Peeking out of the Closet

Since the Biden administration came into office, it has said it wants a trade policy for the workers and the middle class. The rest of us have spent the past year trying to figure out what that means—without a lot of help from the administration, which has stuck to the slogan without providing much explanation.

A year ago, I hypothesized that it means:

1) enforcement, enforcement, enforcement, particularly of labor standards; 
2) redistribution of benefits in favor or workers; and
3) reshoring of manufacturing.

From time to time, various administration officials have dropped hints about what they have in mind, most of them supporting my hypothesis. Recently, Ambassador Katherine Tai, who has done the most talking on the subject, provided a bit of fresh material in comments to the Bavarian School of Public Policy at the Technical University of Munich’s School of Governance.

First, she provided recent historical context, explaining that Brexit, Trump’s trade policy, Covid-19, and now the Russian invasion of Ukraine have disrupted the trading system in ways that make it impossible to go back to the pre-2015 system:

We cannot just go back to the world in 2015 and pretend like these things didn’t happen. We feel strongly that we have to take history as it’s happened and we have to adapt.

And then, she got to the point:

But here we are, in a version of this globalized world, where I think we’ve got to think about things differently, and therefore, this ‘free trade equals good, protectionism equals bad’ dichotomy is one that I think we need to revisit.

What that means remains unclear, but she added one new element:

Protecting and having high standards for workers and the environment mean higher costs, but they’re critical for resilience and sustainability. So, in this era that we’re in, in refashioning globalization to a globalization 2.0, what we really need to think through is how can we adapt the rules of trade to incentivize firm behavior to take into account more than just efficiency, but to promote and to reward decisions that are made to pursue sustainability for our people and our planet.

This is an important comment in two respects. First, it is, as far as I know, her first acknowledgement that there are costs to this policy. That is no surprise to the business community, which figured it out a long time ago, but it is a constructive step forward for the administration. In the past, I have criticized the administration for pretending that you can push companies to alter their supply chains and reshore at no cost. In fact, there are substantial costs, both simply for making a change and for creating new supply chains that, by definition, will be less efficient than the old ones.

Second, it should be recognized as a profoundly anti-market statement because she is saying that the government is going to pursue policies that encourage (or force—that remains to be seen) companies to take steps that are less economically efficient.

That is not new. The United States is not a laissez-faire economy. The government has many regulations that require companies to act in less efficient ways in the interest of health, safety, or environmental protection, or to preserve competition or promote equity. In most of those, the U.S. regulatory approach has been descriptive and ex post—it sets the standard and leaves it to private companies to decide how to meet the regulation, taking action if they fail to do so. (The European Union approach, in contrast, has often been prescriptive and ex ante—describing what needs to be done and requiring approval beforehand.)

Over time, I think the U.S. approach has been more effective at encouraging innovation and minimizing costs, and it will be important for Ambassador Tai to keep that in mind as she constructs a policy focused on improving worker rights and sustainability.

So far, this column has avoided editorializing on this policy, but since I have a bit of space left, I’ll make a comment or two. First, while goals of equity and sustainability are important, so is the goal of economic growth. Trade is an engine of growth because it opens the door to new markets and new opportunities for us and for other countries. It is a mistake to get so wrapped up in making sure the benefits of trade are fairly distributed, that you forget to create the benefits in the first place. We can be for worker rights and for environmental protection, but we can also be for market access at the same time.

Related to that, as the administration is learning as it tries to assemble its Indo-Pacific Economic Forum (IPEF), market access greases the wheels in a negotiation. If the United States asks countries to accept stronger rules on worker rights, digital trade, and anti-corruption—all things easier for us than them—their response will be, what’s in it for us? So far, the administration has not provided a good answer to that. The most recent suggestion, that we will promise not to raise tariffs or do other bad things to them, sounds more like a threat than a promise and is not, in any event, a confidence-building measure.

So, Ambassador Tai’s recent speech reveals a bit more about what she has in mind, but she is still just peeking out of the closet. There is much more that needs to be revealed.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.   

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