After four years of President Trump’s slash-and-burn trade policy, the bar for the incoming Biden administration could hardly have been lower. Trump’s “America First” bravado was an ungainly amalgam of tax hikes (against foes and friends alike), bilateral power plays (for example, Trump ordered the “renegotiation” of the Korea-US Free Trade Agreement [KORUS], otherwise threatening termination of what he termed “a horrible deal”), and a retreat from international trade cooperation (among others, spurning the megaregional Trans-Pacific Partnership [TPP] and undermining the World Trade Organization [WTO]). Trump’s trade policies not only ruffled the feathers of many of America’s closest trade partners, but they were also economically ineffective. Notably, they failed to benefit even those sectors and locations that his tariffs were supposed to protect. Ironically, the Trump tariffs did not change China’s behavior one bit.

A “New” Washington Consensus

It came as no small surprise when President Biden, despite calling Trump’s trade actions “disastrous” and “reckless,” not only failed to repudiate those policies, but actually amplified them. This is not to say that Trump’s and Biden’s versions of economic nationalism are equivalent. Trump’s style was all sticks and no carrots—belligerent, scattershot, and ad hoc. Biden’s version, albeit no less fervent, is soft-footed and polite—more carrots than sticks; commentators have called it “polite protectionism” or “pragmatic unilateralism.” Most notably, Biden provides a coherent intellectual superstructure that ties his administration’s trade policy to its overall international economic strategy.

In a scarcely noticed but consequential speech in July 2023, National Security Advisor Jake Sullivan outlined the Biden administration’s economic ideology. Sullivan blamed the United States’ most pressing challenges—namely, a hollowed-out industrial manufacturing base, dramatic economic inequality between rich and poor and between coast and heartland, the economic and military rise of China, and the climate crisis—on a number of factors including hyperglobalization, unfettered deregulation, naive beliefs in trickle-down economics and market efficiency, and trade liberalization as an end in itself. Drawing a sharp contrast to the 1990s-era policy package known as the “Washington Consensus”—championed by the US Treasury, IMF, and World Bank—that according to Sullivan encapsulates the idolatry of free markets and liberalized trade, he declared that the Biden administration stood for a “New Washington Consensus.” To address the above-mentioned challenges, the administration’s novel paradigm is aimed at achieving supply-chain resilience in strategically important sectors, a return to former manufacturing grandeur, more equitable growth that benefits American workers, rapid decarbonization and a successful transition to green technologies, and a containment of China’s military and economic might.

Few Americans would disagree that these are worthy goals. It is, however, the implementation of these goals that warrants scrutiny: Sullivan stated that this “New” Washington Consensus was to be effectuated by a policy bundle including (1) a “modern American industrial strategy,” (2) selective partnerships with economic allies, and (3) various policies aimed at curbing the ascent of China. In the following, I argue that each of these three strategies is fraught with peril. In addition, I show that this alleged new “consensus” does not reflect unanimity between the United States on the one hand and its trade allies on the other, but rather constitutes a unilateral move to undo over six decades of trade liberalization. In the final section, I propose an alternative to the so-called “New” Washington Consensus—an alternative set of policies that achieves better results for the United States and remains in the four corners of a rules-based global trading order.

Biden’s Industrial Policy: Subsidies on Steroids

Let us start with the first pillar of the “New” Washington Consensus, Biden’s industrial policy. It is a mix of muscular government interventions that consist of the following:

• direct subsidies and tax credits, enacted through the Inflation Reduction Act (IRA), the Creating Helpful Incentives to Produce Semiconductors Act (CHIPS Act), and the Research and Development, Competition, and Innovation Act—all targeted at industries deemed especially critical or strategic, mainly semiconductors and green technologies;
• “Buy America” provisions for government procurement;
• favorable loan terms; and
• protectionist trade policies, including continuation of many Trump-era tariffs, domestic content requirements, and so-called trade defense measures (intended to punish alleged foreign dumping and—irony of ironies—to counter foreign subsidies that affect exports to the United States).

True to its promise, in mid-May of this year the administration slapped new tariffs up to 100 percent on Chinese electric vehicles, advanced batteries, solar cells, semiconductors, steel, aluminum, and medical equipment, thus affecting imports of green and clean tech goods in excess of $18 billion. (These new tariffs, notably, are imposed on top of the still active across-the-board import tariffs on some $350 billion in Chinese goods originally imposed by the Trump administration, which cost US consumers and downstream industries $48 billion annually, and that entail welfare losses of at least $1.4 billion per month caused by reconfigurations of US supply chains and an overall reduction in the availability of imported varieties.)

While industrial policy done right can be useful, all indications are that Biden’s version is poised to cause significant domestic and international damage. This is not the place to offer a fulsome critique of the risks that Biden’s industrial-policy package poses for the domestic economy. Suffice it to say that the package is costly (experts expect IRA subsidies to be $1.2 trillion over the next decade—three times more than initially forecast), which in and of itself is not fatal if the returns are adequate. However, the returns may not be adequate.

First, there is the challenge of getting industrial policy right. It is difficult for any administration, let alone that of the world’s biggest economy, to pinpoint the precise industry targets and provide the appropriate amount of incentives. The range and depth of knowledge that the Biden administration must possess in order to implement successful industrial policy is extraordinary. It not only must know and understand the relevance of broad-ranging and complex questions, but it must also undertake weighing alternatives and prescribing an adequately supported policy mix. These are skills rarely found in the private sector, let alone in the civil servantry. Even highly trained (and remunerated) portfolio managers who specialize in single industry stocks, as well as industrial conglomerates themselves, oftentimes founder at even a fraction of the tasks required to design successful industrial policy.

Second, there is the difficulty of achieving the objectives of the industrial package. It is not at all clear how Biden’s policies will undo 30 years of lost manufacturing edge, out-subsidize Chinese production of semiconductors and green technologies, and re-shore entire value chains for these sophisticated technologies. In fact, it appears that even evaluating applications and distributing approved funds already strain the system. For example, well over a year after passage of the CHIPS Act, many recipients are still awaiting funds. (Worse still, a significant chunk of the promised funds are unavailable: the Federation of American Scientists reports an appropriations gap of $8 billion for the R&D portion of the CHIPS Act, thus leaving core national and regional science, research, and education projects underfunded.)

Third, even if Biden were to overcome these nontrivial roadblocks, it is the unintended consequences of industrial policy that are the most troubling aspect of the administration’s industrial policy package: For one, industrial policy creates numerous distortions in those industries that receive subsidies and trade protections. These distortions include anything from monopolization (or oligopolization) in protected markets to favoritism and political horse-trading, inadequate supervision of policy implementation, entitlements (once granted, subsidies tend to stick around long after the policy objectives have been achieved), and cascading protectionism. These unintended consequences more often than not result in growing complacency, reduced productivity, and less innovation in subsidized sectors.

More critically, strategic support of some industries and not others crowds out resources otherwise allocated to export-oriented firms and industries in which the United States has an international comparative advantage (i.e., lower costs or superior quality). Apart from not getting handouts, unsubsidized industries also face higher relative costs—for employees, capital, and raw and intermediate materials. Notably, the unsubsidized export-oriented firms are the ones that are most agile, productive, and innovative, and thus most able to bring about decarbonization, supply chain resilience, national security, and better wages.

In the end, Biden’s industrial policy tied to specific industries and localities is unlikely to create jobs (instead, it merely shifts them from export industries to protected industries), let alone unionized jobs in the heartland (a region that already suffers from a crippling dearth of skilled labor). It is furthermore unlikely to boost overall US economic growth beyond the initial spending bump. It is, however, likely that the real results of Biden’s industrial policy are higher consumer prices, accelerating inflation, and an overall loss of US competitiveness.

Domestic effects aside, Biden’s industrial policy also has negative international repercussions. First, many of the industrial policies violate the very trade principles the United States championed when it helped form the WTO. In a way, the United States therewith forgoes its privileged position in promoting and developing trade rules abroad (and legitimately enforcing those rules). It certainly forgoes any legitimacy in disciplining behavior abroad that the United States itself has implemented at home.

Second, Biden’s industrial policy is essentially self-dealing. It is designed to draw investment, production, and raw materials away from other countries. This zero-sum logic will almost definitely provoke an international backlash. Let us start with those countries that can afford to pay subsidies to domestic industries. Powerful countries will retaliate, emulate, or, in rare instances, negotiate. None of these responses are good news for the US economy, as is obvious in situations where countries retaliate against US exports of goods and services (recall, for example, China’s reaction to the Trump tariffs). When other countries emulate our discriminatory industrial policies, the harm to the US economy may be particularly pronounced, because it again shuts out US exports and may easily trigger lose–lose subsidy wars in which too-big-to-fail national champions compete on the world stage. In addition to being costly to the supporting countries, subsidy wars also tend to stifle innovation and technological diffusion, which would be particularly bad for accelerating a green energy transition. Losses to the US economy are smallest in cases in which powerful trade partners manage to negotiate preferential access to the US market (for example, the European Union [EU] managed to extract concessions for its electric vehicles to benefit from certain IRA subsidies). Yet, imports still risk being more expensive, and potentially of lower quality compared to imports entering under a nondiscriminatory policy alternative.

Next, consider the reaction of poorer countries that cannot afford costly subsidy programs. These countries will see shrinking export markets and inward investment, and thus less developmental progress. They will find themselves hat in hand, begging for access to the US market, to become part of US supply chains, or at least to be able to export raw or processed materials. This is guaranteed to breed mistrust and resentment against the United States and may draw these poorer countries toward other trade alliances.

Biden’s Strategy for International Cooperation: Milquetoast

Let us now turn to the second policy prescription of the “New” Washington Consensus: Biden’s strategy for cooperating with trade partners and allies. The good news is that the Biden administration, as opposed to its predecessor, actually sees virtue in international cooperation. That said, it is instructive to note what Biden’s trade cooperation strategy does not include: it entails no aspirations to pursue either traditional trade agreements (such as rejoining the TPP or finalizing the Transatlantic Trade and Investment Partnership [T-TIP] with the European Union). It entails no ambition for a revitalization of the multilateral trading order. On the contrary, Biden has continued Trump’s expansive assertion of national security exceptions to justify trade restrictions and has dialed back US ambitions for ongoing trade negotiations in key areas such as digital trade.

The United States under Biden has championed sectoral partnerships (such as the critical minerals agreement negotiations initiated with allies Japan and the EU) and so-called framework agreements (such as the Indo-Pacific Economic Framework for Prosperity [IPEF]). What is common to these types of agreements is that the United States is not willing to make concessions, particularly market access concessions, to foreign goods and services. Rather, the sectoral partnerships championed by the United States are solely based on areas of common interest. Some sectoral partnerships deal with financing infrastructure projects in the region, others with developing secure supplies of minerals needed to make advanced electronics or writing agreements to facilitate digital commerce. Some are mutual accords to exclude, or induce behavior changes of, third parties (as with the planned Global Arrangement on Sustainable Steel and Aluminum [GASSA] with the EU that limits access to US and EU markets for “dirty” Chinese and Indian steel). While these sectoral agreements can be quite effective, they may not always be WTO compliant.

As for the negotiations of framework agreements, the US strategy largely involves the attempt to extract commitments on environmental or labor standards from trade partners. In addition, the Biden administration aims at negotiating mutual recognition of existing procedures or standards.

All of this is weak tea, because the United States is not willing to give something to get something. There is no incentive for other countries to adopt proposed principles (besides those that are in their interest anyway). The last IPEF summit in November of 2023 predictably collapsed because the United States asked developing countries to give up comparative advantages (cheaper labor and laxer environmental rules) for nothing in return. Under the current mindset, one may reasonably expect that future “trade” agreements will be less about trade and more about forging political and security relations and thus may easily become subject to political whims and maneuvers. Trade agreements motivated by politics, rather than economics, may jeopardize, rather than strengthen, supply-chain efficiency and resilience. Moreover, they risk being fair-weather accords—purely transactional bargains that can be violated or revoked at no cost at any time. While those weak accords help further Biden’s domestic agenda that shields US industries from global competition, it is anyone’s guess how such trade deals will ultimately benefit US workers, make supply chains more resilient, or result in decarbonization.

Moreover, the US disinterest in reciprocal trade liberalization drives countries that still believe in liberalized trade and the efficiencies it entails into the arms of US rivals. Case in point, while the United States is sitting on the sidelines, the EU is in the process of finalizing a trade deal with Mercosur, while the United Kingdom is engaged in negotiations with eight countries in parallel. China is also aggressively pursuing new trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), TPP’s new name after the United States’ exit.

Biden’s China Strategy: Go It Alone

Finally, arguing that China pursues aggressive economic policies and has flouted international trade rules, either in letter or in spirit, the Biden team has set an objective of slowing down China’s economic and military ascent. Yet the United States cannot single-handedly take on China, even if the US objective is not decoupling but derisking, as Sullivan claims (although some commentators have questioned Washington’s derisking stance in light of the administration’s latest tariff escalation affecting Chinese clean tech). If the United States acts alone, China itself may decide to decouple, racing to find different markets for its exports, to develop different sources for critical imports, and to push technological advances at home to reduce dependency on the United States. Needless to say, a decoupling that goes too far too soon would be to the detriment of US companies, could jeopardize Biden’s green revolution, and could potentially even affect US military and intelligence capabilities. Focusing on export controls against China (only one policy in the US trade toolkit), a recent paper by the New York Federal Reserve estimates that US firms affected by export controls face declines of revenues by 8.6 percent, profitability by 25 percent, and employment by 7.1 percent (while, unsurprisingly, China substitutes US imports for non-US suppliers and domestic firms).

To be effective in pursuing its objectives vis-à-vis China, the United States needs to deepen relations with key allies and present a united front against violations of the international trading system. It is then all the more puzzling that the Biden administration continues to weaken, rather than strengthen, important alliances it relies on to effectively pursue its China objectives with minimal economic blowback. Examples abound: the “pause” on US liquefied natural gas exports that sent shockwaves through the EU; the quiet shelving of a US–UK trade agreement; or President Biden’s opposition to the nonhostile acquisition of US Steel by Japanese market leader Nippon Steel, stating that “it is vital for [US Steel] to remain an American steel company that is domestically owned and operated.”

“New” Washington Consensus, or “Washington Consensus 2.0”?

It is not clear whether President Biden’s trade stance is owed to political exigencies or personal conviction. It may also be that Biden is simply unable to stave off a seismic shift toward economic populism and nationalism in US economic policy that is bigger than either Trump or Biden. Be that as it may, it is not an exaggeration to note that the Biden administration’s “New” Washington Consensus is nothing short of a challenge to at least five decades of economic orthodoxy. It is exclusionary and anti-export. It weaponizes trade to achieve domestic and security goals. It is also a rejection of a rules-based international economic order in which the United States used to have a leading role and that served it well for decades. The “New” Washington Consensus no longer represents the belief that international trade is a win-win for all countries. Instead, it espouses a zero-sum logic whereby one country’s gain is the other’s loss and cooperation is ad hoc and transactional—cooperation is pursued if and when it suits US interests. This new strategy is myopic short-term thinking—it risks precipitating the disintegration of global trade into rivaling blocs, with the United States and China in opposing camps and other countries in the uncomfortable position of having to pick sides. And given the US protectionist stance, what is the incentive for third countries to join the United States?

International trade currently is unpopular with Americans from the nationalist right to the progressive left (35 percent of Americans see international trade as a threat to the economy, while only 61 percent see it as an opportunity). Advocates for international trade certainly are not blameless here: In the past, they have overhyped the gains from trade agreements while underestimating distributional costs on lower-skilled labor, and they failed to anticipate localized recessions resulting from international competition. However, instead of yanking the pendulum toward neo-protectionism and techno-nationalism, one may consider updating and improving the existing rules-based order—call it Washington Consensus 2.0.

What would a Washington Consensus 2.0 look like? Domestically, it would capture the gains of liberalized trade, while offering effective protection from the downsides of globalization. The focus thereby would be on workers, not jobs. Rather than trying to save uncompetitive facilities and declining industries, the Washington Consensus 2.0 would promote job creation in distressed areas and improve transition assistance for those who have lost their jobs to international competition and technological advance. The Nordic countries and New Zealand teach us that an economy can be open and egalitarian at the same time. A Washington Consensus 2.0 would foster (WTO-compliant!) investment in infrastructure, R&D, education, and talent attraction, rather than bet on handpicked industries (one step in the right direction is the Bipartisan Infrastructure Law, passed under Biden’s watch in late 2021, though it remains diffuse and incongruous). Comparative advantage cannot be compelled with handouts and protection, but it can grow organically given the intellectual and infrastructural fertilizer. A Washington Consensus 2.0 would mean focusing on technology adoption, not technology production: Diffusion and adoption of the best available technologies (even if imported) is more likely to create long-lasting economic benefits and larger innovative breakthroughs than a government trying to pick winning technologies (on that issue, recall France’s irrational, and costly, attachment to the telex at a time when the rest of the world was already using the internet).

Internationally, a Washington Consensus 2.0 would mean more and deeper trade agreements since it is better to coordinate, not compete, with allies on public investments in complex areas such as high tech and decarbonization. This cooperation would remove commercial conflict and facilitate the spread of the best technologies. The United States should seek out comprehensive and enforceable trade agreements with a large membership, such as the TPP and T-TIP, not only to provide a veritable counterbalance to China’s heft—as originally intended by the Obama administration—but also to help promote technological diffusion and adoption of common international technical standards (including on labor, the environment, and AI). A Washington Consensus 2.0 would mean an immediate deblocking of WTO dispute settlement and a redoubling of efforts to engage in (an, admittedly, overdue) WTO reform that takes on rule flaunting by developed and developing countries alike. And if any WTO member were to block meaningful WTO reform, the United States should assemble the largest possible coalition in a future-oriented club of the willing (e.g., climate club).

International trade is here to stay. The question is to what degree the United States will participate in it and whether the US will resume its leading role in defending the ground rules of global trade. Historical evidence shows that expanding trade has delivered tremendous value to the US economy. A Washington Consensus 2.0 could convince Americans that being protrade is neither unpatriotic, nor antiworker, anticlimate, or hypercapitalist. Being protrade means being in favor of a system that rewards innovation, efficiency, and dynamic growth; that makes the distributable pie larger; that actually attempts a fairer distribution of the spoils of trade; and that advances US diplomatic, security, and economic interests in the long term.

Simon Schropp is a managing economist at the global law firm Sidley Austin LLP. He previously worked for the World Trade Organization (WTO) Secretariat.

To read the full policy brief as published on the website of George Mason University’s research center, the Mercatus Center, click here.

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Why 10 percent? Why all countries? There is no other reasonable explanation than that Trump considers all trade to be “unfair” in some respect, or at least disadvantageous.

This isn’t normally the way presidents act when it comes to tariffs. Additional tariffs are generally imposed very selectively, under trade remedy statutes crafted by Congress. They are actions taken pursuant to a finding that a particular product is involved in a specified unfair trade act, or it may be that the new tariff is a surgical retaliatory measure to open a market for a specified American product.

Many uncertainties surround Trump’s proposals.

We don’t know why 10 percent was chosen or why it would remain at 10 percent once imposed, but we do take Trump at his word on tariff matters—think about his fulfilling his pledge on day one of his time in office to withdraw the United States from the Transpacific Partnership (TPP) negotiated by President Barack Obama with Asia Pacific countries. He also already applied tariffs at a level of his choosing, first to steel and aluminum imports, and then to most imports from China, which netted out to 19 percent, a third of what he is promising now.

But didn’t President Biden just put on massive tariffs on Chinese goods? It is true he kept his predecessor’s blanket China tariff and then added some very high selective tariffs of his own. The new Biden tariffs place 50 percent tariffs on semiconductor imports from China. But that trade is modest, just under $1 billion a year. This compares with US chip imports from all sources that amount to about $6 billion each month.

The number of Chinese EVs being imported into the United States is even harder to detect (most press articles on the new tariffs on EVs contain no data), but only about 2,000 of these vehicles entered the United States from China in 2024 Q1. The EV tariff is a pre-emptive strike against these imports, not because they caused injury to the domestic automobile industry, but because they might prevent the industry being served by domestic American companies. The 100 percent tariff could be circumvented. Transplants could come in, but the United States, as opposed to France, has not put out the welcome mat for Chinese car investment. The bottom line is this new Biden measure affects $18 billion in trade coverage at present, as compared with total US merchandise imports of $ 3.826 trillion in 2023.

There is no reason to assume that the US tariff would not be met with additional foreign tariffs. The European Union, Canada, and Mexico retaliated immediately when Trump put on the steel and aluminum tariffs in 2018. Does the United States then go another round of escalating tariffs at that point? Or does it all get sorted out, as it did pretty much in that case? Even so, it is high stakes game, and what is at stake is the health of the US economy and that of the rest of the world.

The indiscriminate imposition of tariffs would no longer be confined to a trade war with China, if that is where the United States is headed, but a war against trade itself. It is time to remember some largely forgotten economic history. Fifty years ago, in 1970 when the Congress was considering import quota legislation, trade speeches were larded with allusions to the dangers of Smoot-Hawley level tariffs and “beggar-thy-neighbor” policies. Everyone knew then what those terms meant. The 1930 Tariff Act was a bidding war of members of Congress trying to give import protection to their constituents. The Congress, which under Article I of the US Constitution has authority over commerce, raised tariffs on imports to an average of 47 percent. This caused immediate retaliation from about a dozen countries, including Canada and Mexico. A year later, Great Britain abandoned its free trade policy, authorizing its Board of Trade to impose tariffs of up to 100 percent of value. The Board imposed tariffs of up to 50 percent immediately. Economists agree that high tariffs broadened and deepened the Great Depression, when US unemployment reached 25 percent and we nearly lost our democracy.

These are not yet the conditions we face today. US tariffs average around 3 percent, and unemployment is under 4 percent. Despite the headline-grabbing numbers for the high Biden tariffs, this is not Smoot-Hawley.

Unlike the Biden tariffs, the Trump plan is for increased tariffs on all products from all countries. It is not just America First; it is America Alone. Politicians and the public, here and abroad, are getting used to the idea of having higher tariffs, de-sensitized to the fact that high tariffs ought not to be the new normal. They are in fact added taxes on us, and having them will have real costs.

Beyond this, there is a risk of contagion. US treasury secretary Janet Yellen has invited other countries to follow the United States in its imposition of China tariffs. Given that there is an undeclared US trade war with China, this is not surprising, although it is not normal for modern secretaries of the treasury to be tariff proponents. Europe is also expected to act by putting into place much milder tariffs on EVs from China. This is likely be followed by a Chinese response in kind, already being bruited about, affecting luxury autos. Where would this end?

The impact of an unlimited trade war between the United States and China is one thing. China accounts for 16.5 percent of US imports, still relatively small compared with the nation’s experience in 1930. But the next administration, depending on the outcome of the election, could be working on building tariff walls, this time against world trade.

Only trade experts can readily tell that the two, Trump and Biden, are not using tariffs in the same way. The American public and foreigners looking on can be excused if they don’t see a difference. In the 1930s, President Franklin D. Roosevelt led the way back from Smoot-Hawley and blanket trade protection. A second Trump administration, freed from an awareness of history, may lead the world toward experimenting with blanket protection, tight-rope walking over an economic abyss. If Biden, sometimes compared to Roosevelt because of his federal programs, is given a second chance, he will need to be clear that his trade policies will be designed to be good for America and good for America’s friends abroad. The American president was formerly seen as “leader of the free world.” That honor requires a trade policy that other nations can emulate, that can be both to their advantage and ours.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics.

To read the full blog piece published by the Peterson Institute for International Economics, click here.

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The US is mulling an end to the de minimis provision that allows shipments valued under US$800 to enter the world’s largest consumer market, a move largely aimed at Chinese exports. Such a move would escalate a raft of trade controls Washington has already placed against China, including controls on semiconductor technology and outbound investment.

In many ways, a key piece of legislation impelling the momentum is the US Uyghur Forced Labor Prevention Act (UFLPA). Passed in late 2021, the ambition of the UFLPA is far more comprehensive than the “small yard, high fence” scope of containment policies, as it seeks to restrict imports in toto from an entire region inextricably linked to global supply chains. Growing political pressure and technical know-how within the retooled oversight agencies portend much more robust UFLPA enforcement across a growing category of goods.

This is likely to be one of the more conspicuous developments in the US’ international trade posture in 2024. The Biden administration signaled last week that it may escalate controls on China’s access to sophisticated semiconductor technologies, as Commerce Secretary Gina Raimondo vowed “we will do whatever it takes.” Alongside these tech controls, Washington has existing policy weapons it could use to target the extent to which Xinjiang is embedded in global supply chains, including in strategic industries suffused with Chinese overcapacity. Early signs of enhanced enforcement action suggest a particular focus on the automotive sector.

Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.

To read the full article published by the Hinrich Foundation, click here.

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It is taking steps to rebalance its position in the global economy. While seeking to preserve the benefits of interdependence with the rest of the world, the European Union is contemplating policies that would induce change. One change seeks to alter the footprint of global production for certain goods, affecting whom it sources imports from and whom it sells exports to. It wants to decrease certain trade dependencies (which could be weaponized) and increase others (to encourage diversification). A second change is the enactment of new contingent policy instruments intended to allow the European Union to respond more quickly when policymakers in other countries act badly (or to establish a credible threat sufficient to deter them from doing so in the first place).

This paper describes how the European Union is seeking to use trade and industrial policy to achieve its economic security objectives. It identifies some of the economic costs and tradeoffs of using such policies. Because the issues it examines—many of which are noneconomic, for which reasonable estimates of costs and benefits are lacking—are evolving, the paper shies away from normative recommendations. Instead, it explores the political economy of what is emerging and why. The paper focuses on EU efforts to “de-risk” vis-à-vis China especially, given the emphasis EU policymakers now place on doing so.

The paper is organized as follows. Section 2 defines the concept of economic security and the events that led it to play such a sudden and prominent role in modern policy. It provides some early evidence to motivate the new policy interventions but emphasizes that much remains unknown, especially concerning their design.

Section 3 explores a case study that highlights the difficult choices the European Union faces in responding to threats to its economic security. The case study involves the electric vehicle (EV) industry, the European Union’s potential use of trade defense instruments (TDIs) to address unfairly subsidized imports from China, and China’s potential retaliatory response of placing export restrictions on graphite, a critical material needed to manufacture EV batteries. It also identifies unknowns facing policymakers seeking “a clear-eyed picture on what the risks are,” in the words of European Commission President Ursula von der Leyen. The section also explores empirically whether the European Union’s trade interdependence with China may be deepening—despite stated goals to de-risk—in part because of the third-country effects arising from the US– China trade war.

Section 4 introduces the policy instruments the European Union, its member states, and other governments are pursuing to address concerns about their economic security. They include stockpiling and inventory management, investment or production subsidies, various forms of tariffs, export controls, and regulations on foreign investment. This section also highlights proposals for new policy instruments, analyzes the associated tradeoffs, and briefly describes basic World Trade Organization (WTO) rules that might discipline such instruments.

Section 5 turns to the potential for selective international cooperation over the use of such policy instruments. It explores how countries facing common concerns over economic security have been acting in coordinated fashion— implicitly or explicitly—and the difficulties of doing so.

Section 6 concludes with some caveats and lessons from history.

Chad P. Bown is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.

To read the abstract published by the Peterson Institute for International Economics, click here.

To read the full working paper, click here.

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Since its accession to the World Trade Organization in 2001, the CCP has pursued a multidecade campaign of economic aggression against the United States and its allies in the name of strategically decoupling the People’s Republic of China (PRC) from the global economy, making the PRC less dependent on the United States in critical sectors, while making the United States more dependent on the PRC. In response, the United States must now chart a new path that puts its national security, economic security, and values at the core of the U.S.-PRC relationship.

The House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party (Select Committee) has studied the PRC’s pattern of aggression and economic manipulation and recommends the following strategy for economic and technological competition with the PRC.

The strategy that follows is guided by three pillars:

First, the United States must reset the terms of our economic relationship with the PRC and recognize the serious risks of economically relying on a strategic competitor that harnesses the power of the Party-State to compete economically. While economic exchange with the PRC will continue, the United States government and the private sector can no longer ignore the systemic risks associated with doing business in the PRC or allow companies’ pursuit of profit in the PRC to come at the expense of U.S. national security and economic resilience. For over two decades, the U.S. government and businesses have sought access to the PRC as a market for consumer goods, a source of low-cost production, and a recipient of U.S. investment. In that time, the PRC has failed to live up to its trade promises, tightly controlled access to its markets, stolen hundreds of billions of dollars a year in technology and IP, and employed subsidies and unfair trade practices to squeeze out American competitors. These are not merely an assortment of separate moves made by individual actors but a feature of Beijing’s long-term strategy to harness the scale of its domestic market to achieve global dominance for PRC firms in critical technology and products and to make foreign countries, including the United States, dependent upon the PRC and subject to its coercion.

Second, the United States must immediately stem the flow of U.S. technology and capital that is fueling the PRC’s military modernization and human rights abuses. General Secretary Xi has made plain his intent to “resolutely win the battle of key and core technologies” and build the People’s Liberation Army (PLA) into a “great wall of steel.” At present, U.S. capital, technology, and expertise aid that effort. They support the PLA’s modernization, the CCP’s predatory technological goals, and genocide. The United States must change course. To quote Dr. Eric Schmidt’s remarks at the Select Committee’s hearing, “Leveling the Playing Field,” “it’s never too late to stop digging our own grave.”

Third, the United States must invest in technological leadership and build collective economic resilience in concert with its allies. The best defense against the CCP’s predatory economic practices will fail if not paired with a proactive strategy to invest in America and increase economic and technological collaboration with likeminded partners. The United States must bolster its unique advantages in technological development by funding research, incentivizing innovation, and attracting global talent in critical areas. In addition, the United States needs to invest in workers, who must remain competitive for jobs of the future, including by helping workers acquire skills-based training and adapt to technological transitions.

Consecutive U.S. presidential administrations have sounded the alarm on growing U.S. dependence on the PRC for critical goods, including rare earth minerals, components and chemicals used in U.S. weapon systems, and pharmaceutical products and precursors. The PRC has already demonstrated its willingness to weaponize these dependencies to coerce the United States and its allies and seek to constrain our policy options. The PRC’s growing leadership in key critical and emerging technologies vital to long-term competitiveness heightens the risks. 

The strategy presented here includes sets of findings and recommendations for each pillar. Taken together, they would level the economic playing field, reduce the PRC’s hold on U.S. and allied critical supply chains, and invest in a future of continued economic and technological leadership for the United States and its likeminded allies and partners.

To read the full committee report, click here

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Introduction

Since 2018, the United States and China have been embroiled in a trade war. The trade war stems from US President Donald Trump’s decision to impose tariffs on several products and commodities imported from China. In response to the policy, China also imposed tariffs on several products and commodities imported from the US. Research conducted by Chad P. Bown (2022) from the Peterson Institute forInternational Economics shows that as of July 2018, the average US tariff on imports from China was still 3.8%. However, tariffs on imports from China gradually increased until they peaked at 21% in September 2019 and then dropped to 19.3% in February 2020.

Meanwhile, on the Chinese side, in July 2018, the average tariff on imports from the US was at 7.8% and then gradually increased to 21.8% in September 2019. As of February 2020, Chinese tariffs on imports from the US decreased to 21.3% and reached a low of 21.2% on July 2020. Furthermore, based on the impact of tariffs on the percentage of trade, around 66.4% of US imports from China and 58.3% of Chinese imports from the US in June 2022 are still affected by tariffs set against each other.

There are efforts between the US and China to defuse the trade war through the Phase One agreement, which was agreed upon in December 2019. The two countries agreed on structural reforms to China’s economic and trade regime, particularly in intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. In the deal, China also committed to increasing the imports of goods and services from the US. Furthermore, a dispute resolution system was established with immediate and effective implementation and enforcement. Finally, the US agreed to modify Section 301 of the Trade Act of 1974. Despite these efforts, as shown from the data in the previous paragraph, the tariffs that the US and China imposed on each other remained relatively high.

The US put several Chinese companies on the Entity List as the trade war escalated between the two countries. The US Bureau of Industry and Security (2022) reported on August 23rd, 2022, that about 600 Chinese companies were already included on the list, with 110 companies included during President Joe Biden’s tenure. In practice, companies on the Entity List will have restrictions on access to commodities, software, and technology from the US. However, US entities may export, re-export, and transfer such matters to companies on the Entity List with a license from the US Bureau of Industry and Security.

The conflict between the US and China is not limited to political economy issues but also security politics. China’s claim to much of the South China Sea, known as the nine-dashed line, is contrary to the principles of the US freedom of navigation. This situation leads to freedom of navigation operations (FONOPS) by the US Navy in those waters that China regards as part of its territories as opposed to its claims. The existence of Taiwan also creates issues between the two countries. Although since 1972, it has recognized the communists in Beijing as the sole representative of China, the US maintains its ties with nationalists in Taipei and ensures their independence from Beijing. China’s growing economic and military power over the past two decades allows the country to become increasingly assertive of Taiwan. This raises tensions with the US as Taiwan’s ally and security guarantor.

The conflict between the US and China prompted the two countries to reduce their dependence on each other. US manufacturing imports from China have decreased, while Asian countries categorized as low-cost countries, have increased. At the same time, the issue of reshoring US companies’ operations in China arose. A survey conducted by A.T. Kearney (2022) found that about 47% of executives of US manufacturing companies operating in China have moved part of their operations back to the US in the past three years. 29% said they would restore parts of their operations in the next three years, and 16%said they had considered reshoring but are yet to make a decision. In the survey, US company executives also outlined that their options also include Mexico, Canada, and Central American countries (nearshoring), not limited to reshoring to the US. This decision coincides with the trend of automation by US companies; instead of looking for cheap labor, they are replacing them with robots. The process creates challenges for countries that host part of US companies’ operations characterized by the labor-intensive and technology-laden process.

From the Chinese side, the disruption caused by the conflict with the US encourages them to become more economically self-sufficient. Such efforts to achieve self-sufficiency are made through the dual circulation model, which includes changing the growth model from export-based to domestic consumption and reducing dependence on imports. Concerning the second element, according to the Economist Intelligence Unit (2020), China focuses on three sectors. First, technology with a priority towards semiconductors. China provides fiscal incentives and subsidies, and encourages cooperation between industries and universities to reduce dependence on US semiconductor companies or companies from other countries that use US technology. China also provides fiscal incentives and subsidies, and encourages cooperation between industries and universities. The second sector is energy. China does not rely on the US or its allies for energy supplies, however, shipping oil and gas by sea is vulnerable to a blockade or interception. The threat of a blockade prompted China to increase its renewable energy sector investment. The third sector is food. China’s agricultural sector is labor-intensive, but they experience labor shortage and are dependent on imports of seed and technology. This limitation prompted a policy of agriculture modernization from labor-intensive to technology-intensive.

Alfin Febrian Basundorois a graduate student at the Strategic and Defence Studies Centre, Australian National University, Canberra, Australia.

Muhammad Irsyad Abraris a graduate student at the Department of International Relations, Universitas Gadjah Mada (UGM), Yogyakarta, Indonesia.

Trystantois an undergraduate student of international relations at Universitas Gadjah Mada (UGM), Yogyakarta, Indonesia.

To read the abstract as it was originally posted by the Journal of World Trade Studies, click here.

To read the full research article, click here.

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The United States was a first mover in advancing trade rules for the digital economy. The most recent Trade Promotion Authority legislation, reflecting a strong bipartisan consensus, states: “The principal negotiating objectives of the United States with respect to digital trade in goods and services, as well as cross-border data flows, are . . . to ensure that governments refrain from implementing trade-related measures that impede digital trade in goods and services, restrict cross-border data flows, or require local storage or processing of data[.]” 

Just four years ago at the start of the JSI talks, the United States put forth a communication detailing just how important data flows are and emphasized why it is critical that the JSI tackle the challenge of negotiating rules to facilitate data flows. The text tabled by the United States in the JSI also mirrored the data flows text in United States-Mexico-Canada Agreement (USMCA) and the text in the U.S.-Japan Digital Trade Agreement. The United States is now bound by those rules, not only vis-a-vis Canada, Mexico, and Japan, but also vis-a-vis over a dozen Free Trade Agreement (FTA) partners who enjoy Most-Favored Nation (MFN) rights from those prior agreements.

But these policies go back further and rules to enable cross-border data flows have been a part of modern U.S. trade policy. 

1. The 2012 U.S.-Korea FTA contains an electronic commerce chapter with commitments on data flows. Article 15.8 states: “Recognizing the importance of the free flow of information in facilitating trade, and acknowledging the importance of protecting personal information, the Parties shall endeavor to refrain from imposing or maintaining unnecessary barriers to electronic information flows across borders.”  
2. Article 15.5 of the 2004 U.S.-Chile Agreement states: Parties recognize the importance of “working to maintain cross-border flows of information as an essential element for a vibrant electronic commerce environment[.]” 
3. Article 14.5 of the 2006 CAFTA-DR (Dominican Republic-Central America FTA) states: Parties affirm the importance of “working to maintain cross-border flows of information as an essential element in fostering a vibrant environment for electronic commerce[.]” 
4. And, with respect to financial services, a U.S. obligation, available to all WTO members, was memorialized in the General Agreements on Trade in Services (GATS) Financial Services Understanding in 1994. Article 8 states: “No Member shall take measures that prevent transfers of information or the processing of financial information, including transfers of data by electronic means, or that, subject to importation rules consistent with international agreements, prevent transfers of equipment, where such transfers of information, processing of financial information or transfers of equipment are necessary for the conduct of the ordinary business of a financial service supplier.”

Principles underlying these rules have been prevalent throughout U.S. law and policy, but it’s also part of the Biden Administration’s agenda. 

The U.S. Commerce Department has spent decades negotiating agreements with trading partners on data transfer mechanisms. Under Secretary Raimondo, these efforts have continued and expanded. In 2022, Commerce announced the establishment of the Global Cross-Border Data Privacy Forum. The preamble of the Declaration states: “Believing that cross-border data flows increase living standards, create jobs, connect people in meaningful ways, facilitate vital research and development in support of public health, foster innovation and entrepreneurship, and allow for greater international engagement”. Commerce also successfully negotiated a new agreement with the European Union on transatlantic data transfers. Later this month, the United States will also host the APEC Leaders Summit, a venue where the United States and aligned trading partners have long championed the APEC Cross-border Privacy Rules System that facilitates data flows among member economies. 

Enhancing data flows is a part of U.S. foreign policy under the Biden Administration. The U.S.-led Declaration on the Future of the Internet commits signatories to “[p]romote our work to realize the benefits of data free flows with trust based on our shared values as like-minded, democratic, open and outward looking partners.” And just days after the United States announced its JSI decision at a meeting in Geneva, the United States then joined G7 members in a statement emphasizing importance of facilitating digital trade and data flows: 

“We recognize that unjustified data localization measures have a negative impact on crossborder data flows, by increasing data management costs for businesses, particularly Micro, Small and Medium-Sized Enterprises (MSMEs) and heightening cybersecurity risks. We remain committed to tackling unjustified data localization measures that lack transparency and are arbitrarily imposed, which should be distinguished from measures implemented to achieve legitimate regulatory goals.”

In short, USTR’s announcement last Wednesday should have those in the inter-agency process puzzled, in addition to sparking stakeholder concerns. It is also alarming that USTR’s move appears to be driven by domestic interests in pursuing competition-related legislation in the United States. However, the effects of rules promoting data flows on abuse of monopoly power have no obvious relevance or articulated rationale, other than to constrain the export potential of a handful of companies, while denying benefits to a much broader set of stakeholders who are arguably the more important beneficiaries. Research continues to show the benefits of data flows and access to new markets are particularly beneficial for start ups and SMEs. Further, digital trade provisions not only catalyze the exchange of digital products and goods between markets, but also serve as a multiplier effect for other sectors. The OECD has found that reducing barriers to cross-border data flows is essential to increasing non-digital services exports and goods exports from industries such as agriculture and food.

In the retreat of U.S. leadership at the international level, one is left to ask who steps in. Many were quick to point to China following the announcement, including many voices in Congress criticizing USTR’s decision. 

But this abdication of leadership involves more than just competition between the United States and China. This issue is about deciding the preferred governance model going forward for the digital economy. At a time when many countries are pursuing digital sovereignty and industrial-focused policy with respect to new technologies, the United States is sending a clear signal that it is at least amenable to these approaches–pointing to a more fragmented and unstable framework for trade likely to undermine global prosperity. 

It’s telling how others are reacting to the abrupt change to U.S. policy. India has long been critical of negotiating digital rules at the WTO. While it represents one of the fastest growing digital markets, it is also one of the most restrictive, protectionist, and closed markets for foreign exporters. Stakeholders in India have taken note of the reversal, seeing it as a “validation” of a digital isolationist approach. Ajay Srivastava, founder of Global Trade Research Initiative (GTRI), opined: “The new US stand on digital trade validates India’s approach on the subject. India had long ago foreseen potential challenges with unregulated digital trade and thus refrained from participating in the WTO e-commerce negotiations.”

It remains to be seen how others in the WTO process will respond, noting that many of these countries are actively pursuing their own regional and multilateral trade agreements with similar digital trade provisions outside the JSI such as Singapore’s Digital Economic Partnership Agreement and the EU’s pursuit of new bilateral trade agreements and initiatives like the recently-concluded EU-Japan data flow agreement. While the various approaches may differ in level of ambition, ultimately countries negotiating digital rules among themselves stand to benefit their economies and their suppliers, as the United States watches from its self-imposed exile.

So where does this leave the WTO process? 

It is encouraging that progress has been made on other elements of the JSI agreement. Last week co-conveners announced consensus text on the following areas: online consumer protection; electronic signatures and authentication; unsolicited commercial electronic messages (spam); open government data; electronic contracts; transparency; paperless trading; cybersecurity; open internet access; electronic transaction frameworks; electronic invoicing; and “single windows.”  

However, the dereliction of U.S. leadership with key trading partners to pursue an ambitious agreement with key outcomes on critical components of digital trade dampens the significance and effectiveness of global rules.

To read the full article, click here.

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Policymakers should take heed that their efforts on both sides of the Atlantic do not pose challenges for transatlantic cooperation. The US Inflation Reduction Act (IRA), as the most potent case, fueled a sense that the United States and the EU might become competitors rather than partners in the green transition. More recently, the EU’s anti-subsidy investigation into Chinese electric vehicles could bring collateral damage to US companies, like Tesla, that manufacture in China.

With the EU and United States still searching for solutions to improve their economic security and resilience, this raises a number of critical questions: What does a values-based industrial and trade policy look like? How should the United States and EU develop mechanisms to address policy differences, avoid or at least manage disputes, and craft real forms of cooperation? How can the United States and EU extend cooperation to other likeminded partners such as the Group of Seven (G7)?

Action will not doom cooperation. The French subsidy scheme on electric vehicles designed squarely with China in mind serves as a basis for a flexible subsidy design, that remains outwardly compatible with the World Trade Organization (WTO), but actually closely aligns with the US approach while not violating the EU’s own trade red lines.

Ahead of the upcoming summit between the United States and the EU in October, the Atlantic Council’s Europe Center launched a working group to examine these questions and propose potential solutions to strengthen and grow the transatlantic economy. The working group conducted interviews with current and former EU and US officials from various offices, agencies, and cabinets to understand attitudes in Washington and Brussels.

Background

The view from Washington

The IRA was a key first step as the United States finds its footing on economic strategy in the Biden administration. The Biden team, as outlined by US National Security Advisor Jake Sullivan, wants to find a way “to build capacity, to build resilience, to build inclusiveness, at home and with partners abroad” that shapes US strategy on everything from green energy subsidies to critical raw materials.

So far, the US strategy has a number of competing aims: constraining the rise of China and its ability to compete with the United States, reindustrializing the United States to bring back jobs, and delivering the green transition. These competing goals influence how the United States views industrial policy and trade vis-à-vis Europe—and mean that transatlantic cooperation is not always the highest priority, and Europe’s interests are not always appreciated and understood by law- and policymakers.

The United States was surprised by how strongly US partners—not just Europe, but Japan, South Korea, and others—have reacted to the IRA. While some partners clearly signaled their concerns early and secured substantial concessions, the EU was initially slower to engage with the United States, especially with Congress before the IRA passed, and has not been able to obtain all of the same concessions offered to others, such as free trade agreement (FTA) partner countries.

The EU’s unilateral environment, social, and governance (ESG) and digital policymaking rules will adversely impact its trading partners including the United States. The United States is concerned that these initiatives could require significant changes to global supply chains. Many of these instruments would force American firms to change how they do business, even outside Europe, due to their extraterritorial effect. The initiatives equally pose concerns for third countries, introducing the risk that these countries will ultimately see China as easier to do business with than the West—as illustrated in the EU’s difficulties finalizing its proposed FTA with the Mercosur countries.

The United States and EU are not doomed to have disputes on every aspect of industrial policy. On issues such as semiconductors, the United States and EU have a transatlantic consensus fueled by a determination to diversify chip manufacturing away from Asia, and they have coordinated closely on their respective approaches to semiconductor subsidies. A key reason for this consensus is that the initiatives did not come as a surprise to either side. Furthermore, the EU and United States are in similar positions, with a declining share of global production and fears about the security of future chip supplies.

More broadly, the United States and EU are working through the question of who makes the rules in response to emerging international challenges. While the United States may be the more natural rule-maker of the two as the bigger economy, it has largely ceded its position to the EU, demonstrated by the EU’s leadership on topics such as digital policy and sustainability. Through the IRA, a broader conversation is playing out on how the transatlantic partners should create trade and industrial policy. The United States seems more prepared to leave behind current international norms and bypass WTO rules, while the EU is more protective of the existing legal frameworks for international trade.

The view from Brussels

Industrial policy as such is not the problem for Brussels. The EU was more comfortable with the CHIPS and Science Act (CHIPS Act) than the IRA, for example, because the CHIPS Act does not directly harm Europe’s economic strengths or actively constrain its ambitions. However, the EU views the IRA’s local content requirements as discriminatory and as directly targeting the EU’s ambitions for global leadership in green industries—having developed regulations and policies designed to foster green industries in Europe early.

US local content requirements do not distinguish between damage to China and collateral damage to partners without an FTA with the United States, such as the EU. The United States has shown a degree of flexibility and willingness to course correct to ease the EU’s concerns, including on commercial leasing and critical minerals content, but there is still frustration in the EU that the United States appears unwilling to offer Europe the same flexibility it has given to other countries. For example, the Biden administration agreed to a mini FTA with Japan without congressional approval, but as a result of domestic political concerns, is now unwilling to offer a similar type of deal with the EU, instead requiring a more substantial deal that will take longer for both sides to agree on and ratify.

The EU feels forced to respond to the IRA, but the form of response has split Europe, namely through loosening a restriction on member states’ state aid for green energy projects and reusing EU funds from other places to drive investment in sectors that could be impacted by the IRA. The EU cannot replicate the nature of the IRA’s generous subsidies (such as unlimited and automatic tax rebates for production activities) because the EU lacks the same fiscal muscle and the EU treaties generally prohibit the use of state subsidies, except in defined circumstances. These rules are essential to limiting competitive distortions and promoting a level playing field among EU member states. Loosening these requirements allows some member states with a large fiscal capacity (such as France and Germany) to grant subsidies, which other member states could not afford to do. But the alternative EU-level subsidies would effectively require richer member states to contribute to supporting industry in poorer member states, whether directly or through joint borrowing. Given countries’ existing stretched budgets, there is little enthusiasm for this approach. Other members have not had the visceral reaction to the IRA that larger EU economies have had, further limiting the appetite for action. Moreover, the EU’s views of the IRA have gradually become more relaxed as there is growing understanding that the bulk of the bill has to do with subsidies which are far less discriminatory than the EV tax credits.

More generally, however, and despite the positive noises being made in public, stakeholders in the EU are getting frustrated by the lack of progress on transatlantic industrial and trade initiatives such as the “green steel club,” the Critical Minerals Agreement, and the Trade and Technology Council. In private, many European leaders see the Biden administration as having adopted a similarly protectionist trade policy as the Trump administration, albeit with a less heavy focus on imposing unilateral tariffs and with far more cordial diplomatic relations.

A lack of progress in transatlantic discussions has not prevented unilateral EU policymaking from continuing. The EU has pressed ahead with its own instruments to incentivize trade and investment partners to better protect human rights and the environment and to ensure that the EU’s own high domestic standards do not undermine its international competitiveness. These instruments include the carbon border adjustment mechanism (CBAM); the Corporate Sustainability Due Diligence Directive; the deforestation initiative; and the EU’s efforts to secure more enforceable ESG rules in its trade deals with Mercosur countries. The European Commission has also just launched an investigation into Chinese subsidies for electric vehicles. Many of these instruments pose challenges for the United States, even if most will have a much larger potential impact on China.

The case for cooperation

There are three drivers that make cooperation and compromise necessary: the geopolitical imperative to enhance US and European resilience and counteract the growing threat from China; the need for transatlantic cooperation on climate change; and the desire to secure manufacturing jobs in Europe and the United States.

First, China remains the greatest long-term strategic threat to both sides of the Atlantic. China’s well-practiced model of copious and opaque state aid, its regulatory support for national champions, its global dominance in markets for critical raw materials, its willingness to weaponize trade dependencies, and its production capacity mean that it poses far more of an industrial threat to the EU and the United States than they do to each other. Both Europe and the United States also remain concerned by China’s growing technological capabilities, including in artificial intelligence. A trade or subsidy war between Europe and the United States would only serve Chinese interests by fragmenting Western markets and supply chains, making it harder for Western companies to counter the advantages enjoyed by certain Chinese firms such as their ability to achieve economies of scale.

Second, the persistent and growing threat of climate change serves as another simultaneous, perhaps conflicting, pressure that requires action now from all of the world’s largest economies. Industrial policy is climate policy and vice versa. A tit-for-tat US-EU trade dispute will not help deliver the green transition as quickly as a coordinated approach would. Conversely, a coordinated joint transatlantic approach to industrial policy, green tech, and carbon emissions could serve as an important catalyst to convince other major players around the world to follow suit.

Third, the IRA seems to be part of a broader trend in both the United States and the EU toward more proactive and dirigiste industrial policies to secure manufacturing jobs. In the near to medium term, the transatlantic partnership will be increasingly similar to the economic partnership model of the 1960s to 1980s where both sides were engaged in assertive industrial policies, including supporting national champions, and the United States was anxious about losing its technological leadership to Japan. However, there are new elements in the story. Policymakers must take into account sustainability targets, along with digital and technology policy and the green transition, and not just satisfy manufacturing goals. And China represents a far more profound geopolitical, economic, and technological threat than Japan did in the 1970s and 1980s.

Going forward, US industrial policymaking will also be as much if not more constrained by domestic politics, which will limit Washington’s ability to regulate industries or implement internationally agreed approaches in areas like climate change. Just as the passage of the IRA required money to support and assuage industry, labor unions, China hawks, and climate activists, the politically easiest way to shape industrial policy will be through the checkbook.

In Europe, industrial policy, subsidies, and state aid are similarly becoming more the norm than the exception, although the EU’s regulatory agenda also remains relentless. Continued extensions of the (originally temporary) loosening of state aid, first in response to the pandemic, then to Russia’s war in Ukraine, and now to the IRA, may prove to have strong staying power. The framework may be difficult politically to phase out again.

Different approaches to industrial and trade policy will continue to hamper the transatlantic partnership. The United States, while officially maintaining its commitment to the WTO and its reform, will likely continue to violate the WTO’s rules in pursuit of its industrial policy goals. The EU will try to at least plausibly comply with international trade rules and is reluctant to set rules that explicitly single out China (though it is prepared to use its traditional trade defense instruments against China, as it did recently in commencing its anti-subsidy investigation for Chinese-made electric vehicles). European officials expressed their frustration that the technical guidance from the US government for US firms on how to benefit from subsidies in the IRA, for example, continues to emphasize local content requirements and does little to quell lingering European frustrations. Several stakeholders told us that the US-EU Trade and Technology Council (TTC), which could function as a forum to resolve or mitigate these issues, remains mostly a talk shop and that many key EU-US discussions on trade and industrial still occur outside of this platform.

The clock on resolving a number of important EU-US disputes and charting a better course forward is ticking. US and EU policymakers must imminently resolve the steel and aluminum tariffs that have haunted US and EU trade negotiators since the Biden administration put the Donald Trump–era transatlantic trade war on ice. US and EU leaders have publicly committed to resolving the dispute by this fall’s summit which corresponds with the deadline for reaching an agreement before the suspended tariffs kick back in, but time is of the essence to make progress on this tricky issue. This will require creativity and compromise from both sides on CBAM given that the United States is unlikely to have a national emissions trading system in place anytime soon.

Finally, the 2024 elections impose a tight timeline on both the EU and United States to find a potential path toward stronger industrial and trade relations. The US presidential election remains top of mind for policymakers on both sides of the Atlantic. Europeans have a reasonable concern that if an isolationist mood returns to the White House, the United States will be even less willing to take Europe’s concerns and interests into account, which in turn will make the EU even more determined to pursue unilateral strategies to protect its interests in the name of “strategic autonomy.” As campaigning makes politics more partisan, even limited results are better than none, and they are needed sooner rather than later.

Europe will choose a new European Parliament and Commission college in 2024. While Ursula von der Leyen’s reappointment currently remains probable and would help maintain good US-EU relations, it is not guaranteed. Internal EU horseracing could incentivize lavish spending promises to support domestic industry. Political trends in European member states will also come into account. The upcoming Polish and Hungarian presidencies of the Council of the EU are likely to prove polarizing and controversial, adding an additional layer of difficulty to EU policymaking. A potential further shift to the populist right in Europe, following recent wins in Finland, Slovakia, and elsewhere, may also impact the EU agenda and challenge support for trade and climate action. Together, these trends mean the EU may soon find it more difficult to build consensus around policies that would strengthen the transatlantic relationship.

Areas of convergence

While differences remain on each side of the Atlantic in both motivations that inform actions and the actions themselves, there are still strong areas of convergence. The United States and the EU are increasingly aligned on their respective determination to combat deindustrialization and build local green industries.

For Europe, much of the focus is about maintaining its competitiveness and trying to get third countries to adopt the EU’s ESG standards, so that the EU’s high standards do not lead to firms moving their businesses offshore where standards are lower. The EU’s goal is to become a leader in green technologies of the future. In that vein, it is a good thing, many Europeans stressed to this working group, that the Americans are taking climate financing seriously, and this can offer opportunities for European firms such as new subsidies for scaling up production.

For the United States, the focus is on a foreign policy for a middle class: an idea that foreign policy must fit into a domestic lens—in this instance, job creation. Jake Sullivan made the most articulate case for this approach: The United States will prioritize its own industry, “unapologetically” even, as well as partnerships with like-minded partners. His reference to Europe in this effort is a recognition of the importance Europe plays to this fundamentally domestic strategy.

Merely agreeing on the need for industrial policy will not be enough. Uncoordinated industrial policy can undermine the effectiveness of said policies if two economies compete for global leadership of the same industries. But there is space for convergence when the aim of industrial policy is to de-risk from problematic third countries or to diversify supply chains, for example. Where both the United States and Europe start with a low base and neither is likely to quickly achieve global dominance, industrial policy can be treated as a positive-sum game.

Some EU member states are developing subsidy programs that, while smaller in scale, achieve a similar effect as US efforts while being more justifiable under international trade law. French President Emmanuel Macron, for example, recently announced changes to French subsidies for vehicles that qualify as “green.” The assessment of whether a vehicles is green would take into account factors like the emissions involved in transporting it from its place of manufacture and whether the production facilities were powered by coal or more climate-friendly sources of electricity. These changes are expected to exclude most electric vehicles made in China while still rewarding countries for greening their means of production. Such subsidy schemes illustrate that there is space for European and US subsidy programs to be better aligned without requiring the EU or United States to breach their red lines.

Europe and the United States are also increasingly speaking the same language on China. While country agnostic, the Commission’s Economic Security Strategy provides little doubt that the Commission wants to see the EU reduce its dependencies on China. Important to note, however, is that the Commission’s approach, led by the transatlanticist von den Leyen, is not necessarily adopted by all of its member states. German Chancellor Olaf Scholz has stressed that de-risking is the responsibility of companies, not governments. Macron has also signaled the importance of Paris’s continued commercial relationship with Beijing. Even if the Commission’s latest proposals on Foreign Direct Investment screening and export controls on sensitive technologies require member state buy-in, a process that can be cumbersome with Berlin and other capitals being hesitant, it is clear that current EU and US approaches toward economic security are converging far more than they are diverging.

US policymakers should recognize the limits of Europe’s hawkishness on China, and see a partner that is, if not entirely in sync, moving closer to the US approach. At the same time, the United States has also aligned with Europe by emphasizing that its strategy is aimed at a few narrow strategic sectors, rather than trying to achieve a broader decoupling. Joint statements from the TTC, US-EU Dialogue on China, and the US-EU High-Level Consultations on the Indo-Pacific, for example, provide an example of communiqués written with China in mind and illustrating a degree of convergence.

Industrial policy is not a monolith, and certain areas will be harder to get agreement on. The attempt to resolve the oversupply of steel and aluminum, for example, will prove difficult without negative repercussions for US or European manufacturers. But cooperation in certain areas remains feasible. The clean energy investment dialogue, now folded into the TTC and created in response to the IRA, is proof that cooperation is possible. Other related issues like the CBAM or a proposed critical raw material club provide the opportunity for discussions to avoid competition or establish greater cooperation. The EU’s ESG initiatives, such as its forced labor law, which along with its stated focus on upholding human rights was also designed to keep certain Chinese products out of the EU market, was a welcome sign in Washington which has taken similar steps itself in recent years.

Recommendations

There are short- and long-term policies that decision-makers in Brussels and Washington can agree on. And there are both modest successes and moonshot opportunities possible for each side of the Atlantic.

With an upcoming EU-US summit, immediate action is needed, and policymakers should consider the following for October:

• Find a creative solution to steel and aluminum tariffs: A return of transatlantic tariffs would be a political disaster for both the Biden administration and the von der Leyen Commission. Failure to resolve the issue, or develop a stopgap, would put further transatlantic trade and industrial policy on a much weaker footing politically. The EU has been hard pressed to accept Washington’s proposal to resolve the dispute by creating a global green steel club (with membership premised on countries agreeing to reduce their industries’ carbon intensities, to avoid overproduction and limit the role of state-owned enterprises). Brussels believed the proposal could breach WTO rules by imposing discriminatory tariffs against imports from countries that are not members of the club. The EU has already enacted a CBAM, which would levy tariffs on imports based on the carbon intensity of their production without overtly discriminating among countries, and which has pushed as the model for a transatlantic deal. But the EU does not believe it can give the United States its requested blanket exemption from CBAM without breaching WTO rules, and the parties have not found a way to comprehensively tackle problems like perceived overproduction. Despite these problems, news reports suggest there is convergence at least on the threat posed by Chinese steel and aluminum exports. The EU is poised to launch anti-subsidy investigations which could result in the EU imposing higher tariffs on China’s exports of these products to the EU – mirroring Washington’s approach. While this would not solve all the problems the EU and US had hoped, it would at least give the US a rationale for extending the suspension of tariffs on EU products, buying time for both sides to work on a more comprehensive approach.
• Identify areas of industrial policy where US and EU subsidies will not be perceived as a zero-sum game and prioritize work in these areas: In line with their cooperative approach on semiconductor subsidies, the EU and United States could focus their industrial policies on other sectors where the biggest threat to their local industries is China rather than each other. This is true in electric vehicles: The EU is now starting to realize its industry is more threatened by Chinese vehicle exports to Europe than by constraints on Europe’s ability to export vehicles to the United States. But it is also true in other sectors, such as extraction of critical minerals, as noted in the communiqué from the last TTC. The EU and United States should focus on identifying and prioritizing other sectors where they both have a low share of global production and their ambitions are to reduce their reliance on China rather than dominate the global market at the expense of the other.
• Establish a WTO-compliant club: Without a US-EU FTA and while WTO compliance is a first-order priority of the EU, the United States and EU should concentrate instead on a club model with a focus on coordinating subsidies and the use of trade defense instruments. Any club must stay within WTO rules, while still remaining beneficial for Washington and Brussels, avoiding active discrimination of third countries. For example, building on the clean energy incentives dialogue, the club could work on designing subsidies that are WTO-compliant while bringing EU and US policies into closer alignment on China. The club could take inspiration from recently announced changes to French electric vehicle subsidies, which take into account factors like China’s heavy reliance on coal for powering its manufacturing industry. The club could also coordinate on the use of trade defense instruments to ensure that the other jurisdiction’s businesses will not become unexpected collateral damage in any trade dispute with China. For instance, there are concerns that the EU’s current anti-subsidy investigation into Chinese electric vehicles could also result in tariffs against US carmakers that manufacture in China.
• Take US concerns about the EU’s ESG agenda into account: The EU seems likely to slow down its barrage of ESG initiatives. French President Macron has called for a “regulatory break,” with a period focused on implementing existing rules rather than making new ones. The conservative European People’s Party has similarly proposed a pause on new initiatives. And the European commissioner responsible for many of these initiatives, Frans Timmermans, recently stepped down to return to national politics, with his successor, Maroš Šefčovič, promising more consultation with industry. The EU should take the opportunity to consult with the United States and third countries about how the EU’s recent ESG laws will be implemented, and the shape of potential future initiatives. This dialogue would have three benefits. First, it would help assuage American concerns that the EU’s agenda is inflexible and does not adequately take Washington’s concerns into account. Second, it could help ensure that EU initiatives do not create unnecessary barriers to a single transatlantic marketplace. Third, it could help the EU ensure that its initiatives better reflect the EU and United States’ joint ambition to foster closer economic ties with countries that China is trying to attract—rather than making the EU look like a difficult and demanding trading partner.
• Commit to implementing the IRA without causing further harm to EU industries: EU policymakers should be clear-eyed that the EU will not receive a Japan-style mini FTA as it has become politically unfeasible. Instead, the Biden administration could commit to a “do-no-further-harm” policy in the implementation of the IRA, specifically through its technical requirements where some EU policymakers are concerned that the administration is taking an unnecessarily protectionist and “America first” approach when allocating IRA funding. The executive branch has significant discretion over how the IRA is interpreted and applied, so it is somewhat unconstrained by Congress. The United States must be clearer on things such as permitting and what “local content” means—does that translate to the whole supply chain needing to be included in the United States or just the final assembly? Another relevant issue is the role of hydrogen subsidies under the IRA. The US and the EU should coordinate closely on how to define clean hydrogen as this is a promising area of transatlantic cooperation as the US is considering doubling down on subsidies for hydrogen while the EU is already leading on the technology and know-how that is essential for deploying hydrogen.

Policymakers should also start working now on the longer-term issues that industrial policy will ultimately require:

• Make the case for US-EU third-party engagement: Both the United States and EU need third countries. But for many countries, engagement with China is not just politically necessary, it is more attractive. Yet China’s largely condition-free investments—compared with ESG requirements, for example—still come with strings attached, catching countries in a debt spiral. China also frequently fails to deliver on its infrastructure investments, or those investments fail to deliver long-term economic benefits. The US-EU relationship has an opportunity to gain the advantage. US and EU policymakers should map out a joint initiative to promote an engagement strategy with other likeminded democracies, especially within the context of initiatives such as the G7 or Organisation for Economic Co-operation and Development, and build on the success of projects including those in the TTC to sell the benefits of sustainable investments.
• Double down on the TTC: Many of the irritants in the transatlantic relationship have come from the lack of a unified, collaborative approach, driven by the fact that the United States did not have a position on key issues that mattered to the EU (like tackling anti-competitive activity in tech), and so the EU therefore adopted its own unilateral approaches. The TTC is still important to help address this dynamic. It can help tease out where the United States has a position. Although it cannot solve US domestic political gridlock, it can therefore help the EU design its initiatives so that, if the United States is later able to move (like it has on climate), EU-US cooperation does not face unnecessary hurdles. Similarly, it can give the United States more predictability about the direction of travel for the EU. Dismissal of the TTC as a “talking shop” consequently seems unnecessarily negative: Many of the TTC’s successes will be from avoiding disputes before they arise. In particular, discussions on standards of emerging technologies such as AI and quantum, supply chain issues, and economic security are all promising areas where the TTC can make a distinctive contribution. Before the elections, Presidents Biden and von der Leyen should commit to continuing the TTC as central for transatlantic coordination on trade and tech issues while tasking a group of advisors to review the effectiveness of the format and put forward a set of ideas for how to enhance its effectiveness over the next four years such as streamlining the ten different working groups.

Erik Brattberg is a nonresident senior fellow at the Atlantic Council’s Europe Center.

Frances G. Burwell is a distinguished fellow at the Atlantic Council and a senior director at McLarty Associates.

Jörn Fleck serves as senior director with the Europe Center at the Atlantic Council with primary responsibility for the Center’s EU efforts, programming related to Western Europe, Brexit, and US-EU relations.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center.

Zach Meyers is a research fellow at the Centre for European Reform (CER) where he works on EU competition policy, particularly in the digital sector.

James Batchik is an assistant director at the Atlantic Council’s Europe Center, where he supports programming on the European Union, the United Kingdom, Germany, the Three Seas Initiative, and the center’s transatlantic digital and tech portfolio.

Emma Nix is a program assistant with the Atlantic Council’s Europe Center where she supports the Europe Center’s programming on the Three Seas Initiative and Central and Eastern Europe.

To read the full issue brief, click here.

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