National Security Advisor Jake Sullivan recently gave an important speech on the direction of trade policy. It was not his speech alone, but part of a coordinated roll-out of the Biden administration on trade policy, including contributions from President Biden, US Trade Representative Katherine Tai, and US Treasury Secretary Janet Yellen.
It’s worth looking at the Sullivan speech in detail. It signaled that the administration is willing and eager to increase the role of government in international commerce. In this the Biden team shares the outlook of the previous administration. As we’ve seen before, the international trade restrictions of the Trump administration (steel, aluminum, China) have largely been retained by the Biden team. And, perhaps more important, the role of government in international commerce is reaching more sectors because of the role of vital industries (green energy, semiconductors) in the nation’s security. Both carrots (subsidies) and sticks (trade restrictions) are being used and government is trying to move industries back to the US.
Sullivan mentioned several sectors and initiatives in his speech, which was lengthy. He 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. 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 changing course. The new course, to quote Sullivan, “will build a fairer, more durable international economic order for the benefit of ourselves and for people everywhere.” How 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.
Blaming Republicans is no surprise. The history of the last 30 years or so shows that both parties were involved in trade liberalization, tax cuts, and privatization. While the speech highlighted perceived mistakes in the past, the speech did not go much beyond generalizations concerning what to do for the future.
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. Simply put, we can make more things, and more technology, with fewer people. Services and technology will continue to grow as a share of the labor force. The path to full employment depends on a vigorous, dynamic economy that creates new jobs.
One example of this trend is electric vehicles (EVs). Auto producers are shifting production to EVs from internal combustion cars. But many of the components of electric vehicles are made overseas. Many components are largely made overseas now. Sullivan noted that the US now produces 10% of the world’s semiconductors (the most advanced chips are from Taiwan), only 4% of lithium for EV batteries, and essentially no nickel and graphite. China has taken over 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 global competition and opposition on environmental grounds at home. 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 and 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, 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 US 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 avoiding a “race to the bottom” on corporate taxation.
Sullivan’s speech laid out broad but indefinite ideas. There is something for everyone in the speech. Some of the goals are in conflict. Priorities must be established, meaning goals may be moderated or pushed aside for other goals. The government is not equally proficient at all these goals. Building capacity in semiconductors will require tools that government may not be able to pursue; government must stand aside 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.
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