Biden Opens Sneaky New Front in Trade War Against China
To understand the administration’s new stance, look to the South Korean semiconductor firm Magnachip.
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As he took office, President Biden inherited an economy still distressed from the COVID-19 pandemic as well as an ongoing trade war with China, among other challenges. Initially, Biden’s top economic priority was combatting COVID-19 and overseeing a robust economic recovery, and his first major action on the economy as president was signing the $1.9 trillion American Rescue Plan in March 2021 to address the economic hardships inflicted by the pandemic. Beyond addressing the economic damage caused by COVID-19, Biden is now turning his focus toward other campaign priorities, including strengthening domestic manufacturing, reforming the tax code, investing in clean energy and high-tech sectors, resolving ongoing trade conflicts, and navigating the continued challenges posed by China. Having heavily criticized former President Trump’s Tax Cuts and Jobs Act and inability to cut down U.S. companies’ practice of offshoring jobs, Biden seeks to expand domestic manufacturing through strengthening union power and incentivizing companies to purchase American-made products by closing existing tax loopholes that favor offshoring. He is advocating for moving jobs, particularly in manufacturing, back to the U.S. from overseas and, akin to Trump, has designated a major part of his economic agenda “Buy American.” Alongside the American Recovery Act, Biden also signed Executive Order 14005, which focused on increasing the amount of domestically produced components used in supply chains. In a June 2021 address, Janet Yellen and finance ministers from the G7 nations and the EU pledged to combat corporate tax avoidance globally. The pledge included and agreement, in principle, to implement a global minimum corporate tax of 15 percent and eliminate national digital services taxes. On July 1, 2021, officials from 130 countries announced their support for the international minimum corporate tax. But despite international support, the agreement still needs to pass in Congress, where it is likely to face strong opposition.
COVID-19 has impacted every economy globally, with the global economy contracting at its worst rate since WWII. However, global growth has begun to return in 2021, with China leading the strongest post-pandemic economic recovery globally.
Real GDP Growth Rates Over Time
Biden is advocating for increasing domestic investment in the clean energy economy as a central pillar of his economic agenda and has included these commitments in the $1 trillion Infrastructure Investment and Jobs Act and a $3.5 trillion budget framework currently under consideration by Congress. The infrastructure bill passed in the Senate with bipartisan support in August 2021 and now heads to the House for debate. As currently written, the clean energy investments included in the bill are $12.5 billion for electric vehicles and $65 billion for modernizing the U.S. electric grid. Alongside these provisions, an additional $255 billion is allocated toward rebuilding and expanding physical infrastructure, and $65 billion for expanding broadband internet access. Biden has tapped Jessica Rosenworcel—a longtime advocate for expanding broadband access—as acting FCC chair. While the bipartisan infrastructure bill was stripped of most of its proposed environmental and social spending provisions during debate in the Senate, these priorities have been added to the budget framework, which can be passed with a simple majority using the budget reconciliation process—the same process used to pass the American Rescue Plan and Trump’s Tax Cut and Jobs Act in 2017. As of publication, the budget currently includes $333 billion targeted toward mitigating the effects of climate change, including reducing carbon emissions and developing clean energy, alongside $726 billion for social programs, including universal pre-K education, tuition-free community college, and Medicare expansion. Both proposals still face significant hurdles, including disagreement on the scope of spending between moderate and more liberal Democrats in Congress, unified Republican opposition to the budget, and rising inflation concerns. Still, Biden’s focus on climate as a top economic priority drastically departs from that of the Trump administration, which aggressively rolled back environmental regulations and focused on revitalizing the coal industry. Biden has appointed Janet Yellen and Gina Raimondo to execute the climate-focused elements of his economic agenda, both of whom have vowed to use their new roles to combat climate change.
Biden has recognized international alliances as essential for strengthening the U.S. economy and resilience of global supply chains, but he has not rushed the U.S back into international free trade agreements. Under Trump, the U.S. placed tariffs on the EU and numerous other allies, pushed NATO allies to increase their defense spending, halted talks on the proposed U.S.-EU trade deal, and pulled the U.S. out of the Trans-Pacific Partnership (TPP). The U.S. and the EU suspended tariffs in March 2021, and officials are exploring trade and economic partnerships as part of an effort to strengthen U.S. competitiveness in strategic sectors and to counter competitors, notably China. Biden has branded China as the U.S.’s “most serious competitor,” and thus far is maintaining a hardline stance, keeping the Trump administration’s tariffs and sanctions in place. He is advocating for a multilateral approach to confronting China but is carefully balancing this with continuing to move the U.S. away from widespread embrace of free trade policies. Further demonstrating his tough stance, Biden labeled Chinese actions toward the Uyghurs “genocide” and appointed numerous China critics to key positions, including Katherine Tai as U.S. Trade Representative and Avril Haines as Director of National Intelligence. Tai previously argued in front of the WTO that China’s trade practices were unfair, and Haines released an intelligence report in April 2021 identifying China as the top threat to U.S. national security.
Biden intends to counter China’s rising influence through aligning a broad coalition of democracies to exert pressure on its most strategic economic competitor, and as a candidate he promised to convene a summit of democracies toward that end. Though the EU has recently acknowledged China as a “systemic rival,” countering China’s influence in the region still poses a series of challenges. China is the EU’s largest trading partner, and many European states in the Balkans and Eastern Europe are eager to welcome Chinese investment and do not have the same restrictions on Chinese FDI as EU member states. Additionally, China has been focusing its investment in EU countries on smaller industrial cities while working directly with local authorities and allowing them to circumvent national-level policies. Expanding U.S. economic influence will be even more difficult in the Asia-Pacific, where China has steadily deepened its trade and investment relationships since Trump pulled the U.S. out of the TPP. Since launching its Belt and Road Initiative (BRI) in September 2013, China has invested more than $500 billion into Southeast Asian economies and has stepped up its diplomatic outreach through the Association of Southeast Asian Nations (ASEAN). As president, Biden is moving to counter China’s influence in the region through strengthening relations with key U.S. allies, prioritizing meetings with Japan’s Prime Minister Yoshihide Suga and South Korea’s President Moon Jae-in in his first round of international trips. After Biden’s meeting with Suga in April 2021, the U.S. and Japan announced an agreement to advance “shared democratic norms,” which aim to increase cooperation on sensitive supply chains (including semiconductors), climate change, and global health. In June 2021, Katherine Tai met with Taiwanese officials to discuss a free trade agreement between the U.S. and Taiwan. If adopted, the move could potentially further provoke China, especially given the ongoing dispute among China, the U.S., and Taiwan over semiconductor supply chains.
The ongoing COVID-19 pandemic continues to pose economic challenges as unemployment remains relatively high, critical supply chains are strained, and inflation rates are rising. The global economy has been rocked by COVID-19, with the World Bank estimating that the global GDP contracted by 5.2 percent in 2020—the largest contraction in decades. In the U.S., GDP contracted by 3.5 percent in 2020, its largest drop since 1946. Critical supply chains have been impacted, especially in the manufacturing and industrial sectors. The U.S. is now facing a severe semiconductor shortage, which is impacting a range of industries, including automobiles, medical devices, IT, and defense technologies. The auto industry has been hit particularly hard, and both Ford and GM have projected earnings losses between $1.5 and $2.5 billion in 2021 due semiconductor-related delays and cutbacks in production. To address weaknesses in critical supply chains impacted by the pandemic, Biden issued Executive Order 14017, mandating a review of existing supply chain networks. After identifying vulnerabilities in vital sectors such as semiconductors, batteries, minerals and materials, and pharmaceutical manufacturing, Biden is directing federal agencies to act on shoring up existing supply chain gaps. In May 2021, Secretary of Commerce Gina Raimondo began lobbying Taiwan Semiconductor Manufacturing Co. Ltd. and other Taiwanese firms for their help toward addressing the U.S. auto industry’s semiconductor shortages. Biden has made it clear that his economic agenda cannot be fully realized without first getting the pandemic under control. Yet, the pandemic continues to present new challenges, as the rapid spread of the Delta variant of the coronavirus now threatens to slow business re-openings, while the economic recovery has been mixed. The unemployment rate fell to 5.4 percent in July 2021, down from 10.2 percent a year earlier, but inflation rose by 5.4 percent over the same period, realizing a fear expressed by some economists after the American Rescue Plan was passed. Both the CARES Act (signed in March 2020 under Trump) and the American Rescue Plan provided extensive economic aid alongside roughly $55 billion for administering vaccines and tracing infections. However, many of the provisions that were meant to provide economic support, such as enhanced unemployment benefits and eviction moratoriums, are set to expire, as temporary extensions will lapse in September 2021. Simultaneously, COVID-19 infections are once again rising, while vaccination rates are stagnating. Further roadblocks to a post-pandemic economic recovery threaten to sidetrack Biden’s domestic economic agenda and potentially weaken the U.S.’s competitive position internationally vis-à-vis China, whose economy the International Monetary Fund (IMF) estimates will grow at a robust 8.1 percent in 2021.
The Biden administration inherits ongoing trade tensions with China, the EU, Canada, Asia-Pacific, and the WTO as well as a difficult decision on continuing Trump’s tariff regimes. Trump made trade reform central to his international economic policy, and as president he disregarded existing multilateral trade agreements and pursued a series of protectionist policy measures. He withdrew the U.S. from the Trans-Pacific Partnership (TPP), halted negotiations on the Transatlantic Trade and Investment Partnership (TTIP), and handicapped the World Trade Organization’s (WTO) dispute-resolution body. Trump framed his trade policy as primarily targeting China—which he saw as exploiting the current international system through currency manipulation, intellectual property (IP) theft, and running up the U.S.-China trade deficit. Trump imposed tariffs on 66.4 percent of Chinese exports in his trade war with China, but he also broadly targeted tariffs toward long-standing U.S. allies, such as Canada and the EU. As a candidate, Biden criticized Trump’s withdrawal from the TPP and stated that he would work with allies in Europe and Asia to confront China on trade issues. However, as president, he has not referenced re-entering the agreement, and his 2021 Trade Policy Agenda instead lays out steps for confronting China through the WTO and through relationships with allies in the region, like Japan, South Korea, and Taiwan. However, as president, he has not referenced re-entering the agreement, and his 2021 Trade Policy Agenda instead lays out steps for confronting China through the WTO. While Trump lifted tariffs on U.S. allies such as Canada and Australia before leaving office, and the U.S. and EU reached an agreement on suspending tariffs in March 2021, Biden has left existing tariffs in place on Chinese goods. Biden’s proposed trade agenda to date has focused on tackling COVID-19, strengthening renewable energy supply chains, and increasing worker protections, but it also continues key elements from Trump’s policies. Principally, Biden still singles out China as the largest abuser of the global trade system—from using forced labor in Xinjiang to industrial overcapacity—and in his “Made in America” tax policy he references the U.S.-China trade deficit, a key issue that drove Trump’s trade policies. While Biden has emphasized a multilateral approach to trade, he still faces challenges in repairing alliances with key partners in the EU and Asia and navigating the ongoing trade war with China against the backdrop of a global economy currently devastated from the COVID-19 pandemic.
In the context of a deteriorating U.S.-China relationship, the Biden administration faces myriad China-related economic challenges ranging from intellectual property protection to market access. Beyond trade, the U.S. still faces a wide range of economic challenges from China, and the Biden administration’s approach to China is likely to be its defining economic challenge internationally. Obama initiated a more cautious approach toward China’s rise with his “return to Asia-Pacific” strategy, meant to contain the rise of China through increasing U.S. naval presence in the region and entering into the TPP with other Pacific nations. However, the Trump administration took a more aggressive approach, abandoning the TPP and directly implementing tariffs and sanctions, while labeling China a foreign adversary and designating Chinese companies Huawei and ZTE as national security threats. The Trump administration also sought to limit technology exports to China and to push Chinese companies out of 5G development, which included banning semiconductor exports and blacklisting a wide range of Chinese technology and telecommunications companies. Biden has continued to criticize China, calling for democracies to unite against its “high-tech authoritarianism” and adding more Chinese companies to the U.S. blacklist. As president, Biden is seeking to contain China by keeping many of Trump’s hardline policies in place and by strengthening economic relations with regional allies. To date, his actions have included a virtual meeting of the Quadrilateral Security Dialogue – or the Quad (Australia, India, Japan, and the U.S.), visits by Secretary of State Antony Blinken and Secretary of Defense Lloyd Austin to Japan and South Korea, and a trip by Austin to India. Most recently in July 2021, Deputy Secretary of State Wendy Sherman met with Chinese Foreign Minister Wang Yi and Vice Foreign Minister Xie Feng. The meetings did little to mitigate the ongoing stalemate in U.S.-China relations. Sherman pressed Xie on sensitive issues, notably those related to Hong Kong, Tibet, and Xinjiang, while Xie presented Sherman with two lists of Chinese grievances (including requests to lift restrictions on Chinese companies and CCP members). Biden has also pushed NATO allies to be more critical of China, and NATO’s recent statement from its June 2021 communique specifically identified China as a challenge to maintaining a rules-based international order. Maintaining an aggressive U.S stance toward China, however, risks economic losses from U.S-China decoupling, which could reach up to $500 billion, access to critical minerals and supply chains, or potential conflict.