Yahoo Finance One thing Biden and Trump have in common
A lot changed when President Trump left the White House in 2021 and President Biden moved in. But one thing didn’t: a protectionist effort to bring more production back to the United States and become less dependent on China.
Biden’s policy toward China differs from Trump’s, but the goal is the same: To rework supply chains so more crucial goods come from American suppliers and friendly nations and fewer come from China. But economists are starting to warn that this “decoupling” of the two economic powerhouses could backfire and bring more fragility, instead of more self-reliance. Trump's strategy didn't work, and there are now signs that Biden's approach may stumble as well.
Trump focused on the large U.S. trade deficit with China, slapping tariffs on hundreds of billions of dollars’ worth of Chinese imports. By making Chinese imports more expensive, that was supposed to spur more U.S. manufacturing of similar goods, which would face a smaller price disadvantage because of the tariffs or even be cheaper.
The Trump tariffs didn’t do what they were supposed to: the U.S. trade deficit with China hit a new record in 2022, as U.S. importers either ate the higher costs, passed them on to consumers, or found workarounds. But Biden kept the Trump tariffs in place, anyway. Biden counts labor unions as a key constituency, and unions favor protectionist measures that make imports more expensive and give an edge to domestic production.
Biden has since gone a lot further than Trump, pursuing what economists call “industrial policy,” or an active government role directing key sectors of the economy. Two bills Biden signed last year, the Inflation Reduction Act and the CHIPS Act, include tax breaks and other powerful incentives to bring the manufacturing of semiconductors, electric-vehicle components and many other things back to the United States. Biden has also imposed a new ban on sale of advanced American technology to China, which is more focused on national security than economic competition. That’s meant to prevent China from using advanced semiconductors and other cutting-edge tech in weapons or other systems that could give China a military edge.
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At a broader level, the Biden administration is promoting “friend-shoring,” or the development of key supply chains in nations that, unlike China, are like-minded democratic allies. The European Union is developing similar policies, some meant to counter or match Biden’s protectionism. Russia’s invasion of Ukraine, which led to a remapping of global energy flows, underscores the risks of relying on troublemaker nations for critical supplies.
But there are risks to protectionism, too, as economists have preached for decades. “The idea of ‘Buy American’ has broad populist appeal,” Adam Posen, president of the Peterson Institute for International Economics, wrote recently in Foreign Policy. “Yet detailed research has repeatedly shown that policies aimed at maximizing domestic manufacturing employment rather than the development and adoption of new technologies are not only doomed to fail but crowd out the very industrial and trade policies that contribute the most to innovation, national security, and decarbonization.”
The Intl. Monetary Fund recently warned about the risks of deglobalization, or “slowbalization,” as some people call the flatlining of trade and the decline in cross-border investment that’s been occurring since around 2015. The IMF predicts current trends could eventually cut global output by about 2% over time, with developing nations hurt most but advanced economies such as the United States harmed as well.
In the United States, both Republicans and Democrats have become China hawks, viewing the U.S.-China relationship as more of a competition than a partnership. This shift occurred during recent years as China stole Western technology and trade secrets on a massive scale, in an effort to build a domestic economy on par with Europe and the United States. During the last decade, under President Xi Jinping, China has also become militarily aggressive, claiming disputed territories in surrounding seas, rapidly building up its military and repeatedly threatening the breakaway republic of Taiwan.
Posen cites research showing that "Buy-America" policies tend to raise costs—since American goods are typically more expensive—without any corresponding gain in efficiency. That lowers productivity. Raising the cost of domestic production also makes US exports more expensive in foreign markets, which cuts exports.
Another problem with industrial policy is the tinkering often required to get the desired result, and the complexities and unintended consequences that often crop up. This is already happening with the domestic-content requirements for the electric-vehicle tax credits Biden signed into law last year. The Biden administration has made those requirements looser than some legislators intended, to address objections by some foreign automakers and to account for certain materials not (yet) produced in the United States. Democratic Sen. Joe Manchin of West Virginia, a key force getting that bill passed last year, now says the method of implementation may “violate and subvert the law.” Manchin has even threatened to sue stop the credits from going into effect, unless there are changes.
Biden may feel he has no choice but to roll out muscular industrial policy, because China does it very effectively. The Chinese government has broad control over key economic sectors and uses that control to advance national priorities determined by the Chinese Communist Party, such as domestic development of artificial intelligence, electric vehicle technology, and pharmaceutical components. The traditional U.S. approach was to create incentives here and there, but broadly let the market determine where jobs and production should go. As China grew dominant in steel production, shipbuilding and other industries, however, some free marketeers have become more comfortable with the idea of a heavier government hand in parts of the U.S. economy.
There will be flubs, as there usually are when the government tries to steer the development of one technology or another. China itself has a vastly overbuilt and over-subsidized real-estate sector, and the government has to prop up many state-owned firms that lose money. In the United States, the poster-child for wasted government subsidies is Solyndra, the California solar company that got $570 million in taxpayer funding during the Obama administration and then went bust. There will probably be more Solyndras in America’s future. Yet it's hard to see a future president, of either party, backing away from policies meant to give the U.S. economy an edge over China’s—even if it doesn’t always work out that way.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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