized freedom from want as an essential freedom and stated that international economic cooperation was for the purpose of securing "labor standards, economic advancement, and social security"; and she references a "broader code of economic ethics."

In my view, these issues go beyond trade policy, which I think of as narrower and focusing on the rules governing tariffs, protectionism, and subsidies. Obviously, a lot of other issues have seeped into the trade policy discussion over the years, but that doesn't make those issues into core trade policy issues so much as expand the international economic cooperation discussion to cover global governance more broadly. If all these other issues are trade policy, then trade policy would cover ... well, just about everything. Along these lines, recall my long ago April fools' day joke about a trade agreement on gun rights. And even without the jokes, thanks to the expansion of the scope of trade agreements, we actually do have trade rules requiring that copyright terms be for the life of the author plus 70 years. Tai seems to be for expansion, but it's worth noting that expansion can go in very different directions, and once you start down that road, it might go in a different direction than you had planned. Of course, it's clear that trade policy does not exist in a vacuum, and has overlaps with a wide range of other economic policies. But I think it's a mistake to classify all these trade-adjacent issues as "trade policy," and "global economic governance" is probably a better description of what she is talking about here.

Second, I don't think the mid-1980s was as "rigid" about trade liberalization as Tai suggests, in the U.S. or elsewhere. The creation of the WTO did tighten up the rules to some extent, but there were plenty of carveouts included as well. It's also worth noting in this context that 1980 was the moment that we saw a big shift in U.S. trade remedies practice, a crucial area of trade policy. A while back, I mentioned a Horlick & Shea paper noting that "the use of antidumping law in the United States increased significantly in the 1980s, with U.S. cases totalling three hundred and forty-six from 1980 to 1986, compared with one hundred and thirty-five from 1970 to 1976." (See also this Doug Irwin paper on the history of anti-dumping activity). As I've said before here on this blog, I'm not sure we will make much progress on crafting good trade policy until we put some more thought into what we are doing on trade remedies. The last time I recall such a discussion was in the early- to mid-1990s, at which point Mankiw & Swagel noted that anti-dumping was the "third rail" of trade policy. By the 2000s, it was mostly just the Cato trade folks who were talking about it, and it didn't seem as though anyone was listening. All the old questions are still out there waiting for a resolution.

Finally, I have a few questions for Tai about her vision for trade policy. First up is this: What do you want to see in terms of the use of tariffs, subsidies, and assorted protectionism around the world? Based on her descriptions of an ideal trade policy, I get the sense she thinks every country should focus on developing its own domestic industries, using subsidies, tariffs, etc. as key tools. But will state-supported industries that do not face much external competition really make the "working people" and "middle class" in all of these countries better off? How exactly do the benefits of corporate subsidies, for example, trickle down to most middle class people? Since none of this is really new, we can look around at all the countries where it has been tried. Have subsidies and tariffs helped the middle class in the many countries who have adopted this approach? I am skeptical that the results have been generally positive for the middle class. Just about every country has tried these policies, and there are many more failures than successes, with workers and the middle class suffering the most in the failures. And for the countries that have industrialized successfully in recent decades, and who used subsidies and tariffs just like everyone else did, there are often explanations for their success other than the subsidies and tariffs.

In terms of the international trade rules that should apply to all this, what I wonder is, does she have in mind any limits on domestic subsidies, tariffs, and other protectionism? If so, what are they? Keep in mind, that's basically what current WTO rules are -- modest constraints on subsidies, tariffs, and other protectionism. Does she want to keep that system, but just make it more flexible? How much more flexible? Because the existing system is pretty flexible as it is.

Also on this point about international rules, I understand that she wants to add new rules on labor and antitrust and the environment. As I commented here, though, one flaw with this idea is that the U.S. may never be willing to accept such rules if they were to have an actual impact on U.S. policy; and another flaw is that the U.S. position on these issues tends to change with each shift in political power within the U.S. (just about everything the Biden administration did is now up in the air in the incoming Trump administration).

That last section had a lot of questions I'd like to hear more from Tai about. As I suggested at the outset of this post, I'd be happy to have her talk about it here on this blog, but if not then maybe she'll write about it wherever she ends up.

Call for Papers: Journal of World Investment & Trade

This is a call for papers from early career scholars in international trade and investment law from the Journal of World Investment & Trade:

Submit your abstract, and if selected, you will be invited to participate in an exclusive workshop where you will receive invaluable advice and guidance from leading experts, including Andrea Bjorklund, Julien Chaisse, Dominic Npoanlari Dagbanja, FHEA PhD, Ming Du, Filippo Fontanelli, Moshe Hirsch, Joanna Lam, Maria Laura Marceddu, Irma Mosquera Valderrama, Krista Nadakavukaren Schefer, Shin-yi Peng, and more! They will guide you through the submission and peer-review process of the Journal of World Investment & Trade.

•⁠ ⁠Deadline for submission of your abstract: 1 February 2025
•⁠ ⁠Announcement of the results: early April 2025

Details of the "Call for Papers" are here. For further queries, contact Dr Maria Laura Marceddu at [email protected].

Call for Papers: Shaping Appropriate ADR in International Law

The International Law Association is hosting a conference on Shaping Appropriate ADR in International Law, on 7 April 2025 in Florence, Italy. The call for papers is here. Here is the conference theme:

As 2025 begins, there is no shortage of international law disputes, in areas ranging from geopolitics to boundaries, trade, investment or environment. As disputes increase, so does interest in efficient, effective, outcomes-focused dispute resolution – whether through adjudication or through alternative means. Growing reluctance to accept binding dispute settlement in some areas of international law makes it all the more important to identify dispute settlement mechanisms that can be both acceptable to the parties and efficient.

The ILA ADR Committee’s April 2025 conference will focus on appropriate ADR in public international law disputes in which at least one party is a State. Are there situations where ADR is generally more appropriate and effective for resolving international disputes, compared to other alternatives? Are particular types of such disputes best suited to ADR, or to some particular type of ADR? Our primary focus will be on non-adjudicatory and non-court processes and procedures in public international law, including but not limited to fact-finding, negotiation, mediation, conciliation, ombuds or transitional justice.

More details from the ILA:

This is an open call which welcomes all viewpoints and experiences. We encourage submissions that draw on empirical evidence and set it into theoretical context.

The conference will be held in person in Florence in hybrid format, with speakers able to hear and speak remotely. Preference will be given to authors participating in person.

Abstracts (up to 500 words) are due by February 5, 2025
Selected authors will be notified by February 25, 2025

We warmly invite scholars and practitioners to participate in this vital discussion.
Submit your proposals to [email protected]

Jake Sullivan's International Economics Legacy

Never having worked in government at a high level (I was a summer intern once a long time ago), I am only vaguely familiar with the idea of bolstering your "legacy" at the end of your time in office. But people who seem to know what they are talking about say this is a real thing that happens, and these people also seem to think this David Ignatius Washington Post piece is trying to do this for Biden administration National Security Advisor Jake Sullivan. The piece focuses mainly on foreign policy, but there was also this bit on economics:

Sullivan came to the White House with a “big idea,” which was that “the American middle class is a national security asset,” as he put it to me. Since 2016, he had been ruminating that there was a disconnect between the United States’ grandiose notion of “exceptionalism” and the experience of ordinary people who felt left behind in the rush to globalization. When Biden was elected in 2020, Sullivan initially wanted a White House job in which he could oversee economic revitalization rather than something at the NSC.

Sullivan’s populist economics were initially out of step with the Democratic establishment. I remember chiding him in the fall of 2016 for encouraging Clinton to reject the Trans-Pacific Partnership, a cornerstone of free trade. The conversation took place at a fancy conference in Aspen, Colorado, where, as Sullivan remembers, the hotel had a menu for dogs. He was adamant that the Democratic elite was missing something fundamental. What he was seeing on the campaign trail that year was an angry, resentful America.

Looking back, Sullivan was right to break with neoliberal orthodoxy. Paradoxically, his lasting achievement in the Biden White House might be in economic rather than foreign policy. With NSC aide Tarun Chhabra, he provided the intellectual firepower for the Chips and Science Act, supply-chain management, infrastructure legislation and other aspects of Biden’s “industrial policy.”

I have a few reactions to all this.

First, in his position as National Security Advisor, Sullivan had more to say than I expected on domestic and international economic policy. My sense when he started had been that he was more of an international relations and national security person than an economics person, but nevertheless he appears to have strong opinions about international economic issues and it's interesting to hear that he "initially wanted a White House job in which he could oversee economic revitalization." He gave a big speech about these issues in 2023, and in my comments at the time, I pointed out what I thought were some flaws in his understanding of U.S. and international trade policy. I see similar problems in the excerpt quoted above. Has there really been a "rush to globalization"? It seems to me that it has all been pretty slow and plodding, with protectionism strongly embedded in both the domestic and international parts of the system.

There is a view out there that the U.S. has been practicing an extreme version of free trade for many years now, but people who work in trade policy know that's not the case. Every "free trade agreement" has a wide range of carveouts. For example, domestic industries have been using anti-dumping laws to protect themselves from import competition all along (this avenue was ratcheted up in 1980 with the shift of dumping/countervail calculations from Treasury to Commerce). Here are just a few examples from the supposedly free trading "neoliberal" 1990s:

• 2.36%-55.77% duties on canned pineapple from Thailand in 1995
• up to 61.67% duties on bicycles from China in 1996
• 4.16%-188.45% duties on tomatoes from Mexico in 1996
• 6.28%-243.87% duties on preserved mushrooms from India in 1998
• up to 54.55% duties on non-frozen apple juice from China in 1999

As another example, U.S. farm subsidies have been used extensively for decades, with careful carveouts from WTO rules providing a legal basis. (For those of us who have been complaining about farm subsidies all these years, the Biden administration's semiconductor subsidies aren't that new and surprising.)

Second, I have no idea what "the American middle class is a national security asset" means, but putting that aside, I wonder what exactly he has in mind when he uses the term "middle class." Does Sullivan think he is middle class? He seems to have objections to the "Democratic elite," but isn't he part of this elite? More generally on the middle class, what percentage of Americans think they are middle class? My sense is that the number is fairly high, which makes me think the category might be so broad that the term is not that useful. The middle class is not a monolith, and if you say you want to help the middle class, you should probably explain which middle class people you think you are helping and how exactly you are doing so.

Several Biden administration policies are mentioned above in this regard. What impact are they having on the middle class broadly speaking? For some of these policies, if there are benefits, from what I can tell they go to a small sub-set of the middle class. To evaluate the overall impact, these benefits need to be balanced against the harms to others in the middle class. To illustrate this, whatever you think of semiconductor subsidies as a matter of economic or security policy, there aren't many people benefitting economically in the short term (a few big companies and their employees mainly), while the middle class as a whole is helping to pay the bill for these subsidies. It's worth talking to people in the middle class to see what they think of things like this, but my sense is this does not happen much in practice. Instead, there is a think tank/White House convergence around what the middle class needs, and then the administration and its allies try to sell the idea to the rest of Washington. What do all of the many millions of people in the middle class think of the idea? Were there alternative ways to achieve the policy goals -- without spending taxpayer money this way -- that some middle class people might have preferred? What do people in the middle class want the administration's priorities to be? These are questions that don't get as much attention as they should.

Relatedly, free trade and globalization have come under attack in recent years (even though we have never been close to having free trade, as noted above), but now that industrial policy has undergone a revival, it's time to put that under the microscope. To what extent are the "ordinary people" referred to in the Washington Post article helped by industrial policy? A significant aspect of the Biden administration's industrial policy seems to mean subsidies to big corporations. People sometimes characterize certain free market policies as "trickle down economics," but aren't corporate subsidies also trickle down economics, in the sense that some portion of the corporate subsidies will trickle down to the ordinary people who work for the company?

As to the politics of all this, in the 2024 election, American voters didn't seem very impressed by the Biden administration's economic policies. Sullivan and other advocates of these policies may want to think about why that was. I can imagine the answer they will give is the one Sullivan offered in the article: “[A focus on rebuilding U.S. economic strength and the middle class is] a strategy measured in decades, where elections are measured in two to four years.” Clearly, he believes in his preferred policies, and isn't going to let the election outcome affect his view that, in the long run, they will pay off. However, it may be worth reflecting on the possibility that, as suggested above, the Biden administration's economic policies were crafted without talking to enough people in the middle class and simply don't reflect what this group most wanted from Biden when they voted for him in 2020.