US protectionism is a flawed strategy

Omar Adan

Global Courant

US National Security Adviser Jake Sullivan recently came to the Brookings Institution to give a speech the international economic strategy of the Biden administration. There are several things about Sullivan’s speech that have been well received by many economists, but also some concerns.

A positive aspect of the strategy is the recognition that economic strength is the basis of national security. That the US partnership with its allies, especially in Asia and Europe, is a foundation for economic security and that concerns about China’s trade practices should not lead to a complete decoupling of the West from China.

Read also: US in an ill-considered turn to neo-mercantilism

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Sullivan used the image of a small yard with a high fence – that is, there are technologies of security importance where we Americans want China out of the supply chain (the high fence), but this will affect only a small portion of the US economy (the small yard). Other economic exchanges with China can continue, as well as cooperation on global public goods such as carbon reduction and development aid.

What is worrying about the strategy is its heavy focus on industrial policies that include both subsidies and domestic market protection through “Buy American” provisions. Subsidies are well justified for problems with large externalities, but protectionism will prove to be a mistake.

President Joe Biden’s administration uses one tool, industrial policy, to achieve two goals: to protect national security and to bring back manufacturing jobs. Trying to hit two targets undercuts each target to some degree.

In terms of national security, the “Buy American” provisions make it more expensive to meet US targets. Take the energy transition, for example.

The Biden administration rightly believes that a transition to electric vehicles and renewable energy generation is key to America’s long-term prosperity and security. But the “Buy American” provisions will make electric cars, batteries and renewable technologies more expensive in the United States than elsewhere, delaying the transition.

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As for the second goal, creating manufacturing jobs in the United States, the government’s approach is very indirect. It consists of subsidizing the build-up of capital stock, both through direct subsidies and indirectly through import protection, in the hope that more capital stock will create more jobs.

Assuming the proposed construction of infrastructure and investments in semiconductors and electric vehicles actually go ahead, jobs will clearly be created. But some, perhaps all, of the workers involved will be drawn elsewhere in the economy, including other manufacturing jobs.

After all, the United States currently has an unemployment rate of 3.7%, so there aren’t many underemployed workers. There is no guarantee that net manufacturing jobs will be created.

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In addition, the world has changed so much that the average manufacturing wages in the United States are now lower than average wage in the rest of the private sector. The idea that manufacturing jobs in the United States pay particularly well is outdated.

If we are concerned about good jobs, as we should be, a more direct approach would be to focus on labor issues, including creating a better climate for union organizing, strengthening social security, providing government support for childcare and early childhood education, and investments in mid-career retraining. All of these are likely to have wider implications for workers than subsidizing a small portion of industrial output.

To be fair to President Biden, these social measures are all part of his broader agenda. But the administration’s focus has been on its industrial policies, and now there seems little chance of advancing its social agenda given the divided US Congress. There is a risk that little or no progress will be made in the manufacturing renaissance in the coming years and that this failure will be obvious and politically striking.

Another issue is how these protectionist measures are viewed by US allies. Biden has done a great job rebuilding security alliances with partners in Asia and Europe, which is an important part of the US strategy.

The United States has been a leading force in building the coalition to support Ukraine in its resistance to the Russian invasion and has convened its partners to counter China’s economic coercion. But many partners are unhappy with the US turning inwardsas evidenced by the decision to exit the Trans-Pacific Partnership and on its recent protectionist measures.

American partners generally liked Sullivan’s language about the small garden with a high fence, because they are not in favor of decoupling from China. But there is some skepticism from allies, and even more so from China, that the United States is sincere about keeping the yard small. The United States will roll out additional export and investment controls for China, and even if each step seems small, the overall trend is toward decoupling.

The unwillingness of the United States to participate in new trade and investment liberalization is a serious flaw in its strategy. It leaves the field open for China to strengthen its economic ties with countries around the world.

As a result, the US international economic strategy will produce mixed results at best. It is hoped that the United States will eventually respond by returning to promoting an open global economy and leading by example.

This article was first published by East Asia Forum, which is based on the Crawford School of Public Policy within the College of Asia and the Pacific at the Australian National University. It has been republished under a Creative Commons license.


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