Fair enough. On the day after that phone call, however, the Wall Street Journal’s Bob Davis and Lingling Wei wrote a long story about the Biden administration’s emerging approach toward Chinese subsidies after a “monthslong review of China policy, amid rising criticism by U.S. business leaders that the White House is taking too long to address key issues dividing the world’s two largest economies.”
After reading it, I have bad news for Joe Biden — the proposed strategy seems unlikely to promote a steady state of affairs between the United States and China.
First off, it is worth acknowledging that the United States has legitimate beefs with how China protects its domestic industries. It is undeniable that the Chinese government has implemented a welter of different mechanisms to favor domestic sectors deemed critical to the Chinese economy: “Buy China” procurement policies, subsidies to key sectors, new subsidies of about $1.5 billion to small and medium enterprises over the next five years.
It is also worth acknowledging, however, that this has not been a foolproof strategy for China. Davis and Wei note that “such programs have also led to wasteful projects, overproduction and deepening inefficiency in the Chinese economy.” All the subsidies in the world have not created a viable Chinese semiconductor sector. The $1.5 billion in subsidies for SMEs over five years is not a lot of money. Furthermore, in some cases the subsidies have benefited the United States — dramatically lowering the cost of solar panels, for example.
Still, let’s stipulate that the United States would like to remedy the subsidy situation. Let’s also highlight that the Trump administration’s trade war with China was an unmitigated failure at doing anything about this situation. After all, subsidies were not addressed at all in the Phase 1 trade deal. Furthermore, the tariffs themselves proved counterproductive; according to Moody’s, just 8 percent of the added costs of the tariffs were borne by China; 93 percent were paid for by U.S. importers and ultimately passed on to consumers in the form of higher prices.
So, how will the Biden administration improve on the Trump administration’s abysmal performance in this area? If Davis and Wei are correct, the difference is … more of the same? “USTR doesn’t plan a wholesale reduction in tariffs on more than half of Chinese imports which were imposed during the Trump years, according to the people familiar with its planning.” The administration plans to stick to the terms of President Donald Trump’s Phase 1 trade deal. The WSJ story notes that the Biden administration does plan on reducing tariffs that are “hurting the U.S. economy” and “U.S. officials are looking at granting exclusions from tariffs for some products.” The USTR is also considering an entirely new Section 301 investigation into Chinese subsidies.
The only real variation from Trump’s misbegotten approach is that Biden also plans a multilateral track to trade enforcement. Oh, wait, that’s not new; Robert E. Lighthizer, Trump’s trade representative, tried that as well, but “Mr. Lighthizer grew disenchanted with the effort, in part because Germany and other nations weren’t willing to put much pressure on China, a key trading partner,” according to the WSJ. Biden officials expressed confidence that they would have better luck because … well they provided no reasons, but I’ll just assume it’s because America is back.
To be blunt, this seems like a dumb strategy. The WSJ’s Davis and Wei note that, “China experts say it is highly unlikely Beijing would negotiate seriously on subsidies, which it sees as essential to its economic success.” As I noted in Foreign Affairs, economic pressure on China has not yielded tangible gains. So all this will do is lead to further trade frictions between the United States and China, more corporate lobbying for exemptions, and the continued passing on of costs to U.S. consumers.