Biden’s trade policy: Modern American industrial strategy

Elements have been delivered already, but last week’s speech by the US National Security Advisor (not normally seen as a key economic post) Jake Sullivan tried to pull together a diagnosis of the problem as seen from the White House with a set of recommendations.  The net effect is a speech that should be required reading for everyone in Asia. 

Sullivan outlines four reasons for why past US policies have been a failure: 1) the US industrial base has been hollowed out; 2) geoeconomics was ignored; 3) climate change was dismissed in favor of economic growth; and 4) inequality rose.  

To resolve these issues, the Biden administration is building a new approach.

The first element of a modern industrial strategy is to pick winners by identifying specific sectors that are “foundational to economic growth” and are strategic for national security.  These can be supported by a combination of subsidies, public investment, and protectionist measures.  Semiconductors and critical minerals are explicitly called out. 

However, even the United States does not have the ability to produce everything it might need, or that might be strategic for national security on its own.  This is particularly true for both sectors highlighted by Sullivan.  As Andrew Jory, Minister-Counsellor for Trade at the Australian Embassy in DC noted, it is not possible to “subsidize your way out of geology.” 

Hence the second element of Sullivan’s plan: to work with friends.  He says, “Our message to them has been consistent:  We will unapologetically pursue our industrial strategy at home—but we are unambiguously committed to not leaving our friends behind.  We want them to join us.  In fact, we need them to join us.”

Sullivan’s vision is thus trying to reconcile two potentially incompatible elements at once—to rebuild US strength and power domestically but get friends and allies to buy into that plan.  He goes on to say that “Creating a secure and sustainable economy in the face of the economic and geopolitical realities will require all of our allies and partners to do more.”

Sullivan then approvingly cites recent actions taken by the European Union, Canada, and Japan on clean energy and with Europe, the Republic of Korea, Japan, Taiwan, and India for semiconductors. 

At this point, Sullivan turns directly to the issue of trade policy.  After dismissing all past actions on trade as being entirely concerned with reducing tariffs, he suggests that the Biden team is far more focused on the problems of today.  This includes creating diversified and resilient supply chains, mobilizing investment for sustainable economic growth, and creating good family-supporting jobs.

Then—surprise!—Sullivan says that the Biden team is already busy solving these problems with the Indo-Pacific Economic Framework (IPEF). 

He makes a very bold statement on the benefits of IPEF, saying “Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly— companies and governments together— pivoting to new options for sourcing and sharing data in real-time.”

Talking Trade readers will know that the next IPEF negotiating round takes place in Singapore next week.  Officials are hoping to make substantial progress, particularly on the supply chain pillar led by the US Department of Commerce.  The hope is to provide something to trade ministers meeting at the end of the month in APEC to review and, potentially, endorse. 

We will have to wait and see what unfolds, but it’s highly unlikely, in fact, that IPEF would have avoided the challenges noted by Sullivan at the outset of Covid.  It might have provided a venue for (virtual) discussions of the pandemic, but the odds that IPEF economies would have listed face masks, hand sanitizer or ventilators as critical equipment in 2019 is zero.  Certainly, none of these items would have fit Sullivan’s description of critical products with national security implications (absent recent experiences with a global health pandemic).

There is, readers may be pleased to note, an inserted paragraph in Sullivan’s speech to say that the US still supports the World Trade Organization (WTO).  The US will engage on making sure that the WTO “benefits workers, accommodates legitimate national security interests, and confronts pressing issues.” 

The next steps focus on investment, including changes to multilateral development banks.

Finally, Sullivan turns to the protection of “foundational technologies” with what he calls a “small yard and a high fence.”  They are focused on “a narrow slice of technology and a small number of countries intent on challenging us militarily.”  The size of the yard and height of the fence are topics for another day, as these measures probably vary depending on perspectives like which sector, which technologies, with which partners on which timeframe.

One way to interpret much of Sullivan’s speech is that it attempts to make lemonade out of lemons.  Given that the White House has had little cooperation with Congress, much of the economic agenda outlined by Sullivan will have to be enacted through Executive Orders. 

Having foreign and economic policy driven by this process severely limits the scope of the possible.  For example, while Sullivan rails in the speech about a focus on tariffs in the past, this is also an area of Congressional responsibility.  Unless and until Congress is prepared to address tariffs, the topic cannot be added to any negotiated trade agenda.  Declaring that tariffs are the root of all evil is a handy way of avoiding doing anything about them.

Something similar is likely for a wide range of potential foreign economic topics which require or are enhanced by Congressional support.  Absent endorsement from Congress, it is necessary to come up with a complicated and complex agenda that allows the US to engage on economic issues with potential friends in Asia and elsewhere.  Policy by Executive Action can easily be overturned or dramatically adjusted by future Executives.

Even within topics, the scope of commitments can be constrained by self-imposed negotiating limits on potential American actions.  This includes a lack of funding to support an IPEF or broader trade agenda, unless resources have been allocated elsewhere and can be readily redeployed.

The definition of “America’s friends” is currently rather loose, although Sullivan seems to imply that all members of IPEF, for example, fit the description.  The 13 other parties to IPEF are a very diverse bunch.  While all are discussing potentially innovative approaches for the future, the idea that all are terribly willing and able to “do more” as Sullivan urges is perhaps a stretch.  Certainly, to expect IPEF members to enthusiastically support America’s domestic agenda seems, at best, naïve. 

“Trust us” is not a message that automatically resonates. Sullivan’s speech is an attempt to put more coherence onto the table and encourage both domestic and foreign audiences to support the construction of a modern American industrial strategy for the future.