As the United States moves ahead with a new approach to trade with the Indo-Pacific Economic Framework for Prosperity (IPEF), should it really abandon the old model of trade agreements? Or should it consider adapting the new approach to the old model?

 

Pressing foreign policy matters remain top of mind—the war in Ukraine, the looming climate crisis, a global economic slowdown and possible recession. At the same time, the Biden administration and Congress must find opportunities for economic growth and job creation.

 

Following the Global Financial Crisis and economic recession, the Obama administration looked to trade as a path to economic growth and prosperity, as well as shoring up alliances with key allies—particularly in the Indo-Pacific. The famous “Pivot to Asia” was grounded in negotiating a regional free trade agreement (FTA) in the Pacific, the Trans-Pacific Partnership (TPP). TPP would have been the largest FTA, encompassing 40 percent of world trade. However, since the United States formally withdrew, the China-led Regional Comprehensive Economic Partnership (RCEP) is now the world’s largest FTA, covering 30 percent of world trade.

 

The Biden administration has stated its intention to reimagine trade—moving away from traditional market access and tariffs, to cooperation, transparency, and inclusivity. The strategy includes labor rights and new areas such as supply chain resiliency and decarbonization. These new ideas are the hallmark of IPEF, which commenced negotiations last December in Brisbae.

 

Unlike a traditional trade negotiation, it’s not clear whether the four pillars (trade, supply chains, clean energy and decarbonization, and tax and anticorruption) of IPEF will include binding commitments. New areas such as supply chain and clean economy are especially murky, as well as trickier areas such as anticorruption. However, very much like a traditional trade negotiation, the first few rounds of negotiations included formal discussions on the four pillars. There were exchanges of text and white papers, and engagement from key stakeholders including business, labor, and civil society.

 

The overall sentiment in Bali was positive and constructive, with many of the IPEF member countries excited to see the United States engaged in the region again. However, it left many wondering—why not just rejoin the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which evolved from TPP and retained much of its structure?

For decades, the United States and our allies have championed clear and equally enforced rules that made global trade transparent and predictable. That commitment created global prosperity and lifted billions of people out of poverty. Today, the United States is backsliding on rule-of-law trade principles that made our country a beacon of confidence, freedom, and success. 

 

Both this administration and its predecessor have embraced a “might makes right” approach to global trade, using national security as a pretext for protecting certain economic sectors from competition. Tariffs imposed in 2018 on imports of steel and aluminum are an illuminating example. Nominally addressing China’s flooding of global markets, these tariffs impacted not just our adversaries but some of our closest NATO allies, along with U.S. businesses consuming steel and aluminum. It is absurd to suggest that imports from our allies are a national security threat, but that is exactly what the Biden administration is arguing, with potentially dire consequences.

 

After the tariffs went into effect in 2018, China and multiple U.S. allies challenged them in dispute settlement claims at the World Trade Organization (WTO). In response, the U.S. effectively argued that the WTO dispute settlement system, which Washington itself helped established, has no authority to judge national security trade measures imposed by the U.S. or presumably any other country.

 

Unsurprisingly, the dispute settlement panels established by the WTO’s Dispute Settlement Body did not agree. Late last year, these panels ruled against the United States in four cases. The response from the Office of the United States Trade Representative was apoplectic. USTR wrote that the WTO had no authority over these cases and that the United States would not comply with the panel recommendations to eliminate the tariffs. More, U.S. Trade Representative Katherine Tai said publicly in December 2022 that the WTO was on “thin ice.” Her remarks made it abundantly clear that for this administration, “national security interests” — however they define it — will trump international trade law.

 

In making these claims, USTR is relying on a now-familiar stalling tactic: appealing cases to the defunct WTO Appellate Body. This arm of the WTO has not adjudicated a single appeal for the past five years. It gets worse. Based on statements by U.S. Ambassador to the WTO, Maria Pagán, the U.S. is now seeking a new interpretation of “essential security interests” that would allow our trade leaders to continue citing “national security” as a pretext for any protectionist barriers — to the detriment of allies and adversaries alike.

 

The U.S. and other WTO members must take a step back and toss this “might makes right” practice into the dustbin of history. Sticking with such practices risks our relationships with trusted allies and isolates the U.S. at precisely the wrong time.

 

The stakes are clear: our behavior on the global stage risks the future of a functional WTO. Recent actions make clear that the Biden administration is playing with fire in its efforts to bully the WTO into compliance with an agenda driven by domestic politics. If the rhetoric spins out of control and prompts this administration — or a future one — to withdraw from the WTO, the consequences would be dire. We’d see high U.S. tariff barriers for all countries, making everyday goods more expensive for Americans. That would certainly come paired with high barriers to U.S. exports, a knife to the gut of efforts to make American businesses competitive in markets around the world.

Energy transition incentives in the 2022 Inflation Reduction Act (IRA) have caused some uproar in US-EU trade relations and within the EU. The intra-EU discussion has been disheartening in that, while supposedly reactive to the IRA, it seems to have disregarded the IRA’s most important lessons.

 

Taking as an example one category of activity that the IRA seeks to catalyze – manufacturing of solar energy equipment – what are those key lessons and how are EU policymakers missing them?

 

Industrial policy lesson: help with operating expenses, not just capital expenses, is essential.

 

Capital formation is not the main barrier to growing solar manufacturing in Europe and North America. The “cost penalty” associated with manufacturing in the United States versus manufacturing in Asia is large enough that, prior to the IRA’s enactment, an investor awarded a “free” U.S. solar cell or module factory could have expected to operate that factory at a continuous loss as far as the eye could see. This is why the U.S. policy mix, post-IRA, now includes per-unit-of-output benefits properly sized to close the ongoing gap. Cap-ex help may be necessary, but it is nowhere near sufficient. This applies in the EU as well.

 

The EU discussion, sadly, has been almost exclusively about cap-ex incentives. This was apparent from arguments about how much EU-level money was available, whether various unused amounts of structural funds could be repurposed, whether new borrowing by the EU itself could occur, etc. Rather than looking for a specific number of euros to award for factory-building, the EU and its Member States could have made space (by amending state aid rules) for new factories to operate for ten or more years free of corporate income taxation. This step alone would cover a good portion of the ongoing cost disadvantage of manufacturing in Europe versus manufacturing in Asia.

In what’s meant to be a bum year for the global economy, world commerce is getting a boost from automotive trade, especially in electric vehicles.

 

In the first two months of 2023, U.S. auto imports rose 21.6% year-on-year to $54.5 billion, and exports jumped 19.3% to $22.1 billion. Meanwhile, auto exports from China, the world’s top exporter, more than doubled in March, rising 123.8% year-on-year to $7.4 billion. A huge chunk of China’s auto industry has gone electric. In 2022, 44.7% of China’s total automobile exports were electric vehicles. Autos and auto parts made up 4.9% of China’s total exports in March, up from 4% for all of 2022.

 

To be sure, dented by geopolitical tensions, auto trade between the world’s two economic superpowers hasn’t performed as well. In the first two months of 2023, Chinese auto exports to the U.S. fell 19% year-on-year to $2.6 billion, while U.S. exports to China rose only 2.3%, to $1.1 billion. 

 

But the general boom in auto trade is expected to continue. The world’s largest economies are committed to developing policies that increase use of electric vehicles to drive down emissions. The U.S. has said it wants half its fleet to be electric by 2030, up from around 6% last year, and the Biden administration this week proposed even more ambitious targets.

 

The automotive trade is a boon for global business, which has suffered from the end of stimulus payments in the U.S. and EU, inflation, and the war in Ukraine. The upturn in electric-vehicle trade is one of the reasons the World Trade Organization last week hiked its forecast for global trade growth in 2023 to 1.7% from 1%. The WTO forecasts trade to grow 3.2% in 2024 after increasing 2.7% in 2022.

 

China’s best export market is no longer the U.S. but the 10-nation ASEAN bloc including countries like Thailand and Vietnam. Exports to ASEAN countries increased 36.3% to $56.4 billion. By comparison, shipments to the U.S. fell 7.7% to $43.7 billion, and exports to the EU rose 3.4% to $45.9 billion.

 

While the Chinese car sector is booming, other sectors are flattening out. China is slumping in some areas of global business where it used to dominate, particularly in tech. Shipments of high-tech products declined 10% to $74.5 billion. Exports of mobile phones dropped 31.9% to $8.5 billion.

 

There’s been a rebound this year in some niche consumer sectors that had slumped. Exports of toys increased 33.1% to $3.8 billion. Footwear exports increased 32.9% to $4.2 billion.

 

And China is making good use of its new relationship with energy-rich Russia, which has boosted its industrial production, which benefits from low-cost energy. Exports of petroleum products rose 23.1% to $4.2 billion. Exports of steel products increased 52.8% to $10.2 billion. Exports to Russia rose 136.8% to $9 billion, while imports increased 34% to $11 billion.