The Unbearable Lightness of U.S. Trade Policy

A regular series on the choices faced by international economic policymakers

The Joe Biden administration’s willingness apply tariffs on trade without considering their implications for U.S. economic growth, the U.S. government’s binding international obligations, and the impact on third countries is like the plot from The Unbearable Lightness of Being. In that Milan Kundera novel, characters shouldering a heavy burden of responsibility are more grounded, real, and truthful, while those eschewing burdens are free to soar—but being untethered, life becomes unbearable.

One example of trade policy “lightness”  is the U.S. Trade Representative’s (USTR) request for comments on promoting supply chain efficiency. It sought ideas on how trade and investment policy can better “support domestic manufacturing and services.” In its May 2 public hearing, USTR explained that it seeks to shift U.S. trade and investment policy away from “a focus on short-term cost efficiency” and welcomed “blue sky thinking” on the use of trade policy tools, without reference to the U.S. government’s binding international obligations. This is a tragedy in the making.

Elizabeth Popp Berman’s Thinking like an Economist: How Efficiency Replaced Equality in U.S. Public Policy documents how a shift to efficiency in U.S. government policymaking diverted attention from social objectives. Efficiency—processes using resources with minimal waste—is a cousin to productivity—the amount of output generated with a given input. Productivity drives economic growth and higher real incomes. International trade can contribute to higher productivity through competition and innovation. Eschewing efficiency and insulating domestic production from international trade run in the opposite direction.

“Lightness” also appears in the administration’s May 14 duty increases on fourteen items from China, which hiked the duty on electric vehicles (EV) to 100 percent. The president’s memorandum indicates that those duty increases aim “to further encourage China to eliminate” technology transfer-related acts, such as intellectual property rights violations, forced technology transfer, and cyber theft. However, eleven of the goods slated for duty increases are not mentioned in the Section 301 review as being targets of such unfair acts, while EV, batteries, and steel have been subject only to attempted cyber theft. The punishment did not match the crime.

USTR did not explain how it calibrated the duty increases. It justified the selection of goods as being in so-called strategic sectors, a loosely defined term that encompasses face masks and medical gloves but also areas where the United States has made significant investments or that are being targeted by China for dominance. The latter is a compelling reason for action. Unfortunately, an analysis of Chinese government subsides was not within the purview of the Section 301 review. In sum, the Biden administration followed the same “lightness” of the previous administration, opting for speed and optics rather than careful analysis following international rules, a tactic that provoked the European Commission (EC) to support China’s complaint against the United States in the World Trade Organization (WTO).

The EC has taken a more responsible, burdensome approach by launching an anti-subsidy investigation on imports of Chinese battery electric vehicles. On June 12, the EC issued a  preliminary finding that China provided unfair subsidies to exported EVs that pose a threat of injury to firms in the European Union. The EC will impose provisional countervailing duties ranging from 21 to 38 percent on July 4 and has contacted Chinese authorities to resolve the issue in a WTO-compatible manner.

Chinese economic policies present an enormous challenge at both the macro and micro levels. China’s revealed policy preference for investment over consumption contributes to its consistent current account surpluses and deprives its citizens the benefits of a growing economy. On the micro side, the Made in China 2025 initiative devotes $500 billion of government funds to achieve domestic and worldwide dominance in ten sectors such as EVs, next generation IT, and agricultural and maritime equipment. On EVs, for example, the Center for Strategic International Studies conservatively estimates that over the last decade Chinese government outlays have totaled around $100 billion.   

USTR’s report on China’s noncompliance with its WTO commitments explains that, instead of further developing market-oriented policies as implied in the WTO rules and anticipated when China joined the organization, China has reversed course, increasing government support and state direction of the economy. USTR despairs that WTO disciplines have been ineffective or not designed to discipline China’s harmful non-market policies and concludes that “solutions independent of the WTO are needed.” The logic is bafflingly “light.”  A response outside the club’s framework to a new member of the club not adhering to the club’s rules would suggest a free-for-all.   

The Group of Seven (G7) Apulia Communiqué of June 15 shows that other G7 members share the U.S. government’s concern “about China’s persistent industrial targeting and comprehensive non-market policies . . . in a growing range of sectors, undermining our workers, industries, and economic resilience and security.”  The communiqué notes that the members defend the right to counter unfair trade practices but also calls for “strengthen[ing] diplomatic efforts and international cooperation, including in the WTO, to encourage fair practices” and “updating and strengthening the multilateral rule-based trading system, with the WTO at its core.” Curiously, this emphasis on the WTO did not appear in the G7 foreign minster’s statement in April. But that was before the United States announced its unilateral tariff action under Section 301.  

Perhaps G7 members and other like-minded countries in the WTO could revive the transitional product-specific safeguard mechanism of China’s protocol of accession that allows members to limit imports causing or threatening to cause market disruption. Although this 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 complying with its WTO commitments and moving toward a market-oriented system. Sectors China has targeted for global dominance could be put on a watch list and then subjected to rapid response should anticipated imports pose a threat of injury to domestic firms.

On the macro level, more robust public discussion in the International Monetary Fund, Asian Development Bank, and the Organization for Economic Cooperation and Development about the cost to the Chinese population of the government’s policies to support investment over consumption would widen the appreciation of the international and domestic implications of Chinese mercantilist state policies.

Among the tradeoffs the Biden administration is making is for trade policy to support higher, more costly domestic production over higher productivity and boosting real incomes. Its recent tariff increases are a tradeoff between quick, arbitrary, unilateral action, and a deliberate, calibrated approach working with other countries and within the guardrails of the rules-based multilateral system. The administration might look tough domestically—protection and tariffs are politically popular among voters—but it has diminished U.S. global leadership on trade policy and its effectiveness in promoting permanent change—the unbearable lightness of U.S. trade policy.