A Trade Policy for the Middle Class

Author: Orit Frenkel, Executive Director, ALI

Click here for a shorter version of this piece, published in The Hill on 12/21/20.
This is the first in a series of ALI publications on the future of US smart trade policies.

When he takes office in January, President-Elect Biden will inherit the worst set of domestic and global crises since FDR - a global pandemic, a ravaged economy combined with social unrest, deeply frayed global ties, and a cold war with China.

These circumstances necessitate a reexamination of traditionally held views, and an openness to break with well-established policies. This crisis brings the opportunity for new creativity to address our new realities. Four new realities should guide the Administration’s thinking.

Foreign Policy and Trade Begin at Home

Traditional approaches have largely dealt separately with “domestic” issues, such as job security and workforce development, from “international” issues, such as trade, aid, and diplomacy. This is true despite the occasional fig leaf of minimal worker adjustment assistance tacked on to trade agreements to achieve their passage in Congress. Recent elections have shown that the American public is skeptical of trade deals and global engagement, as long as their jobs are insecure and a strong social safety net is lacking. America cannot be globally competitive unless it is strong at home. The pandemic and its devastating job losses have sharpened this reality.

The U.S. must launch a broad “New Deal” for working families that includes investments in workers, infrastructure, training, education and R&D. In addition to strengthening America’s social safety net, a national effort must be launched to prepare workers for jobs that are increasingly automated and digital. This must be accompanied by large infrastructure investments to upgrade America’s badly decaying traditional infrastructure, as well as investing in a national, 5G network, to close the digital divide and ensure that every household has access to fast and secure internet, as well as state-of-the-art devices. Finally, the U.S. government must recommit to upgrade its investment in science and R&D, which has declined from 2.25 percent of GDP in 1962 to 0.6 percent in 2019, to maintain America’s national security and global competitiveness. President-elect Biden’s Build Back Better plan includes $300B for increased R&D, focused on breakthrough technologies, like 5G and AI.

All of this must be implemented in a manner that produces a much more inclusive and sustainable economy. For example, special efforts must be made to ensure that marginalized and underserved communities are strongly represented in training and education programs to support equitable benefits from trade and other policies.

National Security is Expanded and Industrial Policy is Back

National security has traditionally only applied to economic security in very limited circumstances - limiting or restricting trade in defense-related technologies, or the rare occasion when an industry is protected for national security reasons, as President Trump did, by imposing tariffs on imported steel and aluminum. Prior to President Trump, this type of restriction had last been used in 1986.

The pandemic and our new economic realities have expanded our concept of national security. Healthcare is now a key element. America cannot be competitive or safe if we cannot keep our population healthy. This calls for increased onshoring of key medical supplies and pharmaceuticals and ensuring that our supply chains are diversified, resilient, and secure. Beyond healthcare, the definition of national security should be expanded to include key infrastructure purchases. Global supply chains are increasingly complex and it is not realistic or desirable to un-couple our economy from the rest of the world.

Nonetheless, there is an increasing realization that America is weaker without strong manufacturing, particularly for essential products and in the use of advanced manufacturing technologies. America will continue to be dependent on global supply chains, however, a targeted reshoring is called for in the interest of national security. President Biden’s plans include a Buy American component which includes $400B for increased public procurement, largely accomplished by a tightening of existing Buy America provisions. This needs to be done very carefully so as not to exclude domestic products that contain some foreign components.

Maintaining American leadership in critical technologies is a key part of an expanded vision of national security. Bipartisan support is evolving in favor of an industrial policy for a limited number of key technologies. Legislation, like the CHIPS for America Act, introduced by a bipartisan group of Senators, includes a range of federal grants and investment tax credits to incentivize new domestic semiconductor manufacturing. These initiatives are necessary to counter China’s massive investment in semiconductors and aggressive moves to expand its global market share. The new President and Congress should work closely with technology companies, civil society organizations, academics, and other stakeholders to understand which technologies are critical for the U.S. to maintain its leadership in and develop industrial policy programs to incentivize investment in those areas to maintain American innovative edge, manufacturing capability, and leadership.

Trade Deals are Paused and Focus is on Low-Hanging Fruit

Other than the notable exception of USMCA, the Trump Administration has largely kept Congress outside of its trade agenda. He has engaged in a range of unilateral trade actions, like the imposition of tariffs on China and our allies, or smaller arrangements, like the mini-deal with Japan on digital services and agriculture, which he avoided calling a trade deal to eliminate the need for Congressional approval.

Trade Promotion Authority, Congress’ delegation to the President of authority to negotiate trade agreements will expire in July 2021. Congress will likely want to engage in a slow, deliberate, and broad rethink of what a 21st Century trade agreement should include. That, combined with the urgent domestic needs, suggests that the new Administration should wait a period of time before negotiating trade agreements. In the meantime, however, there is a great deal of low hanging fruit to be picked.

The tariffs imposed by President Trump are low hanging fruit that provides President-Elect Biden considerable leverage. The priority will be to roll back tariffs on our allies, which will spur our economy, as well as start to restore frayed alliances. These tariffs could be rolled back as an incentive for allies to join forces in addressing China’s non-market practices. Mending the transatlantic relationship is critical to forming a bulwark against China, and other irritants, like the Boeing-Airbus and digital service tax disputes, need to be resolved. As part of this initiative, the U.S. must work with its allies to reform the WTO, revisiting the dispute settlement system, as well as the rules governing subsidies. Reforming and strengthening the WTO is an important element of strengthening international institutions and a rules-based approach to foreign policy. At the same time, however, plurilateral agreements reached in the WTO are lower ambition, given its large and diverse membership, and the U.S. should simultaneously pursue higher standards agreements outside the WTO.

The tariffs on China provide tremendous leverage to redefine our bilateral relationship. The Administration should first roll back tariffs on critical inputs used in domestic manufacturing. as well as medical equipment and pharmaceuticals. necessary to combat the pandemic. This could serve as a gesture to draw China into discussions on issues of commonality, such as the pandemic or climate policy. Further tariff reductions should be done strategically, over time, as a part of a negotiation with our allies, to reduce China’s use of non-market measures, such as subsidies or production overcapacity.

Finally, strong enforcement of existing trade deals is needed. Strong enforcement, including USMCA’s labor, environmental, and other provisions will be important confidence-building measures when it comes time to negotiate new agreements.

New Priorities - Climate is Critical, Digital is the Future, and Values Matter

Joe Biden and Kamala Harris will have new priorities that cut across both domestic and international policies, and each will have an important role to play in building back better the American economy and moving forward. The President-elect has put climate change at the top of his priority list and is expected to rejoin the Paris Agreement on his first day in office. This emphasis provides opportunities for the U.S. to focus on green technologies and jobs, and the opportunity for collaboration with allies, like the EU, as well as an opportunity for cooperation with China. The Biden Administration’s climate initiative should form the underpinning of new trade agreements, including the elimination of tariff and non-tariff barriers on environmental goods and services, a reduction in carbon emissions, the elimination of fossil fuel subsidies, and agreements on border adjustment for carbon pricing.

Second, the pandemic has driven home that our future is digital. Just as digital access, inclusion, and infrastructure need to be a domestic priority, negotiating digital governance agreements must be an international priority. The U.S. needs to work with like-minded allies to negotiate agreements that allow for the free flow of data, ensure privacy, and promote a vision of the internet that is open, transparent, and democratic. This is especially vital when faced with China’s vision of the internet that promotes censorship, monitoring, and autocracy, which it is advancing across the developing world. This could also be an opportunity to reach out to allies in Asia, many of whom already agreed to high digital standards in TPP.

Finally, American foreign policy should be based on the shared values of democracy, human rights, and the rule-of-law. These values start at home - overcoming systemic racism and other violations of our democratic values must be a priority to reassure a distraught nation that America is committed to fairness and democracy. Such actions will also send a message to the world that America is once again a beacon of democracy. These values should extend to America’s interactions with the world, including taking a sharper stand on China’s human rights violations in Xinjiang and Hong Kong and putting a stronger emphasis on rule-of-law in trade agreements.

The challenges facing President-Elect Biden provide a unique opportunity to re-imagine many traditional policies that are out of step with today’s realities. The new Administration will need to pursue global policies that foster inclusive and sustainable growth at home and support the needs of American workers. This new policy framework will lead to a stronger, more inclusive, and competitive workforce, positioning the U.S. to work with its allies and international institutions to lead on the 21st Century’s most pressing global challenges.