Outside the Beltway

China Trade Wars the New Normal

The elite consensus that free trade would bring them around is gone.

James Joyner · Tuesday, December 27, 2022 · 13 comments

POLITICO (“‘A sea change’: Biden reverses decades of Chinese trade policy“):

After decades of U.S. efforts to engage China with the prospect of greater development through trade, the era of cooperation is coming to a screeching halt.

The White House and Congress are quietly reshaping the American economic relationship with the world’s second-largest economic power, enacting a strategy to limit China’s technological development that breaks with decades of federal policy and represents the most aggressive American action yet to curtail Beijing’s economic and military rise.

The new federal rules, executive orders and pending legislation aimed at China’s high-tech sectors, which began this fall and will continue in 2023, are the culmination of years of debate spanning three administrations. Taken together, they represent an escalation of former President Donald Trump’s tariffs and trade disputes against Beijing that could ultimately do more to slow Chinese technological and economic development — and divide the two economies — than anything the 45th president did while in office.

“You really have seen a sea change in the way that they’re looking at the relationship with China,” said Clete Willems, who helped design China economic policy in the Trump White House as Deputy Assistant to the President for International Economics and Deputy Director of the National Economic Council. “[The Biden] administration views Chinese indigenous innovation as a per se national security threat … and that is a big leap from where we’ve ever been before.”

The new strategy, which the Biden administration internally calls its “protect agenda,” is being rolled out this fall and winter in a series of executive actions. In October, the Commerce Department issued new rules aimed at cutting off Chinese firms’ ability to manufacture advanced computer chips. They will soon be followed by an executive order creating new federal authority to regulate U.S. investments in China — the first time the federal government will exert such power over American industry – and an executive order to limit the ability of Chinese apps like TikTok to collect data from Americans.

Congress is participating as well, drafting its own, bipartisan versions of Chinese investment screening, potential rules on American capital flows into China, and restrictions on TikTok and other apps that hawks hope can be passed next Congress.

As alluded to in the led, there was for decades a bipartisan elite consensus that encouraging trade with China would eventually lead to its liberalization. After all, it had worked pretty much everywhere: as countries got richer, the entrepreneurial class gained power and democratization followed over time. While initially a Western phenomenon, it eventually worked in Asia as well, with Japan, South Korea, and others democratizing as they got richer. (Granted, Japan had some external help in the form of a US-imposed constitution.)

Administration after administration, beginning with Nixon’s opening to China in 1972, pushed for greater integration of China into the global economy. Despite the PRC’s constant flouting of the rules, the United States Congress granted Permanent Normal Trade Relations (then “Most Favored Nation”) status toward the end of the Clinton administration and it was allowed into the World Trade Organization early in the Bush administration.

Some of the predicted benefits came. China’s economy indeed grew and poverty there shrunk considerably. And U.S. consumers benefitted from cheaper goods. In some sectors, notably agriculture, U.S. exporters also reaped rewards, as did some U.S. investors.

But the critics were also right in several respects. The hoped-for democratization did not materialize; indeed, the government has cracked down on human rights even further. Nor did China become a member of the liberal world order; it reaped most of the rewards of liberal trade without following most of the rules. And, naturally, the cheaper consumer goods created a race to the bottom that further gutted the U.S. manufacturing base.

Then again, successive U.S. administrations were complicit in this, as they let the PRC get away with it. As a POLITICO report from a year ago (“China joined rules-based trading system — then broke the rules“) noted,

The Clinton administration viewed China’s entry into the international trading system as a mutually beneficial opportunity to manage its economic rise. And the first few years of China’s WTO entry supported that gamble. A Report to Congress on China’s WTO Compliance in 2004 praised the Chinese government for an improving performance that made it “substantially in compliance with its [WTO] obligations.”

[Clinton’s U.S. Trade Representative Charlene] Barshefsky blames the administrations of former Presidents George W. Bush and Barack Obama for failing to wield the WTO tools at its disposal — specifically an import safeguard mechanism built into China’s accession agreement. That tool gave the U.S. and other WTO member states wide latitude in addressing import dumping through targeted tariffs.

With enforcement, “China would have understood to the extent that imports in various sectors were blocked or sharply reduced, that it couldn’t do business the way it was doing business and that may have had an impact in terms of their economic model and the surges of [Chinese] imports that occurred could have been prevented in significant part.”

Despite the relative ease with which affected companies could file for safeguard measures, only three such applications were filed during the Bush administration, and the president denied all three of them “on some misplaced geopolitical calculation,” Barshefsky said.

The sole import safeguard imposed against Chinese imports before the mechanism expired in 2013 was the Obama administration’s 2009 imposition of duties on Chinese tire imports linked to the loss of 5,000 U.S. jobs.

I’m skeptical that those measures were ever going to be enforced, though. As Jennifer Hillman, who served in high positions at USTR from 1995 to 2007 notes in that same article,

U.S. policymakers made implicit — and often explicit — assumptions that ushering China into the global trading system would empower reformers committed to market economics and fundamental changes in China’s authoritarian one-party state.

“For some members of Congress and for some in the Clinton administration … there was a perception that there was a significant number of people in China at all levels [of government] that wanted an economically reformed China, that wanted a market economy and some that also wanted a democratic China,” said Hillman.

Still, it would not have been in the U.S. interest to block China’s entry to WTO 20 years ago, said Hillman, [now] a professor of practice at Georgetown Law School.

“There was no way to say ‘no’ because if the U.S. had said ‘no’ and China had not joined the WTO, it would have probably engaged in a whole series of [trade] agreements that would have had the effect of discriminating against the United States,” Hillman said.

Fear of Chinese government retaliation against U.S. goods reprisals effectively stifled the use of the import safeguard mechanism built into China’s WTO accession agreement to prevent damaging flows of low cost imports, she added.

Mickey Kantor, Barshefsky’s predecessor as USTR and then Secretary of Commerce under Clinton, defends the decisions:

Successive U.S. administrations weren’t naive about the potential benefits and the challenges the U.S. faced in seeking to make China’s WTO entry a success for all its members.

“I think we were generally correct that China was going to become the second largest power on the face of the earth and if the first largest power, the United States of America, did not reach out and begin to bring China into a system of liberal order and rule of law, then everyone was going to suffer,” Kantor said.

“We knew everything would not go perfectly. President Clinton said it. President Bush and President Obama said it. No one had unrealistic expectations,” he added.

But that understanding of the challenges involved didn’t prepare Kantor for the frustrations in trying to push China into honoring its WTO commitments.

“What we had was the expectation that we’d work towards making solid, serious progress — and what has happened is the Chinese have taken that as some form of weakness,” Kantor said.

The failure was overdetermined. The aforementioned elite consensus was slow to dissipate. Lots of powerful groups were doing quite well under the system. And, while our political system has many advantages over the centrally managed system in the PRC, it’s also much harder to take decisive action, since it requires building consensus.

One of the things that Donald Trump grasped was the fact that the elites were out of touch with public sentiment on China. His “trade wars are easy to win” policy was laughably stupid in its execution but a new direction was needed. As Dan Drezner noted a couple weeks ago, the Biden administration has been more effective—for good and ill.

I know I sound like a broken record on this issue, but the point that bears repeating: the primary difference between the Trump administration’s foreign economic policy and the Biden administration’s foreign economic policy is that the Biden team is way better at implementing protectionist policies.

It’s one thing if the Biden team wants to rationalize a strategic decoupling from China: I get that. I even kinda sorta get the principle of defending the national security exemption in Article XXI. Applied properly and judiciously, it’s important that there be such an exception.

Defending the steel and aluminum tariffs, which represented Trump’s crudest, dumbest attempt at issue linkage, is something altogether different. I believe the young people today — the ones most hurt by the higher consumer prices created by this kind of dumb protectionism — would call it “extra.” The claim of a national security threat was always ginned up, particularly since the 2018 action had no effect on imports of Chinese goods — they were already facing steep tariffs.

The Biden administration simultaneously wants to claim that “America is back” from the bad old days of the Trump administration while implementing an awful lot of trade restrictions that target U.S. allies. The inherent tension between these two aims is not going to go away — which means that, from time to time, I will have to remind readers about the logical hole at the center of Biden’s grand strategy. Or as Brad DeLong recently explained to the Financial Times, “The U.S. is now an anti-globalization outlier.’“

While the elite consensus that a richer China would be more liberal was wrong, the elite consensus that liberalization is good has not faded. Tariffs on China are, after all, simultaneously taxes on American consumers. As Drezner notes,

[T]he economic effects of the [Trump] tariffs [which were continued under Biden, even after the WTO ruled they were in violation of international agreements] were eminently predictable. The U.S. has a lot more manufacturing jobs and output in the steel-and-aluminum-using sectors than in steel and aluminum. According to EconoFact, “the number of jobs in U.S. industries that use steel or inputs made of steel outnumber the number of jobs involved in the production of steel by roughly 80 to 1.” And, sure enough, weaker demand due to higher steel prices caused firms like US Steel to shutter plants and see their stock price fall precipitously in the year or so after the tariffs were originally imposed.

The Trump administration dismissed concerns about the economic and political repercussions, claiming that the tariffs would strengthen the country and that anyway there would be no retaliation. Both claims proved to be wrong. U.S. consumers and workers were hurt, as were poorer countries overseas. U.S. national security was not bolstered a whit.

Longstanding U.S. allies are protesting our policies which, again, are in violation of agreements we ourselves brokered.

At the same time, I get it. A sizable Democratic constituency was against “free trade” at the time Bill Clinton was signing NAFTA (a deal largely brokered under his Republican predecessor, George H.W. Bush and which passed largely on the strength of Republican votes in Congress) and helping usher in the WTO as a successor to the old GATT. While the decline of the very-short-lived heyday of unionized manufacturing workers was already well underway, globalization has long been blamed as the culprit. It’s actually ironic that a nominal Republican, Trump, was the one to capitalize on it.

But Biden is doubling down. Back to the original POLITICO article:

Those initiatives come on the heels of Biden’s “promote” agenda — using the government to promote American competitiveness. That involved the approval of hundreds of billions of dollars of subsidies for domestic manufacturing in the CHIPS for America Act and Inflation Reduction Act last summer, focused on breaking U.S. reliance on China, and new rules against U.S. companies working with Chinese chipmakers.

Taken together, the “protect” and “promote” agendas represent a fundamental rethinking in the American government’s approach to China’s technological advancement and, ultimately, its economic development. While American policymakers were previously content to manage China’s technological growth and make sure it stayed a few generations behind the U.S., security officials now seek to bring Beijing’s development – particularly in chips and computing, but soon in other sectors — closer to a standstill.

This is very much a trade war. I have mixed feelings about it, in that I think there’s clearly justification for breaking dependency on China for key technologies. They’re a bad actor and there’s no doubt that they’ll abuse their power. At the same time, this is all rather clearly in violation of rules we put into place and it’s not likely to win us a lot of friends.

“It’s not an exaggeration to say this is a Biden doctrine of technology policy toward China,” said Eric Sayers, a former staffer for the U.S. Pacific Command during the Trump administration. “More than an escalation, it’s a grand departure from a three-decade strategy.”

It’s also a departure the White House would rather downplay. The administration insists that its protect agenda is focused squarely on stalling the Chinese tech sector, and not aimed at halting China’s overall economic growth or “decoupling” the two economies more broadly.

“We are not seeking the decoupling of our economy from that of China’s,” Commerce Secretary Gina Raimondo, who is enacting key parts of the agenda, said in a late November address outlining the administration’s new tech policies. “We want to promote trade and investment in areas that do not threaten our core economic and national security interests or human rights values.”

That’s a difficult tightrope to walk.

But that attempt at a middle road between decoupling and unfettered economic engagement is under attack by China hawks and free traders alike.

Those who want a tougher stance toward Beijing point out that the total amount of trade between the nations boomed through the pandemic, feeding a record trade deficit between the countries. Those China hawks, including some Trump administration veterans, say that Beijing’s control over the Chinese economy is so complete that the only way to ensure that American commerce does assist Chinese military development is to push for less trade between the countries, particularly in high-tech and defense-related sectors.

“I think we have to start the process of strategic decoupling,” said Robert Lighthizer, Trump’s former trade chief and a longtime China hawk, who commended Biden’s recent tech actions against China but urged him to pursue broader efforts to reduce U.S. reliance on the Chinese economy.

“Once you decide [China’s] a foe, you have to start the process of stopping the shipment of hundreds of billions of dollars each year that they’re using to rebuild their military,” he said, referring to record trade deficits with China following the pandemic.

While the Biden administration rejects those calls rhetorically, it also acknowledges that the protect agenda will soon spread to other major sectors of the Chinese economy. In particular, Sullivan has highlighted biotechnology and clean energy as two industries where the U.S. must not let China take the lead. But White House policymakers say those actions will be “carefully tailored” to affect only high-end, strategic products, and not cut off everyday commerce.

“Clean tech, biotechnology — these are sectors that are poised for significant growth,” said a senior administration official, who spoke anonymously to detail administration policies. “But to suggest that we’re going to be controlling all technologies within those sectors is not the case. It will be focused on critical technologies and choke points within sectors.”

Acknowledging that these issues are incredibly complex, this is yet another case where the administration’s goals are in opposition to one another. Trying to “win” the clean energy race almost certainly slows down its spread but imposing new costs. Ditto, as I’ve noted before, the policy of subsidizing technologies like electric vehicles and heat pumps but only for those who make a politically acceptable amount of money.

Still, three successive administrations—going back to Obama’s “Asia Pivot”—have recognized China as a strategic competitor whose goals were decidedly not aligned with ours. (Indeed, absent the 9/11 attacks and the ensuing Global War on Terror, we may well have shifted in that direction a decade earlier. Candidate George W. Bush was calling China a “strategic competitor” in 1999, even while defending the elite consensus that we should bring them into the fold of the liberal order.) The last two administrations have made China the “pacing threat” of our defense strategy. It stands to reason that some of these moves would come.

Ostensibly, national security concerns have trumped business concerns. But much of this is pure domestic politics as well.