The Transatlantic Trade Policies Do Not Add Up

A tale of two speeches

Photo by Diego Fernandez on Unsplash

The hard-working staff here at Drezner’s World, back when it was the hard-working staff at Spoiler Alerts, has made no secret of its displeasure with the Biden administration’s trade policy — and the working assumptions behind that policy. I dare say that this policy was at least partly responsible for that inflation that economists and politicians have been banging on about at length.

There is not a lot of difference between Biden and his predecessor when it comes to trade. “Not a lot” is not nothing, however. In the past week U.S. Trade Representative Katherine Tai delivered a speech to the Roosevelt Institute's Progressive Industrial Policy Conference that made some headlines. Tai’s speech was a mix of sweet and sour when it comes to trade openness. My concern is that another speech suggests that Tai’s theory of the trade case, as it were, does not entirely add up.

Let’s start with Tai’s by-now depressingly standard criticisms of past U.S. trade deals:

We’ve been doing FTAs for almost forty years now.  And while some sectors of the economy have benefited, many in this room know that the traditional approach to trade—marked by aggressive liberalization and tariff elimination—also had significant costs:  concentration of wealth.  Fragile supply chains.  De-industrialization, offshoring, and the decimation of manufacturing communities.
 
At the same time, we’ve experienced over two decades of the PRC’s non-transparent, state-directed industrial dominance policies conducted on a massive scale.  Traditional trade tools and the multilateral trading system failed to address these distortions, and markets even rewarded them.  The global impacts of these policies have profoundly limited the ability of workers and industries in open markets and free societies like ours to thrive or even survive.
 
This has led many people to view trade and globalization with increased hostility—and to a lack of confidence in our very institutions.

I would be willing to let most of this go if it was not for the “fragile supply chains” horseshit. It’s an easy talking point, and yet all of the evidence suggests that globalized supply chains are in fact more resilient. Furthermore, efforts to nationalize supply chains often leads to greater shortages and bottlenecks (see: the baby formula shortage of this past summer).

To be fair to Tai, this is not the interesting part of her speech. That comes when Tai acknowledges that the Biden administration’s embrace of industrial policy has made U.S. allies uneasy:

Here’s something I hear from partners abroad as well as from critics at home—that this new focus on industrial policy in economies like ours will result in the global economy devolving into a kind of state of nature—where might makes right.  That the most developed economies are working toward a world where countries only look after themselves.
 
That is not the Biden Administration’s vision.

Hey, that last sentence is news to me — but it’s encouraging news! A Biden administration that recognizes the benefits of greater trade and exchange with key allies and partners is a Biden administration that starts to develop some separation from the Trump administration on trade policy. And given the current security situation around the globe, there is some logic behind trying to make sure that vital value chains are kept within trusted allies.

So it’s unsurprising that Tai said, “the EU Ambassador to the U.S. recently told me that when the U.S. and the EU fight, we make headlines.  But when we work together, we make history.” The rest of the speech was Tai’s listing of moves with European and Asian partners that range from concrete steps to reduce trade tensions (resolving the Boeing-Airbus dispute) to aspirations steps (whatever the hell the Indo-Pacific Economic Framework is).

But now we get to the other speech that is worth noting: EU High Representative Joseph Borrell’s speech to EU Ambassadors. Borrell’s speech contained two themes that suggest some future frictions with Tai’s approach. The first theme, similar to Tai’s, was a renewed fear of weaponized interdependence:

Our prosperity was based on China and Russia – energy and market. Clearly, today, we have to find new ways for energy from inside the European Union, as much as we can, because we should not change one dependency for another. The best energy is the one that you produce at home. That will produce a strong restructuring of our economy – that is for sure….

[One trend] is a competitive world where everything is being weaponised. Everything is a weapon: energy, investments, information, migration flows, data, etc. There is a global fight about access to some strategic domains: cyber, maritime, or outer space. 

Sounds similar to Tai. But the second theme in Borrell’s speech is that the EU has no choice but to be wary of the United States as well:

While the cooperation with the Biden Administration is excellent, and the transatlantic relationship has never been as good as it is today – [including] our cooperation with the United States and my friend Tony [Anthony] Blinken [US Secretary of State]: we are in a fantastic relationship and cooperating a lot; who knows what will happen two years from now, or even in November? What would have happened if, instead of [Joe] Biden, it would have been [Donald] Trump or someone like him in the White House?….

President Macron said that very clearly: we cannot substitute one dependency by another. We are happy that we are importing a lot of Liquefied Natural Gas (LNG) from the United States – at a high price, by the way - and substituting Russian gas by American and Norwegian gas, or Azerbaijani gas – well, from Azerbaijan it’s a small quantity. But what would happen tomorrow if the United States, with a new President, decided not to be so friendly with the Europeans? Why not? You can imagine the situation in which our critical dependency from LNG coming from the United States could also be in crisis.  

Borrell has no authority over trade, but if this speech reflects the European mindset then it represents a challenge to Tai and the rest of the Biden administration. Simply put, if the Biden plan is to reduce economic interdependence with China and Russia, it implies stronger economic linkages with European, Latin American, and Pacific Rim allies. If those allies look at the United States and see an ally they cannot trust, however, then that option will be foreclosed. Or, as Borrell put it, “We are too much Kantians and not enough Hobbesians.”

Borrell also said in his speech, “remember this sentence: ‘it is the identity, stupid’. It is no longer the economy, it is the identity.” We are moving into a world where leaders are explicitly acknowledging that they are prioritizing economic security over economic welfare. I am not sure they realize where that road leads.