US President Joe Biden is having a great few months – and in almost every policy area. Thanks in large part to his military and diplomatic initiatives, Ukraine is advancing Russia, and NATO is united and strengthened. Al Qaeda leader Ayman Zawahiri has finally been deposed. After a year in which Biden’s signature domestic legislation, the Build Back Better Act, looked doomed, the president managed to pass much of it reconfigured as the $737 billion Inflation Reduction Act. And inflation—perhaps the biggest threat to Democrats ahead of the upcoming midterm elections—is starting to ease, and Republicans are suddenly looking more vulnerable in the polls. Biden is so full of beans that he declared, prematurely, on Sunday, that the coronavirus pandemic was “over.”
But on Biden’s most neglected agenda item, promoting global trade, things are barely getting started. This is a cause for concern, as it means that few people in power in the US government – or in other leading economies – are focused on the growth of the global economy and a potential global recession is looming. On the contrary, there is every indication that the world’s two largest economies, the United States and China, have settled into a long-term trade war with no end in sight and which will inevitably shrink the global economy.
It is fair to conclude, almost two years into the Biden administration, that we are in a new era where the economy is no longer of much importance. Instead, cry populist rally about techno-nationalism reign supreme. The United States and other major economies are in protection mode, ready to raise more trade barriers and tariffs if necessary. You could call this generational shift the long tail of the “China Shock,” the phenomenon of recent years in which U.S. producers fled to cheaper sources of labor abroad, particularly in newly market-friendly China. (Which, as it turns out, was not intended to play fair in trade.) In Washington, conventional economic wisdom about the growth benefits of free markets has been largely dismissed from the discussion. Everyone, it seems, has become an economic nationalist. Especially in relation to China.
United States President Joe Biden celebrates with Joshua Aviv, CEO of SparkCharge, as Senate Majority Leader Chuck Schumer (D-NY) speaks about the CHIPS and Science Act during a ceremony at the White House on August 9. The legislation contains $52 billion in funding to boost US semiconductor chip manufacturing. Chip Somodevilla/Getty Images
For nearly a year, the Biden administration has been reviewing hundreds of tariffs, or taxes on trade, imposed by Biden’s predecessor, Donald Trump, who withdrew from Washington’s last major free trade agreement, the Trans-Pacific Partnership (TPP). . The president continues to temporize. He is clearly afraid of the political consequences of being 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 “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 Chinese imports under Section 301 of the US Trade Act of 1974. This allows Washington to punish to punish a nation deemed to be violating trade norms, as China allegedly does by stealing intellectual property, forcing technology transfers from foreign companies, and heavily subsidizing exports to exert an outsized influence have on key industrial sectors. In October 2021 the administration said it would reconsider tariffs as part of a plan to reopen talks with China, and proposals to end some of the tariffs are now on Biden’s desk. But “we’re waiting to hear from the president on a few issues,” according to one senior administration official who spoke on condition of anonymity.
The slow pace can be strategic. In a recent podcast interview, US Trade Representative Katherine Tai broadly defended the Trump tariffs as “a response to legitimate economic and competitive concerns” after two decades of failed engagement with Beijing. What could have been, in a previous era, an economic debate on tariffs has been informed by the tense political atmosphere in Washington as Biden tries to maintain a bare majority in the House and Senate ahead of November’s midterm elections.
“It’s always easier to impose tariffs than to raise them,” said Wendy Cutler, now a career US trade negotiator with the Asia Society. “The arguments for raising at least some of the tariffs are very strong, especially with rising inflation, food insecurity and climate change.” But, Cutler said, “the tariff debate is less about merit and more about politics, which suggests that the tariffs will remain for the foreseeable future.”
Meanwhile, the administration is projecting confidence in its approach to trade, which emphasizes workers’ rights, anti-corruption initiatives, reducing income inequality through proposed changes to the tax law, and new trade rules on with digital and clean energy technology. Many of those priorities are embedded in one multilateral trade initiative of the Biden administration, the Indo-Pacific Economic Forum (IPEF). The first IPEF ministerial meeting was held earlier in September in Los Angeles, and Biden’s team managed to get all 14 members except India (including others Japan, Australia, Singapore, Vietnam and Korea) to sign. on its trade agenda. On Sunday, however, Tai shot down any immediate hope for what policymakers call “deliverables”—trade benefits, in other words—from IPEF.
“We felt there was so much unity and enthusiasm in Los Angeles and a commitment to a really ambitious agenda,” Bianchi said, adding that there was “thankfulness” among participating ministers that the United States was pressure to initiate IPEF. “I cannot overstate how relieved these countries are to have the United States at the table. Whether it’s agriculture or digital trade.”
Biden, to be fair, has already delivered some exemptions to Chinese tariffs, for example, by temporarily allowing Chinese-made solar panels to be imported from Southeast Asian nations. (Some of their manufacturing has been moved to Beijing in that region to avoid the tariffs). And a year ago, the administration reached a limited agreement to lift barriers to steel and aluminum trade with the European Union. “I think we’re moving fast,” Bianchi said.
Biden comes to talk about rebuilding US manufacturing through the CHIPS and Science Act at the groundbreaking of Intel’s new semiconductor manufacturing facility near New Albany, Ohio, on September 9. SAUL LOEB/AFP via Getty Images
But many experts believe that the clip is not fast enough. IPEF’s agenda does not include what they want most: new market openings in the US. 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 danger 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 is unlikely to be completed before the next election in 2024.” Plus, Lovely said, “the next administration can sweep him away if it’s not Biden.”
Biden administration officials counter that major trade agreements take years to finalize, and participation in itself helps. “Anytime countries embark on a positive agenda to strengthen investment and trade ties, the process itself helps to ease the pressures of economic nationalism and isolationism,” said former Biden official David Marchick, who is dean of American University Kogod School of Business.
But the administration’s other big new trade agenda—separate talks to expand trade with Taiwan (which was left out of the IPEF)—is creating new concerns. A deal with Taiwan will only further strain US-China relations as Beijing balks at renewed US efforts to move closer to Taipei.
At the same time, the global economic data is getting grimmer. On Wednesday, the Federal Reserve promised more economic “pain” when it raised the federal funds interest rate by another quarter point, and signaled that more increases were coming. It is clear that Fed Chairman Jerome Powell, who was criticized for moving too slowly in reducing rising prices, is now committed to erring on the side of recession when it comes to pressure on 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 further stagnation dating back to the 1970s. “Global growth is slowing sharply, and further slowdowns are likely as more countries fall into recession,” said World Bank Group President David Malpass. The report cited the restriction of trade as a key factor, saying that policymakers “need to implement measures to ease the constraints facing labor markets, energy markets and trade networks.”
Former US Treasury Secretary Larry Summers – whose immediate warnings of dangerous inflationary trends were ignored by Biden last year – also believes the recession is coming to both the US and Europe, which could be even worse. . This is partly due to the “huge vulnerability” the Europeans have created for themselves by relying too much on Russian energy, Summers said last week. On Wednesday, Deutsche Bank economists significantly increased their forecast of a serious recession for the eurozone, saying they expect output to fall 2.2 percent next year, compared with an earlier projection of a 0.3 percent slump. first.
US Treasury Secretary Janet Yellen listens to Biden during a meeting in Washington on October 6, 2021. Chip Somodevilla/Getty Images
The trend, however, is deeper, more disturbing and longer-term: Economics is being sidelined. Prominent economists such as Janet Yellen, who succeeded Summers as Treasury secretary and also warned of the dangers of tariffs, are taking a back seat to China hawks in the administration. The new nationalism has set in, deeply, in both political parties. Trade restrictions rule in Washington, and it’s nearly impossible to find a voice advocate, even in the business community. Consider what happened when Chubb chief executive Evan Greenberg, former chairman of the US-China Business Council, called the idea of US-China “decoupling” an “economic decoupling” in of June. Greenberg was alone, and his view was not supported by many business leaders.
In Washington, there is now a widespread consensus that America must pull out all the stops to pull out of China, withdraw from globalized supply chains, and rebuild vital industries at home, even to the point of filtering out investments from abroad. The result is a return to the kind of industrial policy that was considered wasteful in the past, but which many Americans now think is necessary. In late July, a massive $280 billion bill to invest federal dollars in American high-tech companies passed the normally divided US 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 spend more than $50 billion to bypass China by developing America’s domestic semiconductor industry. On Tuesday, the administration announced a team of prominent technologists experienced in distributing government money to run its newly established CHIPS for America offices.
Biden was nothing if not consistent. In his 2022 State of the Union address, the President declared to applause from both sides of the aisle, “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 reduce costs.” A year earlier, Biden said, “There’s no reason why the blades for wind turbines can’t be built in Pittsburgh instead of Beijing. No reason. None.”
In fact there is a reason: more than 200 years of proven economic thinking and the idea of comparative advantage, which posits that other nations can build such things more efficiently, more efficiently and more cheaply, which helps all one in the end. And, in any case, inflation only rose, just as traditional economics might have predicted. As both political parties lose their economic centrists and open trade supporters, they are, according to the Peterson Institute’s Lovely, “taking a lot of institutional knowledge with them.”
US President Donald Trump speaks to workers at the Whirlpool manufacturing facility in Clyde, Ohio, on August 6, 2020. Scott Olson/Getty Images
In some ways, no one is more to blame for this situation than the economics profession itself, which overestimated the benefits of freer markets in the post-Cold War years. That Pollymanism may have helped propel Trump, a defensive populist with little knowledge of economics, into the White House, promising to “restore manufacturing in the United States.” The “China Shock” resulted in the loss of millions of jobs in the United States, particularly in manufacturing, and fueled the rise of anti-China sentiment. While Biden has denounced many of Trump’s newly isolationist policies, he has left out some surprises on his trade agenda, including, of course, most of his tariffs.
Administration officials say the IPEF is designed to ensure that America’s trade doors are never opened again without sufficient recovery. They focus on streamlining digital markets and easing tax restrictions. The early signs are that the new nationalism is not all bad. Some manufacturing reform is underway. According to a new report from the Replacement Initiative, a lobbying group, American companies could bring nearly 350,000 jobs back to the United States this year, up from 260,000 in 2021 and the largest number in recent memory.
But the reality is that most multinational companies are not bringing back most manufacturing jobs. They are just moving to new places that are not China. And while Biden has tried to put a lot more money into education, the United States has not been able to train its people well enough to get back into high-tech manufacturing in large numbers. “The idea is that if China hadn’t opened up we’d still be doing all these things here,” Lovely said. “Multinationals would have gone elsewhere … Who is going to quit a job in the service sector to go into manufacturing?”
Economists say that trying to artificially replace domestic content in foreign-made products is bound to raise costs for everyone and will only benefit a few well-heeled tech companies. And some experts say there appears to be no overall U.S. strategy to willy nilly close more trade rather than facilitate it, especially in 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 wrote a recent study on the risks of haphazard decoupling . Bateman and other experts warn that too much isolation from international markets and supply chains will only put US businesses at a disadvantage, from artificial intelligence to agriculture. A cautionary example occurred during another bout of anti-Chinese sentiment two decades ago, when Congress imposed harsh export restrictions on all US commercial satellite sales, even to friendly nations like Canada, in response to misplaced suspicions. The result was that the US share of the world market took a devastating hit, falling from 75 percent to 45 percent.
Without a long-term vision, Bateman said, “The easiest thing to do is essentially a dribble of additional technological restrictions, sanctions, controls and executive orders. Many of the actions were rational on their own,” he said. But “the problem is that you can’t identify a stopping point.” The biggest concern, he said, is that “there’s not really any high-profile US political figure who is vocally warning about putting a floor under the US-China trade war [a war trade] technologically or economically.”
A customer walks down the stairs at a sparsely populated shopping mall in Shanghai amid repeated COVID-19 lockdowns.VCG via Getty Images
The economic danger is exacerbated by the fact that Chinese President Xi Jinping is in line with the movement of Biden’s nationalist agenda. Thanks to Xi’s own efforts to make China self-sufficient – and his massive coronavirus lockdown of entire cities – China’s economy is slowing to unprecedented levels, to around 3 percent, which was once unimaginable in the nation high growth. Youth unemployment is at 20 percent. China’s housing market bubble, fueled by massive debt and too-rapid expansion, is also in serious danger of crashing.
There are also lingering doubts about how China, as the world’s largest official creditor under its nearly $1 trillion Belt and Road Initiative (BRI), will handle a looming global debt crisis. Bankruptcy in Sri Lanka was the first victim – and as the biggest creditor China is blaming for too much credit – but countries in Central Asia, Africa and Latin America may have to face also ran banks. After a decade of prodigious borrowing, Beijing’s debtors are struggling to pay 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 in debt distress or at high risk of borrowing from China. (In 2010, that number was just 5 percent.)
This is not to say that global trade is slowing down, or even picking up, at the moment. Global merchandise trade volumes have increased slightly, but “trade is expected to increase slightly in 2022 and 2023 compared to the past decade, despite an expected downgrade due to the war in Ukraine and growth global economic slowdown,” its new version. found a report from the New York University Stern School of Business. Interestingly, much of the new growth is coming from nations in Southeast Asia and Latin America, countries that are trying to cut deals with both China and America.
With no real prospect of serious negotiations between the United States and China, “the real area of competition between the US and China is in third markets,” said William Reinsch, former secretary of the Commerce Department. “China will not treat foreign companies equally in China, and we can do the same to them here if we want to. It’s competing with them in the rest of the world that matters.”
Beijing is countering American protectionism with its own trade agreements in Asia, and according to a recent Reuters report, in Latin American trade outside of 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, the European Union and China – is taking off, and as trade between them slows, the risk of a severe recession only grows.