U.S. President Joe Biden has enjoyed a marvelous couple of months—and on almost all policy fronts. Thanks in large part to his military and diplomatic initiatives, Ukraine has been thumping Russia, and NATO is united and strengthened. Al Qaeda’s leader, Ayman Zawahiri, has finally been eliminated. After a year in which Biden’s signature domestic legislation, the Build Back Better Act, looked all but doomed, the president managed to pass a substantial portion of it reconfigured as the $737 billion Inflation Reduction Act. And inflation—perhaps the biggest threat to the Democrats ahead of the forthcoming midterm elections—is starting to ease, while Republicans suddenly look more vulnerable at the polls. So full of beans is Biden that on Sunday he declared, prematurely, the coronavirus pandemic was “over.”
But when it comes to Biden’s most neglected agenda item, promoting global trade, things are barely getting started. This is worrisome, because it means that with a possible global recession looming, few people in power in the U.S. government—or other leading economies—are focused on growing the world economy. On the contrary, every sign is that the world’s two largest economies, the United States and China, have settled in for a long-term trade war with no end in sight and which will inevitably shrink the global economy.
It is fair to conclude that, nearly two years into the Biden administration, we are in a new era in which economics no longer matters much. Instead, populist rallying cries about techno-nationalism reign supreme. The United States and other major economies are in defensive mode, ready to raise more trade barriers and tariffs if necessary. You could call this generational change the long tail of the “China Shock,” the phenomenon of recent decades whereby U.S. producers fled to cheaper labor sources overseas, especially in newly market-friendly China. (Which, as it turns out, had no intention of playing fair in trade.) In Washington, traditional economic wisdom about the growth benefits of free markets has been largely banished from the discussion. Everyone, it seems, has become an economic nationalist. Especially regarding China.
U.S. President Joe Biden celebrates alongside Joshua Aviv, the CEO of SparkCharge, as Senate Majority Leader Chuck Schumer (D-N.Y.) speaks about the the CHIPS and Science Act during a ceremony at the White House on Aug. 9. The centerpiece of the legislation is $52 billion in funding to boost U.S semiconductor chip manufacturing. Chip Somodevilla/Getty Images
For nearly a year, the Biden administration has been reviewing the hundreds of tariffs, or taxes on trade, imposed by Biden’s predecessor Donald Trump, who withdrew from Washington’s last major free trade pact, the Trans-Pacific Partnership (TPP). The president continues to temporize. He is evidently fearful of the political consequences of appearing soft on China. This, despite a senior administration official admitting to me in early May that there is “no strategic case” for many of these tariffs, and that they are “just hurting American consumers and manufacturers.”
In an interview with me on Monday, Deputy Trade Representative Sarah Bianchi said it will take until next year to complete a scheduled four-year review of China imports under Section 301 of the 1974 U.S. Trade Act. This allows Washington to punish a nation deemed to be violating trade norms, as China is allegedly doing by stealing intellectual property, forcing technology transfers from foreign companies, and heavily subsidizing exports to dominate key industrial sectors. In October 2021 the administration said it would be reconsidering tariffs as part of a plan to reopen talks with China, and recommendations on removal of some of the tariffs are now on Biden’s desk. But “we’re waiting to hear from the president on a couple of issues,” according to one senior administration official who spoke on condition of anonymity.
The slow pace may be strategic. In a recent podcast interview, U.S. Trade Representative Katherine Tai broadly defended the Trump tariffs as a “response to a legitimate concern economically and competitively” after two decades of failed engagement with Beijing. What might have been, in a previous era, a keen economic debate over tariffs has been rendered moot by the tense political atmosphere in Washington as Biden seeks to maintain a bare majority in the House and Senate ahead of November’s midterm elections.
“Imposing tariffs is always easier than lifting them,” said Wendy Cutler, a career U.S. trade negotiator now with the Asia Society. “The arguments to lift at least some of the tariffs is compelling, particularly at a time of rising inflation, food insecurity, and climate change.” But, said Cutler, “the tariff debate is less on the merits and more on the politics, suggesting that the tariffs will remain for the foreseeable future.”
Meanwhile, the administration is projecting confidence about its approach to trade, which emphasizes worker rights, anti-corruption initiatives, reducing income inequality through proposed changes in tax law, and new trade rules for digital and clean energy technology. Many of these priorities are embedded in the Biden administration’s sole multilateral trade initiative, the Indo Pacific Economic Forum (IPEF). The first IPEF ministers meeting was held earlier in September in Los Angeles, and the Biden team managed to get all 14 members but India (others included Japan, Australia, Singapore, Vietnam, and Korea) to sign on to its trade agenda. On Sunday, though, Tai shot down any immediate hopes of what policymakers call “deliverables”—trade benefits, in other words—from IPEF.
“We felt like in Los Angeles we had such unity and enthusiasm and a commitment to a really ambitious agenda,” Bianchi said, adding that among the participating ministers there was a lot of “gratitude” that the United States was pushing its IPEF initiative. “I can’t overstate how much these countries are relieved to have the United States at the table. Whether it’s agriculture or digital trade.”
Biden, to be fair, has delivered some exclusions on China tariffs already, for example, by temporarily allowing Chinese-made solar panels to be imported from Southeast Asian nations. (Beijing has moved some of its manufacturing to that region to evade the tariffs). And a year ago, the administration came to a limited agreement to lift barriers on steel and aluminum trade with the European Union. “I feel we’re moving at a fast clip,” said Bianchi.
Biden arrives to speak on rebuilding U.S. manufacturing through the CHIPS and Science Act at the groundbreaking of the new Intel semiconductor manufacturing facility near New Albany, Ohio, on Sept. 9. SAUL LOEB/AFP via Getty Images
But many experts believe the clip is not speedy enough. The IPEF agenda does not include what countries most want: new U.S. market openings. Some economists and experts believe it is “built on a house of straw,” in the words of Mary Lovely, a senior fellow at the Peterson Institute for International Economics in Washington. “The risk here is that IPEF has no enforcement mechanism,” such as recourse to the WTO, she said. “The only one is ‘I’m taking my ball and going home.’ I can slap tariffs on you if you don’t raise worker standards. And it’s unlikely to be completed by the time of the next election in 2024.” Plus, Lovely said, “it can just as easily be swept away by the next administration if it’s not Biden.”
Biden administration officials counter that big trade pacts always take years to complete, and engagement in itself helps. “Any time countries engage in a positive agenda to strengthen investment and trade ties, the process itself helps mitigate pressures for economic nationalism and isolation,” said former Biden official David Marchick, who is dean of the American University Kogod School of Business.
But the other big new trade agenda the administration likes to tout—separate talks to expand trade with Taiwan (which was left out of the IPEF)—is creating new worries. An agreement with Taiwan will only further freeze U.S.-China relations as Beijing takes umbrage over fresh U.S. efforts to move closer to Taipei.
At the same time, the global economic data are getting grimmer. On Wednesday, the Federal Reserve delivered on its promise of more economic “pain” when it raised the federal funds interest rate by yet another three-quarters of a point, and indicated more increases were coming. It is clear that Fed Chairman Jerome Powell, who has been criticized for moving too slowly in curtailing rising prices, is now committed to erring on the side of recession when it comes to crushing inflation. A new World Bank report warns that rising interest rates and a global slowdown could “trigger a global recession in 2023” as well as the prospect of more stagflation that harks back to the 1970s. “Global growth is slowing sharply, with further slowing likely as more countries fall into recession,” said World Bank Group President David Malpass. The report cited the constriction in trade as a key factor, saying policymakers “need to put in place measures to ease the constraints that confront labor markets, energy markets, and trade networks.”
Former U.S. Treasury Secretary Larry Summers—whose prescient warnings of dangerous inflationary trends were ignored by Biden last year—also believes that recession is coming to both the United States and Europe, which may end up even worse off. This is in part because of the “staggering vulnerability” the Europeans created for themselves by remaining too reliant on Russian energy, Summers said last week. On Wednesday, Deutsche Bank economists dramatically escalated their prediction of a serious recession for the euro area, saying they expect output to shrink by 2.2 percent next year, compared to an earlier projection of a 0.3 percent downturn.
U.S. Treasury Secretary Janet Yellen listens to Biden during a meeting in Washington on Oct. 6, 2021. Chip Somodevilla/Getty Images
The deeper trend, however, is more disturbing and long term: Economics is being tossed aside. Renowned economists such as Janet Yellen, a successor to Summers as Treasury secretary and who has also warned about the dangers of tariffs, are taking a back seat to the China hawks in the administration. The new nationalism has settled in, deeply, in both political parties. Trade restrictionists rule in Washington, and it is nearly impossible to find a vocal expansionist, even in the business community. Just look at what happened when Chubb chief executive Evan Greenberg, a former chair of the U.S.-China Business Council, called the idea of “decoupling” between the United States and China an “economic impossibility” in June. Greenberg found himself all but alone, with few business leaders endorsing his view.
In Washington, there is now widespread consensus that America must pull out all the stops to pull away from China, withdraw from globalized supply chains, and rebuild critical industry at home, even to the point of screening investments from overseas. The result is a return of the kind of industrial policy considered wasteful in the past, but which many Americans think is necessary now. In late July, a massive $280 billion bill to invest federal dollars into American high-tech companies passed the usually divided U.S. Senate by a vote of 64 to 33, with 17 Republicans voting in favor. As part of that legislation, both political parties supported Biden’s plan to devote more than $50 billion to bypass China by building up America’s domestic semiconductor industry. On Tuesday, the administration announced a team of eminent technologists experienced at doling out government money to run its newly established CHIPS for America offices.
Biden has been nothing if not consistent. In his 2022 State of the Union address, the president declared, to applause from both sides of the aisle, that “instead of relying on foreign supply chains, let’s make it in America. Economists call it ‘increasing the productive capacity of our economy.’ I call it building a better America. My plan to fight inflation will lower your costs.” A year earlier, Biden said, “There is simply no reason why the blades for wind turbines can’t be built in Pittsburgh instead of Beijing. No reason. None.”
Actually there is a reason: more than 200 years of proven economic thinking and the idea of comparative advantage, which dictates that other nations might build such things more efficiently, proficiently, and cheaply, which in the end helps everybody. And, in any case, inflation only rose, exactly as traditional economics could have predicted. With both political parties losing their economic centrists and advocates of open trade, they are, according to the Peterson Institute’s Lovely, “taking with them a whole lot of institutional knowledge.”
U.S. President Donald Trump speaks to workers at a Whirlpool manufacturing facility in Clyde, Ohio, on Aug. 6, 2020. Scott Olson/Getty Images
In some ways, no one is to blame for this state of affairs more than the economics profession itself, which in the years after the Cold War oversold the benefits of ever-freer markets. That Pollyannaism may have helped put Trump, a protectionist populist with scant knowledge of economics, into the White House, promising “to restore manufacturing in the United States.” The “China Shock” led to the loss of millions of U.S. jobs, especially in manufacturing, and engendered the rise of anti-China populism. While Biden has repudiated many of Trump’s neo-isolationist policies, he has left intact a surprising portion of his trade agenda, including, of course, most of his tariffs.
Administration officials say the IPEF is designed to ensure that America’s trade doors don’t again swing open without getting enough in return. They point to the streamlining of digital markets and easing tax restrictions. Early indications are that the new nationalism isn’t all bad. Some reshoring of manufacturing is happening. According to a new report from the Reshoring Initiative, a lobbying group, American companies could bring back nearly 350,000 jobs to the United States this year, up from 260,000 in 2021 and the most in recent history.
But the fact is that most multinational companies aren’t bringing back most manufacturing jobs. They’re simply moving to new places that aren’t China. And though Biden has sought to put a lot more money into education, the United States has failed to train its people well enough to leap back into high-tech manufacturing in large numbers. “The idea that if China hadn’t opened up we would still be making all these things here is total rot,” said Lovely. “Multinationals would have simply gone elsewhere … Who is going to give up a job in the services sector to go into manufacturing?”
Economists say that trying to artificially restore domestic content to products once made overseas is bound to raise costs for everyone and will wind up benefiting only a few well-positioned technology companies. And some experts say there appears to be no overall U.S. strategy for willy nilly shutting down more trade rather than facilitating it, especially when it comes to technology.
“I think it’s fair to say there’s still no coherent strategy,” said Jon Bateman, a senior fellow in the Technology and International Affairs Program at the Carnegie Endowment for International Peace who authored a recent study of the risks of haphazard decoupling. Too much isolation from international markets and supply chains, Bateman and other experts warn, will only disadvantage U.S. businesses, from artificial intelligence to agriculture. A cautionary example occurred during another spell of anti-China sentiment two decades ago, when in response to misplaced suspicions that Beijing was stealing satellite secrets, Congress placed harsh export restrictions on all U.S. commercial satellite sales, even to friendly nations like Canada. The result was that the U.S. share of the global market took a devastating hit, dropping from 75 percent to 45 percent.
Without a long-term vision, Bateman said, “the easiest thing to get done is basically a dribble of additional tech restrictions, sanctions, controls and executive orders. Many of the actions have been reasonable on their own,” he added. But “the problem is you cannot identify a stopping point.” The larger worry, he said, is that “there really is no high-profile U.S. political figure who is vocally warning about putting a floor beneath the U.S.-China [trade war] technologically or economically.”
A customer rides an escalator at a sparsely populated shopping mall in Shanghai amid recurring COVID-19 lockdowns.VCG via Getty Images
The economic danger is being exacerbated by the fact that Chinese President Xi Jinping is matching Biden’s nationalist agenda move for move. Thanks to Xi’s own efforts to make China self-reliant—and his massive coronavirus lockdowns of whole cities—China’s economy is slowing to almost unprecedented levels, to about 3 percent, which was once unthinkable in the high-growth nation. Youth unemployment is at 20 percent. China’s housing market bubble, fed by huge debt and too-rapid expansion, is also in danger of crashing big time.
Huge doubts remain, too, about how China, as the world’s largest official creditor under its nearly $1 trillion Belt and Road Initiative (BRI), will handle an emerging global debt crisis. A bankrupt Sri Lanka was the first victim—and as its biggest creditor China fields some blame for overextending credit—but countries in Central Asia, and Africa and Latin America may also face bank runs. After a decade of exorbitant lending, Beijing’s debtors are scrambling to pay up in the face of inflation, high energy costs, and higher rates. According to one recent study, since the pandemic, nearly 60 percent of low-income countries are now either in debt distress to Chinese lending or at high risk. (In 2010, that number was just 5 percent.)
That’s not to say global trade is slowing to a halt, or even plateauing, at the moment. The volume of world merchandise trade has flattened somewhat, but “trade is still expected to grow slightly faster in 2022 and 2023 than it did over the previous decade, despite forecast downgrades due to the war in Ukraine and slowing global economic growth,” a new report by the New York University Stern School of Business found. Interestingly, much of the new growth is coming from nations in Southeast Asia and Latin America, countries seeking to cut deals with both China and America.
With no real prospect of serious U.S.-China negotiations, “the real arena of competition between the U.S. and China lies in third markets,” said William Reinsch, a former Commerce Department undersecretary. “China will not treat foreign companies fairly in China, and we can do the same thing to them here if we wish. It is competing with them in the rest of the world that matters.”
Beijing is retaliating against American protectionism with its own trade pacts in Asia, and according to a recent report by Reuters, in Latin American trade outside Mexico, China has overtaken the United States. But the signs are not good for anyone. Growth in the world’s three major economies—the United States, European Union and China—is flagging, and as trade between them slows, the danger of a serious recession is only growing.
