The irony at the heart of Biden’s trade policy

When former House Speaker Tip O’Neill wisely observed that, “All politics is local,” electric vehicles (EVs) were still a futuristic dream of U.S. automakers. But that truism lies at the core of a current rift between the U.S. and its closest European and Asian allies over “America First” policies on EVs, batteries and other renewable technologies.

The Inflation Reduction Act (IRA), a multiyear $369 billion program that subsidizes U.S. EV automakers, EV batteries and other green technologies with “Buy American” provisions, has angered both European and Asian allies. During his state visit earlier this month, French President Emmanuel Macron, amid the celebration of transatlantic friendship, lashed out at U.S. protectionism, which he warned may, “fragment the West.”

There is a delicious irony here, as the basis of the Biden administration’s trade and technologies seeks to forge exclusive arrangements with like-minded democracies. 

The U.S. role as guardian of the open, rules-based order ain’t what it used to be. The IRA subsidizes EVs up to $7500 per vehicle to EVs and batteries made in America and, along with the CHIPS Act, which subsidizes the U.S. semiconductor industry, is part of an “America First’ industrial policy. European and Asian firms such as Volkswagen, Toyota, Honda and Hyundai have spent billions in some 20 auto plants built in the U.S. Along with South Korean firms SK and LG Group, they currently build or plan to build EVs and batteries in the U.S.

All these newly embraced U.S. industrial policies may be necessary and maybe even a good idea. But they are all animated through the prism of competing with China. Yet, however much they share values, allies such as the European Union, South Korea and Japan are also competitors of U.S. firms. Life is complicated.

In response to Macron and others objections, President Biden said at a joint press conference with Macron, “I never intended to exclude folks who are cooperating with us.” But that is the clear intent of the law that Biden signed. Biden suggested that they could “work out the differences” in implementation of the law in a joint task force on the problem.

But a senior EU official walked out of a recent meeting of the transatlantic talks in exasperation. It is highly unlikely that Congress will change the law, though the White House may seek exemptions in implementation rules. But I suspect our allies and partners got the message.

Of course, European outrage notwithstanding, the EU has more than its share of protectionist measures in pursuit of “digital sovereignty” not to mention a spate of regulations aimed at U.S. Big Tech firms. The point here is not that one side is pure, but that the world trade system, which grew 4,300 percent from 1950-2021 and created unprecedented prosperity, is fragmenting. The World Trade Organization (WTO), in need of radical reform, risks becoming irrelevant, in no small measure because its principal champion, the United States, less enthusiastic about expanding market access, has not seized the mantle of leadership.

Exhibit A is the White House National Security Strategy (NSS) released last October. In it there is no reference to the World Trade Organization (WTO) and the multilateral trade system that is a pillar of the “rules-based order” at the center of Biden’s “Democracies vs. Autocracies” foreign policy. The language on trade, touting the U.S. “affirmative agenda” says, “we have to move beyond traditional Free Trade Agreements…”

But the arrangements it cites as examples are “a global minimum tax, and Partnership for Global Investment and Infrastructure.” All worthy goals, but how do they replace free trade agreements? The NSS argues that such non-binding arrangements will set new rules and standards for “technology, cyberspace, and economics.”

But why does the rest of the world continue to actively pursue free trade arrangements (FTAs)? The qualifier “traditional” is a bit of a straw man — many current trade agreements include labor and environment provisions and high digital standards. In fact, recent pre-Biden U.S. agreements such as the U.S.-Mexico-Canada Agreement (USMCA) and the Trans-Pacific Partnership (TPP), which the U.S. negotiated to counter China, and then withdrew from, include labor, environment and digital standards.

The U.S. effort to work with like-minded democracies to fashion a 21st century system of trade and technology rules and standards is smart policy if the goal is to build a coalition to adopt common policies as leverage to set global standards. That was the original goal of the TPP — to forge high standards to pressure China to reform or risk losing markets.

But the trajectory of current policies by the U.S. and other major powers appears to be leading toward a fragmented world of regional blocks and contested standards. China is the world’s largest trader, with $5.8 trillion in total trade in 2021, and is a leading trade partner of the U.S., EU and many Asian countries. Despite sanctions, tariffs and export bans, U.S.-China trade with China was $671 billion in 2021, up from 2020, and is projected to rise for 2022. Markets still matter.

How, exactly, does a trade system excluding China work when China is a major trading partner of the U.S. and its allies? I don’t pretend to have the answer. But the trendlines suggest growing fragmentation, and a deficit of global rules while markets remain global. China’s, party-state capitalism, reversing Deng Xiaoping’s reforms and curbing and controlling the private sector, raise basic questions about doing business with China. I fear this will not end well.      

Robert A. Manning is a distinguished fellow at the Stimson Center. He served as senior counselor to the undersecretary of state for global affairs, a member of the U.S. secretary of state’s policy planning staff and on the National Intelligence Council Strategic Futures Group. Previously, he was director of Asian studies at the Council on Foreign Relations. Follow him on Twitter @Rmanning4.