Three admin blunders: G7 Summit, Putin meet, supply-chain review

Will the US-EU Summit on June 15th do better?

The June 7th to 13th, 2021 roundup of major trade developments, with L.C.

Biden’s first foreign foray began with the 47^th Group of Seven Summit, hosted by the UK in Carbis Bay, Cornwall, June 11^th to 13th. From there, Biden goes to Brussels for a NATO Summit on June 14th and the US-EU Summit on the 15th. On May 16th, Biden will be meeting in Geneva with the Russian leader, Vladimir Putin. Biden has been severely criticized for meeting with Putin under present circumstances.

The G7 host, UK prime minister Boris Johnson, tried to shape the summit as a renewal of cooperation among democracies. He’s long been known to wish for a D-10 grouping of the G7 countries plus India, South Korea, and Australia, an idea the US has essentially endorsed. Johnson would have benefited from some signs of good will by the Biden administration. But no progress toward the long-discussed US-UK free trade agreement was reported. Instead, the US warned London not to jeopardize the Irish Good Friday Agreement. This was an unwelcome and uncalled-for intrusion into a sensitive UK domestic political matter.

The G7 summit is being reported as a success by the Biden-boosting media. If issuing harmonious but feckless joint statements at conference conclusion is counted as success, then the summit indeed was so. But the G7’s agreement to pursue an anti-competitive 15% global minimum tax and an accelerated phase-out of fossil fuels in response to a non-existent climate crisis; together with the G7’s failure to adopt specific measures to curb China’s military, economic, and human rights depredations, mark the conference as a “success” only by the standards of a very low bar.

US-EU Summit

At the US-EU summit in Brussels on June 15^th, which will be attended by US president Joe Biden, European Commission president Ursula von der Leyen, and European Council president Charles Michel, the two sides intend to announce a path to ending their main trade disputes. These comprise the Section 232 tariffs on steel and aluminum and the EU counter-tariffs, and the retaliatory tariffs imposed by each side as a result of their WTO clash over aircraft subsidies.

It is not apparent from the information obtained this week whether the US intends to also end the metals tariffs imposed on other countries, most importantly Japan.

The Section 232 tariffs were largely a response to a crisis created by China’s over-production of metals. Therefore, any resolution would have to involve assurances that the China problem will be dealt with. But there is no indication as to why this new effort will be any more successful than the languishing OECD-led steel subsidy talks.

Ending the tariffs will be politically difficult for the Biden administration if not paired with a credible plan on excess capacity, given the strong support for the tariffs from the steel industry and union, a key Biden constituency. But the pressure to end the tariffs is intense. This week over 300 metal-using manufacturers sent a letter to Biden calling for immediate termination of the tariffs, together with an explanation as to how harmful they have been to US industry.

Asked at a press conference concluding the G7 Summit as to when he would end the metals tariffs, Biden responded, “[I’ve only been in office] 120 days, give me a break, I need time.”

Senate passes anti-China bill

Back in the US, the Senate passed the US Innovation & Competition Act by a vote of 68-32 on June 8th. The strong bipartisan support reflected the rising concern about China across the political spectrum.

Nineteen Republicans voted in favor and one member of the Democratic Caucus – Bernie Sanders (I-VT) – voted against it. But none of the opponents spoke out against the purpose of the bill: to better position the US to contain China’s bid for technological dominance.

The 2,400-page bill was characterized in the press as “sprawling,” which it certainly is. It encompasses six pieces of legislation developed separately, largely by different Senate committees, many amendments offered by both parties (18 by Republicans and four by Democrats), and measures addressing an array of areas ranging from the US semiconductor sector, R&D spending, and Chinese human rights abuses and trade infractions.

The bill will increase government R&D spending about $250 billion over five years. This includes funding for the CHIPS Act, aimed at boosting US semiconductor manufacturing.

The bill’s passage was a victory for Senate Majority Leader Chuck Schumer (D-NY) because its core is the Endless Frontier Act introduced by Schumer and Sen. Todd Young (R-IN), to which the other bills and amendments were accreted. The huge bill, Schumer claims, “will supercharge American innovation and preserve our competitive edge for generations to come…. The number one thing China was doing to take advantage of us… was investing heavily in research and science. And if we didn’t do something about it, they would become the number one economy in the world.”

Senate Minority Leader Mitch McConnell voted for the bill. But neither he nor most Republicans were satisfied with it. The June 9^th Wall Street Journal reported that “Some Republicans have pushed back, contending the bill costs too much and interferes too much in the economy, mimicking China’s top-down approach to investing in favored sectors and companies.” Sen. Ron Johnson (R., Wis.), was quoted saying that “This bill will increase government’s influence over the private sector while weakening America and making us less competitive by increasing our debt.”

The semiconductor industry and many others welcomed the legislation. Amazon, however, didn’t like the provision calling for country-of-origin labeling of online goods. Many of the goods it sells come from China.

The administration releases its supply-chain review

On June 8th, the White House released a fact sheet with the “key findings” of the 100-Day Reviews of critical supply chains that government agencies submitted to the White House the week before. The full report is 250 pages and is titled “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth.” The main purpose of the review is to plot a way for the US and its allies to get Western economies to become more resilient, competitive, and self-reliant. This is in order to defend democracy and market-based capitalism against China’s centrally-planned, market-distorting state capitalism, which is seeking global dominance.

Critics have noted, however, that the review veers toward industrial policy and more state involvement in the private sector, i.e., it proposes to fight Chinese methods by imitating them.

Unsurprisingly, the current administration’s concern with supply chain vulnerabilities – dependence on unreliable sources and remedies based on more government involvement – does not differ much from the preceding administration. Emphasis on cooperation with allies, however, does set the review apart from the Trump approach. But, as became apparent at the G7 Summit, not all US allies are in agreement with the US president’s wish for a more assertive stance. Germany, in particular, has just come in for a scathing analysis in The National Interest titled “Germany is a Bad Ally.”

The Biden administration’s supply chain review reinforces moves toward decoupling the US economy from China – and other foreign suppliers too, though the intended main target is China. A key issue is whether a US-government-promoted push to re-shore manufacturing and mining would wind up being so inefficient that it renders the US less competitive. The administration would argue that US security requires it anyway, and that US production is uncompetitive and foreign sources appear more efficient only because of unfair foreign government actions (subsidies, state-owned enterprises, forced tech transfers and IP theft, and other unfair trade practices).

Supply chain vulnerabilities or protectionist rationale?

As with all Biden pronouncements, the fact sheet makes clear that Buy American will be a key consideration in its supply chain policies – and do so apparently without exempting allies. Thus, the review states:

The Federal Acquisition Regulatory Council… plans to issue a proposed rule to develop a new process for preferencing critical products that are in manufactured products or component parts, under the Buy American Act. This will leverage the buying power of the nearly $600 billion in federal contracting to strengthen domestic supply chains for critical products.

This makes a mockery of the Biden administration’s claim that it is distinguishing itself from its predecessor by promoting cooperation with allies.

The fact sheet motivates its proposed statist interventions by indicating where the administration thinks the private sector has fallen short. It states the actions

are critical because… structural weaknesses in both domestic and international supply chains threaten America’s economic and national security…. decades of under-investment and public policy choices led to fragile supply chains…. Unfair trade practices by competitor nations and private sector and public policy prioritization of low-cost labor, just-in-time production, consolidation, and private sector focus on short-term returns over long-term investment have hollowed out the US industrial base, siphoned innovation from the US, and stifled wage and productivity growth.

No move to drop Section 232 actions

Thus, the White House is using what it portrays as a supply chain crisis to promote its plans for a more activist, even statist government involved in encouraging, subsidizing and protecting what are considered critical parts of the private economy. For example, the Commerce Department “will evaluate whether to initiate an investigation into neodymium magnets, which are critical inputs in motors and other devices, and are important to both defense and civilian industrial uses, under Section 232 of the Trade Expansion Act of 1962.”

This favorable citation of Section 232 (the national security exception allowing unilateral imposition of trade barriers) makes clear that the Biden administration considers that this law, so often controversially invoked by the Trump administration, is proper and effective and will be used as well by the new administration. “We want to use all the tools at our disposal,” National Economic Council Director Brian Deese said in an interview regarding the possible use of Section 232. 

The fact sheet further states that the Defense Department “has announced an investment in the expansion of the largest rare earth element mining and processing company outside of China to provide the raw materials necessary to help combat the climate crisis.” This suggests that the administration may be contemplating a Section 232 case that declares combating CO2 emissions to be a national security interest. China is the main global source of neodymium, and over 95% of rare earth elements and 76% of rare earth magnets used in renewable energy.

Administration prefers expensive, ineffective, and pseudo-scientific measures

The simpler, cheaper, less free-trade-hostile action would be to admit that the AGW (anthropogenic global warming) crisis the Democrats have ginned up to increase their government powers is unsupported by the facts and that China can simply take their green energy monopoly and stuff it.

US-Indian cooperation and amity is crucial to containing China’s attempted domination of Asia, but Biden administration instead seems determined to push India toward China. Take, for example, the supply-chain review’s final section on pharmaceuticals, which might be taken as a summation of all the separate sector reviews. It argues:

China and India are estimated to control substantial parts of the supply chain where there have been issues with shortages…. The drive toward lower costs as well as unfair trade practices have led to a hollowing out of domestic production. A new approach is needed to ensure more resilient supply chains that includes improving transparency, building emergency capacity, and investing in domestic production.

Replace Indian pharma with a US home-grown industry? That would be crazy. US pharmaceutical firms have now developed four different vaccines with 90% or greater effectiveness against the Wuhan coronavirus. China has not a single vaccine of comparable efficacy and India none at all. There’s no surprise here. It makes much more sense for China and India to manufacture aspirin, ibuprofen, and other chemically simpler products while the US and EU continue to focus on the mRNA and other advanced technology pharmaceuticals in which they have a proven capability.

Indeed, much of the present supply-chain hysteria can and should collapse once the US and its allies:

• Build stockpiles for medical or strategic materials that might be embargoed or become the occasion of critical bottlenecks;
• Maintain naval control over the ocean’s key routes;
• Abandon the spurious AGW crisis and self-destructive measures adopted to address it; and
• Focus on US private-sector strengths in innovation and entrepreneurship. This requires low taxes, a minimal regulatory apparatus, stability of laws crucial to business and individual saving and investment; and a better educated labor force. Government investment and subsidies should be confined only to well-defined projects for national defense.

But the just-recommended policies are the very opposite of those being pushed by the Biden administration and that were endorsed at the recent G7 meeting.