Biden trade policy is shaping up to be variant of Trump’s failed protectionism: Buy American, domestic-content rules, screw allies (Canada first), a cheap dollar, Section 301 tariffs, government subsidies to the favored, and no TPP — but without the abundant, reliable, inexpensive, domestically-produced energy of the Trump administration.
The weekly trade report with L.C.
Biden is taking an immediate action on trade – one that is in line with his predecessor and has a protectionist tinge. He will sign an executive order on January 25th toughening the Buy American requirements for federal government procurement. The executive order will reportedly require federal agencies to close loopholes that allowed some foreign purchases that were otherwise barred by existing Buy American regulations and require that agencies strengthen their current Buy American regulations. It also cracks down on false claims that a product is made in the USA.
There already exist an array of such domestic-content rules for the government, especially the Defense and Transportation departments, and they have long been criticized for raising prices for infrastructure and other projects and even for US troops who have to buy certain apparel for themselves. They also invite foreign retaliation. But the rules are loved by organized labor and parts of industry. For this reason, they seem an easy political “sell” to both political parties.
Uncertainty created, US credibility undermined
Some domestic-content rules could violate the WTO Government Procurement Agreement (GPA), though there are various exclusions such as for purchases related to national security. A president can waive Buy America rules for products from other GPA members or free trade agreement partner countries. Foreigners will be watching closely for the precise content of the Biden executive order. Already there are reports that some trading partners, led by Canada and the EU, are concerned that the new order may hit them.
The stress on protection through Buy American rules undercuts US authority when it demands that other countries give up local content requirements, a demand the US makes often and has filed WTO complaints about, e.g., regarding India’s solar sector.
Yellen testimony
Treasury Secretary-designate Janet Yellen spoke at her confirmation hearing before the Senate Finance Committee on January 19th and was quickly unanimously approved by the committee. Her quick approval by Republicans is astonishing considering the time-wasting parliamentary slowdowns Senate Democrats put up against Trump’s appointees, no matter how qualified, delaying for months his ability to get a government off the ground.
The wide range of questions posed to Yellen included trade policy. She was thus among the first administration figures to comment on trade in an official setting. She had much to say about policy toward China. As with Anthony Blink, she argued for a continuation of Trump’s hard-line approach, said she would be especially concerned with technological competition, and wouldn’t immediately lift the Section 301 tariffs.
Trump’s Section 301 tariffs did little harm to China, raised prices for US producers and consumers, and failed utterly to increase US manufacturing, the purported reason for the tariffs. Were senators impressed with Mrs. Yellen’s commitment to continue this unsuccessful policy?
Words contradicted by deeds
She stressed that the new administration will work closely with allies to counter China’s abuses. As one of his first acts, President Biden showed how much he cared about working with allies — by canceling the Keystone XL Pipeline, of major economic importance to Canada as well as the US.
Yellen added – as Tai has also stressed – that a key way to deal with China is by insuring that the US economy is strong and competitive. But how can the US economy be strong and competitive when its school population scores in the bottom half of international math and reading scores. This abysmal performance is largely attributable to Democrats’ all-out opposition to school choice, which would allow children, armed with vouchers, to escape under-performing urban public schools in favor of better-performing private and parochial schools.
Yellen called for enhancing investments to help the US out-compete China in technology. But technological innovation and economic growth require inexpensive, reliably available energy. That too the present administration is sabotaging through its anti-fossil fuel and anti-nuclear policies. Biden’s plans to massively increase taxes on corporations and the rich will also discourage investment in new competitive industries.
Trillion dollar expenditures will weaken dollar
On currencies, Yellen said the dollar’s forex value should be market determined. She did not give any support to a weaker dollar, as Trump often did. She said, “The US does not seek a weaker currency to gain competitive advantage, and we should oppose attempts by other countries to do so.” But the trillion dollar expenditures the Biden administration is planning to finance through Yellen’s Treasury will continue weakening the dollar. This is one of the reasons China now is the recipient of more foreign direct investment than the US.
USMCA
Meanwhile, 122 House Democrats sent a January 19th letter to Biden urging him to add Paris climate agreement commitments to the USMCA, which, like most trade agreements, includes a pledge to abide by specified multilateral environmental agreements. Since Canada and Mexico are signatories to the Paris accord, they have already pledged to abide by the commitments they made in it and so they might be willing to add it to the USMCA. Under Trump, Democrats had failed to get the Paris agreement inserted in the USMCA. But Trump could have and should have sent the Paris agreement to the Senate for ratification as a treaty, as the Constitution requires. Its certain defeat there would have put an end to this China-favoring agreement foolishly entered into by western nations.
Worker-centered trade policy?
The Biden administration cannot be accused of merely rubber-stamping the Trump administration’s preferred form of self-defeating protectionism. The Biden administration will reportedly deploy a new flavor of worker-friendly protectionism. According to an article in the January 25th Wall Street Journal,
No longer would American negotiators focus on opening markets for financial-service firms, pharmaceutical companies and other companies whose investments abroad don’t directly boost exports or jobs at home…. Clinton administration Treasury Secretary Lawrence Summers goes even further, arguing against prioritizing gains for Hollywood, investment banks and inventors who want intellectual property protection. Their “elite concerns” don’t contribute much to U.S. employment or tax revenue, he said in an interview…. A Biden trade transition task force member, Brad Setser, has provided much of the intellectual firepower behind the proposed shift…. Mr. Setser urges that trade and tax policy promote U.S. exports of manufactured goods, a call picked up by… incoming U.S. Trade Representative Katherine Tai…. Ms. Tai says the new administration wants a “worker-centered trade policy”… The Trump administration’s trade representative, Robert Lighthizer, asserts he already created a worker-centered policy.
Lighthizer is right. This is just a new face on the previous administration’s failed policy to promote the revival of uncompetitive US manufacturers and boost their exports. Trump and Lighthizer preferred tariffs; the Biden-Setzer approach will be to provide credits to domestic manufacturers who expand at home and punitive taxes on companies that invest abroad.
Government as director of investments
Both the Trump and Biden administration have been under the illusion that politicians know best what the proper allocation of labor is between blue collar and white collar employment, which industries should receive government favors, and where companies should invest the funds entrusted to them by their stockholders. But they don’t, and the Obama administration’s many failed green investments and the Trump administration’s failed tariff policies are the proof.
If the US were to focus on having the best educated working class in the world – something it once could boast of – with minimal regulations and taxes, and with plentiful, inexpensive, unsubsidized energy, workers in obsolete industries and professions would quickly find new, often better-paying employment. This perspective is the opposite to the one the new US administration is pursuing.
CPTPP
The US and its allies can prosper and successfully hold off the China-Russia axis if they work together as in one freely-trading division of labor and agree on common trade and investment policies toward China and Russia. The CPTPP is a key vehicle for implementing such an allied policy. UK Trade Secretary Liz Truss announced on January 20th that London “will shortly submit our formal request to join” the CPTPP. Her statement listed an array of benefits the UK would get from membership, including “deeper access to nearly £9 trillion of GDP… modern rules of origin… 95% tariff-free [goods] trade… from cars to seafood, or the modern standards in services, data and digital trade.” She noted this “would play to the UK’s strengths as a global hub for services and technology trade,” saying, “Together, we can help set the standard for trade in the 21st century, promote higher standards in green trade and pile pressure on the WTO to reform.”
The US was once slated to be a founding member of the CPTPP’s predecessor, the TPP. That agreement was the best trade accomplishment of the Obama administration, but Trump killed it in his first days in office. Biden and his Obama administration retreads once supported that agreement and could have made a real contribution to US prosperity by announcing the US would immediately commence negotiations to rejoin. No such luck. For failing to join, the US – outside the agreement — has lost trade deals and has handed China a major geo-strategic victory. The TPP was intended to provide a Pacific trade alternative to Chinese domination of that region.
As we said before, meet the new boss, even dumber than the old one.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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