Yellen to the Rescue?

I had planned to continue my rant from last week’s column about the United States thumbing its nose at the World Trade Organization (WTO) after it lost the case against its steel and aluminum tariffs, but along the way I discovered something interesting that does not seem to have attracted much attention so far: a commentary in Project Syndicate by Treasury Secretary Janet Yellen.

It is not unusual for a treasury secretary to comment on trade. Nor is it unusual for a treasury secretary to reflect a more positive view about trade than some other cabinet members with different portfolios that cater more to short-term domestic interests. Trade is, after all, about money, and who in the cabinet is more concerned with money than the secretary of the treasury?  She even has her signature on it.

What was fascinating about her commentary was that it manages to demolish the administration’s trade policy at the same time as it supports it. She begins with a quick world overview covering the war in Ukraine, Covid-19, and climate change, all of which have led to supply chain disruptions, shortages, and rising poverty in developing nations. Then comes praise for President Biden’s policy promoting supply chain resilience, bottleneck easing, and infrastructure improvements. Nothing new or unusual there.

She then goes on to a brief discussion of the theory of comparative advantage and the need to add reliability to the equation, which means dealing with the three big challenges she lays out: (1) over-concentration, (2) geopolitical and security risks, and (3) human rights violations, which she elaborates on later in her article. This is an interesting turn. You don’t often hear about comparative advantage from politicians, but Secretary Yellen is an economist, so it makes sense, as does her description of the dangers the world faces. However, it is not the same description we get from the Office of the U.S. Trade Representative (USTR), which has nothing to say about comparative advantage and lots to say about sustainability, worker rights, and the environment.

The article then goes on to make a point we used to hear all the time but have not heard very much in the past two years:

No country can, or should, produce every good its economy needs. Trade brings significant economic benefits to all countries involved. We can export goods that we produce more efficiently. And we can import goods produced more efficiently by other countries. For businesses, trade boosts production by providing a larger market for exports. It enables our most productive firms to expand and create good jobs for more people. For consumers, it means lower prices and greater choice in the products we purchase. Trade also encourages the global flow of ideas that is essential for scientific discovery and technological advancement. We must vigorously protect global economic integration.

None of that is new, but all of it is novel for this administration, particularly the USTR, which has focused relentlessly on the distribution of trade benefits rather than their creation. Yellen puts the spotlight back where it belongs—on trade as an engine of growth and job creation. In doing so, she does not stray far from the White House’s focus on the supply chain blockages, the security risks created by the global crises the world currently faces, and the administration’s principled stand on human rights, particularly in China.

Her solution is “friend-shoring,” which she goes on to explain:

Friend-shoring aims to achieve economic resilience and realize trade’s economic efficiencies simultaneously. We don’t seek to produce everything ourselves. Nor do we seek to limit trade to a small group of countries. That would substantially harm the efficiency gains of trade and hurt US competitiveness and innovation. Rather our core goal is to diversify away from risky countries and concentrated supply chains.

I have no complaints about the policy—the Scholl Chair’s previous work on pharmaceuticals and semiconductors recommended the same things in those sectors. Whether the Biden administration is actually pursuing a friend-shoring policy is for another column. Our friends and allies irritated by the Inflation Reduction Act would doubtless say our actions fall far short of what Secretary Yellen advocates.

The important things are that she is inserting basic economic theory into U.S. policy and is avoiding the “woke” rhetoric of the USTR (except for a sentence or two of lip service at the end). These are welcome developments. The theory of comparative advantage is still relevant, although we now face countries that have learned how to create it through a combination of subsidies, protection, and government management, policies the Biden administration is beginning to pursue as well. Understanding this challenge and dealing with it effectively is the right policy goal, and it is clear Secretary Yellen is on the right track.

Framing the policy the way she has, though, also suggests that the administration’s “trade policy for workers” or “trade policy for the middle class”—take your pick—is, or should be, one that actually promotes more trade. So, Yellen manages to support the Biden administration’s focus on resilience, security, and working with friends and allies while simultaneously implying that those goals are achieved through more trade and that sustainability, worker rights, and the environment, while important, are not the main point. Very clever, indeed.

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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