President Biden has inherited a U.S. and global economy in much worse shape than did former President Trump. As such, he can ill-afford to repeat the same trade policy mistakes that the Trump administration made. This is especially the case if he wishes to arrest the worldwide drift to protectionist policies that now threatens to be destructive to U.S. and global prosperity.
It would be a gross understatement to say that Trump’s trade policy was a dismal failure. Not only did he fail to eliminate the U.S. trade deficit and to level the trade playing field with China as he had repeatedly promised to do. He also managed to alienate our traditional trade allies in Europe and Japan, lose our economic influence in the Asian Pacific region by pulling out of the Trans-Pacific Partnership and abandon our country’s traditional world economic leadership role.
A key economic policy mistake that Donald Trump made was to view international trade as a zero-sum game and to take a “my way or the highway” approach to trade policy. This induced him to adopt an “America First” trade policy and to start a costly Chinese trade war on a unilateral rather than on a multilateral basis. It also induced him to undermine the World Trade Organization (WTO), to arbitrarily impose import tariffs on our allies on supposedly national security grounds and to eschew participation in multilateral trade agreements.
Another cardinal trade policy mistake made by the Trump administration was not to realize that our trade deficit is determined fundamentally by the difference between our country’s saving and investment levels. Had he grasped this basic economic principle, he might have refrained from engaging in the large 2017 unfunded corporate tax cut. By reducing the country’s savings level, that tax cut had the effect of causing us to revisit the twin budget deficit and trade deficit problem of the Reagan years.
While the Biden administration is yet to articulate a coherent international trade policy, it is far from clear that it will be making a clean break from Trump’s trade policy and restoring the country’s traditional role of promoting freer international trade.
On the positive side, the Biden administration has made clear that it wishes to adopt a more multilateral and rules-based approach to trade than did the Trump administration in general and that it wishes to restore the WTO’s authority in particular. Another encouraging sign is that President Biden has not ruled out the possibility that the United States might re-join the Trans-Pacific Partnership.
The Biden administration also seems to understand that our European trade allies share our concern about China’s multiple unfair trade practices and that our leverage in our trade negotiations with China would be enhanced if we cooperated with Europe. This is particularly the case considering that European trade with China now exceeds that of ours.
On the negative side, Biden is pursuing a “Buy American” program that appears to have taken a page out of the “America First” playbook. Worse yet, he now appears committed to fast tracking a $1.9 trillion-dollar budget package that is almost sure to create a twin deficit problem that would make that of the Trump administration pale. It will do so by causing the country’s savings level to plummet and the dollar to rise on the back of higher U.S. interest rates that a more expansive budget policy would entail.
With the world still in the grip of its worst post-war economic recession and with protectionist policies on the rise, the world very much needs U.S. international economic leadership to maintain an open international trade system. To provide that leadership, the U.S. will need to lead by example.
Such U.S. leadership will require repairing fences with our traditional European economic allies to facilitate greater international cooperation to ensure that all countries, including China, play by the rules of the game in their international trade policies. It will also require that the Biden administration dials back on its protectionist tendencies and refrains from pursuing a reckless budget policy that threatens to exacerbate current international economic imbalances.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.