Is Biden Fighting the Last War on Trade?

Perhaps no issue has divided the Biden administration more than U.S. President Joe Biden’s long-stalled trade agenda. Now, the Trump-era tariffs Biden has kept intact are starting to hurt the U.S. economy and, in the aftermath of Russia’s Ukraine invasion, raise serious questions about what critics call a failure of U.S. leadership worldwide.

This is especially true in the Asia Pacific region, where the administration’s Indo-Pacific economic framework (IPEF)—its putative solution to the perceived vacuum of U.S. leadership on trade—has been delayed again and again since it was announced more than six months ago. Even as Biden temporizes over what to do about tariffs on China, other nations are forging ahead on their own, accelerating the division of the world into geopolitical blocs that may no longer include the United States. This is especially true since 2017, when Biden’s predecessor, Donald Trump, withdrew from Washington’s last major free trade pact, the Trans-Pacific Partnership (TPP), and imposed a raft of tariffs against friendly nations and rivals alike. Facing a populist revolt against free trade, both 2016 Democratic candidate Hillary Clinton as well as Biden backed away from the TTP despite their earlier support for it.

Yet that has come with heavy costs. “By exiting TPP, we created a vacuum. And that vacuum is being filled,” said Wendy Cutler, a career U.S. trade negotiator and a key player in the TTP process. “Other countries are not standing still. I think there was an expectation when we left that it would just fall apart. We were proven wrong. … Those countries wanted to show they could move ahead without us. And they wanted to gain the benefits of trade.”

China is moving steadily into that vacuum. “You can isolate Russia, but you can’t isolate China because for so many countries, it’s their main trading partner,” said Nicolas Lamp, a former dispute settlement lawyer at the World Trade Organization and co-author of the recent book Six Faces of Globalization: Who Wins, Who Loses, and Why It Matters. “The question really is where are these nonaligned countries going to end up—on who’s side? Economically, many would probably have to pick China.”

Some critics say Biden and his team don’t seem to fully comprehend that the trade debate has shifted dramatically, especially in the face of new inflationary pressures. (A tariff is, quite simply, a tax that raises the price of supplies and products, thereby contributing to inflation.) A Gallup survey in March showed a significant shift in sentiment, with 79 percent of Democrats now viewing foreign trade as an opportunity rather than a threat. It found that Americans today are “more positive toward trade than they were at any point from 1992 through 2016.”

Administration officials say the IPEF, which is expected to be rolled out by the end of May, is a partial response to questions about U.S. trade policy. They also contend that this agenda is one U.S. allies, such as Japan and Australia, are signing onto. According to one senior administration official who is involved in its formulation, the framework will constitute a new vision of trade, embracing “broadly shared growth” focused on reducing income inequality through proposed changes in tax law as well as new trade rules for digital and clean energy technology. “It’s a different model in kind from your cookie-cutter FTA [free trade agreement] in the way we’ve been doing for the last 30 years,” the official said, without offering details.

But some experts say U.S. trade partners are expecting the IPEF to be disappointing in terms of what they can gain from it, especially on the tariff issue, and it has taken much too long to formulate since the framework was first announced last October. Reports have indicated, and administration officials confirm, that Biden is also not planning to offer major new U.S. market openings, even to friendly nations—which is still mainly what other countries want.

“They don’t seem to appreciate how little time they have,” said William Reinsch, a former Commerce undersecretary and a China trade expert. “They have two mantras: One is that they’re creating a trade policy for workers and the middle class; and two, there is [U.S. Trade Representative] Katherine Tai’s regular statement, ‘The policy is under review.’ You can get away with that for a while. But the China issues they’re wrestling with now are the same as they were wrestling with eight months ago. The facts now are not a lot different, except for inflation.”

Inflation is now rising at its fastest pace in 40 years, and the U.S. Federal Reserve on Wednesday jacked up its discount rate by half a percentage point—the largest increase in two decades and one that raised fears of recession. All of this is grim news for Biden as the U.S. midterm elections approach this fall: A new CNN poll shows that the president’s economic approval numbers remain low and are still dropping, with 34 percent approving of his performance and 66 percent disapproving, compared with 37 percent approval and 62 percent disapproval previously.

Meanwhile, the Biden administration is engaged in an internal debate over how much tariffs are driving up costs for consumers and producers. Late last month, U.S. Treasury Secretary Janet Yellen said reducing some tariffs—especially a slew of tariffs added by Trump—was “worth considering.” U.S. Commerce Secretary Gina Raimondo has also supported trying to ease tariffs on about $360 billion in Chinese imports annually.

A recent study by the Peterson Institute for International Economics found that “a feasible package of trade liberalization” could reduce the U.S. consumer price index by around 1.3 percentage points or $797 per U.S. household.

But the decision rests with Tai, officials stress, and she has said she doesn’t want to give up her leverage at the negotiating table. Tai said of the Peterson study on Monday that it was “either something between fiction or an interesting academic exercise.” Other Biden officials said the study can’t be considered a serious policy proposal since it posits the elimination of all tariffs and countervailing duties, not just those placed on China imports under Section 301 of the 1974 U.S. Trade Act, which allows the Office of the U.S. Trade Representative to punish a nation deemed in violation of trade norms. (A separate Peterson study showed that, indeed, lowering tariffs on Chinese imports alone would supply only “a small, short-lived dent in overall inflation.”)

Asked to respond to the criticism of Tai’s pace, Adam Hodge, spokesperson for the office of the U.S. Trade Representative (USTR), said “the administration is turning a page in the old playbook” for trade and Tai has already made breakthroughs in other areas such as steel and aluminum tariffs.

The real problem, critics say, is the administration remains somewhat paralyzed over trade largely because the powerful, progressive wing of the Democratic Party still supports tariffs to protect working-class jobs, whereas Republicans on Capitol Hill are vehemently opposed to any softening on China.

“The question remains: What is the point of these tariffs?” said Jennifer Hillman, a Georgetown University law professor who served as USTR general counsel. “The basic point of section 301 is simply to create leverage. The tariffs were not supposed to be imposed for the sake of imposing tariffs. They were intended to get China to correct the underlying problems [of illegal subsidies to its companies and intellectual property theft]. That’s not happening. From the very get-go, the whole process has gotten off the rails.”

“The Chinese told Trump no, they’re just going to tell Biden no, and Biden knows they’re going to tell him no,” Reinsch said.

The senior administration official told Foreign Policy that Biden fully intends to roll back many Trump-era tariffs on China but would not say when. Why has it taken so much time to review them? “You have to start from the mess we inherited,” the official said. “Trump blanketed our economy with tariff lines that run across 11,000 areas, including animal pelts and salad spinners, and we’ve hopefully been plain that for a lot of that stuff, there’s no strategic case for it. And it’s just hurting American consumers and manufacturers. So we are absolutely interested in scrubbing some of those.”

Some government and private studies indicate that Trump-Biden tariffs are hurting the U.S. economy far more than China’s. A paper published last year by Federal Reserve economists estimated that the United States would “experience larger GDP losses from the currently implemented tariff hikes than China,” with U.S. GDP declining by 1.3 percent over the long run and China’s only by 0.7 percent.

Yet there are also larger geopolitical issues at play. One is whether the United States, under Biden’s neo-protectionist agenda, is hurting itself by retreating from globalization—and thus, economic efficiency—faster than other major economies. In particular, the European Union, Canada, Japan, and South Korea continue to push for open trade and are not engaged in U.S.-style tariff battles, which critics characterize as quixotic efforts to bring back lost manufacturing.

Another issue is whether Beijing is exploiting U.S. indecision on trade as well as stark international divisions emerging over Russia to attempt to wean nations from China’s almost 1.5 billion-person economy. After Trump withdrew from the huge 2015 Trans Pacific Partnership trade deal negotiated by his predecessor, Barack Obama, China helped orchestrate the Regional Comprehensive Economic Partnership (RCEP) agreement—a free trade agreement with Australia, Brunei, Cambodia, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. Washington was left out of RCEP, which came into being in January. Beijing is also seeking to join the Washington-less successor to the TTP: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Both pacts are expected to “yield especially large benefits for China, Japan, and South Korea and losses for the United States and India,” the Peterson Institute said in another study.

Even some U.S. allies that are nominally on Washington’s side when it comes to Russian aggression are openly forging relationships with nations on the other side: Canada, for example, is now negotiating a Comprehensive Economic Partnership Agreement with Indonesia, which remains nonaligned and has even invited Russian President Vladimir Putin to the G-20 summit in November.

The TTP was, ironically, designed in large part to do precisely what the Trump tariffs were intended for. The trade pact was intended to pressure China to adhere to trade rules under the World Trade Organization (WTO) and restrain illegal subsidies to state industries as well as halt the theft of intellectual property and force technology transfers from more advanced countries. But despite widespread plaudits for its design—some of which later formed the basis of Trump’s replacement for the North American Free Trade Agreement, the United States-Mexico-Canada Agreement—the Democratic Party’s base opposed it, and Biden has been reluctant to advocate a return to it. Or even mention it.

But without the TTP and with the WTO sliding into something close to irrelevance, many trade experts fear an emerging world of hostile trade blocs and supply chain “de-coupling” that could hand Chinese President Xi Jinping and his partner, Putin, just the sort of divided world order they desire.

“We have got to be worried about what could come,” Hillman said. “You could see these blocs forming in which everyone who didn’t join Russian sanctions decides they want to discriminate against anyone who participates in those sanctions. If you look at who’s applying the [Russia] sanctions, from the Rio Grande on down, it’s no one in Latin America, no one in Southeast Asia, no one in South Asia, no one in the Middle East. And the longer that bifurcation continues is a real concern. Then you’ll start to see fairly entrenched changes in supply chains, in standards.”

Countries such as China are also engaged in the hoarding of food supplies and raw materials. At one point, the World Trade Organization—the only institution preventing discrimination in global trade—was intended to prevent such outcomes. Here, as with so many other trade issues like the TTP, the United States once led the way, helping to orchestrate global trade talks in the 1940s that led to the 1947 General Agreement on Tariffs and Trade and ultimately, in 1996, the formation of the WTO. But with the WTO’s appellate court—its main enforcer—denuded by Trump, the globe no longer has a trade cop in place.

Biden hasn’t completely embraced the Trump trade agenda. The president solved, at least temporarily, the Boeing-Airbus dispute and made deals with the European Union and Japan that will conditionally free them from tariffs on steel and aluminum by setting quotas—in other words, no tariffs as long as trade volumes remain below certain levels. But the administration has resolutely refused to cut traditional trade deals granting increased market access to the United States.

And while the United States’ trade agenda flounders and other nations go their own way, little progress is being made on critical issues, such as food security, fishery subsidies that lead to overfishing and harm carbon capture, and a plan to waive the pharmaceutical industry’s intellectual property rights on COVID-19 vaccines.

“It’s sort of a replay of Obama, I’m afraid,” Reinsch said. “He took about five years to decide he wanted to do something, and by that point, it was too late.” Indeed, by the time Obama sought to gain approval for the TPP toward the end of his tenure, a wholesale backlash against free trade was underway—helping lead to Trump’s 2016 victory over Clinton. Similarly, Biden may now find difficulty in wresting the trade agenda back from China and other countries.

The USTR plans to review the Trump tariffs when they are up for renewal in July, but as of yet, there is little indication of whether Tai will support rolling back some of the $100 billion or so that have little to do with China’s rogue trade behavior and are mainly consumer goods. The senior administration official also argued that China still has a long way to go in gaining entrance into the CPTPP, the successor to the Trans-Pacific Partnership, while the RCEP pact that Beijing joined is “a pretty Swiss cheesy agreement” and not expected to dramatically improve trade for China and other nations in the region.

But the American public may now be ahead of Washington’s politicians in seeking new trade agreements. “Tai is fighting the last war on this stuff,” Reinsch said. “They were all traumatized in 2015 and 2016, but the politics has changed.”