Biden edging toward trade war truce with China

TOKYO – Joe Biden’s White House is signaling a repeal of tariffs on some Chinese goods, but for multiple reasons, there needs to be a firmer grip and faster action. The US leader said earlier this week that his economic team was still discussing dropping levies on certain Chinese goods.

When Biden took office in January 2021, he had two big economic wins at his immediate disposal. The first was ending Donald Trump’s clumsy and chaotic trade war with the nation that makes the vast majority of goods Americans buy. Though Trump claimed China bore the brunt of his 10%-15% levees on imports, households from Miami to Seattle did as well.

The second was rejoining the Trans-Pacific Partnership (TPP) free trade deal, which Trump exited in one of his first acts as president – leaving Tokyo to take over the pact’s leadership role. Yet Biden failed to pluck either of these low-hanging pieces of fruit.

Rather, he left the tariffs in place for fear of being labeled as soft on China by Republicans. And he kept the US out of TPP to avoid irking progressives and others in his Democratic Party wary of free trade and popular perceptions it exports American jobs overseas.

What Biden’s team did not grasp was that the latter step would’ve taken most of the sting out of the former.

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Trump’s withdrawal from TPP in 2017 made Chinese leader Xi Jinping’s year. The 12-nation grouping initiated during Barack Obama’s 2009-2017 presidency aimed to contain China’s role in Asia. Obama even cajoled Japan’s Shinzo Abe to join, despite intense pushback from the late prime minister’s Liberal Democratic Party.

Washington’s exit – and Biden’s failure to rejoin – created a free trade void that Xi gleefully filled with the Regional Comprehensive Economic Partnership (RCEP), the biggest trade grouping in history.

Fast forward to the present, Biden’s failure to ease or scrap Trump’s China tariffs is exacerbating the inflationary pressures that are already upending his legacy and chances at mid-term elections in November.

But now, as Xi makes his own host of policy errors, not least his adherence to a “zero-Covid” policy that is crippling the Chinese economy, there are finally some encouraging free trade signals coming from Washington.

Better late than never

Biden’s commerce secretary, Gina Raimondo, said over the weekend that the White House will decide “shortly” on reversing taxes on goods that did nothing to alter Beijing’s behavior and everything to boost costs for American households.

There are many metrics for the extent to which Trump’s trade war backfired, not least of which was paving the way for today’s runaway inflation.

One of the more glaring comes from Federal Reserve Bank of New York economist Mary Amiti, who argues Trump’s tariffs erased US$1.7 trillion of market capitalization among nearly 3,000 companies she tracked in 2018 and 2019.

And the damage goes beyond US shores.

In a recent report for the Peterson Institute for International Economics, David Steinberg and Yeling Tan found that US protectionism is turning many mainlanders against free trade.

Trump’s policies, they argue, “produced a consistent decline in public support for international economic cooperation in China, the world’s second-largest trading nation in 2019 and by far the largest among developing economies.”

Similar fallout is being detected as far afield as Latin America.

“This finding is replicated in parallel experiments on technology cooperation, and further validated outside of the China context with a survey experiment in Argentina,” Tan explains.

The research shows, she says, that “responses to US protectionism reflect both a ‘direct reciprocity’ logic – citizens want to retaliate against the United States specifically – and a ‘generalized reciprocity’ logic that reduces support for trade on a broader, systemic basis.”

This, in turn, makes it harder for Xi to make concessions to the US, argues Cornell University economist Jessica Chen Weiss.

Appearing to bow to Washington, she says, would risk a “potentially destabilizing domestic backlash.” Tan adds that “since US protectionism also incentivizes foreign governments to increase their own tariff barriers, the total costs of these measures are likely to be even larger than is often appreciated.”

Biden’s team has so far slow-walked ending the trade war, a reflection of the competing voices and views in his administration.

US Trade Representative Katherine Tai is in league with American labor organizations that want the tariffs to remain, believing they give Washington leverage in talks with Xi’s government.

But Treasury Secretary Janet Yellen has argued cutting Trump’s taxes will help reduce the worst US inflation seen since the early 1980s.

In June, Yellen said that while “I honestly don’t think tariff policy is a panacea with respect to inflation,” reductions “could help to bring down the prices of things that people buy that are burdensome.”

Commerce Secretary Raimondo says that ending duties on household goods “may make sense.” Still, she favors keeping taxes on steel and aluminum products made in China on national security and fairness-to-US-workers grounds.

Some private economists are less optimistic about the inflation benefits of lifting the tariffs. Barclays Bank, for example, thinks any drop in China tariffs will be a “drop in the bucket” for taming US inflation, now rising at an annual rate of 8.6%.

David French, senior vice president at the US National Retail Federation, argues that no one knows how quickly consumers might feel genuine relief.

“Billions of dollars in tariffs have already been paid on a large number of items that are currently working their way through retail supply chains,” French told Bloomberg. “Retroactive tariff relief may have more of an immediate impact on costs for items that have already arrived in the US.”

The hope is that “over the long term,” says Clete Willems, a former top White House trade negotiator, this “will lead to a process that tries to rationalize things more broadly and link them more closely to their supply chain objectives.”

Time for a trade change

Regardless, a change in US strategy would be well-timed.

Rather than seeking to transform China, the Biden administration has until now been content to watch Xi’s government shoot itself in the foot with ham-handed foreign and domestic policies, say economists Sam Bresnick and Nathaniel Sher.

“Xi Jinping is having a bad year,” they argue in a recent analysis for The Diplomat. “Amid intensifying competition with the United States, the Chinese president has pushed through a raft of policies that are damaging China’s economy and driving countries in Asia and around the world to partner with the United States.”

Beijing’s zero-Covid policy, they write, is hurting the Communist Party’s credibility, and Xi’s support for Russia’s invasion of Ukraine is tarnishing China’s international image.

“Although China emerged from the first wave of Covid-19 as the only major economy to avert recession, recent crises in the property sector, aggressive technology regulations, rising energy costs, and lockdowns in major cities have battered the Chinese economy,” Bresnick and Nathaniel Sher argue.

“Business sentiment has hit a wall, and foreign companies are increasingly wary of committing more capital to China. Others are considering leaving for good,” they wrote.

Yet Biden’s dithering is further undermining Washington’s standing in global free trade circles – and for little payoff.

Mark Williams at Capital Economics reckons that tariffs knocked off just over 0.5% of China’s GDP. “Some Chinese firms were able to evade them by re-routing shipments to the US through third countries, mainly in Southeast Asia,” Williams says. “This may have offset as much as half of the drag.”

And the US arbitrary imposition of levies on Washington’s trading partners damaged both America’s reputation and the global trade scene. “Under Trump, the United States really began behaving as something of a rogue state in international trade,” says analyst Ben Horton at Chatham House.

Since then, Biden’s administration has made only glacial progress in raising America’s economic game.

Soon after taking office, Biden pledged to spend big on new research and development to ensure the US tech industry regains momentum – $300 billion for a start. That marked a giant pivot away from the Trump era, which disrupted the global trade system but neglected domestic capacity building.

Trump’s massive $1.8 trillion Covid stimulus package did nothing to incentivize investments in semiconductors, innovation and productivity-enhancing technologies that might be curbing inflation pressures today.

Biden realizes more than Trump that taking on China means building economic muscle at home.

Congress, though, has stymied Biden’s plans to challenge Beijing’s ginormous multi-trillion-dollar campaign to make China the dominant power in 5G, electric vehicles, semiconductors, artificial intelligence and renewable energy.

“The US might know how to make the world’s best bombers and missile systems, but they will not help us here,” says Nobel laureate Joseph Stiglitz, an economist at Columbia University.

Instead, Stiglitz says, “the West must once again make our economic, social and political systems the envy of the world. In the US, that starts with reducing gun violence, improving environmental regulations, combating inequality and racism, and protecting women’s reproductive rights. Until we have proven ourselves worthy to lead, we cannot expect others to march to our drum.”

Stiglitz thinks, too, that “we must offer concrete help to developing and emerging-market countries, starting with a waiver on all Covid-related intellectual property so that they can produce vaccines and treatments for themselves.”

Even before that, the signs are increasing that Biden, 538 days into his presidency, realizes it’s time to end a trade war policy that’s damaging American consumers much more than Xi’s government and policies.

(Courtesy Asia Times, Canada)