The U.S. would be insane to go it alone on trade and manufacturing

Punching down on our allies will not help the middle class.

Art by GPT-4. Prompt: “Fortress America”

The paradigm shift in U.S. economic policy began during the 2016 presidential election campaign. It was in that campaign that the candidates of both parties agreed on scrapping the Trans-Pacific Partnership (TPP). The TPP was a proposed free trade deal between the U.S. and a bunch of friendly Asian countries that was intended to create a regional trade bloc as a counterweight to China. Both Donald Trump and Bernie Sanders came out against the TPP early on, and Hillary Clinton was eventually pressured into rejecting it as well. When Trump won the election, canceling the TPP was one of the very first things he did, and Bernie Sanders praised him for it wholeheartedly.

That was a pivotal moment in U.S. economic history. Although some opponents pointed to specific problems with the TPP — for example, its intellectual property provisions — neither Trump nor Sanders was thinking much about those specific issues. Instead, as both Trump and Sanders made clear, the cancelation of the TPP was due to the idea that free trade hurts American workers.

Which is not entirely wrong. As we discovered in the 2000s with the China Shock, free trade can hurt American workers, quite badly. Without the China Shock and the devastation of the U.S. manufacturing workforce in the 2000s, I doubt that the groundswell of anger against the TPP would have been so powerful, or so bipartisan. The China Shock is pretty clearly what killed the elite consensus in favor of free trade, at least within the economics profession.

As I wrote many times back when I was at Bloomberg, the TPP was absolutely the wrong target for the backlash. The intellectual property provisions were bad, but these provisions could have been removed from the deal — and indeed, they were removed from the deal, immediately after the U.S. withdrew. The fact that they were removed didn’t matter; the U.S. showed zero interest in rejoining the modified deal, because opposition to the TPP had never really been about IP in the first place.

The main concern was about labor, but this concern was misplaced. The key TPP signatories were developed countries — Japan, Australia, Canada, and New Zealand — with high wages, strong unions, and high environmental standards. Trading with countries like that doesn’t present a competitive threat to American workers. And the two low-wage countries in the deal, Indonesia and Vietnam, were much smaller than China, and had zero chance of causing anything resembling the China Shock of the 2000s. The same economists who showed that the China Shock devastated American workers also found that this was the only time in modern history that a trade shock had had that effect. Trade usually isn’t a big danger to American workers; China was simply unique in its size and its willingness and ability to pull out all the stops to take manufacturing market share away from other countries.

The TPP would have had two big benefits. The first is diplomatic. Vietnam and Indonesia are key “swing states” in the contest for influence between the U.S.--Japan bloc and China, and binding them more closely to the U.S. economy would have helped keep them out of China’s orbit. The second benefit would have been the opportunity for friendshoring — everything we produce in Vietnam or Indonesia instead of China weakens China’s dominance of global manufacturing.

I raised these concerns repeatedly, as did many other commentators. But the U.S. was in the mood to push back against free trade in 2016, and the TPP happened to be the trade deal that was on the table at the time, so it took the brunt of the backlash. And because of cognitive dissonance, it’s very hard for most Americans to now look back and realize that this was a mistake — withdrawing from TPP was a bipartisan, collective decision, so we have to tell ourselves that we must have had a good reason for doing it.

But now, eight years after the death of TPP, we have an opportunity not to repeat our mistake. The Biden administration has shown some encouraging signs that it understands the importance of trading with our allies. Biden lifted Trump’s pointless tariffs on Japanese steel, and gave the EU an exemption from similar tariffs. When South Korea complained that Biden’s Inflation Reduction Act put its electric vehicles at a disadvantage, administration officials made regulatory changes to solve the issue, and the dispute was patched up.

Most importantly, Biden has created something called the Indo-Pacific Economic Framework for Prosperity (IPEF). The agreement — which includes all of our major Asian allies, as well as all of the region’s key “swing states” — covers various areas of cooperation like climate change and corruption. But the key provision is an agreement to cooperate on supply chains. The Center for American Progress, a progressive think tank, praised this part of the IPEF back in November:

The [IPEF is] designed to enhance supply chain coordination, increase investment, and improve working conditions in a region critical to U.S. national security, as well as a key source of inputs for U.S. manufacturers and a key export market for U.S.-made goods…A strong domestic industrial base requires U.S. manufacturers to have access to resilient and reliable supply chains for the component parts and materials needed to make products here at home…

Governments do not directly control most supply chains, which is why the IPEF Supply Chain Agreement is so important…Among other things, it calls for partners to improve logistics infrastructure, collaborate on investment attraction for critical sectors, help companies diversify their sourcing, share best practices on cargo risk assessment, increase supply chain monitoring capabilities, and remove restrictions on warehousing near ports of entry…The pact contains a commitment from each partner to monitor supply chain vulnerabilities and import dependencies and to share information with other partners…The agreement also establishes three new bodies designed to facilitate cooperation among IPEF partners on supply chain issues going forward.

This is all great stuff, and these sorts of institutions will definitely be needed if the U.S. is going to decouple its supply chains from China. Simply knowing where components are sourced from is crucial in order to avoid fake decoupling, in which Chinese products are shipped to third countries for light assembly before being shipped on to the U.S. IPEF will help monitor that, as well as observing choke points where China still controls key production bottlenecks, and helping figure out which other countries could provide alternatives.

But these are only a few tentative steps. There are still plenty of signs that the go-it-alone attitude of the Trump administration, which started trade wars with allies and rivals alike, still predominates in the Biden administration and in the larger progressive movement.

For one thing, the IPEF was originally designed with a trade deal as part of the overall framework. But Biden canceled this at the last minute, under pressure from other Democrats:

[I]n the final hours of talks, Biden’s team walked away from the trade portion of the pact under pressure from lawmakers in their own party, worried Republicans could use the deal against them in 2024…[T]hree officials in and around that agency say the final call to jettison the trade provisions came from the National Security Council at the White House, which got cold feet after Midwestern lawmakers like Sens. Sherrod Brown (D-Ohio) and Tammy Baldwin (D-Wisc.) said they would not support the deal…

Whoever ultimately pulled the plug, the motivation for their decision is clear: the U.S. was not able to secure commitments from member nations to raise labor and environmental standards…Without those, the Midwestern Democrats feared [having to] to explain all that to Rust Belt voters this fall.

“Even if their [Indo-Pacific] framework wasn’t really a retreat on the progress we’ve made … the perception would be there,” Baldwin [said].

This demonstrates that U.S. trade policy, like so many other aspects of U.S. politics and society, is still living in the shadow of the 2016 election. Polls back this up — a 2023 survey by the Reagan Foundation found that “When asked which particular priorities should be a major focus of U.S. foreign policy, protecting American jobs and companies ranks at the top of the list.” It’s going to be a long time before American politicians are bold enough to make the case for trade with allies.

Without provisions that give Asian countries greater ability to sell components to U.S. producers, the IPEF’s supply chain provisions are just an information-gathering mechanism and a forum for conversation. That’s not useless, but if we want to actually get our supply chains out of China, we’re going to need to provide financial incentives for companies to source things from India, Japan, Indonesia, Korea, etc. Tariff reductions are one such financial incentive, but thanks to the spirit of 2016, these appear to be off the table.

Another example is the acquisition of U.S. Steel. U.S. Steel is a crappy company that has never really done any innovation; it’s not even the biggest U.S. steelmaker anymore, and it’s in terminal decline. But when Japan’s Nippon Steel offered to buy U.S. Steel, Biden publicly opposed the deal.

Progressives are trumpeting the decision. Todd Tucker, who handles trade policy for the influential Roosevelt Institute, and one of the leading progressive voices on industrial policy, praised Biden’s move as “a foreign policy for the middle class”:

When faced with a choice between upsetting labor or potentially upsetting an ally, the working class needs to win—at least some of the time…[W]hen unfair trade practices in China or other disruptions hurt steel markets, the [steelworkers’] union reasonably questioned whether a Japanese company would ever idle its home country operations before it idled its US operations, and whether it would use its newfound control over US Steel’s iron ore assets to privilege its overseas factories. Additionally, Senators Brown, JD Vance (R-OH), and Bob Casey (D-PA) have raised concerns about Nippon’s ties with Chinese producers, which have undercut US producers in recent years.

This is extremely foolish, for a number of reasons.

First, it’s a slap in the face to a key U.S. ally. Japanese leaders were astonished, with one former government official saying “We thought we're completely aligned countries.” This comes at a time when U.S.-Japan cooperation is becoming increasingly crucial. We need Japan to help us stop China from dominating key strategic industries — semiconductors, batteries, magnets, etc. And U.S. defense manufacturing — hamstrung at home by a number of factors, including NEPA and other environmental permitting regulations that Todd Tucker strongly supports — is becoming increasingly dependent on allies like Japan who can actually build things.

At a time like this, treating Japan like a foreign adversary is an absolutely boneheaded diplomatic move.

Second, Tucker’s framing of the deal as a choice between supporting an ally and supporting the U.S. middle class is absolutely wrongheaded. As far as I can tell, the steelworkers’ union’s fear that a Japanese company would cut American jobs to preserve Japanese jobs seems rooted in absolutely nothing except instinctive fear of foreign ownership. This has certainly not happened in the auto sector, where Japanese manufacturers are deeply invested in U.S. production — most of the most “made in America” cars are made by Japanese brands, while U.S. companies have consistently shipped more American auto manufacturing jobs overseas.

Furthermore, U.S. Steel itself is a dying entity. Despite the “U.S.” in the name, it’s not even the top American steelmaker — that would be Nucor, which uses the far more advanced mini-mill technology (which is also much easier to decarbonize). Without an acquisition, U.S. Steel is destined for the scrap heap, and all of the good middle-class union manufacturing jobs it still supports will vanish into thin air. Of course, U.S. Steel could theoretically be acquired by an American producer, but Cleveland-Cliffs, which Tucker cites as an alternative buyer, appears to be backing out. The Japanese company was essentially offering to do the U.S. middle class a favor by buying the doomed husk of U.S. Steel; now, all those steel jobs are in much greater danger.

As for Nippon Steel’s factories in China, they’re a tiny part of its global production, and it’s unclear why they would represent a strategic threat to the U.S. in any case.

I suspect that beneath all the stated concerns, what Tucker and other opponents of the U.S. Steel deal really wanted was just any kind of a “win” — some kind of political victory they could point to and say “Look, worker power defeated the foreign corporations.” If that win couldn’t come against the U.S.’ real competitive threat, i.e. China, then it had to come against a weaker, more vulnerable ally like Japan. We punched down because we needed someone to punch. This was exactly Trump’s reason for slapping steel tariffs on Japan, and Tucker’s approving citation of J.D. Vance — a leading MAGA figure and Trump ally — suggests that the same sentiment is in operation now.

This is all incredibly frustrating. The skeletal remains of U.S. manufacturing aren’t threatened by Japan or Europe — they’re threatened by China. It’s China that managed to devastate the U.S. middle-class manufacturing workforce in the 2000s — something trade with Japan, Europe, Mexico, etc. never did. It’s China, not Japan or Europe, that massively subsidizes its products and floods foreign markets with its cars, chips, and electronics. It’s China that deliberately maintains control over metals processing and other key choke points in the global manufacturing supply chain.

And China, currently, is winning the manufacturing race. Currently, it manufactures about as much as the U.S. and all of our allies combined:

Source: Richard Baldwin

The U.S. will not be able to stand against that juggernaut by retreating behind a fortress of tariffs and trying to become an expensive, smaller mini-China. The only way the U.S. will be able to stand against that juggernaut is to get a big gang together. We have to weld the economies of the democratic nations into a single whole, sharing supply chains and markets and technology. Only by doing this will we be able to match the incredible size and scope of the Chinese industrial machine.

The TPP would have been a first step toward creating that unified economic bastion, but we killed it. The IPEF’s trade component would have been an important step in that direction, but we killed that too. Just like the people in the legend of Pandora’s Box, we rushed to shut the lid on trade agreements when all the monsters had already escaped, and the only thing we managed to lock in the box was Hope.

We may still have time to reverse course. Perhaps if Biden wins in 2024, and the electoral pressure is off, the administration will gain the political breathing room to turn the country toward strategic trade agreements with allies. This will require some leadership from the administration, and also some attitude adjustments on the part of the American intellectual class. Yes, free trade was bad in the 2000s. But Fortress America isn’t a workable alternative. The alternative is strategic trade, and I hope we realize that in time.

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