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US-China trade

The missed opportunities in US trade dysfunction


Published 14 May 2024

Biden’s reprisal of his predecessor’s parochialism in US trade policy has allowed Beijing to disingenuously present itself as a champion of free trade. But to counter China’s new round of industrial overcapacity, the US would do well to take selectively from the Chinese playbook, and leverage what China decidedly lacks: a global network of technologically advanced allies.

The perceived political toxicity of trade amongst vital segments of the electorate in the United States means that President Joe Biden has often reprised the parochialism of his predecessor in US trade policy. Key proposed initiatives with Association of Southeast Asian Nations (ASEAN) and the European Union (EU) have mostly floundered.

This hardly makes for fortuitous timing. A new round of Chinese overcapacity threatens the industrial bases and development aspirations of a swathe of established and emerging economies. So far, the US has mostly engaged unilaterally or bilaterally with China.

A truly multilateral response to Chinese overcapacity would help counter specious narratives of China as being the new standard bearer for free trade. As the world’s largest consumer by far, the US continues to play an indispensable enabling role in global trade and prosperity.

Don’t say the T word

The Overton window in US trade policy has long precluded any effusive embrace of free trade. By 2015, shifting sentiments forced erstwhile ardent free trader and then presidential hopeful Hillary Clinton to expediently declare her opposition to the Trans-Pacific Partnership (TPP).

With the EU-US Transatlantic Trade and Investment Partnership (TTIP) also being negotiated at the time, the US could have been the focal point of two gargantuan free trade zones.

With the benefit of hindsight, the Obama Administration put the cart before the horse in neglecting to pay sufficient heed to disaffected, previously solid Democratic constituencies.

Successive administrations failed to effect a socially responsible transition for rust belt communities once home to thriving manufacturing industries. Cultivating and channeling this severe disaffection proved to be a potent political weapon.

Any hope that Biden could revert to an untrammeled embrace of free trade through rejoining the revived TPP (now the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP) proved overoptimistic.

Pledging to be the most pro-union President in US history, Biden could not have won without states like Michigan and Pennsylvania. The political imperative to placate these core constituencies has been one of several tails wagging the dog of US policy.  Another related development has been the increased salience of issues like labor rights, the environment, and digital antitrust concerns.

These policy priorities and the need to revitalize rust belt communities are all legitimate objectives. However, their intrusion into what are ostensibly trade negotiations has at times provided fig leaves for otherwise naked protectionism.

Foreign policy for the middle class

Look no further than the Indo-Pacific Economic Framework for Prosperity (IPEF).

Launched in early 2022, IPEF contains four pillars – trade, supply chains, clean energy technology, and rule of law. Fourteen countries, including all ASEAN nations, India, Japan, and South Korea, participated in negotiations. Though US Trade Representative Katherine Tai assiduously precluded offering greater market access, IPEF has implicitly been understood in Asia as a substitute for US participation in the CPTPP.

In the absence of tangibles like lower tariffs or other traditional incentives, IPEF has inevitably tended towards abstraction. One Indonesian diplomat acerbically compared IPEF to being invited to lunch during Ramadan, “There is not a lot at the table.”1

Official US statements on the three pillars where substantive agreement has been reached – supply chains, energy, and rule of law – generally leave much to desire in the realm of tangible, funded deliverables. “Concrete benefits” are assured, but strikingly for “US workers, consumers and businesses”, rather than IPEF collectively.2

Most deliverables focus on technical assistance and the formation of vaguely defined working groups. Though these initiatives may yet bear fruit, they are a parsimonious substitute for the CPTPP.

Most powerfully demonstrating Washington’s aversion to trade, was its 11th-hour decision to scuttle negotiations on the digital component of IPEF’s trade pillar and, then around a week later, jettisoning of the entire trade pillar itself. The plan had been to achieve substantive agreement on all four pillars as a coda to the hosting of the 2023 Asia-Pacific Economic Cooperation Summit.

As it was, a powerful group of Senators led by Sen. Elizabeth Warren on digital issues, and Sen. Sherrod Brown on trade successfully lobbied Biden to enact a volte-face. Brown, facing a bruising re-election campaign in Ohio, cynically argued that IPEF would harm US jobs because it lacked “enforceable labor standards”.3 How the US was meant to intrude such standards without offering market access à la TPP was unclear.

Warren took the not entirely unreasonable view that digital trade provisions of IPEF could counteract Congress’ anti-trust agenda for Big Tech. Warren’s posture nonetheless stridently undercut years of the US’s ostensible support for the free flow of data across borders.

ASEAN and other participant nations were less than impressed. The 2024 ISEAS-Yusof Ishak Institute regional survey found a marked decrease in the percentage of respondents reporting favorable views of IPEF.4

This is far from the only instance of domestic priorities stymieing the US trade agenda. Despite concerted entreaties from Jakarta, the US looks unlikely to conclude a critical minerals agreement giving Indonesian nickel access to preferential tax credits under the Inflation Reduction Act (IRA).

Senators including maverick Virginia Sen. Joe Manchin have lobbied against the proposed deal on the grounds that Indonesia has lax labor laws, and because of the pollution, carbon intensity and a heavy Chinese footprint on Indonesia’s nickel sector.

These criticisms are somewhat meretricious. The problem for Washington and the IRA, writ large, is that Indonesia is by far the world’s largest producer of low-cost nickel. This fact has not been lost on Ford, which last year took a direct stake in a nickel plant in Sulawesi.

Washington’s recalcitrance means it has passed up an opportunity to proactively shape Indonesia’s nickel sector, including in ways that could have made it less Chinese-dominated and more environmentally and labor-friendly.

A common thread is also visible in US efforts to revive its hollowed-out semiconductor fabrication industry through the CHIPS and Science Act.

Despite Taiwan Semiconductor Manufacturing Company’s (TSMC) founder Morris Chang’s warning that US-made chips could be 50% more expensive than Taiwanese chips, Washington has made subsidies contingent on arguably extraneous pre-conditions. Successful recipients will have to provide detailed childcare plans for employees and share “excess profits” with the US government.5

Construction at TSMC’s flagship Arizona facility is running more than a year behind schedule, not helped by persistent disputes with local unions bridling at efforts to expedite the project by importing skilled workers from Taiwan.

TSMC is having much better luck in Japan, which has conversely pulled out all stops to try and rebuild its semiconductor fabrication industry.

China’s overcapacity hangover

The unfortunate byproduct of the US’s trade neuralgia is that it has allowed China to disingenuously present itself as an unabashed champion of free trade.

China has indeed displayed a growing preference for lower tariffs, including through its stated interest to join the CPTPP. However, this has much more to do with the need to offload mounting overcapacity than any Damascene conversion to market capitalism. With China’s consumption languishing at 40% of US levels, China continues to produce far more than it, or in an increasing number of sectors, the entire global economy, can possibly consume.6

Successive rounds of overwhelmingly supply-side stimulus since 2020 and the imperative to find growth drivers other than property, have culminated in the resurgence of Chinese overcapacity.

Sectors including petrochemicals, steel, electronic equipment, and the “New Three” electric vehicles, batteries, and solar panels - all show overcapacity. President Xi has also re-emphasized the role of lower value-added industries (a categorization he rejects) like textiles in building a “modern industrial system”.7

China’s mercantilist strategy is evidently not only a threat for G7 economies. Countries as diverse as Turkey, Mexico, Chile, Brazil, Vietnam, Indonesia, and India originated a substantial portion of the over 300 defensive trade measures against China across 2023 and 2024.8

An intriguing, interrelated phenomenon is China’s aggressive concurrent reemphasis on attracting foreign investment.

German auto and industrial companies are notably availing themselves of the generous incentives on offer to desperately localize their operations to protect falling market share, and more ominously for German jobs, use China as a global export base.

From Beijing’s perspective, foreign companies with critical expertise and localized supply chains have a role to play in China’s bid to grow ever more dominant in global manufacturing. Just don’t expect these companies to export much to China beyond bottleneck technologies that Chinese companies cannot produce – or goods that foreign companies are wary of making in China.

US global leadership: Missing in action

The US is hardly sitting on its hands.

One way to interpret the IRA is an attempt to insulate the US market from a glut of cheap Chinese batteries, EVs, turbines, and solar panels. Although allied nations have legitimate gripes with the IRA’s onerous local content requirements, the US has emerged as a redoubt for Korean, Japanese, and European battery and auto producers who are otherwise ceding global market share to Chinese rivals.

The most explicit response to overcapacity to date came during Treasury Secretary Janet Yellen’s April visit to China. Yellen warned her Chinese interlocuters that the US would not accept US industry being “decimated”. Yellen mentioned that Washington’s concerns were shared by allies, but her brief was clearly to advance US interests first.9

Beijing was unmoved. It shows every sign of doubling down on its existing approach rather than transferring wealth to consumers as Yellen would like. The People’s Bank of China is currently formulating a new facility to direct even more cheap cash to priority sectors. Relative to gross domestic product, China already spends between three to nine times more than the US and Germany on industrial subsidies.10

If the US is politically unable to pursue conventional free trade agreements, forging a genuinely multilateral approach to Chinese overcapacity should be low-hanging fruit.

Unfortunately, previous US initiatives to form a united front on issues inextricably linked to Chinese overcapacity do not inspire confidence. Under the aegis of the EU-US Trade and Technology Council (TTC), Brussels and Washington attempted to forge deals on green steel and aluminum as well as critical minerals – the latter to facilitate access for EU-produced battery metals under the IRA.

The reasons for the failure of these agreements are all too familiar. The minerals agreement floundered because of intrusive US demands to inspect mines for evidence of labor rights violations. Curiously, labor concerns do not appear to have stopped the US-Japan critical minerals agreements – despite Japanese law currently lacking detailed forced labor protections.

The exact intent of the green steel deal always seemed to be in the eye of the beholder. But, in essence, the idea was to use tariffs or a Carbon Border Adjustment Mechanism-type instrument to protect transatlantic production and incentivize third-party exporters to green their operations. Critics have argued that the deal fell over because the US was far more interested in the former, and more specifically the imperative to protect steel jobs in states like Pennsylvania.11

Recent EU moves on Chinese overcapacity are strongly suggestive of an olive branch aimed squarely at Washington.

Just days after Yellen’s visit, President of the European Commission Ursula Von der Leyden pointedly echoed similar concerns over overcapacity. The comments were a not-so-subtle riposte to German Chancellor Olaf Scholz’s musings on the drawbacks of defensive trade measures ahead of his visit to China.

The most overt call for transatlantic cooperation came during European Commissioner for Competition Margrethe Vestager’s 9th of April speech, fittingly delivered in the US. Announcing probes into Chinese turbine manufacturers’ tenders for contracts in five European countries, Vestager called for a establishing a G7-wide “trustworthiness criteria” which would guide public procurement and government incentives policy. Vestager’s core message was that Brussels and Washington needed to cooperate to ensure that China doesn’t replicate its current dominance of solar panels in wind turbines, EVs, legacy chips, and other critical technologies.12

Learning from China?

To counter Chinese overcapacity, the US would do well to take selectivity from the Chinese playbook. For example, the US could afford to be more flexible – both in achieving a balance between trade and values-based imperatives, and in seeking to accommodate the needs of foreign investors in priority industries like semiconductor manufacturing.

The US could also channel some of China’s Belt and Road Initiative’s financial muscle in better resourcing its own Partnership for Global Infrastructure and Investment to help upgrade the industrial bases of emerging economies. Both the EU and US should ensure that whatever hypothetical G7 initiatives emerge also involve developing economies – lest they be misconstrued as just another ‘rich club’ initiative.

Above all, in responding to Chinese capacity, the US should leverage what China decidedly lacks: its global network of technologically advanced allies.

***
[1] Curran, Interview with Dr Michael Green, Australian Financial Review.
[2] US Department of Commerce, Fact Sheet – Clean Economy Agreement.
[3] Sevastopulo, “Joe Biden halts plan after opposition from Democrats”, Financial Times.
[4] Staff writer, ASEAN countries grow more apprehensive about IPEF, Inside Trade.
[5] Gordon, “TSMC calls some of Biden’s conditions unacceptable”, Fortune.
[6] Hofman, “Diminishing expectations”, Substack.
[7] Zenglein, “The World’s factory strikes back”, Hinrich Foundation & MERICS.
[8] Douglas & Sebastian, “China Shock 2.0 Sparks Global Backlash”, WSJ.
[9] Lawder, US will not accept Chinese imports decimating new industries”, Reuters.
[10] Staff writers, “Foul Play?”, Kiel Institute.
[11] Lincicome, “The System Keeps Working”, Cato Institute.
[12] Vela, “Vestager gets tough on China”, Politico.

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).


Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.

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