Rewiring US trade policy to address new global realities

In a recent speech, U.S. Trade Representative Katherine Tai commented on the “inflection point” of the international trading system, asserting that “we’re done with the status quo…”

For those paying attention, her statement came as no surprise. Ambassador Tai has repeatedly said that the U.S. is reforming its trade policy to make it more “worker-centered,” “equitable” and “inclusive.”

This approach can be understood as a focus on trade as a tool for achieving economic and national security, including in addressing geopolitical competition with China. This new approach to U.S. trade policy is being developed piecemeal, by the Biden administration and Congress, through a mix of laws, regulations and executive orders, in which traditional trade policy is playing merely a supporting role. 

This new trade policy has three main elements.

1) A risk-based approach to international trade: The move from a free trade approach to a risk-based approach marks a foundational shift in U.S. thinking on trade. This has prompted an urgent development of new policies, which includes a greater reliance on export controls and investment restrictions to tightly regulate access to products that the U.S. believes could threaten its national or economy security. For instance, the U.S. has enacted export controls that block access by China to high-end semiconductors used in artificial intelligence (AI) as well as China’s ability to design or manufacture advanced chips. U.S. National Security Advisor Jake Sullivan has identified AI, quantum computing, clean technology and biotechnology as among the key technologies that will affect U.S. security. Many of these technologies are already subject of U.S. export restrictions and foreign investment screening.  

2) A renewed role for industrial policy: Increased support for industrial policy reflects a rethinking of policies that can most effectively strengthen U.S. capacity in sectors considered foundational to national security, competitiveness and supply chain resilience. As the Biden National Security Strategy notes, “the United States is pursuing a modern industrial and innovation strategy.” This year the U.S. passed the Inflation Reduction Act (IRA), which include tax credits for electric vehicles, batteries and advanced manufacturing. Meanwhile, the CHIPS and Science Act provides $52 billion of subsidies for companies investing in semiconductor fabrication in the U.S.

3) Greater cooperation with trusted allies and partners: The U.S. has lessened its support for multilateralism and traditional trade agreements in favor of broad economic engagement with trusted allies and partners. The Indo-Pacific Economic Framework (IPEF), U.S.-EU Trade and Technology Council and the Quadrilateral Security Dialogue (composed of Australia, India, Japan and the U.S.) are examples of these developments. While these forums include topics in traditional trade discussions, they have also expanded to include cooperation on issues such as technology standards, investment controls, supply chains and infrastructure development. 

The shift on U.S. trade policy is a response to two key trends — first, geopolitical competition with China and, second, a changing domestic political landscape with respect to international trade. 

Geopolitical competition has highlighted that it is no longer sustainable to rely on China for inputs critical for national or economic security. China’s growing authoritarianism and coercive economic practices have made the risks of such reliance clear. China’s rapid rise has also reinforced a growing bipartisan political consensus that global trade rules have failed to constrain China’s unfair trade practices, negatively impacting U.S. manufacturing, jobs and wages while threatening its future innovation and competitiveness.

The result is a view that open, nondiscriminatory multilateral trade and trade rules that constrain domestic policy space and options for intervention in the economy are no longer tolerable.

The forces of geopolitical competition and domestic politics will continue to push the U.S. toward ever tighter restrictions on China and more protectionist policies. However, unless the administration develops a more principled and coordinated approach, it risks raising tensions with allies and creating policy incoherence that will undermine its goals.

Recent U.S. policies have sent conflicting messages about its commitment to work with allies and rile the very partners needed to build an effective coalition to counter China. For instance, the IRA electric vehicle tax credits for assembly in North America have provoked South Korea, the European Union and Japan. The recent U.S. unilateral export controls directly affect many U.S. allies and partners whose support will be needed for the export controls to prove effective.

Close coordination among allies is important to avoid governments seeking to out-subsidize each other, which would create inefficiencies, misallocate resources and damage partnerships. As it pursues these policies, the U.S. should seek to be clear that it remains a champion of the international rules-based order, from which it has been a primary beneficiary.  

While trade can support the Biden administration’s security agenda, the U.S. must ensure that it balances security with international cooperation as well as the economic opportunities from expanding trade. The administration should also develop a clear set of principles that can guide and underpin its new approach to trade and avoid unnecessarily antagonizing allies and friends.

Given the rare bipartisan consensus on China, buy-in from Congress is crucial to ensure the sustainability of this new trade policy beyond the transition of administrations.  

Joshua P. Meltzer is a senior fellow in the Global Economy and Development Program at the Brookings Institution.