New Directions in International Trade Policy--Jake Sullivan Announces Change

New Directions in Trade Policy

by Lewis Leibowitz, Principal, The Law Office of Lewis E. Leibowitz

Last month, National Security Advisor Jake Sullivan spoke about the direction of US trade policy.??It was not his speech alone, but part of a coordinated roll-out of the Biden administration’s new positions on trade policy, including contributions from President Biden, USTR Katherine Tai and Secretary of the Treasury Janet Yellen.??

It’s worth looking at the Sullivan speech in detail.??It signaled that the administration is willing and even anxious to push the role of government in not only regulating but shaping international commerce.??In this, the Biden team largely shares the outlook of the previous administration by steering trade in ways that support the national interest.??The goals differ, though, from the previous administration.?

The trade restrictions of the Trump administration (steel, aluminum, China) have largely been retained by the Biden team.??Perhaps more important, the role of government is now being extended to industries like green energy and semiconductors that touch on national security.??Both carrots (subsidies) and sticks (trade restrictions) are being employed to create incentives toward moving industries back to the US.??

Sullivan outlined the damage to American cities and towns resulting from trade expansion and international competition that moved investments overseas.??Through the 1990s, America was the most prosperous and vital economy in the world.??Mr. Sullivan believes that the magic ran out with the expansion of China’s economy and the increased competitiveness of friendly nations as well.??The administration is now changing course away from trade expansion as a “good in itself.”??The new policy, to quote Mr. Sullivan, “will build a fairer, more durable international economic order for the benefit of ourselves and for people everywhere.”??How and when will that happen?

Sullivan blamed Republican ideas (tax-cutting, deregulation, “privatization over public action”) for the hollowing out of America’s industrial base.??It criticized excessive reliance on private initiative (the belief that “markets always allocate capital productively and efficiently, no matter what our competitors did”) led to relocation of entire industries and supply chains overseas.??The speech also outlined new challenges, such as the failure of trade liberalization to change the behavior of other countries, especially Russia and China, and climate change.??All these points lead inexorably to more government regulation (indeed, control) over economic activity.??

Government did champion trade expansion in the postwar period, but with important exceptions, like textiles, steel, shipping and sugar.??

Blaming Republicans for things that both parties pushed for decades should not surprise anyone; but the history of the last 30 years and more shows that both parties were involved in trade liberalization, tax cuts and privatization.??President Obama recognized, during his time in office, that the decline in manufacturing employment in the US was caused more by technology than unfair trade practices.??While the speech highlighted perceived mistakes in the past, the speech did not go much beyond generalizations concerning what to do for the future.??

Simply put, we can make more things (and more technology) with fewer people.??Sok while output is growing, the number of people involved in existing industries shrinks because of productivity.??Services and technology will continue to grow as a share of the labor force, creating more jobs.??However, the path to growing employment depends on a vigorous, dynamic economy that creates?new?jobs.??The Sullivan speech, beyond urging a return of old industries to the US and supporting the creation of a few new ones (like green energy), does not chart a clear path for a dynamic new economy.

One example of this trend is electric vehicles.??The US is investing billions to spur the rapid growth of EVs.??Auto producers are shifting production to EVs from internal combustion cars.??But many of the components of electric vehicles are made overseas.??Sullivan noted that the US now produces only 10 percent of the world’s semiconductors (the most advanced chips are from Taiwan), 4 percent of lithium for EV batteries, and essentially no nickel and graphite.??China has taken a leading role in those key industries, producing most of the world’s output.??Moving those tasks back to the US will require time, money and commitment in the face of fierce global competition and opposition to relocation to our shores on environmental grounds.??Turns out that building clean cars is not a very clean business.??

Sullivan’s speech also made some interesting concessions.??It conceded, for example, that a new world economic order depends on foreign trading partners.??“It isn’t feasible or desirable to build everything domestically,” he said.??He also conceded that acknowledged that the starting point of achieving “resilience” is to build up domestic production capacity, but then to work with trading partners to help them build capacity too.??Paying more attention to labor is a key component of this development.??Better supply chains do not (and cannot) mean that we make everything here.

The agenda is broad and ambitious.??Trading partners are listening, but the implementation steps toward broader cooperation are not clear yet.??

The question is whether these initiatives will result in more reliable supply chain and more competitive US businesses to produce for domestic production and for export.??Sullivan said that cutting tariffs is not just to reduce barriers to trade.??Instead of negotiating tariff reductions, a traditional approach, the Biden administration wants to fit trade liberalization within a broader framework of making trade work better for the United States—by which he seems to mean the United States government’s priorities, including national security, improving labor conditions and incomes and making more products in the US or with our trusted partners, while relying less on supply from China.??It also includes working on digital trade and inhibiting a “race to the bottom” in corporate taxation.???

Sullivan’s speech laid out broad but indefinite ideas.??There is something for everyone in the speech, but not really enough to enthuse our trading partners.??Moreover, some of the goals are in conflict.??Priorities must be established, meaning some goals should be moderated or pushed aside for others.??

The government is not equally proficient at all these goals and initiatives.??Building capacity in semiconductors will require tools that government may not be able to pursue efficiently; government must retreat if it cannot adequately choose the right innovations.??The private sector is generally better than government at innovation; government can subsidize and create tax breaks—but building better and more modern products is usually better in private hands.??

As the 2024 campaign heats up, business and government need to communicate regarding goals.??In the current uncertain international environment, both government and private industry have a lot to worry about.??In the last analysis, we are (or at least should be) on the same side.???