In everything from climate change to the courts to foreign policy, the Trump and Biden presidencies could not be less alike. But when it comes to foreign trade and protectionism, there’s more continuity than difference.
Former President Donald Trump was the most pro-tariff president in decades, particularly targeting China. Instead of pushing back, President Joe Biden has preserved most of the Trump tariff regime. The Inflation Reduction Act, Biden’s signature climate bill, extensively favors US industry in a way that has provoked mass outrage from foreign governments, including close allies; an Indian government official called it “the most protectionist act ever drafted in the world,” and a South Korean official called it a “betrayal.”
Biden seems to be joining Trump in turning America inward, at least economically, and undermining the open trade regime that their predecessors from both parties worked for decades to build.
In making sense of this strange continuity, the first person I called was Kimberly Clausing. A professor at UCLA Law School, Clausing was formerly deputy assistant secretary of the treasury for tax analysis in the Biden administration, making her the lead economist for tax issues in the Treasury department. Before her time in the White House, she also wrote an excellent book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital, in 2019, which pushed back both on Trump’s isolationist tendencies and on hostility to trade, immigration, and capital flows from progressives.
Clausing is immensely proud of many Biden administration accomplishments, and obviously believes him infinitely better than his predecessor overall. She worked on Treasury Secretary Janet Yellen’s effort to win an international agreement to tax multinational corporations at a minimum rate of 15 percent, which 19 countries plus the EU have taken steps toward adopting, even if the US hasn’t. “This reduces the pressures of tax competition by creating a higher floor on tax rates worldwide, whereas the floor used to be literally zero,” Clausing says. “It makes it a lot easier for a country like France or Japan or the United States to go above a 15 percent rate on corporations if they want to.”
She’s enthusiastic about the Inflation Reduction Act’s potential to combat global warming, and about many aspects of the CHIPS and Science Act and the Infrastructure Investment and Jobs Act (“infrastructure is some of the best money a government can spend,” she says).
But she’s concerned about some of the administration’s posture toward international trade, and its insistence on moving production to the US, even at the expense of both friendly trading partners like the EU and Canada and global efforts to rapidly reduce carbon emissions. “It’s kind of a fool’s errand to think that you’re going to get a lot of manufacturing jobs out of all this CHIPS money and all this steel protection,” she says.
There’s the rub — the Biden approach to industrial policy might not just undermine other commitments, but fail on its own terms to bring huge numbers of jobs building things like solar panels and semiconductors back to the US.
Our conversation, edited for length and clarity, follows.
Among the most obvious protectionist measures undertaken by Biden are the “made in America” rules that have dominated implementation of the infrastructure bill and key climate provisions, like tax credits for electric cars. That means that most of the electric cars on the market aren’t eligible for credits.
This strikes me as not just a problem for meeting our climate goals but a pretty brazen return to protectionism of the kind you condemn at length in your book.
I am deeply disappointed by the inclusion of these national content provisions in the green subsidies for at least two reasons. One reason is that it makes the entire transition project less efficient. While we might hope that all the things that we want can be achieved with one policy tool, often when you load up policy tools with multiple objectives, you make it more difficult to achieve the goals you most wanted.
For example, if we say you can only have this tax credit if it’s also made in America, and it has certain labor requirements, etc., that makes it harder to achieve the underlying environmental goal.
The second reason it’s problematic is that we’ve had a long tradition going back decades of discouraging national content provisions like these. And the WTO [World Trade Organization] has clear rules on this that we argued for, because we knew that when other countries did this too, it would affect the ability of our firms to sell in their markets. We hadn’t enthusiastically stepped over that line until these credits.
Now the administration’s attitude appears to ask, “What line?” They don’t even use the word “WTO” or acknowledge that this is a problem. When you’ve got an institution like the WTO that’s built around solving a global collective action problem, and then you pretend that it doesn’t apply to you, it would be better if you could think a few steps ahead, and imagine, what happens when the global collective action unravels?
What if everybody else decides to do that too? What if Canada and Germany and Japan decide, “You know what, we’re going to have our own national content requirements?” Fortunately, I don’t think many of our trading partners are going to do it that way, because they realize it’s an inefficient way to meet climate goals.
Climate change is arguably the world’s most important externality. Ideally we’d want to deal with it in a cost-effective way. But that doesn’t seem to be in front of mind on some of these issues.
A counterargument might be that a subsidy competition on particular things in the green transition could be positive. We all suffer from extreme global warming. Yes, this might set off a subsidy race with South Korea, EU, Japan, but that just accelerates the green transition. What’s wrong with that narrative?
Part of that narrative is correct. If we all throw money at our green industries — let’s ignore the national content part, let’s just focus on the fact that we’re subsidizing — if we all do that, then those industries get bigger. The bigger they get worldwide, the better, right? Because there are scale effects, there’s innovation, there’s learning. Take, say, green hydrogen or carbon capture. These are technologies that aren’t quite economically feasible now, but if you invest enough, they might be.
Where it gets a little trickier is that in the short run, there are some zero-sum elements here. If you want to expand the supply of critical minerals, you need more mines. Mines take years to develop. There’s going to be some short-run scarcity regarding key companies, key expertise, and key inputs. If the rich countries of the world are cornering those resources, that makes it harder for India or countries in Africa to do their transitions. If one country has the lock on the expertise or the inputs, it may actually set back others in the short run, even though those clean energy industries are expanding over time in a useful way.
It’s easy for the US government to say, in a somewhat self-serving way, “everybody should just subsidize.” But not everybody can afford to, poor countries especially. If you add up US and EU emissions combined, [it’s] less than a quarter of the entire world’s emissions. If you’re making it harder on the Global South to transition away from fossil fuels, that’s not necessarily helping with the vast majority of world emissions.
A subsidy approach also makes it a little harder for a country like, say, Canada, to price carbon. Because they rely on a carbon price and the US subsidizes, the result may give US firms a large advantage relative to the Canadian counterparts. So if you’re Canada, why should you price carbon anymore? I worry that US policy choices might unravel these effective policies abroad.
I wonder if the Buy America stuff will even work on its own terms. One thing your book is clear about is that the decline in manufacturing jobs in the US owes a lot more to automation than it does to trade competition. Is this going to work as a means of stimulating manufacturing jobs here, even if that was the right goal for the administration to pursue? Maybe we do bring manufacturing back, but we don’t bring jobs because it’s a highly automated industry now.
That’s more likely than not, right? What can we control? We can’t control technological innovation and we can’t control the myriad actions of thousands of companies who are working on their bottom line. We’re not a command and control economy, and thank goodness for that.
But we can control elements of the policy environment. Do we have a good education system? Do we have an open immigration policy? Are we collecting enough tax from people in the top part of the income distribution? Are we collecting enough tax from people in the middle of the income distribution? Do we have a strong enough social safety net? All of those things we can control, and those would probably do more to bring society together than focusing on industrial policy to target elusive manufacturing jobs.
Focusing on this manufacturing and jobs question, it’s kind of a fool’s errand to think that you’re going to get a lot of manufacturing jobs out of all this CHIPS money and all this steel protection. Your fiscal costs per job could reach something like a million dollars, right? There are much better ways to improve people’s lives that are less expensive that we should really be focusing on instead.
We’ve been talking a lot about friendly partners like the EU, Canada, South Korea. The trade war with China seems like it’s really ramped up kind of dramatically. I would have expected a lot more of a divergence from what Trump did, and it seems like there’s a lot of continuity between the Trump and Biden approaches to China instead.
The Trump administration cast a long shadow in a couple of ways. If you look at the government of China and their attitude towards the United States, it clearly got worse during those years and hasn’t recovered at all.
But also, if you look at some of the US government’s recent policy choices and statements, it could be interpreted as if their goal is to suppress economic development in China.
When Trump’s steel tariffs were challenged by the WTO for not fulfilling the national security criteria under which they were levied, USTR [the US Trade Representative’s office] said, effectively, we don’t care about your views on our national security interests. The administration was making an argument that steel writ large is a national security thing. Nobody thinks that’s actually true. But some of these policy actions could provide fodder for the hardline Chinese view that we’re trying to suppress their development, and the policy link between these tariffs and US policy goals has always been rather weak.
Other US policy statements, such as those from Secretary Yellen, for example, do a better job of separating national security goals from the broader economic case for engagement, trade, and policy coordination on matters like climate. At the same time, the Chinese state hasn’t helped matters because it’s often taken a much more hardline approach. They’ve threatened countries and firms with large repercussions if they do anything even slightly against the Chinese state’s view of things. Australia was targeted by such retaliatory trade actions in recent years. So I don’t think China is at all blameless.
So we’re in a bad equilibrium, and that does worry me a lot. But, the US government is leaving some important tools by the wayside. A great response to concerns about China would be to rejoin the Trans-Pacific Partnership [an Obama-era free trade pact of non-China Pacific nations that Trump withdrew from, now called CPTPP]. That was a brilliant foreign policy move; it provided real benefits to partner countries and deepened economic relationships in a way that should both improve economic resilience and achieve foreign policy objectives.
It is such an own-goal to negotiate this great policy response, and then simply step aside and have other countries do it without us. (Indeed, that great Pacific power, the UK, just joined!) What if China joins eventually? Then we’ve created this great market access tool and a harmonized region that is serving someone else’s economic interests, not ours.