Biden must restore US economic leadership in Asia

When Janet Yellen was appointed Treasury secretary one year ago, many observers believed it would signal a major break from President Trump’s international economic policies. They anticipated that the Biden administration would shift from protectionism to a stance that favored freer trade. To the chagrin of many observers, that has not happened.

The need to formulate a coherent international strategy has heightened in the wake of Russia’s invasion of Ukraine. While the U.S. response has been formidable, it has yet to formulate a clear approach for China and allies in Asia.

The key issue is how the U.S. should rethink global trade rules to deal with countries practicing state capitalism or that have become rogue states.

During the 1990s, President Clinton believed Russia and China could be integrated into the global economy and global institutions following the end of the Cold War. He hoped they would accept the obligations as well as the benefits of integration. George W. Bush and Barack Obama also favored the strategy of bringing these countries into the Western orbit through trade integration and access to capital markets.

Thereafter, President Trump shifted U.S. policy in a different direction. He campaigned on reversing decades of outsourcing by U.S. multinationals and the loss of industrial capability and manufacturing jobs. He saw the U.S. as being taken advantage of by its trading partners and invoked tariffs on goods from Europe, North America and Asia, with China eventually becoming the primary target. He also favored bilateral deals over multilateral arrangements.

In her testimony before Congress, Yellen declared that the Biden administration would pursue a robust trade agenda and would “reach out to allies, rebuild bridges and pursue trade agreements that support American prospects and put workers first.” She also indicated that the Biden administration would undertake a comprehensive review of Trump’s trade policies toward China, including the interim trade deal signed in January 2020.

Thus far, Biden deserves credit for reaching out to NATO allies over the past year. It proved fortuitous when Russia struck, as the Western alliance was prepared to implement an unprecedented array of sanctions that have hurt Russia’s economy and financial markets. In light of what has happened, our European partners recognize they must play a greater role in their own defense.

In contrast, the Biden administration’s response to China and our allies in Asia has been surprisingly similar to the prior administration’s policies. In a recent interview, U.S. Trade Representative Katherine Tai claimed the U.S. is done “sitting on its hands” and is preparing a new approach to China trade policy.  Meanwhile, several key issues remain unresolved.

First, it has left tariffs in place on $350 billion of Chinese goods imported into the United States. President Biden has indicated he is uncertain what will happen, because China has fallen far short of its pledge under a Phase 1 trade agreement to purchase an additional $200 billion in U.S. goods and services during 2020-2021. China is on track to purchase only 60 percent of the goods it committed to buy. Until Biden makes clear how he is holding China’s government accountable, it will assume that the U.S. lacks discipline to enforce its agreements.

The problem for many businesses is that uncertainty over trade policy makes it difficult for them to decide where to source production and how to deal with supply chain problems. Instead of free trade, the Biden administration appears to be settling for “managed trade” in which tariffs and quotas are left in place even for U.S. allies. 

According to the New York Times, businesses are lobbying heavily for tariffs to be removed, so they can rely on their factories in China instead of making investments in the United States. Yet, this is precisely why the issue is dicey for the Biden administration.

Finally, others fret that there is a vacuum in global leadership since the U.S. pulled out of the Trans Pacific Partnership (TPP) in 2017. China has been filling the void through a series of regional trade agreements, and it has become the world’s largest trading nation, with two-thirds of the world trading more with China than the U.S. Accordingly, the U.S. must re-establish a leadership role in the Asia-Pacific region by rejoining TPP, especially with China applying to join it.

To be fair, America has a poor track record of dealing with China. An NPR report observes that there is growing recognition that previous tactics with China under both Republican and Democrat presidents have not worked as intended. 

More surprising is that the Biden administration lacks a point person for trade and exchange rate policy issues.

Traditionally, this role has been served by the deputy secretary of the Treasury for International Affairs. The position became prominent during the early 1970s, when Paul Volcker oversaw the transition from a fixed exchange rate system to a flexible exchange rate regime while U.S. inflation soared. Two decades later, Larry Summers worked with Treasury Secretary Robert Rubin to rein in outsized U.S. budget deficits and formulate a strong dollar policy.

In the wake of Russia’s invasion, the Biden administration needs to revamp international policy for a new world in which rogue nations may threaten sovereign states. While this will present formidable challenges, the guiding principles should be clear and enforceable. 

Namely, countries that observe the international code of conduct should be allowed to trade relatively freely with one another and have access to international capital markets. Those that do not should no longer enjoy these benefits.

China poses a more nuanced challenge than Russia, because it is highly integrated into the global economy and has not violated international law.  In 1979, the United States switched diplomatic recognition from Taipei to Beijing, but the Taiwan Relations Act provided the legal basis for the U.S. to assist Taiwan in maintaining its defensive capability while seeking a peaceful resolution of cross-strait differences. One lesson from Russia’s actions is that in its dealings with China, the Biden administration must not waiver in this commitment.

Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business.  He is the author of three books including “Global Shocks: An Investment Guide for Turbulent Markets.”