Biden’s Trade Challenge: Kicking the China Dependency Habit

Date: Friday, June 23, 2023
Source: Wall Street Journal

China has many sources of geopolitical leverage, from its military to its vast market. Potentially, the most potent and least appreciated is the choke-point position it has built in global supply chains.

President Biden has devoted a lot of his foreign policy to addressing that vulnerability, from cultivating closer ties to India, which aspires to become an alternative manufacturing base to China, to negotiating critical minerals deals with Europe.

Oddly, he hasn’t used a more obvious tool: trade deals. Biden has turned aside pleas to join pacts such as the Trans-Pacific Partnership, an accord between 12 Pacific Rim economies, or use access to the U.S. market as a tool of diplomacy.

A speech by U.S. Trade Representative Katherine Tai last week provides important new insight into why this is. While reiterating progressive criticism of free trade, she also argues it increased rather than decreased China’s influence over the world’s production networks.

Past trade deals’ emphasis on efficiency and low cost caused “significant content to come from countries that are not even parties to the agreement,” she said. “These rules benefit the very countries that have used unfair competition to become production hubs.”

How can China benefit from a free-trade agreement of which it is not a member? Via the “rules of origin,” which determine how much of a product’s value can come from outside a free trade area and still qualify for duty-free access. A reason the Trump administration renegotiated the North American Free Trade Agreement was that its rules of origin were so loose as to allow a growing portion of auto content to originate outside North America, particularly in China.

A similar argument was leveled against the TPP, negotiated by former President Barack Obama and repudiated by former President Donald Trump. Critics, including then-candidate Trump in 2015, said its rules of origins were loose enough that even though China wasn’t a member, products with substantial Chinese content could enter the U.S. duty free.

Many Asian countries would love Biden to rejoin the TPP or turn his less formal Indo-Pacific Economic Framework into a free-trade agreement that lowers barriers to trade. But their goal in any trade deal with the U.S. is to leverage their existing supply chains which are already tightly integrated with China. The result would be more, not less, dependence on Beijing.

As Tai said in her speech: “The supply chain rules in these FTAs tend to reinforce existing supply chains that are fragile and make us vulnerable. This doesn’t make sense at a moment in history when we are trying to diversify and make them more resilient.”

Tai avoided singling out China in her remarks. In part that is because Biden administration officials want to avoid unnecessarily antagonizing Beijing or ratifying its accusations (and allies’ worries) that the U.S. harbors a “Cold War mentality.”

It is also because Tai, like Biden, sees free trade in general, not just with China, as part of a discredited orthodoxy that gave priority to efficiency and consumers while undermining workers, the environment and national security. In its place, they champion industrial policy and buy-American incentives, a doctrine I’ve called “Bidenomics.”

“We decided to replace this theory with what the press has now called ‘Bidenomics,’” Biden told a campaign-style event in Philadelphia on Saturday. “I don’t know what the hell that is. But it’s working.”

Yet most of what Tai and Biden blame on trade is really attributable to trade with just one country. The loss of jobs and incomes to American workers resulting from China joining the World Trade Organization in 2001 far exceeded anything comparable with Japan or Mexico, never mind smaller FTA partners from Peru to Jordan.

And no other country is as central to supply chains. China accounts for nearly a fifth of the world’s manufactured exports, up from less than 5% in 2000. It accounts for 66% of lithium-ion cells, used in electric-vehicle batteries; half the materials in windmills; 86% of all rare-earth minerals; and 77% of drones, according to the European Union, and more than 80% of solar-panel manufacturing, according to the International Energy Agency. Beijing is a key supplier of active pharmaceutical ingredients used in drugs, purified neon used to fabricate semiconductors and the dyes used in medical imaging.

Western companies source countless manufactured inputs in China. Group of Seven countries imported $1.2 billion in aircraft parts from there in 2018, including inputs to foreign airliners, according to a report released Thursday by the Atlantic Council and Rhodium Group. While mostly low-tech, those inputs can be difficult to replace on short notice, the report said, pointing to a shortage of wire connectors that coincided with lockdowns in China in 2022 that delayed production of Boeing’s 737 jetliner.

These choke points are powerful levers with which Beijing could deter or retaliate against the West, for example, in a flare-up over Taiwan.

No other country is remotely comparable. Allies such as the Netherlands, Canada and Japan are major suppliers of semiconductor machinery and metals but they hardly threaten American security. Tai cited the disruption to world fertilizer and grain markets caused by Russia’s invasion of Ukraine. But the two countries account for less than 30% of world exports of fertilizer, wheat, barley or corn.

Some countries have sought to translate their control of oil and gas supplies into geopolitical clout, from the 1973 Arab oil embargo to Russia’s cutoff of natural gas to Western Europe. But oil and gas are fungible, and consumer nations are relatively adept at finding alternatives.

Tai is right: Trade agreements that increase the world’s dependence on one, potentially hostile, country undermine U.S. security. Avoiding that should be a goal of future trade agreements. For example, TPP’s rules of origin could be renegotiated to discourage inputs from nonmarket economies, i.e., China.

For the U.S., Tai said, resilient supply chains mean “having more options that run through different regions.” Done right, trade can create those options.

[Read from the original source.]