The New Washington Consensus on Trade Is Wrong

In April, U.S. National Security Advisor Jake Sullivan delivered remarks at the Brookings Institution in Washington on international economic policy, focusing on why the Biden administration believes protection of sensitive industries should replace free trade as the United States’ primary objective. In Sullivan’s telling, this shift is already so broadly accepted both domestically and among some key U.S. allies that it should be seen as a “new Washington consensus.”

While Sullivan may be right that a political convergence is underway, evidence from history and today’s circumstances suggest that it would be better if the old consensus were updated and improved instead of dethroned.

The trade principles that guided U.S. international economic policy prior to 2017 were embraced to varying degrees by 12 successive administrations, starting with Franklin D. Roosevelt’s. Starting in 1934, FDR began negotiations with other countries to reduce tariffs on goods going in both directions to help end the Great Depression, which had been caused in part by the aggressive protectionism of the 1920s, thus moving the United States from the practice of restrictionism, designed to shield preferred industries, to the pursuit of reciprocal, ever freer trade agreements. After World War II, the embrace of freer trade gathered force globally because the United States—as the dominant Western democracy—heavily promoted and supported it.

While there were episodic and mostly temporary moves by U.S. policymakers during the postwar period to protect certain sectors and companies, the old consensus was never challenged as fundamentally misguided by either major party until Donald Trump, a lifelong protectionist, became the Republican presidential nominee in 2016 with a heavy focus on criticizing previous trade agreements. He claimed the nation’s leaders had sold out American workers and that the agreements they had negotiated gave unfair advantages to foreign governments. His charges struck a chord in certain quarters, in part because his opponents never marshaled effective responses.

After assuming office, Trump was generally unsuccessful in delivering the dramatically different economic outcomes he promised. He did initiate aggressive trade sanctions on a broad range of goods from China, which mostly resulted in higher prices for American consumers. He also rolled out tariffs on imports of steel and aluminum from some of the United States’ closest allies, and threatened to do so for automobiles, on the basis of alleged national security concerns.

The real surprise since 2021 has been that President Joe Biden not only has not repudiated the trade policies of his predecessor but also has amplified the philosophy behind them in a way that raises serious questions about the future of U.S. and global trade policy. This shaking of the old edifice of consensus is taking place despite Biden’s long record of support for free trade while serving in the Senate. This record includes his votes in support of NAFTA in 1993, the U.S. entry into the World Trade Organization (WTO) in 1994, and allowing China to join the global trading system as a full and permanent participant in 2000.

Sullivan and others present the shift in positions that Biden and others have taken as if the empirical case for it is self-evident, but the old consensus was not the disaster that critics claim. Quite the contrary. The historical evidence shows that expanding trade was central to the most successful run of wealth expansion and poverty reduction in history, and it delivered tremendous value to the American consumer.

A recent overview of the relevant research from scholars at the Peterson Institute for International Economics summarizes the impressive record. Among other things, trillions of dollars in economic benefits have accrued to Americans from global commerce. Further, as more countries joined the world trading system in the 1980s and 1990s, some 1 billion people were lifted out of extreme poverty, according to U.N. estimates.

Enacting increasingly stringent Buy America provisions, undermining the rules-based global trading system, and engaging in below-zero-sum state aid arms races jeopardize all of these gains. Other countries will not simply accept higher barriers to their products in the U.S. market without responding in kind. The result will be welfare losses and reduced productivity growth for all concerned.

What is causing the current turn is not evidence that contradicts the clear record of broad economic benefits from liberalized trade but political considerations. More specifically, Democrats, who were shocked and traumatized by Hillary Clinton’s loss in 2016, have internalized the lesson they believe that campaign taught, which is never to let Republicans outflank them on protecting domestic industries with trade restrictions, especially in the manufacturing sector.

Biden’s current trade representative, Katherine Tai, has given voice to this perspective by claiming that Clinton would have won if not for the target the Obama-era Trans-Pacific Partnership (TPP) provided for effective Trump attacks. His broadsides against consummating that and other trade deals resonated with just enough working-class voters, so the story goes, to flip the key states of Michigan, Pennsylvania, and Wisconsin. Clinton herself promised to abandon the TPP—a major deal that the Obama administration had spent years building—if elected.

It is apparent that Biden agrees with Tai’s 2016 postmortem. His 2020 campaign, and the one planned for 2024, emphasized his active support of the American labor movement, and it is unions that have always been the most uneasy with free trade. As such, the president has made no moves suggesting even modest support for existing or new free trade agreements and many moves that point to a willingness to undermine the free trade edifice that was carefully erected over seven decades.

Most especially, the administration has pushed the most aggressive direct subsidization of favored industries and companies in the entire postwar era, in apparent violation of the trade principles the United States agreed to when joining the WTO. Through two pieces of legislation, the CHIPS and Science Act and the Inflation Reduction Act (IRA), the federal government is providing direct tax subsidies, favorable loan terms, and protection through domestic content requirements to companies seen as central to the energy transition and to building resilience in sensitive sectors, including semiconductors.

As the funding provided by these new laws has begun to roll out, the administration has been buoyed by news stories pointing to more than previously projected numbers of firms lining up to participate in these initiatives. Officials contend that this enthusiasm demonstrates the laws will work as planned to fight climate change and give the United States access to sensitive technologies that otherwise would make the country dependent on China.

But there is no tangible data yet in hand that supports these premature verdicts of success. It is not at all surprising that access to low-cost financial support from the government is popular, but that only means the costs to the federal government might exceed what was projected at enactment. In fact, Goldman Sachs analysts expect the subsidies provided through the IRA to cost $1.2 trillion over a decade, which is several hundred billion dollars more than the official forecast predicted last year. Further, the costs to consumers from the IRA’s subsidy-focused strategy for slowing climate change exceed what would occur if U.S. policymakers chose instead to achieve the same pace of progress through a carbon tax. In other words, paying companies to change their business models is simply less efficient than price signals for bringing about the desired outcome.

In addition, federal programs that support some but not all firms and industries necessarily create distortions in the economy and many inequities. Enterprises ineligible for subsidization face higher relative costs of labor and supplies because they must compete for employees with firms in subsidized sectors who are paid in part through funds received from the government, not customers.

There are substantial costs for American consumers, too, as they must purchase products made with domestic content requirements, which necessarily means higher-efficiency options are pushed aside and competition is reduced. With inflation running at levels not experienced since the 1980s, U.S. policymakers should prioritize giving consumers access to lower-priced options. As matters now stand, the Biden administration’s protectionist moves will provide fuel for higher inflation. And a “green jobs” agenda comes with significant downside risk in a context of record-low unemployment and record-high vacancies.

The reemergence of industrial policy also opens up the U.S. economy to further political distortions. Companies that are subsidized by the government under the banner of the green transition or isolating China will push to expand that support and make it permanent. Other companies will lobby to become eligible, too. Meanwhile, the sectors dominated by these subsidized firms will see less innovation and disruption as government barriers will make it more difficult for new and unsubsidized entrants to upend settled business relationships. Political connections and lobbying prowess will rise in importance, while technical competence and efficiency will fall.

Both the Biden and Trump administrations often cite China and its market manipulations as a reason for abandoning free trade, but if China were the primary cause of concern, the solution would be to provide a workaround rather than to abandon free trade entirely. As it happens, President Barack Obama provided the solution, which was to deepen trade relations with key partners in the region while excluding, and thus isolating, China. The TPP, with Australia and Japan among the signatories, would have created an immense trading bloc that could have checked the power of China.

Both Trump and Biden rejected this strategic option because it would involve passing another free trade agreement through Congress over the objections of the labor movement, and neither was willing to do that. The result is that the TPP has been reworked by the non-U.S. participants and recast as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Meanwhile, the Biden administration is playing catch-up with a framework aimed at supply chain cooperation with Asian allies, but there is little momentum behind it because it does not improve access to the U.S. market for companies based in the partner countries. A similar dynamic is at play in trade relations with the European Union, where the ambitious Transatlantic Trade and Investment Partnership has been replaced with the perhaps well-intentioned but ultimately marginal U.S.-EU Trade and Technology Council.

Trump used anti-trade rhetoric to boost his political standing in key states, but it should not be assumed that protectionism is a political winner in all contexts and regions in the United States. A 2022 Gallup survey found that 61 percent of respondents viewed promotion of international trade favorably, although a divergence may be emerging between Democrats and Trump-era Republicans on support for the general concept of free trade, with the latter’s enthusiasm noticeably falling in recent years. Still, the overall survey results showing that trade is not frowned upon by most voters, a consistent finding over many years, reflect the many millions of U.S. employees working in export-dependent industries and the savings that American consumers see when buying lower-priced, and possibly higher-quality, goods made abroad.

Perhaps the best we can hope for is for Arizona and Georgia to become as salient in the minds of the U.S. political class as (the mythical versions of) Michigan and Pennsylvania have been for the past few years.

As others have noted, the U.S. turn toward strategic protectionism also betrays a lack of confidence in the Western system of democratic capitalism, which has served it very well. In some quarters, there is a tendency to look with envy on the Chinese model, which allows the Chinese Communist Party to set boundaries on private enterprise in the name of national interests (even while prospering from the advantages that open markets and favorable trading rules produce). The U.S. economy and government do not work this way, and for most of the postwar era, U.S. leaders saw this difference as an advantage. Reliance on free trade has allowed for the rapid exchange of technological improvements across national borders. It is a decentralized system that rewards innovation, efficiency, and dynamic growth, which have maximized income gains for the most people. The solution for those who work in firms that suffer from global competition is help in moving to more viable enterprises and support during the transition, as the United States already does with the millions of people who change or lose their jobs every single month.

All of the immense benefits from free trade would be at risk if the United States, as the primary force behind it for seven decades, chose to elevate short-term political considerations instead. Ironically, that might be the outcome of a trade war that China would value most.