The Unbearable Lightness of US Trade Policy

A regular series on the choices facing international economic policymakers

The Joe Biden administration’s willingness to impose trade tariffs without considering their impact on U.S. economic growth, the U.S. government’s binding international obligations, and the impact on third countries is reminiscent of a plot The Unbearable Lightness of BeingIn Milan Kundera’s novel, characters who bear the burden of responsibility are more grounded, true, and truthful, while those who avoid their burdens are free to soar upwards – but life, when detached from them, becomes unbearable.

One example of the “lightness” of trade policy is the USTR’s request for comment on promoting supply chain efficiency. He was asked for ideas on how trade and investment policies could better “support domestic manufacturing and services.” At a May 2 public hearing, the USTR explained that it seeks to move away from U.S. trade and investment policies that are “focused on short-term cost efficiencies” and welcomed “out-of-touch thinking” about how to apply trade policy tools without reference to the U.S. government’s binding international commitments. This is a tragedy in the making.

Elizabeth Popp Berman Thinking Like an Economist: How Efficiency Replaced Equity in American Public Policy documents how the U.S. government’s shift toward efficiency has diverted attention from societal goals. Efficiency—processes that use resources with minimal waste—is a cousin of productivity—the amount of output produced from a given input. Productivity drives economic growth and higher real incomes. International trade can drive higher productivity through competition and innovation. Eschewing efficiency and isolating domestic production from international trade works in the opposite direction.

“Lightness” also appears in the administration’s May 14 tariff increases on fourteen items from China, which raised tariffs on electric vehicles (EVs) to 100 percent. The president’s memorandum indicates that these tariff increases are intended to “further encourage China to eliminate” technology transfer activities such as intellectual property infringement, forced technology transfer, and cyber theft. However, eleven of the items covered by the tariff increases were not listed in the Section 301 review as targets of such fraudulent activities, while EVs, batteries, and steel were the subject of only attempted cyber theft. The penalty did not fit the crime.

USTR did not explain how it calibrated the tariff increases. It justified the selection of goods as belonging to so-called strategic sectors, a loosely defined term that includes face masks and medical gloves, but also areas where the United States has made significant investments or that are targeted by China for domination. The latter is a compelling reason to act. Unfortunately, analyzing Chinese government subsidies was not within the scope of the Section 301 review. In short, the Biden administration has followed the same “light touch” as the previous administration, opting for speed and optics over careful analysis consistent with international rules, leading the European Commission (EC) to support China’s complaint against the United States in the World Trade Organization (WTO).

The European Commission has taken a more responsible, burdensome approach, opening an anti-subsidy investigation into Chinese imports of battery-powered electric vehicles. On June 12, the European Commission issued a preliminary ruling that China was providing unfair subsidies for exported electric vehicles, posing a risk to EU companies. The European Commission will impose provisional countervailing duties of between 21 and 38 percent on July 4 and has contacted Chinese authorities to resolve the issue in a WTO-compatible manner.

China’s economic policies pose enormous challenges at both the macro and micro levels. China’s apparent preference for investment over consumption contributes to persistent current account surpluses and denies citizens the benefits of a growing economy. On the micro side, the Made in China 2025 initiative is allocating $500 billion in government funds to achieve domestic and global dominance in ten sectors, including electric vehicles, next-generation IT, and agricultural and marine equipment. On electric vehicles, for example, the Center for Strategic International Studies conservatively estimates that Chinese government spending has totaled about $100 billion over the past decade.

The USTR report on China’s non-compliance with WTO obligations explains that instead of further developing market-oriented policies, as WTO rules suggested and as was anticipated when China joined the organization, China has changed course, increasing government support and state direction of the economy. The USTR laments that WTO disciplines have been ineffective or not designed to discipline China’s harmful non-market policies and concludes that “solutions are needed that are independent of the WTO.” The logic is surprisingly “light.” A response outside the club’s framework to a new club member who does not play by the club’s rules would suggest a free-for-all.

The Group of Seven (G7) communiqué from Puglia on June 15 shows that other G7 members share the U.S. government’s concerns “about China’s persistent attacks on industry and pervasive non-market policies… in an increasing number of sectors, undermining our workers, industries, and economic resilience and security.” The communiqué notes that members defend the right to counter unfair trade practices, but also call for “strengthening diplomatic efforts and international cooperation, including within the WTO, to encourage fair practices” and “updating and strengthening the multilateral rules-based trading system, of which the WTO is at its core.” Interestingly, the emphasis on the WTO did not appear in the G7 foreign minister’s statement in April. But that was before the United States announced its unilateral Section 301 tariff action.

Perhaps G7 members and other like-minded countries in the WTO could revive the transitional product-specific safeguard mechanism in China’s accession protocol, which allows members to restrict imports that cause or threaten to cause market disruption. Although that protocol expired in 2013, twelve years after China’s accession, a strong argument can be made that China is still in a “transitional phase,” both in fulfilling its WTO obligations and in moving toward a market-oriented system. Sectors that China has targeted for global dominance could be placed on a watchlist, and then subject to rapid action if anticipated imports pose a threat to domestic firms.

At the macroeconomic level, a more vigorous public discussion within the International Monetary Fund, the Asian Development Bank, and the Organisation for Economic Co-operation and Development about the costs to Chinese society of government policies that prioritize investment over consumption would allow for a broader understanding of the international and domestic implications of China’s mercantilist policies.

One of the trade-offs the Biden administration is making is a trade policy that promotes higher, more expensive domestic production over higher productivity and rising real incomes. The latest tariff increases are a trade-off between quick, arbitrary, unilateral action and a deliberate, calibrated approach, working with other countries and within the multilateral rules-based system. The administration may seem tough at home—protection and tariffs are politically popular with voters—but it has undermined U.S. global trade leadership and its effectiveness in promoting lasting change—the unbearable lightness of U.S. trade policy.