Trade Cases

Leibowitz on Trade: More Managed Trade in the Offing?

Written by Lewis Leibowitz

The end of summer marks a return to normal in Washington. Congress is back, and so are the president’s cabinet and advisors. This is the time of year for officials to float new ideas.

In the international trade arena, American business groups grew increasingly impatient with the lack of ideas on resetting the economic relationship with China. Early this year, the new president ordered a top to bottom review of the relationship, including, but not limited to, the tariffs on Chinese exports to the United States. The review has stretched on for several months, with no clear sign so far of a conclusion.

Now, in September, some glimpses of how the Biden administration may be approaching this issue are coming out. Call them “trial balloons” at this point—it’s clear that no final decisions have been made. But when you are in politics, these trial balloons can reveal how the administration weighs the interests of various groups in the political universe.

Some observers are pointing out that the competition with China differs from the Cold War because both China and the United States are operating within a single global economic environment, while the Cold War involved two separate and effectively isolated systems. This view holds that China has a real stake in the survival of the global system, as does the U.S. While rules of competition have been violated by both countries (and the weight of evidence suggests that China has done more than the U.S. to violate those rules) neither country wants that system to collapse. The two countries are still struggling to find a way to channel their competitive energies without causing a more basic split.

With that rather sensitive dynamic in mind, the “trial balloons” suggest that the system’s existing rules should be used to reduce bad behavior. Just this weekend an approach that would be based on a new Section 301 action aimed at China could be in the U.S. toolbox.

Clearly, the U.S. remains dissatisfied with China’s behavior. The tariffs imposed during the Trump administration on Chinese imports, together with other moves, including the Phase One trade deal early in 2020, have not produced positive results. In fact, the data suggest that they have not even prevented the situation from becoming worse.

So USTR is looking into a new Section 301 proceeding, focusing on China’s industrial and technology subsidies and imposing new tariffs to address those subsidies. There are reports that USTR has reached out to U.S. businesses to obtain estimates on how much these subsidies have harmed U.S. companies.

The situation may be more complex than just that, of course. Over the past 20 years, since China formally joined the WTO, American and other Western businesses have grown more dependent on China as a source of raw materials but, more importantly, advanced products that have become vital to U.S. industries. Imposing more tariffs will likely do more harm to the U.S. and less harm to China than the administration would like. That is part of the reason for the delay in making any trade policy announcements.

Two things are clear: first, any sanctions (like tariffs or quotas) that come out of a new Section 301 investigation on China’s subsidization of its industries will result in domestic criticism that the tariffs will be paid by Americans, not Chinese, and will undermine the global competitiveness of U.S. industry.

Second, new tariffs are very unlikely to simply be piled on the tariffs we already have. They have hurt businesses that are dependent on China, and new tariffs will intensify that injury. The rumor mill suggests that, if a new Section 301 subsidy investigation commences, it will be combined with a reduction on China tariffs that are already in effect. In addition, the Biden White House will attempt to increase Chinese purchases of U.S. products in a “Phase Two” deal with China. Note that the 2020 Phase One deal has fallen well short of the targets for Chinese purchases; the Biden team does not want to duplicate that failure in the next round.

There are two ways to deal with the reduction of existing tariffs on China. The first is selective elimination or reduction of the tariffs that already exist. Many of them have little or no effect on trade, because of antidumping and countervailing duties that would prevent imports even if the China tariffs were removed.

The second way to alleviate harm to U.S. businesses is to resume the exclusion process to exempt imports from China tariffs. That exclusion process covered thousands of products exported from China; but the exclusions expired at the end of 2020 and the Biden administration has not resumed the exclusion procedure. I would expect a revamped exclusion process to be announced, but timed to have the maximum impact on the upcoming negotiations with China.

Katherine Tai, the U.S. Trade Representative, has years of experience dealing with China and with trade negotiations generally. She is aware that tariffs, once imposed, should not be lifted unless they help make progress in negotiations. No unilateral or sudden move on tariffs is expected as a result.

The politics of this situation are also fraught with danger. Ambassador Tai and Secretary of State Antony Blinken have both noted that previous administrations adopted trade policies that were not “worker-centric” enough and that jobs have flown overseas as a result. I am skeptical of this critique as a broad generalization, but perception is reality in politics and winning back organized labor to the Democrats is a key part of the Biden strategy. Labor wants a seat at the table before tariffs are adjusted and new initiatives implemented. Avoiding criticism by unions, particularly in heavily unionized industries, will be a key driver in these decisions.

Negotiations with China cannot proceed seriously until the Biden administration makes up its mind on goals and the mechanisms to achieve those goals. The next three months will see announcements, and debates, about those goals.

The early weeks of the Biden administration saw much discussion about bringing manufacturing back to the United States. That rhetoric has cooled in recent weeks, in part, I believe, because it is not a broadly realistic goal. The global economy is based on global interdependence, which in turn is both an economic and strategic imperative, reducing global poverty and the possibility that countries intent on aggressive expansion can succeed. The U.S. led the way in fostering interdependence. It was that impulse that led to pushback, “America First” and Donald Trump’s appeal to blue collar workers. Joe Biden is trying to make economic progress while wooing those same workers.

No wonder the new policy is taking so long to work out.

Lewis Leibowitz

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Lewis Leibowitz, SMU Contributor

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