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Economic Competitiveness: Policy Briefing

Economic Competitiveness

The Biden Administration Plan for Increasing U.S. Domestic and International Competitiveness

UPDATED July 6, 2021

As he assumed the presidency, 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 will initially be combatting COVID-19 and overseeing a robust economic recovery. Beyond addressing the economic damage caused by COVID-19, he will be tasked with strengthening domestic manufacturing, reforming the tax code, investing in clean energy and high-tech sectors, resolving ongoing trade conflicts, and navigating China’s continued economic challenge. As a candidate, Biden focused his economic agenda primarily on domestic priorities, and his first major action on the economy as president was signing the American Rescue Plan to address economic hardships inflicted by the pandemic and stimulate the economy. Additionally, 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.

China’s Economic Recovery from COVID-19 has Outpaced Other Major Economies

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

Source: OECD

Biden is advocating for increasing domestic investment in the clean energy economy as a central pillar of his economic agenda and made these commitments central in his infrastructure spending legislation. To facilitate the U.S.’s transition toward renewable energy, the administration included $174 billion for electric vehicles and $100 billion for updating the U.S. electrical grid in its $2 trillion infrastructure plan. After initial negotiations with Senate Republicans, though, the Biden administration is now scaling back climate spending in its proposals. Still, Biden’s focus on climate as a top economic priority drastically departs from the Trump administration’s, which aggressively rolled back environmental regulations and focused on revitalizing the coal industry. Biden is advocating for increasing domestic investment in the clean energy economy as a central pillar of his economic agenda. To facilitate the U.S.’s transition toward renewable energy, the administration included $174 billion for electric vehicles and $100 billion for updating the U.S. electrical grid in its $2 trillion infrastructure plan. This approach drastically departs from the Trump administration’s, which aggressively rolled back environmental regulations and focused on revitalizing the coal industry. Biden believes that a whole-of-government effort to fight climate change will stimulate growth and strengthen U.S. economic competitiveness. He has appointed Janet Yellen as Secretary of the Treasury and Gina Raimondo as Secretary of Commerce to execute the climate-focused elements of his economic agenda, both of whom vowed to use their new roles to combat climate change. Biden’s infrastructure proposal also includes targeted technology investments: $100 billion would be allocated toward building broadband infrastructure to increase high-speed internet access, and Jessica Rosenworcela longtime advocate for expanding broadband access—has been tapped as acting FCC chair. The bill also includes $180 billion for R&D investments, $50 billion of which would go to the National Science Foundation for augmenting existing government programs that focus on developing semiconductors, advanced computing, and biotechnology—all deemed essential technologies for competing technologically with China. To date, negotiations over the infrastructure proposal are ongoing, and the extent to which these priorities will receive funding in the final bill remains unclear.

Trump placed tariffs on the EU and numerous other U.S. 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). Biden has recognized international alliances as essential for strengthening the U.S. economy and resilience of global supply chains but has not rushed the U.S back into international free trade agreements. The U.S. and 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 Uighurs “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.

Key Challenges for the Biden Administration

Unemployment is high, and U.S. GDP experienced its largest post-WW II contraction in 2020 due to the ongoing COVID-19 pandemic. 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 manufacturing and industrial sectors. Biden has made it clear that his economic agenda cannot be fully realized without first getting the pandemic under control. 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 take action on shoring up existing supply chain gaps. The first major legislative action of Biden’s presidency was the passing of the $1.9 trillion American Recovery Act, which provided extended economic aid and roughly $55 billion for administering vaccines and tracing infections. While the U.S. economy is showing signs of recovering in 2021—the unemployment rate now sits at six percent, compared to the 14 percent peak in summer 2020—U.S. competitiveness internationally will largely be a function of the rate at which it recovers relative to its economic competitors, particularly China. China has had a strong economic recovery, targeting 6 percent growth in 2021, with the International Monetary Fund (IMF) estimating a higher target at 8.1 percent. With China overtaking the U.S. at the start of 2021 as the top global FDI destination, a delayed U.S. recovery could potentially weaken its competitive position vis-à-vis China as both economies emerge from the pandemic.

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. 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.