After becoming President in 2016, Donald Trump abandoned the “positive engagement” trade and investment policies on China that had guided U.S. Presidents since 1982 along with the free trade doctrine that America had embraced since 1948. In response, the U.S. economics and foreign policy establishment exploded, calling these measures not only wrong-headed but economically harmful to America and an invitation to a “new Cold War,” this time with China. Over the next four years, steady publications and television presentations criticized these measures. These critics longed for replacement of the Trump administration at the first possible moment. Now that Biden has accomplished that, the great surprise to the trade and foreign policy establishment is that not much is changing on the China front.
To be sure, Biden is lifting the tariffs levied on imports from allies and is reversing Trump’s contempt for allies with a charm campaign emphasizing their importance to America and the future of the free world. But regarding China, Biden has changed nothing. Indeed, he has extended and intensified the Trump policy by initiating a review of the global supply chains to determine how they might be altered to reduce U.S. dependence on imports of critical goods from China. This action goes hand-in-hand with new plans for support of infrastructure development in developing countries a la China’s Belt and Road program and a reorganization and beefing up of U.S. alliances and military strength in the Indo-Pacific area. In other words, Biden seems to recognize that even though Trump managed to say everything in the wrong way, everything he said wasn’t wrong.
Let’s take his (Trump’s) China policies. Under the guise of “national security,” he imposed tariffs on imports of steel and aluminum not only from China but also from Canada, Mexico, and Europe while negotiating with Beijing to sell specific amounts of specified U.S. goods to reduce the bi-lateral U.S. trade deficit with China. He also tightened restrictions and reviews on Chinese investment into the United States and banned exports to China of certain very high technology goods. Critics said these policies were having the opposite of the intended effect, increasing prices for American consumers, reducing U.S. exports because of Chinese retaliation, alienating U.S. allies, and spurring China to become self-sufficient in U.S. dominated technologies even faster than initially planned. But the argument that the tariffs he imposed raised U.S. consumer prices is not supported by the facts as reflected in actual surveys of consumer prices over the past three years. It may be true that China was spurred to move faster on becoming self-sufficient in high technology, but its Made in China 2025 program had already shown where China intends to go. It is certainly true that China did not significantly increase its imports from the United States. But they were small to begin with, so no great loss was incurred.
There is a bigger truth that has been mostly ignored by the mainstream press. Trump’s measures introduced an element of risk into investing in China. Corporations who would have proceeded unquestioningly to locate their new factories in China have begun to question the wisdom of that and have started to locate in places like Vietnam, India, and Mexico. Indeed, some have relocated to their own home country. The Japanese government has created a several billion-dollar fund to encourage such “reshoring” of production from China. This diversification of supply chains is likely to reduce excessive free world dependence on China while also reducing the large amounts of greenhouse gas emissions that inevitably arise from the air and sea freight movement essential to China centered supply chains.
The biggest revelation from Biden’s adoption and strengthening of the essential elements of Trump’s China policy is that the post-WWII era of U.S. free trade globalization doctrine and policy is over. But, again, the establishment, mainstream media, think tanks, and universities during the Trump administration have ignored it. Free trade doctrine has been defeated by a long delayed but eventual acceptance, at the highest political levels, of the fact that it was based on two false assumptions.
The first was that free trade is always and everywhere a win-win proposition. This has proven false because it was in turn based on a variety of assumptions and circumstances that have proven untrue or outdated. For instance, free trade doctrine assumes fixed exchange rates. When British banker David Ricardo first enunciated the free trade doctrine of comparative advantage in 1817, the UK and much of the world were on a fixed, gold monetary standard. After WWII, the world adopted a dollar standard with all currencies valued at a fixed rate to the dollar while the dollar was valued at a fixed rate to gold. Thus, in 1948 the assumption of fixed exchange rates was realistic. In today’s system of floating exchange rates, however, it is not. Similarly, the assumption of the non-existence of cross border investment was reasonable in 1817 and even in 1948. However, with cross border financial flows far outstripping trade flows today, the assumption is now nonsense. So too are the standard assumptions of full employment, absence of economies of scale, and zero costs attached to closing factories, opening new ones, and changing jobs.
The second false assumption revealed by Biden’s actions so far is that of China inevitably becoming a “Responsible Stakeholder in the Liberal, Rules Based, Global Order.” Under Presidents from Jimmy Carter to Barack Obama, U.S. policy on China was firmly based on the belief that the adoption of market economics by Beijing and China’s incorporation into the global free trade system would not only marketize its economy but liberalize and even democratize its political system. An early sign that this would not be the case was the creation in 1997 by Beijing of the Great Fire Wall aimed at separating the Chinese Internet from the World Wide Web. Over the past ten years, far from liberalizing, the CCP has extended its autocratic reach by imposing constant surveillance of increasing portions of the population, by reducing the presence of foreign journalists and researchers in China, and by establishing party cells with substantial power in every corporation (both private and state owned) in the country.
In his first months in office, Joe Biden has not only acted a lot like Donald Trump but has finally and fully revealed decades of U.S. conventional wisdom on trade and China for what it was—intellectual fairy tales.
Clyde Prestowitz has worked on Asia and globalization for fifty years and has written several bestselling books on these subjects. He was a leader of the first U.S. trade mission to China in 1982 and is a veteran U.S. trade negotiator and presidential advisor.