Saturday, October 30, 2021

Biden’s New Policy On Trade With China

– Old Wine In Old Bottles

By Daniel Sneider, Lecturer, International Policy at Stanford University and APP member

Toyo Keizai, October 27,2021

After nine months of review, United States Trade Representative Katherine Tai delivered a much-anticipated speech earlier this month, touted as the unveiling of the Biden administration’s “new approach” to trade with China. Instead, to the disappointment of many trade policy experts, including backers of the administration, the senior U.S. official offered no new policies beyond vague statements.
Rather, Tai began with implementing the policies left behind by Donald Trump.

“The speech essentially affirmed the shift of U.S. trade policy on China begun under the Trump administration,” former trade negotiator Clyde Prestowitz told Toyo Keizai.

“It was a bit softer in tone than the Trump administration,” added Prestowitz, a prominent advocate of a tough approach to China, “but certainly not a step back to the ‘positive engagement’ policies of five Presidents. She did not really offer a policy.”

In her speech, Tai focused first on the implementation of the Trump administration’s Phase One agreement with China, a deal centered on Trump’s obsession with the outdated idea that balance of goods trade figures are the only measure of success.

Even though Biden criticized that view, Tai made it clear that the Trump tariffs imposed to enforce that agreement remain in place, with a restart of the process where American firms can seek selective exclusion from those tariffs.

The senior trade policy official expressed the intention to talk to China about its industrial policy favoring the state-controlled firms and its non-market practices, none of which was addressed in the Trump policy. But she offered no concrete path to such negotiations. And while there was a nod to the need to coordinate with allies in Europe (but not Asia), the outlined policy remained anchored in the unilateralism of the previous administration and a similar ‘Buy American’ strategy.

“There was nothing new and we seem to be doubling down on ineffective policies,” commented Brookings Institution expert Mireya Solis. She points to the clear disconnect between being critical of Trump’s approach to China, and then stating that your main initiative is to see through the implementation of the flawed Trumpian agreement.

“My conclusion was that the administration’s policy, at least in the short term, will be enforcement of Trump’s phase one deal,” commented former senior official and trade policy expert William Reinsch, who hosted Tai’s speech at the Center for Strategic and International Studies in Washington, DC. “This is ironic, since the question I am asked the most about the administration’s China policy is how it is different from Trump’s. The answer now appears to be not by much.”

Industrial, not trade, policy

The Biden administration is clearly imprisoned by the deep political divide in the U.S. and focused on passing bills to spur infrastructure and social welfare spending. A tough approach to China remains one of the few issues on which there is some bipartisan agreement and Biden has used the need to compete with China as a primary motivation for his domestic policy agenda.

The Tai speech also conveyed the sense that there has been shift, beginning in the previous administration and continued now, to industrial policy replacing trade policy.

“The question for Biden is not so much what to negotiate with China because it is clear that we are not going to change China’s trade and industrial policies,” says Prestowitz, whose most recent book focused on the struggle with China for global leadership.

“So, the question is what we are going to do about ourselves. The Chips Act hard infrastructure stuff passed by the Senate is a taste of that.”

Working with allies – not so fast

The absence of a global or even a regional trade strategy based on working with allies and partners was particularly disturbing to some observers. In the policy speech, there was only a brief mention of working with European allies in the U.S.-E.U. Trade and Technology Council to combat “non-market practices” but no mention at all of working with Japan, Korea and others on technology security and supply chain management issues.

The emphasis instead was on building domestic industrial competitiveness and defending industries such as steel and solar panels from foreign competitors.

“Mostly, the USTR is talking about continuing with the managed trade approach of the Trump administration, one that that undercuts cohesion with our allies because the purchasing commitments are discriminatory,” comments Solis, who directs the Center for East Asia Policy Studies and Japan Studies at the prestigious Washington thinktank, the Brookings Institution.

The erratic impulsive character of Trump’s Twitter-fueled trade policy is thankfully gone, but the use of tariffs as the main tool remains intact. And this extends to allies. The Biden administration has yet to lift the tariffs on steel and aluminum imports, or questioned the use of Section 232 which imposed those import controls on the grounds that they threatened national security. “Allies are being told two different things --work together on China but things must be produced here,” says Solis.

Meanwhile, opportunities for collaborating with our partners in Asia that could create more effective tools for dealing with China were simply not mentioned in the ‘new’ policy. The most obvious one is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which China has now applied to join.

Trump withdrew from the TPP on his first day in office and a return to the TPP is considered out of the question politically since it faces opposition from both the Democratic and Republican parties. But there are other avenues for multilateral cooperation that are not so politically problematic – the priority should be forming a digital economy partnership agreement that would set market and regulatory standards for the digital economy. A kernel of such a deal has already been formed by New Zealand, Singapore and Chile, now joined by South Korea.

The lack of American leadership is a particular challenge for Japan which has made economic security a priority, aiming to protect critical technologies and diminish the risk of supply chains that are dependent on China.

There is an obvious convergence of interests on this with the U.S., Europe, South Korea and others. But the decision of Japan to move ahead with the CPTPP, hoping that the U.S. would eventually return, offers a precedent for the exercise of independent leadership.

China’s application to join the CPTPP poses a new challenge for Japan. On one hand, the Chinese decision, even it was done for purely cynical reasons to embarrass the U.S., does potentially force China to carry out reforms needed to conform to the tough global standards set by the agreement. The Chinese, however, will likely seek to gain access based on the membership requirements set for Vietnam which allow some exceptions from immediate compliance for its large state-run sector.

If China were allowed to do this, it poses the danger of watering down the CPTPP to the point where it puts no effective pressure on China to open its economy to real competition. Japan and Australia are certain to push back on this but it will be a difficult political battle.

“It will expose how much Japan and other economies are in the front lines, and we are nowhere, we are missing in action,” Brookings expert Solis told Toyo Keizai. “How long can they wait if we don’t signal that we have a pulse.”

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