Trade Policy's Brave New World

As SIGnal readers will recall, the American shift away from free markets to government-guided industrial policy began with President Trump’s “economic nationalism” policies and became bipartisan dogma during Biden’s 2020 campaign. Its public face at the time was Jake Sullivan, a foreign-policy Wunderkind (and famously nice guy) in Hillary Clinton’s State Department who spent the Trump years leading a crack team of Obama administration exiles in search of a “foreign policy for the middle class.” Their boss at the Carnegie Endowment for International Peace was State Department legend Bill Burns, now with four years as CIA director under his belt, just as Sullivan has spent those years as national security adviser. A middle-class foreign policy might even be best understood as a Democratic re-conception of economic nationalism. In both cases, it is security, a/k/a China, that is driving economic policy, which is why the guiding principle for both parties has become economic dominance and supply-chain security rather than efficiency of production within a global market.

It is worth pausing to consider what a profound change this is proving to be. At the Council on Foreign Relations yesterday, Benn Steil, who is no one’s idea of a socialist, crossed the Rubicon and affirmed that the post-Cold War dogma of free trade, based on the venerable theory of maximal production rooted in the pursuit of comparative advantage, has had its day. As he put it, “competitive advantage can be manufactured by a government.” The government he had in mind was that of the Chinese Communist Party. His example was electric vehicles.

The New York Times’s economy reporter Lydia DePillis rather pointedly asked what took so long. Hadn’t free-market purism been dead for a while already? The CFR discussion was occasioned by an article Steil co-wrote with Columbia Law School tax professor Alex Raskolnikov. The latter responded to DePillis’s question by lightly acknowledging that the experts, attached as always to their theories, had lagged behind reality. Steil took a different tack, arguing that economists had been misled by their ingrained assumption that technological change is “exogenous” to an economy and therefore to economics. Steil believes that is not quite the case, and CCP investment in electric-vehicle technologies was the illustration. In that sector and others, China had “manufactured” its comparative advantage rather than acquiring it by the more “natural” (or “endogenous”) means that have underpinnned economic theory since David Ricardo (1772-1823) and Britain’s definitive embrace of free trade over protectionism (1846). Technological change, or innovation, has always been the joker in the pack of mainstream economics. Now the world’s major economies are playing that card. Who knows where it will lead?

One answer can be found in a contest co-sponsored by Jordan Schneider’s indispensable substack ChinaTalk. (The other sponsors were the Federation of American Scientists, economics blogger Noah Smith, and the Fletcher School’s Chris Miller, author of Chip Wars). The contest challenge was to develop policies to counter China’s manufactured competitive advantage in making basic semiconductor chips — “trailing edge” technologies as distinct from “leading edge” ones. As with EVs, batteries, solar panels and much else, China is grabbing market share in basic semiconductors through state-led policy even as the U.S. labors mightily to prevent its advance in leading-edge innovation. As ChinaTalk explained, the problem is that Chinese trailing-edge chips are ubiquitous in today’s products and the microelectronic networks that tie together the digital world. That presents at once a security and an economic vulnerability.

The contest winners generated a fantastic set of out-of-the-box policy options. They include “weaponizing” the U.S. advantage in electronic design automation (EDA) software and imposing an “open design” framework for basic semiconductor production. It would undercut China’s pricing power and be enforced through a production cartel dominated by the U.S. and politically like-minded states together bending their tech sectors to strategic purposes. The long arc of technology innovation that began with the Cold War policy milieu that birthed transistorization, semiconductors and the Internet in the 1960s, then ran through the Silicon Valley privatization of digital networks in the 1980s, ’90s and 2000s, is returning to its public-private roots. This is perhaps not quite what Trump and Steve Bannon had in mind with economic nationalism circa 2016, but it is what we have got.

The ChinaTalk proposals are both arresting and somewhat disturbing. Would the Austrian School philosopher-economist Friedrich Hayek — referenced as a touchstone in Steil and Raskolnikov’s article — have embraced a Free World software-design cartel? Is the expansion of freedom and open societies really served by such market-manipulating strategies? An important article earlier this month by CFR’s new president (and former U.S. trade representative), Michael Froman, makes clear that this is the question of the day.

The economics answer is probably still no. The security answer seems to be a reluctant yes. There remains the sphere of retail politics in leading democracies. (Autocracies like China and Russia have long since decided that free global markets were an imperialist trick to secure first-mover advantages circa 1890. CCP policy can be seen as a descendant of the McKinley Tariffs of that year.) Voters cannot be expected to have the ins and outs of Ricardian theory at their fingertips as they weigh whom to choose for president. Kamala Harris, advocating subsidies rather than tariffs, has tried to portray Donald Trump’s tariff proposals as a tax hike. Economics is on her side; as Froman wrote, “the costs of tariffs are ultimately born by the purchaser,” and disproportionately by poorer consumers. But simply calling your opponent’s tariff a tax and standing pat is unlikely to register with many voters.

Economic policy will always be made by experts. As Raskolnikov said, experts are now catching up with reality. But their willingness to accommodate economic nationalism will only go so far. For now, politics is likely to continue to run ahead of policy.

Bipartisan Consensus on US-China Policy: Will Continuity Mean Instability?

The US presidential debate re-affirmed the centrality of an industrial policy aimed at confronting China. Donald Trump rightly pointed out that the Biden administration continued his China tariff policy. Kamala Harris attacked Trump for not having taken his own (Trump’s) policy a step further in the way Biden did — to cover semiconductor chips. The actionable point is that the two candidates were outdoing each other in advocating US industrial policy as a way to combat the rise of China and the Chinese Communist Party. Whatever else happens in the next presidential administration, this area of policy should remain roughly the same.

How is it likely to roll out? The benign version, advanced by both political parties, involves blocking the export of military technologies to China, keeping Chinese technology out of Western and allied markets and digital networks, and resisting Chinese dumping of export products that are subsidized by the government, such as electric vehicles. When the policy is expressed in these broad terms, it seems sensible and measured. It is not surprising that the House on Thursday voted through an extraordinary set of China bills that had been teed up for this first week after the Congressional recess. The proposed laws, covering biotechnology, drones, and more, will now go to the Senate. Most received bipartisan support in the House and are expected to pass in the Senate and be signed by President Biden.

Unfortunately, what seems straightforward as policy — keeping Chinese-made drones out of US skies, for example, sounds simple enough — will be extremely murky in its results. As discussed previously in SIGnal, the concept of “dual use” technologies — ones that have both civilian and, at least potentially, military uses — has become infinitely expandable. Keeping Chinese technology out of Western and allied markets is possible at the retail level but nearly impossible at the component level. And Chinese subsidization of electric-vehicle manufacture is both hard to distinguish from other governments’ subsidization of the green economy and a crucial source of support for green efforts on a global scale. Chinese companies like BYD (electric vehicles) and CATL (batteries) have been pioneers in developing technological solutions to address climate change. These advances cannot be undone or ignored.

That is why Europe’s leading car-making states (Germany and Spain) oppose shutting Europe off from Chinese electric vehicles as the US has done. In essence, European partnerships with Chinese companies make it possible for European companies to stay in the game, whether by using Chinese components, manufacturing in China itself, or selling to Chinese consumers. The current EU tariff proposal — up for a decision next month, with a term of five years — could very well result in an increase in Chinese exports to the European market, because Chinese EV-maker profit margins are sizable enough that companies could pass the tariffs on to consumers and still make money. Meanwhile higher prices are likely to dampen European consumer demand, slowing the green transition.

The proposed US biotech law could have a similar effect of driving up prices of drugs without pushing the Chinese government to any change in policy. Higher prices could shrink demand. US biotech corporate margins could be thinned, with negative effects on R&D and innovation.

It was only a decade or so ago that analysts were wondering whether Chinese companies would ever be able to get beyond copying (or stealing) Western technology and compete at innovation. That question has been answered. The terrible irony of current tariff and industrial-policy moves in Western markets is that they could have the effect of reducing Western innovation rather than increasing it. Meanwhile, Chinese companies look to demographically younger markets with increasingly empowered consumers — in Africa, Asia and Latin America — where wider margins make them more competitive than their Western counterparts.

For investors, the US bipartisan consensus on China and US industrial policy looks like a promise of continuity, and in the obvious sense it is. But in many other ways it is the opposite: It distorts market mechanisms to such a degree that the results are exceedingly difficult to predict. Investors not only have to integrate political and policy analysis into investment decisions, they also have to do so on a dynamic basis as the landscape is constantly changing. Chinese biotech, for example, was meant to be the sector that would be left alone, and it attracted Western FDI accordingly. But then it all changed.

Trade and the US Presidential Campaign

One of the less heralded political-economic transformations of the past decade has been the shift from a bipartisan consensus for free trade to a bipartisan consensus against it. This was not due to any change in economic thinking; professors continue to teach the logic of comparative advantage. Rather, it was mainly due to a political reaction against income inequality and deindustrialization in wealthy democracies combined with fears of Chinese weaponization of international dependence on Chinese production. The current presidential campaign is being portrayed in apocalyptic terms by both sides. Yet on the critical question of how the United States interacts with the global economy there is an identifiable bipartisan center that is likely to grow.

Donald Trump’s aggressive use of tariffs as president was criticized by Democrats and most economists, but many of those tariffs were kept under President Biden. Biden’s use of industrial policy to direct federal resources at helping certain US industries do better in international competition was itself a variant of the “economic nationalism” that Trump had advocated, but one that involved spending tax dollars rather than imposing costs on imports and thereby on consumers. The Biden administration’s recent imposition of 100% tariffs on Chinese electric vehicles, while symbolic — Chinese electric-vehicle sales in the US are negligible — continues the theme of imposing costs on imports.

In his campaign, Trump has doubled down on promising to implement tariffs, even saying that he would use them to replace some types of tax as government revenue. Such proposals have alarmed Republican officials as well as Democrats. 

Kamala Harris’s position is difficult to locate. In public statements before becoming vice-president, she vigorously attacked what she called “Trump’s trade tax” which resulted in “American families spending as much as $1.4 billion more on everything from shampoo to washing machines” and “farmers in Iowa with soybeans rotting in bins, looking at bankruptcy.” At the same time, she stressed that she wanted trade deals to “protect American workers” and to address climate change. Her opposition on these grounds to NAFTA, USMCA (NAFTA’s replacement, negotiated under Trump) and the Obama-negotiated Trans-Pacific Partnership (TPP) was, taken as a whole, unusual for a Democrat of generally mainstream views aspiring to national office.

Harris did not work directly on trade issues as vice-president. The Indo-Pacific Economic Framework (IPEF) is the only Biden-era international agreement that has embodied the types of environmental initiatives that Harris has praised. She supported it in Thailand in 2022. While it is unclear how much priority would be given to it under Harris, the reality is that multilateral trade talks are popular among American allies but not Americans. The leading examples are the Asian Regional Comprehensive Economic Partnership (RCEP, led by China); the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); and the IPEF.

The CPTPP is a particularly egregious example, given that it was a US initiative until President Trump withdrew. (Hillary Clinton, in her campaign against Trump, distanced herself from the pact.) Democrats had perceived the political power of Trump’s economic nationalism and tacked in his direction. Ever since, there has been little domestic political support for re-engaging with the TPP. Yet the US-brokered past has lived on, its membership including such key US allies and trading partners as Japan (which picked up leadership when the US left), Australia, Canada and, in 2023, Britain.

Harris will at least be less likely than Biden to ignore or downplay such multilateral talks as those that are ongoing for the IPEF. But Harris needs working-class and union voters, who tend to distrust international trade, and she and Tim Walz have green commitments that are not easy to honor in trade deals. Harris is unlikely to declare new tariffs although she might continue existing ones, such as on EVs and their components. Her environmental and jobs priorities will find positive expression in continuing Biden’s industrial policies, with their strong green and strategic anti-China aspects.

Trump’s prioritization of tariffs is likely to be tempered in office. In addition, he does not have Harris’s environmentalist commitments and he was, after all, the last president to bring in a major trade deal, the USMCA.

Whoever is in the White House, that agreement will be due for a review in July 2026. Measured by the growth in US trade deficits with Mexico and Canada, the USMCA cannot be reckoned a great success. Yet the bipartisan consensus on trade and industrial policy suggests it will be celebrated anyway.

Re: Re-globalization

Two substantial articles this week argued, in different ways, that ‘de-globalization’ is an indiscriminate and misleading term. What we are truly entering is a period of ‘re-globalization’. The First Law of Punditry is to always contradict, and contradicting those who speak of de-globalization is true to pundit tradition. De-globalization has indeed been frequently used over the past few years, along with subsidiary terms such as de-linking, de-risking, friend-shoring, and near-shoring. It may well have had its season. With ‘re-globalization’, we could be witnessing the rise of a new analytical cliche from the husk of an old one. SIG’s view, however, is that de-globalization still has room to run

In Foreign Affairs, the economist and former senior Biden official Brad Setser argues, under the commanding headline ‘The Dangerous Myth of Deglobalization’, that US-China de-linking has mainly resulted in lengthier supply chains for US imports: Chinese components have to travel longer as they detour through Vietnam, Malaysia, and Mexico on their journey to American markets. As he underlines, China’s manufacturing exports in general have risen under so-called de-globalization, spectacularly so in electric vehicles and other sectors that have been the focus of Chinese industrial policy. Setser also emphasizes that corporate tax avoidance, by US multinationals in particular, has proved to be a resilient form of capital globalization despite recent regulatory initiatives. These two examples lead him to conclude that deglobalization ‘offers analysts a simple story to tell’ but ‘the reality is more complex’, a conclusion that is inevitably true: reality is always reliably more complex than any one-word descriptor.

In World Politics Review, Roland Benedikter has advocated for ‘re-globalization’ as a more accurate term that escapes the disadvantages of de-globalization. His argument has three main contentions: that the pro-globalization alliance of neoliberal capitalism and ‘leftist cosmopolitanism’ has been broken in favor of economic nationalism; that autocratic non-Western states are leading a charge against globalization that feeds on and encourages a revival of non-alignment in the global South; and that globalization depended on the military umbrella of American power. The umbrella, he maintains, is being withdrawn by American unwillingness to continue paying for it, the determination by China and others to challenge it, and the displacement of it by economic, political, technological, and military competition in space, from low-earth orbit to the moon and beyond.

Setser’s two main points and Benedikter’s three are all well made. Several will be familiar to SIGnal readers. None benefit much from being shoehorned into a debate over the proper definition of de-globalization (Setser) or the substitution of a new term like re-globalization (Benedikter), but they all have the virtue of drawing attention to how subtle and complex the ongoing reconfiguration of political and economic internationalism actually is.

SIG’s view is that de-globalization continues to be a useful shorthand term for describing that reconfiguration, but it is only a shorthand, a point of departure rather than a destination. The main factor remains the re-emergence of states as economic actors maximizing their autonomy on behalf of their respective peoples, most often ethnically and culturally defined. This phenomenon is consistent across democratic and un-democratic societies, rich and poor ones, ex-imperial states and ex-colonial ones. It can probably be dated from the Asian financial crisis of 1997, when China showed that state management of international capital flows was not a first step on the road to serfdom. The triumphal period of the US-led post-Cold War liberal international order then amounts to the six years from 1991 to 1997 — not notably long.

The principal counterforces remain the diffusion of technology and education, the cross-border movement of people (driven principally by economic inequality, at one end, and demographic stagnation or decline at the other), and the mobility of capital in terms of both investment and the securing of profits (very much including offshore). None of this is necessarily liberal or orderly. Globalization and de-globalization are twin forces in a single dynamic that does not resolve into one or the other. ‘Re-globalization’ is a valiant attempt to be neither here nor there, but the reality it confronts is both at once.

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Green Protectionism

Geopolitical competition seems to be leading away from the greening of global production. Major players like China, the European Union, and the United States are all trying to spur green industries like electric-vehicle production in their own territories and with their own companies. Taken as a whole, this has the effect of stimulating production and innovation, which should be beneficial for the planet. But it also raises prices by directing capital to redundant production, and it establishes a kind of green protectionism that seems certain to have unforeseen consequences. Successful investing in an industry whose major players include several antagonistic and powerful state entities is difficult at best.

The most interesting recent development has been the US decision to pressure Mexico not to welcome Chinese investment in electric-vehicle production. Mexico has, of course, benefitted from US-China competition in that companies like Tesla, Samsung, and Nissan have shifted production away from China to Mexico as part of global de-risking. Note that Samsung and Nissan are not US companies. The great appeal of Mexico apart from its workforce is proximity to US consumer demand. By pressuring Mexico to keep Chinese EV companies like BYD, Chery, and SAIC at arm’s length, the US is using the size of its consumer market as a political weapon in foreign policy. The policy goal is to deprive Chinese companies, private or not, of markets. (BYD is private, Chery and SAIC state-owned.)

The European Union has been doing something similar, having become alarmed last year at the growth of European demand for Chinese EVs and the barriers erected by the Biden administration to European companies prospering in the US market. Europe’s car manufacturers don’t want to lose their future domestic market to Chinese competitors. Biden moves to protect US domestic EV production deprived the Europeans of a crucial export market at the same time that Chinese manufacturers were selling high-quality EVs to European drivers at a 30% discount to European prices. These political-economic factors have combined on the Continent with a growing distrust of Chinese tech companies and China — rather, the Chinese Communist Party — more generally. The EU raid this week on Nuctech, a Poland-based Chinese scanner manufacturer long held in suspicion by Western China analysts, was made on economic grounds but has a strong security aspect as well.

Many Chinese argue that the root of these EV conflicts is that Chinese companies are simply better. Europeans and Americans counter that Chinese EV companies are state-backed, which is certainly true, such that the competition is unfair. None of this is wrong exactly but it misses the macro point: the major Western economies embraced extended global manufacturing supply chains and China did not, with the result that China now has innovative vertically integrated large-scale manufacturing companies that can compete globally. Because so many of those supply chains ran through China, the US and the EU are playing catch-up, and they are weaponizing their own consumer populations as well as alliances (as with Mexico) to do so.

One result is likely to be chronic high prices for North American and European electric vehicles, which means (in the absence of Chinese imports) a slowdown in EV adoption — which is already occurring. That in turn means a slowdown in carbon reduction. China’s aggressive, state-led pursuit of green industries was driven, to a great extent, by a desire to innovate out of a global climate crisis that has hit China quite hard. China’s pre-eminence in solar panels was initiallya responseto German rules on energy efficiency that could not be addressed with European products. But US-China competition has now transformed an environmental policy into something that has anti-environmental results. One can hope that all this duplicative effort will result, over the long term, in electric-vehicle and other green industries that will be able to expand around the globe and save the planet. But picking winners in such a roiling political environment is very hard, as Tesla’s investors will have been reflecting this week.

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