New Administration, New USTR — And a New Approach to Trade Policy?

This analysis draws heavily upon the video recording for USTR Tai’s confirmation hearing, for which there is no written transcript. Citations to that hearing refer to the hour, minute, and second (hh:mm:ss) at which the specific question and/or response can be found, as well as the senator asking the question. The video of the hearing is available at: https://www.c-span.org/video/?509315-1/us-trade-representative-nominee-katherine-tai-confirmation-hearing.  

In her first interview since taking office, given on March 28th, U.S. Trade Representative Katherine Tai affirmed that the previous administration’s tariffs on goods from China would not be removed any time soon.[1] This was not all that surprising, considering Tai and other administration officials had already signaled that this would be the case. To be sure, there could be plenty of adverse outcomes from simply “yanking off” tariffs without proper coordination.[2] But how much does the decision represent a fundamental shift from neoliberal consensus, for lack of a better term, in the approach to U.S. trade policy? A look back at Ambassador Tai’s February 25th Senate confirmation hearing illustrates a rough picture of what may be to come.

Orthodoxy on the approach to U.S. trade policy has changed.

Liberalization has long been, and still is, a primary goal of U.S. trade policy. Of course, certain interest groups, such as labor or particular industries, have always been considered in forming policy. Yet, the interests of those groups have often been inadequately represented, which was a major point of controversy regarding the Trans-Pacific Partnership (TPP).[3] Some argue that this applies to the trade policy apparatus more generally, particularly with regard to trade agreement negotiation.[4]

Like the last administration, this one promises to place a greater emphasis on labor. It quite literally refers to that approach as “worker-centered,” taking the well-being of ordinary Americans into greater consideration in policy decisions.[5] It will also incorporate other social considerations, such as racial equity and the environment, in making policy decisions.[6]

In her confirmation hearing, Tai noted that this entails avoiding sacrificing one part of the economy in the interest of another.[7] How this very delicate balance would be achieved remains an open question. To take a real-world example, Tai was asked about an upcoming review of Section 201 tariffs on solar cells and modules, and was urged to consider job loss and forgone megawatt installation.[8] Tai responded that trying to “thread the needle” between those domestic interests and “an industry trying to stay afloat in the face of China cornering the market” is a challenge that involves consulting with all stakeholders. How will it orient the hierarchy of priorities with regard to employment, climate change, its posture towards China, and statutory factors (e.g. relating to Section 201)?

We do know that trade is not an area where the Biden-Harris administration will pull an about-face from its predecessor, as it has done with immigration or the Paris Agreement on climate change. For instance, Tai expressed her intention to hold China to its $200 billion goods-purchasing commitments under the Phase One agreements,[9] which fell more than 40% short of 2020 targets.[10] While the Trump-era tariffs and counter-tariffs between the US and EU were put on a 4-month suspension in early March,[11] Tai nonetheless acknowledged the longer-standing dispute on Boeing and Airbus, and that “inflict[ing] pain on each other’s stakeholders” is how WTO dispute settlement is “supposed to work.”[12]

In short, it is too soon to speculate on many specifics beyond continuation of existing policy. For all the verbal commitments to a worker-centered approach, such efforts are bound to be opposed by certain trading partners and therefore difficult to implement.[13] Nonetheless, the language around trade policy priorities is very different than it was just five or six years ago.

There are a few ways we can anticipate this administration will be “different.”

A return to multilateralism?

As with other areas of foreign policy, this administration intends to leverage its alliances and engage in global forums much more heavily than the last. Trade policy will actively be used to promote goals related to climate change, which itself necessitates a broad base of cooperation. That will likely entail reviving efforts on initiatives such as the Environmental Goods Agreement,[14] for instance, in addition to placing greater emphasis on environmental standards in individual trade agreements.

Leveraging alliances will also be a critical factor for dealing with China. Like the Obama administration, this one highlights the intersection of economic influence and security concerns in the Asia-Pacific and the Eastern Hemisphere more broadly. However, a restart of the Trans-Pacific Partnership to counterbalance China’s economic influence in Asia is unlikely. In fact, the question of joining the TPP (now the CPTPP) came up multiple times in Tai’s confirmation hearing. Each time, it was met with the acknowledgment that “much has changed in the world in the past 5 or 6 years,” since the US was a party to those negotiations.[15] But we should expect something that imbues a greater economic presence than tighter, security-focused partnerships such as the Quad. Especially given the lack of chapters on labor, environment, and state-owned enterprises in last year’s Regional Comprehensive Economic Partnership (RCEP) involving 15 mostly Indo-Pacific nations,[16] a commitment to rules-based order will require both boldness and soft power.

WTO reform was another recurring theme in Tai’s hearing. She expressed interest in structural updates to WTO dispute settlement, as fundamental differences between developed and developing country interests have presented roadblocks for decades. While this administration might ultimately work to achieve such changes, it does not seem optimistic that lasting reform will occur soon.[17] Relative to the Obama administration and those before it, this one seems less willing to sacrifice domestic interests and more willing to challenge past WTO Appellate Body overreach.[18] This is one of many areas where rebalancing the inherent tensions among liberalization, domestic interests, and economic development will be challenging, even with good intentions.

Interagency cooperation

By nature, trade policy requires some degree of coordination across agencies, and there are both old and new mechanisms to facilitate it.[19] Yet in her confirmation hearing, Tai seemed to signal a far greater effort towards interagency cooperation and collaboration. In fact, Tai explicitly mentioned working with counterparts in the Departments of Commerce, Labor, Justice, Treasury, State, Agriculture, and Energy.[20]

Redoubling these efforts would be a necessary step towards a more “holistic” approach that seeks to avoid inadvertently (or knowingly, for that matter) creating winners and losers through policy changes.[21] Tai noted that some of the collaborative mechanisms had been put in place by previous administrations and are only now becoming executable. The specifics of these interagency dealings are not widely known, or at least written about, so it will be interesting to track these efforts through collaborative reports as they emerge over the course of the administration.

Bolstering the role of modern trade agreements

When asked if the ultimate goal of an agreement between developed nations should be minimal barriers to trade, Tai would not outrightly agree. Rather, after the past 5 to 10 years, the intended outcomes and details for achieving them should be “nuanced.”[22]

This is nothing new of course, especially as trade pact provisions increasingly tackle issues unrelated to reducing barriers to trade in goods and more about establishing rules. Often, such auxiliary provisions are toothless in achieving their desired effect, particularly with regard to labor and environmental standards. Much is expected of Tai in strengthening enforcement where it is lacking, an area where she is held in high regard. That reputation was especially bolstered by her show of skill during the USMCA negotiations in securing labor provisions on behalf of both U.S. and Mexican workers.[23] Unsurprisingly, one of the most oft-repeated themes of her hearing was acting on existing enforcement and monitoring provisions of trade agreements.[24] (The words “tool” and “toolbox,” in reference to such provisions or tariffs, were among the most frequently used words in her responses.)

Thus, while innovations in enforcement and monitoring will likely appear in future trade agreements,[25] we should expect a great deal of effort on improving existing ones. Much of this effort will relate to labor and environmental standards, while other steps will address backsliding on basic commitments, such as Canadian dairy market access or China’s promised purchases of U.S. goods.

A shift in priorities

A recurring theme of both the last and current administration invokes the return or rebuilding of economic activity on U.S. soil. Job creation, as well as national security to a somewhat lesser extent, have long been the usual rationales for reshoring. The pandemic gave the world a glaring example of the downside of overreliance on global supply chains.

At the beginning of the pandemic, Americans suddenly noticed shortages of everyday goods. Far more worrisome, shortages of medical supplies and personal protective equipment plagued healthcare workers and hospital patients for an extended period. Even after the world managed to make major adjustments, supply chains are still struggling to attain their pre-pandemic agility, especially for critical inputs such as semiconductors.

As a result, supply chain resilience will factor much more heavily into the policy calculus than it did before.[26] Once largely reserved to scarce minerals, such as those used in long-life batteries, this rationale could now apply to a broader set of goods.[27] Indeed, one of the more fascinating quotes from Tai places supply chain resilience in the broader context of trade policy:

…a lot of the assumptions that we have based our trade programs on have maximized efficiency without regard to the requirement for resilience…trade policy itself needs to be rethought and reformed with resilience and strategy in mind.[28]

Consequently, reshoring presents a triple-purpose solution to building more resilient supply chains, securing access to critical goods, and creating jobs at home. As of now, the most tangible solutions on the table for localizing supply chains are government procurement (e.g. via enhanced Buy American provisions) and tariffs already in place. Yet those tariffs are not likely to be a long-term tool for achieving reshoring, and in some cases have already had the opposite effect.[29] This is presumably what Tai meant by a more “process-driven” approach than her predecessor’s.[30] Though surely a difficult challenge, we should expect to see trade policy – likely in coordination with other policy areas – attempt to disincentivize excessive outsourcing and offshoring. How broadly (or narrowly) this will apply to industries across the economy will be the main question.

China is still front and center.

As the self-described former “chief enforcer against China’s unfair trade practices,” Tai declared in her opening statement: “China is simultaneously a rival, a trade partner, and an outsized player whose cooperation we’ll also need to address certain global challenges. We must remember how to walk, chew gum and play chess at the same time.”[31] The approach to China represents both a strategic and attitudinal shift from that of a decade ago or less.

Given the intersection of trade and other policy areas, as enumerated above, engaging China will require a concerted interagency effort. Before Tai’s confirmation, this was foreshadowed by Secretary of State Antony Blinken and Treasury Secretary Janet Yellen signaling some degree of continuation of the previous administration’s stance on China.[32] The U.S. will use trade to pressure China on issues where it traditionally would, such as forced labor. A few other examples of how trade will play a role are already clear.

Critical minerals

As the global leader in mining and (especially) processing of rare earth or “critical” minerals, China not only has significant control over access to such minerals but also global prices for them.[33] There are restrictions on foreign companies’ participation in production and processing in China. Developing such supply chains elsewhere is difficult given China’s current dominance and support through subsidies. Critical minerals are a key component of clean energy and military technology; thus repatriating supply chains to the U.S. are also environmental and security priorities.

Semiconductors

The issue of semiconductor shortages has been a prominent feature of recent news, and that was reflected in Tai’s confirmation hearing. One reason relates to the pandemic-related breakdown of supply chains. Semiconductors are used in such a wide variety of modern goods, and complex finished goods with a multitude of components – such as cars and medical equipment – cannot be produced without them.[34] Consequently, production forecasts for products incorporating them have had to be scaled back.

There is also, once again, an intersection with national security. The Trump administration put export controls of semiconductors and related manufacturing equipment on Chinese telecom giant Huawei and semiconductor producer SMIC.[35]  The restrictions were then extended to TSMC in Taiwan and Samsung in South Korea, which could supply Huawei. These moves induced stockpiling in anticipation of the restrictions, as well as affected some U.S. firms’ ability to import from the restricted entities, all just ahead of the pandemic.[36] As another key component of green technology, the current semiconductor shortage provides multiple justifications (national security, supply chain resilience, jobs, environment) for reversing some of the liberalizing effects of past trade policy.[37]

Intellectual property

Intellectual property rights are currently the main point of contention in US-China trade relations. There are two important implications regarding this issue.

First, the administration currently has no plans to reverse the Special 301 tariffs initiated under the previous one. The 301 tariffs and other remedial measures are repeatedly described by Tai as “critical tools” in addressing IP rights.[38] She also applauds her predecessor’s diligence in documenting their justification, and while perhaps preferring other processes, intends to build upon that previous effort:

…President Biden and his administration are committed to undertaking a comprehensive China review. That will involve IP protections, and it will also go across the board in terms of our strategic interests and our cross-disciplinary policy areas. With respect to the specific issue of the respect for intellectual property rights, I think that is a particular example of just a flagrantly unfair trade action. And I want to acknowledge that the Section 301 investigation that Ambassador Lighthizer started was based on a very voluminous and hard work documenting examples of that kind of abuse. So the Section 301 investigation is itself one example of IP enforcement and how far you can take it. I think that clearly there ought to be other tools as well…[39]

Second, and related, there is little expectation that China will pursue a less state-centered path than that which it is on. Nor is there much expectation that it plans to cooperate in rules-based forums. Putting too much faith in that strategy would therefore be naïve. Tai did in fact iterate the importance of using existing enforcement measures with regard to China or crafting new ones – whether relating to labor or IP, and whether in bilateral or WTO agreements. She also iterated the role of alliances in enforcing rules. Yet like its predecessor, this administration seems prepared to use punitive, unilateral measures such as Section 301 or other tariffs in order to effect change.[40] It is also prepared to use what is already in place as leverage for what is to come.[41]

Conclusion

Given the country’s recent experience, particularly in the last decade, this administration’s reformulated approach to trade is wise. However, the degree to which it can bring about lasting and fundamental change in a short period of time may not be all that large. Punitive tariffs are usually short-term solutions with consequences, and alternatives require a great deal of planning and unlikely cooperation. Other solutions, such as reshoring, can require significant time and resources. These will likely be narrowly targeted in the short to medium term.

Perhaps the most difficult obstacle is that this approach seeks to square a circle taken for granted in the conventional framework. That framework, partial to liberalization, has long been baked into U.S. trade policy — where powerful interests do not simply have an outsize voice, but they are by design invited to the policymaking table. That framework has traditionally had a simple message: more trade is better, and the creation of winners and losers is inevitable. While that message has been challenged for some time, a system that truly and meaningfully creates fewer losers – both at home and globally – will be no small feat.

Notes

[1] Bob Davis and Yuka Hayashi, “New Trade Representative Says U.S. Isn’t Ready to Lift China Tariffs,” The Wall Street Journal (March 28, 2021), available at https://www.wsj.com/articles/new-trade-representative-says-u-s-isnt-ready-to-lift-china-tariffs-11616929200

[2] Id. For an in-depth analysis of long-term changes to US-China trade, see Chad Bown, “The US-China Trade War and Phase One Agreement,” Peterson Institute for International Economics, Working Paper 21-2 (February 2021), available at https://www.piie.com/publications/working-papers/us-china-trade-war-and-phase-one-agreement

[3] For instance, under the Trade Promotion Authority, the president is given authority to negotiate the deal with little Congressional input, limited time for debate, and an up-or-down simple majority vote on the as-negotiated agreement. See, Congressional Research Service, “Trade Promotion Authority (TPA)” (updated December 14, 2020), available at https://fas.org/sgp/crs/misc/IF10038.pdf. This was the case in 2015 when negotiating the TPP.

[4] Trade Advisory Committees (TACs) incorporate public and private interest input into trade policymaking, and many contend that labor is far underrepresented in the TACs. For instance, compare the extensive list of Industry Trade Advisory Committees (ITACs) to the Labor Advisory Committee (LAC). General List of TACs: https://ustr.gov/about-us/advisory-committees; List of ITACs: https://www.trade.gov/itac-committees ; Membership of LAC: https://ustr.gov/about-us/advisory-committees/labor-advisory-committee-lac

[5] More precisely, it more heavily considers the welfare of working-class Americans outside their role as consumers. USTR, “2021 Trade Policy Agenda and 2020 Annual Report” (March 2021), p. 2, available at https://ustr.gov/sites/default/files/files/reports/2021/2021%20Trade%20Agenda/Online%20PDF%202021%20Trade%20Policy%20Agenda%20and%202020%20Annual%20Report.pdf. See also, U.S. Trade Representative Nominee Katherine Tai Confirmation Hearing, question and response to Sen. Wyden (00:35:09), available at https://www.c-span.org/video/?509315-1/us-trade-representative-nominee-katherine-tai-confirmation-hearing

[6] Id., p. 3.

[7] Response to Sen. Bennett (1:38:49). Her illustrative example includes agriculture and manufacturing, whose interests at times have diverged with respect to individual policies.

[8] Question from Sen. Cortez Masto (2:21:12)

[9] Response to Sen. Thune (1:29:27)

[10] Bown, “The US-China Trade War and Phase One Agreement,” p. 3.

[11] “US and EU suspend tariffs in Boeing Airbus row,” BBC (March 5, 2021), available at https://www.bbc.com/news/business-56296499.

[12] Response to Sen. Menendez (1:17:20). See also Written Responses to Questions for the Record (“Written Responses”), pp. 23-24, available at https://www.finance.senate.gov/imo/media/doc/Katherine%20Tai%20Senate%20Finance%20Committee%20QFRs%202.28.2021.pdf.

[13] Moreover, we have yet to see the administration’s degree of willingness to institute lasting or structural change. For instance, when pressed by Sen. Warren on reforming controversial rules of the trade agreement negotiation process, Tai would make no such commitment. Of course, firm commitments are relatively uncommon in confirmation hearings. See question and response to Sen. Warren (2:43:35).

[14] Written Responses, p. 21.

[15] See, for instance, Response to Sen. Daines (2:04:22), regarding the “awareness about some of the pitfalls of trade policies as we’ve pursued them in recent years.”  See also Written Responses, pp. 8, 15, 24, 43, 56, 63, and 86.

[16] Peter A. Petri and Michael Plummer, “RCEP: A new trade agreement that will shape global economics and politics,” Brookings Institution (November 16, 2020), available at https://www.brookings.edu/blog/order-from-chaos/2020/11/16/rcep-a-new-trade-agreement-that-will-shape-global-economics-and-politics/.

[17] See, for instance, Written Responses, p. 2. See also Response to Sen. Portman (1:23:10).

[18] See, for instance, Written Responses, pp. 6, 12, and 46-47.

[19] See, for instance, Office of the U.S. Trade Representative, “Interagency Role,” available at https://ustr.gov/about-us/interagency-role; and “Interagency Center on Trade Implementation, Monitoring and Enforcement (ICTIME),” available at https://ustr.gov/issue-areas/enforcement/itec

[20] This includes both Tai’s in-person hearing as well as responses to written questions for the record.

[21] Response to Sen. Bennett (1:38:49).

[22] Response to Sen. Toomey (3:06:25)

[23] David J. Lynch, “Tai confirmed as top U.S. trade negotiator,” Washington Post (March 17, 2021), available at https://www.washingtonpost.com/politics/2020/12/09/biden-selects-katherine-tai-us-trade-representative/

[24] See question from and response to Sen. Wyden (00:31:05) for a broader discussion of fuller implementation of USMCA. However, certain provisions such as ISDS, which the administration believes cedes too much power to corporate interests, have no such support. See Written Responses, pp. 3-4, 29, and 63-64.

[25] The next two likeliest agreements are with Kenya and the UK. With respect to China, Tai also noted the importance of addressing “gray areas,” where the rules were not clear or do not exist yet. Response to Sen. Bennett (1:41:25)

[26] As a side note, criticism of the efficacy of Trump-era and similar tariffs is often based on overall welfare analyses, which measure gains and losses of employment, consumption, production, etc. It will be interesting to see whether and how welfare analyses attempt to quantify supply chain resilience. As a public good, it is generally impractical to try to measure national security gains, but this may nevertheless be considered qualitatively in such analyses.

[27] It should be noted, of course, that supply chain resilience and national security concerns were claimed as the rationale behind the Section 232 tariffs on steel and aluminum.

[28] Response to Sen. Cornyn (1:03:20)

[29] Bown, “The US-China Trade War and Phase One Agreement,” p. 34.

[30] Response to Sen. Young (2:16:17)

[31] Opening Statement of Katherine Tai before the Senate Finance Committee (February 25, 2021), available at https://www.finance.senate.gov/download/02252021-tai-statement.

[32] See, for instance, Benjamin Fearnow, “Antony Blinken, Joe Biden’s State Department Pick, Says Donald Trump ‘Got It Right’ on China,” Newsweek (January 19, 2021), available at https://www.newsweek.com/antony-blinken-joe-bidens-state-department-pick-says-donald-trump-got-it-right-china-1562777; Andrea Shalal and David Lawder, “Yellen says U.S. will keep tariffs on China in place for now,” Reuters (February 18, 2021), available at https://www.reuters.com/article/us-usa-trade-china/yellen-says-u-s-will-keep-tariffs-on-china-in-place-for-now-idUSKBN2AI34D.

[33] See response to Sen. Lankford (1:59:06). For a description of China’s dominance of global supply, see Keith Johnson and Robbie Gramer, “U.S. Falters in Bid to Replace Chinese Rare Earths,” Foreign Policy (May 25, 2020), available at https://foreignpolicy.com/2020/05/25/china-trump-trade-supply-chain-rare-earth-minerals-mining-pandemic-tensions/.

[34] Bindiya Vakil and Tom Linton, “Why We’re in the Midst of a Global Semiconductor Shortage,” Harvard Business Review (February 26, 2021), available at https://hbr.org/2021/02/why-were-in-the-midst-of-a-global-semiconductor-shortage

[35] Bown, “The US-China Trade War and Phase One Agreement,” p. 39-40.

[36] Id. and Bindiya Vakil and Tom Linton, “Why We’re in the Midst of a Global Semiconductor Shortage”. The supply chain, from software to fabrication plants (“fabs”), is also scattered in such a way as to complicate production and purchasing relationships when such disruptions occur. See Chad P. Bown, “How the United States marched the semiconductor industry into its trade war with China,” Peterson Institute for International Economics, Working Paper 20-16 (December 2020), available at https://www.piie.com/sites/default/files/documents/wp20-16.pdf. See also question from Sen. Stabenow (00:43:23).

[37] An interesting example of how the previous administration’s policies will increase domestic semiconductor capacity, TSMC has plans to build a $12 billion factory in Arizona. “TSMC warns China-U.S. deleveraging will drive up costs,” Reuters (September 23, 2020), available at https://www.reuters.com/article/us-taiwan-tech/tsmc-warns-china-u-s-deleveraging-will-drive-up-costs-idUSKCN26E1IP.

[38] See, for instance, response to Sen. Crapo (00:40:35).

[39] Response to Sen. Young (2:19:00)

[40] Particularly in her written responses, Tai refers to 301 tariffs, export controls, and other restrictions as tools repeatedly. See Written Responses, pp. 3, 4, 11, 26, 28, 32, 40, 42, 62-63, 66-67, 83-84, and 87.

[41] Davis and Hayashi, “New Trade Representative Says U.S. Isn’t Ready to Lift China Tariffs.”