Synopsis: This paper covers new developments in United States trade laws and policies towards China and other nations, specifically how these policies might impact global trade in the future.
Introduction
Global sentiment towards international trade has shifted from warm acceptance to pessimism and cynicism. A long-standing world of unipolarity—where the United States (“U.S.”) was the world’s behemoth—has shifted and continues to shift closer to a dueling world state. The United States and China once appeared as strong trade partners. However, the impact of COVID-19, accusations going to and coming from both nations of the other violating international law, and geopolitical shocks have strained this partnership. This is most clearly recognized through an analysis of the United States’ new trade policies and laws both towards China and other nations. This paper focuses on these policies and how the United States’ shift to more protectionist and friend-shoring trade policies—risking alienating allies and developing new ones—while still facing a deep reliance on China’s continuing trade might impact global trade in the coming years.
U.S.-China Relations & Policies
The United States’ attempt at decoupling from China presents challenges to global efficiency in trade. Former President Trump introduced a series of tariffs that ultimately left no U.S. import untouched and acted as a stark reversal of the previously favored trade liberalization. More recently, President Biden introduced comprehensive restrictions on the sale of semiconductors and chip-making equipment to China in an attempt to curtail its access to critical technologies. The impact of these tariffs and restrictions did not go unnoticed. As of 2022, China has traded more with developing nations than the United States, Europe, and Japan combined since it started participating in global trade just four decades ago. For example, German and Japanese automakers Volkswagen and Toyota, respectively, previously comprised fifty percent of China’s auto market. Now, those automakers make up thirty percent.While automakers from U.S.-allied nations are not wholly indicative of tariff-induced tension between the United States and China, a deeper look into long-lasting strife between the United States and China may pose challenges to future trade.
Global entities, like the World Trade Organization (“WTO”) and International Monetary Fund (“IMF”), demonstrate similar unease towards the United States’ trade policies towards China. Research from the IMF indicates that greater fractures between the United States and China could cost the global economy as much as seven percent of gross domestic product. Such fractures include the results of increasing instances of friend-shoring—a trade practice that favors sourcing goods and manufacturing from allies over untrusted nations—and protectionist trade policies applied by the United States to the exclusion of China. As will be discussed, members of the WTO similarly hold little faith in the United States’ shift in trade policies.
Yet, President Biden’s recent meeting with President Xi Jinping in San Francisco presented an attempt to salvage the relationship between their two nations. They demonstrated this effort through, for instance, a more substantive effort for military communications to mitigate the risk of miscommunication. Notably absent from the series of promises and conversations between these two nations was talk of trade. Not to imply that their agreements to stifle the production of fentanyl and miscommunications are without meaning, but simply to state that substantive changes in U.S.-China trade patterns seem unlikely as a result of their meeting.
U.S. Protectionist & Friend-Shoring Policies
The United States’ trade policies as of late demonstrate a departure from the longstanding rule of laisses-faire trade policies and shifted to protectionist and friend-shoring tendencies. The Inflation Reduction Act, the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act show the emphasis on growing the domestic industrial sector and minimizing reliance on global ties. To be sure, strengthening the domestic industrial policy does not necessarily pose significant implications for economic relations with foreign partners and can be exclusively focused on developing domestic economic capacity. But to the extent that domestic industrial policy “appears to encourage domestic production of goods” over foreign ones, that policy may give rise to allegations from trading partners that it runs afoul of long-standing principles of “national treatment” inherent to the WTO charter of which the United States has long been a part.
Such allegations have already begun. Since the Inflation Reduction Act passed, the European Union and South Korea alike condemned the United States’ actions and called several provisions of the Act a breach of international trade laws. Notably, both allies of the United States consider the Inflation Reduction Act to contain protectionist provisions. As noted earlier this year regarding the Biden administration’s trade goals, it “seeks to relocate production and reallocate supply chains in what has been referred to as “near-shoring” or “friend-shoring” away from [China] and towards countries with shared values and more market-based economies.” In other words, the United States is moving trade to allied nations, so to speak.
Though this paper disagrees with the United States’ shift to friend-shoring and protectionist policies, such policies are not without their benefits. The United States and its allies alike broadly support containing China and its attempt to become the next global behemoth. The policies presented by the United States would result in diversification of trade, ultimately providing benefits to workers in Europe and elsewhere because of increased job opportunities. Domestic U.S. workers and companies alike would see benefits in increased opportunities for employment and demand for production of goods otherwise produced overseas. Unfortunately, these benefits do not constitute a comprehensive list of the consequences resulting from adopting the policies championed by the United States.
This attempted friend-shoring approach is similarly not altogether favored by those allies, most notably, European nations. These nations fear the formation of favored blocs that, if this relocation and reallocation of trade prove successful, “would receive greater market access opportunities and less behind-the-border trade barriers.” Yet those on the outside of those blocs would experience diminished opportunities, increased costs, and deeper inefficiencies in trade. This would ultimately lead the global economy to suffer, as production would contract, and costs to rise.
The United States’ goal for protectionist and friend-shoring trade policies acts as a stark contrast to the diplomatic and peace-centric meeting between Presidents Biden and Xi. Yet, the United States faces difficulty in developing and maintaining a base of allies “to take on China and a ‘friend-shoring’ policy granting certain countries with priority supplier access to the US,” while, in the same breath, promoting a protectionist industrial policy. The United States, in short, wants to have its cake and eat it, too.
The Reality of U.S. Trade Policies
While the United States’ policies over the last two presidencies indicate a sharp reversal of liberal trade policies, contemporary studies show how its new policies might affect future global trade. Recent global economic studies found that the reshaping of United States imports away from China may not have reduced dependence on China as much as import numbers suggest. This is so because countries that had a deeper engagement in Chinese supply chains experienced the most rapid export growth to the United States. That same evidence demonstrates that countries that saw faster export growth to the United States in certain sectors also had more intense intra-industry trade with China in those same sectors.
So, yes, the United States is attempting some semblance of de-coupling from China. That task simply proves easier said than done. While the United States has, in fact, relocated trade away from China, it has not, in reality, done so to the perceived degree. The reason is that countries that the United States has relocated trade to actually source the same materials from China. As discussed in an article published by the think-tank American Progress earlier this year, this tactic by the United States could give rise to its allies accusing it of allowing “double standards” as it seeks deeper economic connections with countries whose manufacturing practices mirror those of China. The United States’ trade policies, at present, risk frustrating allies and efficient international trade due to it creating and perpetuating a system that places a premium on trust rather than efficiency.
A Way Forward
A way forward for the United States may present itself through a variety of trade policies; however, outlined here are several examples of what the United States might do to mitigate the risk of global favoritism and continued disfavor in the eyes of its allies. Efforts by the United States to diversify supply chains and pursue friend-shoring may continue without issue, but the U.S. must “re-engage in the trade community, re-establish credibility in the WTO, and offer market access to partner countries” while obtaining greater market access opportunities in those countries. This may be done by assuring allies that the protectionist policies at present are simply meant to bolster domestic abilities, not devalue established international connections. Moreover, given China’s increased influence in Africa, meaningful engagement and partnerships with African nations would prove beneficial to the United States. Similarly, continuing the cultivation of dualistically profitable trade agreements with Asian nations—aside from China—is encouraged.
Regarding the United States’ European allies, the U.S. may seek to cement its commitment by allocating “financial assistance, starting with what has already been committed—notably the Green Climate Fund and the Loss and Damage Fund…” created at the 27th U.N. Framework Convention on Climate Change Conference of the Parties. Moreover, it would behoove the United States to work with its European counterparts on the sourcing of critical minerals and technology transfers to Global South countries due to their rising prominence in some of the most essential products to date. To further strengthen its current international trade policies, the United States should create policies with the purpose of better “reflect[ing] the needs and aspirations of low-income countries in attracting overseas investment and strengthening their energy insecurity,” and pursue a new trade agreement with an emerging economy like Kenya or South Africa.
The United States need not aim for wholly globalist trade policies, but it must not, in the same vein, act only in protectionist self-interest and dismiss other means of successful trade. Put differently, the United States may develop strong domestic industrial policy while maintaining and building trade relationships with its allies, in the hopes that it can avoid a world where China has the strongest trade relations, and the United States has alienated its allies. The question now is whether it will do so.
Endnotes
1. Alfaro, Laura; Chor, Davin. Global Supply Chains: The Looming “Great Reallocation”, Paper prepared for the Jackson Hole Symposium, 24-26 Aug 2023, organized by the Federal Reserve Bank of Kansas City Draft: 12 August 2023. https://www.kansascityfed.org/documents/9747/JH_Paper_Alfaro.pdf.
2. Swanson, Ana, Biden Administration Clamps Down on China’s Access to Chip Technology, The New York Times, https://www.nytimes.com/2022/10/07/business/economy/biden-chip-technology.html, Published October 07, 2022, Accessed on February 20, 2024.
3. Douglas, Jason and Fairless, Tom. It’s U.S. v. China in an Increasingly Divided World Economy, The Wall Street Journal, https://www.wsj.com/economy/trade/economy-us-china-tariffs-trade-investment-1c58d24e. Published 3 Nov. 2023, Accessed on 15 Nov. 2023.
3 Id.
4 Id.
5 Id.
6 Id.
7 Pierson, David and Wang, Vivian. In Talks with Biden, Xi Defends China’s Rise, While Seeks to Assure and Assert at the Same Time, The New York Times, https://www.nytimes.com/2023/11/16/world/asia/china-biden-xi-summit.html, published 16 Nov. 2023, accessed 16 Nov. 2023.
8 Sutton, Trevor, Williams, Mike. A New Horizon in U.S. Trade Policy, https://www.americanprogress.org/article/a-new-horizon-in-u-s-trade-policy/. Written 14 Mar. 2023. Accessed 18 Nov. 2023.
9 Id.
10 Id.
11 Id.
12 US trade policy and the future of world trade: managed trade, protectionism, distortions and uncertainties, Int. T.L.R. 2023, 29(2), 69-78, 74. https://www.westlaw.com/Document/IA0F93B50D53311ED993BE6703FE0C5EF/View/FullText.html?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0.
13 Id. at 69.
14 Id. at 70.
15 Id.
16 Id.
17 US trade policy and the future of world trade: managed trade, protectionism, distortions and uncertainties, Int. T.L.R. 2023, 29(2), at 77.
18 Freund, Caroline; Mattoo, Aaditya; Mulabdic, Alen; Ruta, Michele. Is US Trade Policy Reshaping Global Supply Chains?. Policy Research working paper; no. WPS 10593 Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/099812010312311610/IDU0938e50fe0608704ef70b7d005cda58b5af0d.
19 Id.
20 Id.
21 Sutton, Trevor, Williams, Mike. A New Horizon in U.S. Trade Policy, https://www.americanprogress.org/article/a-new-horizon-in-u-s-trade-policy/. Published 14 Mar. 2023. Accessed 18 Nov. 2023.
22 Id.
23 US trade policy and the future of world trade: managed trade, protectionism, distortions and uncertainties, Int. T.L.R. 2023, 29(2), at 78.
24 Id.
25 Sutton, Trevor, Williams, Mike. A New Horizon in U.S. Trade Policy, https://www.americanprogress.org/article/a-new-horizon-in-u-s-trade-policy/. Published 14 Mar. 2023. Accessed 18 Nov. 2023.
26 Id.
27 Id.
