‘Levelling the playing field’ with China, and a focus on domestic economic priorities, will remain key principles of US trade policy, no matter who is in the White House.
With the US and global economy severely shocked by the COVID-19 pandemic, the economic outlook will undoubtedly influence the choices facing the US in the months and years ahead. Irrespective of the outcome of November’s presidential election, many of the economic challenges will be the same, and how the US responds, as the world’s largest economy, will matter for everyone.
Trade was a key tool of the US’s global economic and foreign policy engagement even before Donald Trump made it a signature issue of his presidency. And in light of the growing securitization of both economic and tech policy, trade will continue to drive the US’s geo-economic agenda. But whether Washington’s approach will be more unilateral or multilateral, more inward-looking or focused on global leadership, or more belligerent or cooperative, hangs in the balance with the 2020 election.
What principles guide US trade policy?
Under the Trump administration, tensions between the US and China over trade and technology, trade frictions with some of the US’s closest allies (including the EU), the negotiation of a successor to the North American Free Trade Agreement (NAFTA), and the president’s vocal criticism of the World Trade Organization (WTO) have cemented trade as a key issue.
What have been the driving principles? And will these continue to guide US trade policy for the next four years and beyond? Although some elements of Trump’s stance on trade are unique to his administration, others have the potential to become lasting aspects of US trade policy over the coming years.
Trump’s focus on the US trade balance has guided the administration to target chiefly those countries with which the US runs the largest trade-in-goods deficits: China, the EU and Mexico. The misplaced emphasis on shrinking the US’s bilateral trade deficits is a Trump-specific driver, and will not be an enduring feature of US trade policy in the longer term. Although concerns over large and persistent global trade imbalances may be warranted, protectionist policies are unlikely to address them.
The present ‘zero-sum’ and transactional approach to trade will come to an end with the Trump administration, be this in January 2021 or 2025. But a focus on ‘fair trade’ and ‘levelling the playing field’ will continue to be key principles guiding US trade policy, regardless of who is in the White House.
President Trump has reinforced – albeit more through rhetoric than beneficial action – the nexus between trade policy and national security, and the link between trade and jobs. Structural drivers both at home and internationally mean that future administrations will also use trade policy measures to pursue the goals of strengthening national security and supporting US economic growth.
In particular, China’s mercantilist trade policies and practices, combined with the severity of the economic disruption caused by the coronavirus pandemic, have intensified the rethinking of globalization. In the context of the fragile US economic recovery, a Trump administration will likely step up efforts to reshore supply chains. As Democratic challenger, Joe Biden has pointed to an approach to supply chains and economic recovery that, not unlike Trump’s playbook, emphasizes domestic production and ‘Buy American’ plans. Thus, protectionist trends will not disappear. In contrast to Trump, however, Biden’s supply-chain strategy would focus on working with allies.
On the domestic front, the bipartisan consensus that underpinned broad support for globalization and open trade broke down before Trump was elected president. Paradoxically, even though Americans’ broad view of international trade is increasingly positive, free trade has become politically ‘homeless’ in the US. It is notable that while Democratic voters are gradually viewing trade more favourably, the party in Congress – which has traditionally been more protectionist than the Republican Party – does not reflect this shift. A radical departure from the prevalent anti-trade sentiment in Congress cannot be expected any time soon.
Biden has not set out a standalone plan for US trade policy. Instead, his current (and likely future) approach sees trade policy integrated into a broader foreign policy and domestic agenda. He has said that ‘every decision about trade must be to build the American middle class’. As president, he would not enter into any new trade agreements until there is sufficient investment at home to enable US workers and businesses to compete globally. Dealing with the long-term public health and economic crisis stemming from the pandemic will also demand significant political capital. In short, much as when Barack Obama entered office in 2009 and focused on bringing the US out of the deep economic recession following the global financial crisis, trade negotiations would not be a priority at the outset of a Biden administration.
Under a Biden administration, many of the concerns raised by the Trump administration will remain, but the rhetoric and the methods employed in addressing them would change. Greater emphasis is likely on working with partners and developing a joint framework on issues of shared concern such as China.
When the time is ripe to launch major trade initiatives, Democrats can be expected to put emphasis on labour standards and the environment. However, a paradigm shift to a progressive trade agenda early in a Biden administration is unlikely, given divisions within the Democratic Party itself and between the two parties. In the event that the Democrats control both houses of Congress, there could be a way forward at the right moment.
The key difference between a Trump and a Biden administration will be in the approach. Under a second term for President Trump, there will likely be a doubling down on an ‘America First’ trade policy approach, focusing on tariffs and the repatriation of supply chains – especially in light of the increasing tensions with China and the long-term economic effects of the pandemic. Under Biden, many of the concerns raised by the Trump administration will remain, but the rhetoric and the methods employed in addressing them would change. Greater emphasis is likely on working with partners and developing a joint framework on issues of shared concern such as China, and on a less antagonistic approach than seen under the present administration to managing areas of policy divergence among allies.
Key trade policy issues
The China challenge
The number-one challenge for US trade policy will be confronting China’s trade and tech policies and practices – including forced technology transfer, intellectual property (IP) theft, industrial subsidies, and the role of state-owned enterprises – and at the same time dealing with China’s security crackdown in Hong Kong and its human rights abuses in Xinjiang.
While there is a bipartisan consensus on the diagnosis of these critical concerns, there is disagreement over the remedy. Biden has opposed Trump’s unilateral course of action and recourse to tariffs to address China’s trade practices. Researchers, including at the New York Fed, have found that Trump’s tariffs have meant higher prices for US importers. If re-elected, it will be tempting for Trump to launch yet another round of tariffs to increase pressure on China, but this would undermine the fragile economic recovery at home.
Already, the US–China phase-one trade deal from January 2020 is on shaky ground, as China has fallen behind on its purchasing obligations. The agreement did not address many structural issues, such as China’s industrial subsidies and state-owned enterprises, which were meant to be dealt with during a second phase of negotiations. A phase-two deal under Trump is now increasingly unlikely, given the further deterioration in the US–China relationship.
Moreover, a deal with China will only be as good as its implementation. The effectiveness of the phase-one deal’s enforcement mechanism remains to be seen. As president, Biden would also seek to hold China accountable through the enforcement of trade rules, although his approach would likely put less emphasis on unilateral action compared with the Trump administration.
The nexus of trade, technology and national security will continue to be a key issue for any administration. US sanctions on Huawei, for instance, are unlikely to be eased. Efforts to cut the Chinese government and its firms off from US technology are set to increase – not only on national security grounds, but increasingly also in response to Beijing’s efforts to undermine Hong Kong’s autonomy, and human rights violations in Xinjiang. Under a Biden administration, issues of human rights and labour rights, along with digital surveillance and privacy protection, could become elevated points of tension between the US and China. Because it is unlikely that China is willing to address these issues in a meaningful way, the US will probably have to accept limited progress on human rights if it wants concessions on trade.
Linked to US security concerns over China’s dominance in high-tech sectors is the increased scrutiny of foreign direct investment (FDI). In 2018 President Trump signed into law new rules that expanded the US government’s authority to review the national security implications of FDI in the US. While the rules apply to any foreign investment, they were taken with a view to China. A further tightening of investment screening can be anticipated under either Trump or Biden.
The US stands a better chance of success in confronting what it perceives as China’s unfair trade and tech practices by liaising more closely with key allies. The US, the EU and Japan are China’s most important trading partners, and the three together account for approximately a third of China’s trade in goods. Joint efforts could generate more leverage in persuading China to act, in the interests of preserving its trading ties with the major industrial economies that are critical to its own economic growth and access to technology.
There have been some efforts under the Trump administration to work with the EU and Japan to tackle distortions from non-market economies. But if Trump remains in the White House for the next four years, possible greater friction with the US’s long-time allies could undermine further joint work on China. If Biden wins in November, his administration has the opportunity to build on the trilateral initiative.
The US stands a better chance of success in confronting what it perceives as China’s unfair trade and tech practices by liaising more closely with key allies.
A robust action plan for US collaboration with allies could involve widening participation in talks on countering trade-distortive practices to include the UK, Australia and Canada, among others, alongside the US, the EU and Japan. Under a Biden administration, the US and a coalition of like-minded allies could bring a comprehensive and bold case against China at the WTO. Developing a transatlantic consortium involving Huawei’s key competitors – notably Nokia and Ericsson – could help reduce the exposure of 5G infrastructure to Chinese tech firms on both sides of the Atlantic. Foreign investment screening is another area in which closer international collaboration could readily be fostered. In particular, closer cooperation between the EU, the US and its fellow members of the Five Eyes intelligence alliance (Australia, Canada, the UK and New Zealand) could strengthen the effectiveness of the various FDI screening mechanisms by supporting information exchange and coordination on cross-border transactions that raise common national security issues.
Such joint – and potentially mutually beneficial – efforts still raise the question of what the US under a Biden administration would be asking of its partners, and in what form the EU and other allies may be willing to confront China more vigorously and risk their commercial ties. Perhaps the US will ask the EU to strengthen its export controls regime and limit the sale of emerging technologies to China. The US could also demand that there is increased scrutiny of the transparency and accountability of Chinese companies listed on stock exchanges in Europe and Asia.
Overall, a second-term Trump administration can be expected to double down on efforts to sever the US’s economic ties with China, while a Biden administration would more likely look to manage the relationship to reduce dependence in critical products such as medical supplies or semiconductors. In any case – and with the impact of the COVID-19 pandemic having amplified existing calls for national self-sufficiency – at least a partial decoupling in strategic sectors seems inevitable.
Reform of the multilateral trade system and the WTO
The Trump administration has questioned the value of the WTO, and wants a reset of the organization. It has blocked appointments of new members to the WTO Appellate Body, which resulted in its paralysis in December 2019. Despite various reform efforts under way, a second Trump administration will in all likelihood remain uncompromising, perpetuating the Appellate Body gridlock. In the absence of a resolution, more countries will join the interim appeals mechanism set up by the EU and other WTO members. At the same time, the Trump administration can be expected to continue its engagement on other reform issues: the US has been active in discussions regarding an agreement on fisheries subsidies, in e-commerce negotiations, and in identifying new approaches concerning special and differential treatment for developing countries.
Should the US take forward the reform of the WTO Appellate Body under a Biden administration, it would fare better by putting forward a specific reform proposal – instead of simply reiterating current grievances. Even then, the dispute settlement crisis will not easily be resolved, as many of the US’s concerns regarding the Appellate Body predate the Trump administration and are shared by many other countries (even if they disapprove of Trump’s tactics). Moreover, unless the underlying trade tensions between the US and China – and also between the US and its allies (notably the EU) – are addressed, it is hard to see how there can be any meaningful WTO reform. Thus, while a Biden presidency would certainly mean a return to more collaborative US engagement and leadership in the global trade system, reform of the WTO is not guaranteed.
The coronavirus pandemic has added further complexity to an already packed WTO reform agenda. The wide use of domestic subsidies to fight the severe economic blow dealt by COVID-19 raises the prospect of a wave of disputes at the WTO, as many countries consider these measures to be ‘trade distorting’. This could, in particular, end up as a transatlantic minefield. Moreover, US subsidies or tax incentives – for instance to the semiconductor industry – could leave Washington open to accusations of double standards when it comes to disciplining Beijing’s practices.
Other trade negotiations
Immediately on taking office as president in 2017, Donald Trump followed through on his campaign pledge to withdraw the US from the Trans-Pacific Partnership (TPP), a centrepiece of the Obama administration’s trade policy. As vice-president, Joe Biden supported the deal. He still regards it as an important counterweight to China’s economic influence, but he would (and could) not take the US straight into what has since entered into force among the remaining 11 signatories as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Instead, Biden can be expected to seek to renegotiate the terms of the agreement in a way that addresses domestic opposition across the political spectrum and across US labour and environmental groups. More than 20 TPP provisions have been suspended in the CPTPP, including rules on intellectual property that the US had pushed for in the original agreement. Many CPTPP countries would in principle welcome the US back with open arms, but the Biden administration would be unwise to expect substantial concessions to its interests.
President Trump also fulfilled his campaign promise to renegotiate NAFTA. Biden has supported what has become the United States–Mexico–Canada Agreement (USMCA), as it leaves most of the original NAFTA provisions intact and also draws on the TPP. However, either administration will likely encounter implementation issues, and this could pose some challenges for the US’s trade relationship with Canada and Mexico.
With the phase-one US–China deal, the USMCA and two initial US–Japan trade agreements nominally under its belt, a second Trump administration would likely focus more on trade relations with Europe. Negotiations are already under way for US trade arrangements with the EU and with the UK. Along with the traditional sticking points related to market access, and food and health concerns, bilateral trade tensions (for instance related to the long-standing Boeing–Airbus dispute or the US’s imposition of steel and aluminum tariffs in the name of national security) will continue to stall progress. The issue of digital services taxes will likely become an even greater source of tensions in the period ahead. Moreover, if the EU goes ahead with plans for a carbon border tax, this would become a flashpoint in transatlantic trade relations under Trump.
In contrast, a Biden administration may be expected to engage in a way that ought to make the transatlantic trade relationship less fraught and more stable – for example by rolling back his predecessor’s tariffs on steel and aluminum, and removing the tariff threat on automobiles and parts. Nonetheless, reviving negotiations with the EU along the lines of the Transatlantic Trade and Investment Partnership (TTIP) is unlikely, as those talks were already in trouble before Trump entered the White House. Biden could instead pick up the negotiations started by the current administration with the EU, and make progress before the current Trade Promotion Authority (TPA) expires in July 2021 and needs to be renewed.
For a Biden administration, repairing the transatlantic trade relationship, and working with the EU and the UK to fix the multilateral trade system, will require careful management of areas of divergence between the US and Europe. For example, transatlantic differences over digital services taxes need to be isolated from other areas where there is scope for greater progress. This could be achieved more easily if the US recommits to negotiations regarding digital taxation under the auspices of the Organisation for Economic Co-operation and Development (OECD).
The bottom line
The key challenges facing the US with regard to trade – chief among them how best to deal with an assertive China, reform of the WTO, and strengthening supply-chain resilience for the post-pandemic era – will be the same no matter who occupies the White House next year. Despite significant presidential powers on trade, Congress plays a critical role and could seek to reassert control of US trade policy. Increased partisanship will not go away anytime soon; nor will internal political divisions within the Democratic and Republican parties be readily overcome. These structural factors and constraints limit the potential for a large-scale realignment of US trade policy. At the same time, the trade policies and approaches of a Biden administration would look very different from those of a second Trump administration.
Trade policy begins and ends at home, meaning that either administration will need to build domestic support for its trade agenda. But trade policy also needs to be considered as part of the wider context. It is not the main cause of many of the most pressing challenges facing the US; nor is it the main cure. A well-formulated and well-executed trade policy can, however, play an important role as part of a comprehensive approach to tackling domestic inequality, competing internationally, and addressing climate change.