How trade can help US beat China?

National Review carries an article about Donald Trump and Joe Biden supporting tariffs and “buy America” policies that emphasise domestic production and impede global trade, Caliber.Az reprints the article.

Trade has fallen out of favour on the right and the left. Donald Trump and Joe Biden support tariffs and “buy America” policies that emphasize domestic production and impede global trade. Trade hurts our economy, they claim, and it undermines national security. Big if true, but they are wrong on both counts. Trade restrictions weaken our economy, and by retreating from global markets, we neglect one of our best tools for expanding our influence across the globe and strengthening our national security.

Allies and influence buoy national security. Trade strengthens and deepens relationships with countries, which helps us get more of both. China is expanding its influence in Southeast Asia, but we can counter it by granting countries such as Vietnam, Indonesia, Malaysia, and the Philippines more access to the US market. This would benefit them for two reasons.

First, larger export markets allow firms to expand production, and it does not get larger than our $23 trillion economy — the Chinese economy is still some distance behind at $18.5 trillion. More trade with the United States would create jobs, boost economic growth, and raise living standards in these countries. 

Second, as these countries grow, they can better defend themselves against foreign encroachment, including economic coercion from China. Like Dan Blumenthal and Derek Scissors, we recognize that more economic resilience is important since China is known to use covert tactics to disrupt other countries’ economies: holding up items in port for failing health inspections, faulty fire-code violations for storehouses on Chinese land, and mobilizing “patriotic consumers” for boycotts of goods like Norwegian salmon, Australian wine, and Taiwanese pineapples.

Trade Enhances American Security

The United States also stands to gain from additional trade with Asian countries. Trade improves our security by making us wealthier, fabricating redundancies in critical supply chains, and strengthening our ties to the Indo-Pacific region. Stronger economic relationships better insulate us and our trading partners from economic sanctions, tariffs, or quotas that China may try to impose. And since wealth is the foundation of military power, a wealthier America is a stronger America.

Current US trade policy is weakening us. The Trump administration initiated the trade war with China in a misguided attempt to address trade imbalances and create domestic jobs. While his tariffs likely contributed to the decrease in our bilateral trade deficit with China since 2018, they also increased prices for US consumers. Meanwhile, the jobs have not materialized. A recent study finds that Trump’s and now Biden’s trade war with China did not increase employment, while China’s retaliatory tariffs reduced employment in the targeted U.S. sectors, primarily agriculture.

Trump also walked away from the Trans-Pacific Partnership (TPP), the first comprehensive regional trade deal proposed in East Asia. Now, China is filling the void left by our departure. The United Nations Conference on Trade and Development estimated that shifts in trade patterns following America’s departure from regional trade negotiations would cause U.S. exports to fall by $5 billion.

The Biden administration has largely continued Trump’s trade policies, though it has half-heartedly tried to shift economic policy in East Asia through the Indo-Pacific Economic Framework (IPEF). The IPEF proposes cooperation on the digital economy, environmental regulation, labor standardization, supply chain coordination, infrastructure development, taxation, and anti-corruption but lacks a trade pillar that would expand access to our market.

The Biden administration has made other trade blunders, too. It has undermined the World Trade Organization’s rulings, and its “Buy America” provisions angered Europe, hurt our economy, and, at a time when armed conflict is seemingly around every corner, weakened our diplomatic influence over global affairs.

More recently, President Biden’s decision to pause liquefied natural gas (LNG) export license applications provides a concrete example of how mishandling trade policy can undermine our foreign policy goals, making us less secure. After Russia invaded Ukraine, the flow of natural gas from Russia to Europe fell sharply due to sanctions and other actions designed to punish Russia’s behavior. In part due to existing trade relationships, US LNG producers were able to increase LNG exports to Europe to replace Russian LNG. 

Our exports made Europe less dependent on Russian energy production, but that is just a start. It also improved the economic outlook of American LNG producers, bolstered our trade relationship with Europe, and complicated Russia’s war effort by displacing some of the energy exports that fund its military operations- a true win-win-win. Biden’s pause of new export licenses portrays America as unreliable. If world demand for LNG increases due to frigid weather or some other shock, it could force Europe back into Russia’s arms.

American Economic Statecraft in the Indo-Pacific

The United States needs to dust off its economic statecraft playbook. By economic statecraft, we mean the state’s structuring of economic incentives to encourage or deter particular behaviors, especially behavior that produces security benefits. This time, Washington needs to think beyond sanctions, loans, and foreign aid. Strategically conducted trade can be an economic statecraft tool—winning partners by opening markets and creating new constituencies of US merchants and consumers that reap trade’s benefits

The Indo-Pacific allows America to use trade to temper China’s regional monopsony power. This does not mean forcing Asian countries to pick between the United States or China but offering them better terms and conditions. In short, doing trade better than China by opening the US market as an alternative.

Currently, the United States possesses comprehensive free-trade agreements with only two Asian countries — South Korea and Singapore. Forming agreements with Indonesia, Malaysia, the Philippines, and other nearby countries will improve US relationships in the region without forcing us to engage in schemes like China’s Belt and Road Initiative (BRI), which provides countries with loans — often backed by the Chinese government — for a variety of infrastructure projects. China is using the BRI to link countries to it economically, hoping that such linkages will boost Chinese exports, increase incomes for Chinese workers, and expand China’s global influence. 

Southeast Asian countries are particularly ripe for increased bilateral trade. A 2018 report from the U.S. Department of Agriculture identifies Indonesia, Malaysia, and the Philippines as high-growth import markets for U.S. agricultural products due to their growing incomes, quality standards, and political stability. Despite these favorable conditions, total trade (exports plus imports) between us and the Philippines is only about 25 per cent of total US–Vietnam trade, even though the economies of Vietnam and the Philippines are similar at about $400 billion. Similarly, total trade between us and Malaysia’s $400 billion economy is only 55 per cent of our trade with Vietnam. There is room to expand trade with these countries.

Indonesia offers even more opportunities. Its economy is more than three times as big as Vietnam’s, yet total US–Indonesia trade is only about one-third the size. At over 275 million people, Indonesia is the fourth most populous country and still growing, so its trading potential will only increase. More access to the US market will help it acquire new technology, goods, and services that will further propel its growth while counterbalancing China’s regional influence.

Indonesia is also one of the world’s largest nickel and cobalt producers, both of which are used to produce batteries. Exchanging agricultural and consumer goods for these minerals would support our domestic energy production and enhance our security. The election of a new president, Prabowo Subianto, provides an opportunity to explore such an arrangement. A US foreign policy that uses trade overtures to deepen ties with Indonesia would be a smart move.

Not only is there room for more trade, but soon, there may be a need. China appears to be taking steps to reduce its dependence on foreign trade, opting for a “dual-circulation” strategy of domestic production and consumer spending to offset its slower economic growth. If China reduces access to its economy, countries such as Malaysia, Singapore, Taiwan, and Thailand would have to scramble to replace one of their biggest export markets. America should seize the opportunity to help.

Trade Is an Alternative to Sanctions and Development

Right now, the Biden administration and the US House Select Committee on China assume that sanctions and export controls are the most effective way to compete economically with China.

But because of China’s unique position in the global economy and the interconnectedness of supply chains, robust sanctioning is incredibly challenging. Trade restrictions may frustrate China in the near term, but this will not last. There is already evidence that China is using the US sanctions on advanced semiconductors as the impetus for improving its chip-making capabilities, which may soon render the sanctions moot. 

Sanctions in the era of globalization also require consistent involvement from third-party countries and multinational firms across supply chains. Some European and East Asian countries may cooperate with US policy, but if even a couple of multinational firms deviate, the most draconian control regime can break. American policy-makers need to be realistic about what sanctions can do. 

We should not try to outspend China, either. A program like China’s BRI is not to our comparative advantage, and it is inconsistent with America’s ethos. Some may point to the Marshall Plan as a counter-example, but its success was largely due to its emphasis on market reforms, not direct aid. Moreover, the Marshall Plan occurred when federal debt was far lower than today and as part of a broader multilateral security effort. After our failures in Vietnam, Iraq, and Afghanistan, support for similar initiatives has dried up. Even if support existed, our dire budget situation limits our spending ability.

Instead of trillions of dollars of loans, we can give countries access to our vast economy, making us and them richer over time. Trade can substitute for grants or loans, helping nations develop organically and avoiding the challenge of picking winners at scale. More wealth will not fully protect these countries from possible Chinese economic coercion, but it can increase their capacity to resist.

Conclusion

Trade can enrich and empower rival countries, so there is a national-security risk in trading with other great powers such as China. The flow of strategic goods and services with military and intelligence applications can be dangerous. But we cannot let justified concerns about China completely blind us to the national-security benefits of expanding US trade relations with other nations. Strengthening our economic relationships with important Southeast Asian countries is a prudent first step.

The United States needs an international political-economy framework recognizing that the relative balance of global power has shifted. The US may not be as far ahead of China as it once was, but we are not helpless either. Concerns about China’s economic power and its ability to transform it into military power should not foolishly convince us to go it alone.

Trade is a tool to increase US security and prosperity. A pro-trade agenda focuses on what the United States can offer the world rather than just resorting to pleas and hand-waving when countries do not comply with our requests. More trade is not counter to American interests but is instead conducive to American interests, and it is a bet on the potential of the U.S. economy and its firms, workers, and consumers.