US in ill-conceived turn to neo-mercantilism

Omar Adan

Global Courant

Speaking to the Brookings Institution in April 2023, U.S. National Security Adviser Jake Sullivan stated that national security and industrial policies guide U.S. trade. Sullivan phrased his recipes in soft tones and catchy sentences. ‘Disconnecting’ is out, ‘de-risking’ is in.

The goal is to “forge a new consensus— something different from the market-oriented Washington Consensus of yesteryear. National security restrictions have their limits in a “small yard, high fence”.

US security tries not to participate in a “technology blockade” against China but rather on a ‘level playing field’. The wording recalls Napoleon’s remark about an ‘iron fist in a velvet glove’.

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Embedded in Sullivan’s remarks were familiar neo-mercantilist themes. These include that post-World War II trade agreements have done little to improve life in the US and, at most, have only enriched wealthy Americans rather than working people. Neo-mercantilistic themes also suggest that industrial policy is essential to fueling innovation in neglected sectors.

They emphasize that allies must accept heavy U.S. subsidies even as they attract private investment to U.S. shores, and that national security, broadly defined, must take precedence over market forces.

Not surprisingly, Sullivan’s speech was met with cheers from the deacons of neo-mercantilism. Clyde Prestowitz, an independent columnist, Sullivan applauded because he turned his back on free trade and globalist policies. Todd Tucker of the Roosevelt Institute cordially supported Sullivan for embracing industrial policy and “moving away from moribund neoliberalism”.

Oren Cass of American Progress quibbled that “disconnection is essentialand admonished Sullivan for not taking the preponderance of national security and industrial policy far enough.

Sullivan and his supporters reject basic facts. Post-war liberalization, accompanied by revolutions in transportation and communication, raised the living standards of billions of people. Profits for the United States alone now exceed US$2 trillion a yearabout 10% of GDP.

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Despite its declining popularity, trading still dominates majority support among Americans. Huge industrial subsidies awarded to selected companies may not accelerate growth in the United States. Fierce competition between leading companies – at home or abroad – seems to be the better formula.

If the United States cares about its role as a world leader, then neoliberalism is much better than neomercantilism.

Echoing US trade ambassador Katherine Tai, Sullivan proposed “modern trade agreements” – as opposed to old-fashioned free trade agreements – to achieve “21st century goals”. Those objectives are to promote green energy, to ensure security and openness in digital infrastructure, to prevent a race to the bottom in corporate taxation, to protect labor and the environment and to tackle corruption.

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US trade envoy Katherine Tai only implements “modern” trade deals, not necessarily “for free.” Photo: AFP/Bill O’Leary

The avatar of “modern trade agreements” is the Indo-Pacific Economic Framework, an agreement that contemplates neither economic incentives nor enforcement mechanisms to achieve the goals praised by Sullivan and Tai.

Tariff cuts are not on the table. By implication, market access provisions such as Buy America waivers and exceptions to the Jones Act — which requires goods shipped between U.S. ports to be carried exclusively on U.S. vessels — are also excluded.

As if to emphasize the economic vacuum, Taiwan characterized its parallel agreement with the United States as onebuilding blockto any free trade agreement. But nothing in the draft agreement lowers barriers to agricultural trade, lowers tariffs on manufactured goods, or relaxes Buy America regulations. Such market access provisions are high on Taiwan’s wish list.

From Adam Smith in 1776 to the present, free traders accept the primacy of national security. But the eternal question is about the right domain of constraints. U.S. decisions about whether a country, company, product, or technology threatens U.S. national security are shielded from both public and judicial scrutiny and deliberately ignore economic costs.

While Sullivan is National Security Advisor, the yard may remain small, but his successor could have broad views — especially if former US President Donald Trump is elected to a second term.

US President Joe Biden has successfully implemented his domestic agenda and further legislative action on the trade front and is now awaiting the president-elect in November 2024. This should be a moment for Biden to use his presidential powers to promote an ambitious World Trade Organization agenda.

For the next 18 months, Biden should add the global economy to his justified focus on Ukrainian defense.

Yet Sullivan only gave one weak kink to the World Trade Organization. Sullivan’s words did not call for US leadership in building a rules-based trading system that respects market principles. But Sullivan’s remarks shouldn’t be the last we hear from President Biden about US policy toward the global economy.

Gary Clyde Hufbauer is a Senior Fellow at the Peterson Institute of International Economics.

This article was originally published by East Asia Forum and has been republished under a Creative Commons license.


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US in ill-conceived turn to neo-mercantilism

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