After almost a year and a half in office, President Biden needs to finalize a China trade policy. This has become an increasingly urgent issue with the intensifying debate about how to handle exclusions to the China tariffs, or indeed whether to keep the tariffs in effect at all.
There have been three waves of China trade policy over the last few administrations and the current one (unfortunately as we should have a consistent China trade policy). The first, ascribed to by the Bush 43 and the Obama administrations, was basically open-trade laissez-faire. As part of the Bush 43 policy, China was allowed to join the World Trade Organization (WTO) in 2001. But many of the promises made by China upon its accession, such as those on financial and telecommunications services, subsidies, transparency, non- market economy practices and market opening, have never come to fruition. China reaped the benefits of the opened US market while giving the back of its hand to WTO rules.
The result was vast increases in the US trade deficit with China and vast losses in manufacturing jobs. President Obama imposed tariffs on imports of certain China-made tires early in his administration. But after he was heavily criticized by the free-trade community, he retreated from pursuing an activist China trade policy.
The Trump administration adopted a different course, clearly pulling the curtain back on China’s unfair trade activities, and self-initiating major trade cases under Section 301 of the US trade laws on intellectual property theft and under Section 232 on steel and aluminum import threats to national security.
Now it seems like President Biden and his team sit at a crossroads, unsure what path to take. Certainly, it shouldn’t be underestimated what the war in Ukraine or inflation can do to trade policy. But as we deal with China on Ukraine, failure to have a solid trade position would seem to indicate disarray or even weakness, which will not help in our discussions.
On inflation, many commentators, including the very pro-trade Peterson Institute, have noted an absence of significant correlation between the China tariffs and inflation. In any case, regardless of these developments in other areas, America cannot just sit idly by in a diminished trade environment with respect to China. It is clearly time for President Biden to fully articulate and implement a China trade policy. We need actions and deliverables. What would I like to see?
First, we should call out China for its vast arrays of industrial subsidies that continue to undercut US manufacturing, identifying them specifically and taking action against them. China has said it is willing to address industrial subsidies in its negotiation to join CPTPP (The Comprehensive and Progressive Agreement for Trans-Pacific Partnership).
Well, let’s not wait to see whether that ever happens; we need to address those now. We need to reform unfair trade strike forces across the Cabinet agencies to implement this, and we need to work hand in glove with our allies. We should be pursuing trade cases and devising solutions.
With respect to the Chinese tariffs, there is one key reason they should stay in effect and that any exclusions should be very limited. This is because we need to promote reshoring, near-shoring and ally-shoring of the supply chains supplying America.
Unless you have worked closely with hundreds of American manufacturers, as I have while inside and out of government, you don’t realize one of the great positive impacts of these tariffs. They have put within every American manufacturer’s thinking and planning the clear need to “buy American” or at least develop a source nearby, perhaps in a USMCA or CAFTA-DR country, or in an allied country in Europe or Asia.
These tariffs have been in effect for years, and this process is well underway. To lift the tariffs now puts us back at ground zero, to start all over again (maybe) in the future. Manufacturers (and retailers) must know that the free pass with China is over. Unless a different trade policy that achieves these goals can be put into effect, the tariffs need to remain.
We also need to begin rigorous monitoring and probably controlling capital and investment flows to China. The idea of a reverse-CFIUS on US private and government spending in China is a very good one, as shown by the recent Pentagon study finding that certain Small Business Administration innovation programs were benefiting Chinese companies and the Chinese government.
We must limit exports from the US and our allies of defense-critical technology to China. If we properly control these exports, it is probably still possible to prevent the trade-illegal build-up of the Chinese semiconductor industry, financed by hundreds of billions of dollars of Chinese-government funding, from overtaking the US industry.
But this will not be possible forever. We also must limit major US companies, such as Tesla and Apple, from moving plants to China. It is beyond naïve to think that when the workforce in these plants goes home at night the trade secrets don’t go with them.
We have to continue doing something that President Biden is already doing well: investing government money in the industrial base. The infrastructure bill, with its spending of $1 trillion on US infrastructure, means hundreds of billions of dollars for purchasing US-manufactured inputs. We also must make sure the USICA/COMPETES bill, including the CHIPS Act, are passed quickly.
Finally, we need to enforce all our trade agreements with China, including the Phase One agreement.
How does the lack of a finalized China trade policy or the lifting of the China tariffs help develop a worker-based or climate-based or diversity-centered trade policy, all general objectives put forth by the Biden administration? Quite simply it does not, and we need to take action now.
Gilbert B. Kaplan is chairman of the advisory board of the Manufacturing Policy Initiative at Indiana University and a senior advisor at Center for Strategic and International Studies. He was formerly under-secretary for international trade at the US Department of Commerce.