A New Horizon in U.S. Trade Policy
A New Horizon in U.S. Trade Policy
Key Developments and Questions for the Biden Administration
Under President Biden, the United States is reinvigorating its trade policy to better confront the major challenges of the 21st century, but key questions remain.
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U.S. trade policy—and with it the rules and institutions that constitute global economic architecture—has rarely been static. But over the past five years, beginning with the passage of the U.S.-Mexico-Canada-Agreement (USMCA) and continuing with the Biden administration’s innovative trade initiatives currently being negotiated with partners in Europe, Asia, and the Americas, the future of U.S. trade has never been more open-ended.
Climate, once largely absent from global trade rules and agreements, has vaulted to the forefront of U.S. trade priorities. By contrast, market access, long considered the fulcrum of trade deals, is absent from the Biden administration’s signature trade initiatives in the Asia-Pacific and is being deployed selectively in a sectoral arrangement with the European Union involving steel and aluminum. These new policy directions are occurring against several major shifts in domestic economic policy and global economic governance: 1) a pivot toward industrial policy in the United States driven by three major pieces of legislation—the Inflation Reduction Act, the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act (IIJA); 2) a dramatic turnabout in global attitudes toward supply chain management and the balance between efficiency, resilience, and security in cross-border trade; and 3) the obsolescence of the World Trade Organization (WTO) as a forum for resolving trade disputes.
Climate, once largely absent from global trade rules and agreements, has vaulted to the forefront of U.S. trade priorities.
This issue brief examines some of the key trade initiatives pursued by the Biden administration to date. It then sets out key questions facing U.S. trade policy in a global environment defined by volatility and renewed ambition to tackle the great challenges of the 21st century, such as climate change, inequality, and great power competition.
Overview of key trade initiatives
Over the past two years, the Biden administration has pursued a number of innovative trade initiatives that in different ways aim to redefine the scope and purpose of U.S. trade relations. These initiatives differ both in structure from traditional free trade agreements (FTAs) and also in their substance, most notably in the emphasis they place on climate aims and worker empowerment over tariff reductions.
Variation on a multilateral theme
The United States’ decision not to join the Trans-Pacific Partnership (TPP) it negotiated—now the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—highlighted the skepticism among policymakers and the American public of traditional trade agreements. This does not mean that the United States should or will step back from multilateral engagement and even direct trade negotiations that could lead to enhanced access to the U.S. market, but it has forced a reimagining of what economic engagement looks like. Four examples of this are already underway in the Biden administration:
- The Indo-Pacific Economic Framework for Prosperity (IPEF): Launched in May 2022, IPEF established a framework for negotiations among 13 nations: Australia, Brunei, India, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, the United States, and Vietnam. These negotiations aim to establish an updated model of economic engagement across borders. Market access is not on the table, but there are four pillars that offer broad and potentially substantial levels of investment, regulatory alignment, and coordination around industrial standards and supply chains between the United States and participating nations—depending on the specificity of the outcome and its implementation. These pillars are: 1) connected economy, or trade; 2) resilient economy, or supply chains; 3) clean economy; and 4) fair economy. IPEF members may select among the pillars and are not required to agree to all four.
There are two key points to consider: First, the nations associated with IPEF have significant—though not complete—overlap with the nations that negotiated the TPP. This clearly shows that economic engagement in the Indo-Pacific remains a priority for the United States, even if the nature of that engagement has shifted.
Second, and related, the different pillars of IPEF use language that closely resembles previous FTAs without incorporating market access mechanisms—such as tariff reductions—that raised valid concerns on the part of climate and worker advocates in the United States. For example, the “connected economy” pillar seeks to increase and improve trade among the 13 nations by collaborating and coordinating on core issues such as labor rights, environmental protection, transparency in rule-making and regulations, and facilitation measures such as simplifying customs procedures.
- The Americas Partnership for Economic Prosperity (APEP): Since June 2022, the U.S. State Department and U.S. trade representative (USTR) have engaged with partner countries across the Americas—Barbados, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru, and Uruguay—on a similar series of negotiations aimed at producing a similar set of commitments as IPEF. The ongoing consultations have five focus areas: 1) reinvigorating regional economic institutions and mobilizing investment; 2) making more resilient supply chains; 3) updating the basic bargain; 4) creating clean energy jobs and advancing decarbonization and biodiversity; and 5) ensuring sustainable and inclusive trade.
The APEP negotiations do not have as clear of a precursor as IPEF, which can partially explain the interesting collection of nations associated with this effort. Politics and existing trade relations vary among the included nations—though, on the latter, most of the nations included already have existing bilateral trade agreements or frameworks with the United States. With Ecuador, the United States has a Trade and Investment Council. With Uruguay, there is a Trade and Investment Framework Agreement. Barbados is the only nation where there is currently no agreement or framework. The rest have an existing FTA.
- The U.S.- Taiwan Initiative on 21st- Century Trade: Also in June 2022, the United States and Taiwan began consultations over ways to deepen the trade and economic relationship between the two nations. This evolved into official negotiations focused on building out the details listed within the negotiating mandate, which has similar construct and charges as IPEF and APEP—notably, a commitment to focus on core issues related to trade facilitation that could help further open economic doors, potentially in the form of an FTA.
- The U.S.-EU Trade and Technology Council (TTC): Among the Biden administration’s earliest trade-related actions, the establishment of the TTC occurred as part of a broader statement of joint work and commitments between the United States and the European Union. The TTC’s main charge is to foster cooperation in trans-Atlantic trade and investment, specifically focused on emerging technologies and infrastructure.
The just-announced Clean Energy Incentives Dialogue will be a part of the TTC and focused on coordinating incentive programs. The main goals will be to avoid trans-Atlantic trade tensions and to ensure that such programs are mutually reinforcing and do not simply lead to windfall profits for companies that could play the two against each other for more and better subsidies. This type of dialogue is necessary to guard against excessive corporate welfare and keep the focus on clean energy deployment and strong domestic economies.
Sector-specific trade initiatives
In addition to multilateral negotiations, the Biden administration has pursued initiatives aimed at shifting manufacturing methods and protecting against unfair trade practices in key sectors. This can take into account the global competitiveness of those industries while building up both domestic industries and economic ties across nations.
The clearest example of this is:
- The Global Arrangement on Sustainable Steel and Aluminum (GASSA): Combining the goals of decarbonization and competitiveness in the steel and aluminum sectors helped lead to the formation of this partnership between the United States and the European Union. This sectoral collaboration, combined with initial commitments to drop tariffs and duties on each other’s products, aims to establish a market for steel and aluminum that is based on lowering carbon intensity and combating global overcapacity—while placing barriers in front of nonparticipating nations.
A potential example:
- The critical minerals buyers club: In order to achieve decarbonization, the world is going to need a sustainable and resilient supply of critical minerals, such as lithium, cobalt, and multiple rare earth minerals, to build the critical materials that power the clean economy, such as batteries and solar panels. To help assure that reliable supply, the United States, European Union, and potentially other G-7 nations, such as Japan and the United Kingdom, have begun discussions about a targeted trade pact would allow for critical minerals that are mined or processed in those nations to count toward requirements under Section 30D of the Inflation Reduction Act and—conceivably—some related reciprocity. (More below on the tension related to this credit)
An example focused more on information sharing and collaboration is:
- The Industrial Deep Decarbonization Initiative (IDDI): The IDDI, established via the Clean Energy Ministerial and co-led by the United Kingdom and India, now counts Germany, Canada, and the United States as members. The effort focuses on supporting and identifying policies that lead to decarbonized industrial materials. This includes standardized carbon assessments, procurement targets and policies, and targeted investments.
Other trade policy mechanisms
There are policies being implemented and debated domestically that can help forge pathways for bi- and multilateral trade discussions. Among others, these notably include:
- The carbon border adjustment mechanism (CBAM): Enforcement, via duties and tariffs on nations that do not abide by established rules or meet domestic standards, is a necessary element of trade policy, and climate-focused trade policy is no exception. Implementing duties on imported goods based upon either carbon intensity or a carbon price associated with embedded carbon—known now as a carbon border adjustment mechanism—has been discussed for decades, but only recently has it moved forward into reality in the European Union. The United States has grappled with a CBAM since early discussions of cap and trade, and it is now becoming its own stand-alone policy up for debate.
- Green public procurement: Utilizing procurement to further domestic economic needs is nothing new (see: domestic content preferences), but countries are now deploying the power of the public dollar to help drive down emissions in manufactured goods. In the United States, this is referred to as Buy Clean. This method of procurement leverage can be coordinated and combined across borders and is being discussed at venues such as the IDDI.
Forging a new paradigm on trade, especially in the shadow of the current intersection of trade, climate, and industrial policy will require answering multiple, layered questions. Six are laid out here.
Climate and trade: Synergies or strains?
Until recently, climate was at best a peripheral concern in management of global trade. No U.S. FTA explicitly acknowledges the climate crisis or invokes the Paris Agreement, nor does any multilateral trade agreement or institution. The Peru FTA and its Annex on Forest Sector Governance contributes to the fight against climate change by providing tools to enforce regulations around unsustainable timber harvesting in the Amazon, but the focus is on deforestation rather than emissions. Now, under President Joe Biden, climate has become a front-burner issue in trade policy. USTR Katherine Tai has repeatedly emphasized the need to align trade with climate and environmental issues more broadly. True to that promise, one of the four pillars of the administration’s signature trade initiatives in the Asia-Pacific is focused on “Clean Energy, Decarbonization, and Infrastructure.” Other climate-related provisions are reportedly integrated across other pillars. Even more ambitiously, the GASSA seeks to use a sectoral tariff structure to facilitate trade in green steel.
This pivot from climate avoidance to climate action in U.S. trade policy is a welcome change, but not one without frictions. Climate was not a significant consideration for the architects of the rules and institutions that constitute the global trading system. While some nations have sought to incorporate climate-related provisions into trade agreements, there is no established mechanism or standard for seeking to differentiate between less and more climate-friendly trade in virtually all cross-border commerce that occurs today. For this reason, there is little motivation at present for actors in export-focused sectors to consider greenhouse gas emissions when seeking to make their goods attractive to export markets, except where the destination market has regulatory standards different than those of the home market or procurement preferences for cleaner goods, or where a lower-emissions production method is cheaper and permits a more competitive price relative to like products.
Adjusting for this negative externality, regardless of the precise mechanisms used, will be a technical and administrative challenge, likely involving the development of shared metrics for assessing embedded carbon; agreement over monitoring and reporting of emissions at industrial facilities; and convergence around a list of climate-aligned goods, technologies, and practices. Perhaps more dauntingly, it will be a political challenge. Favoring climate-friendly trade will have disparate impacts across jurisdictions and sectors, particularly in industries where a wide disparity exists in the carbon intensity of production methods of inputs and finished goods, such as steel and steel-derived goods such as automobiles. Middle-income economies whose growth model depends on carbon-intensive manufacturing methods may object to any effort to rewrite trade rules to favor greener practices; yet even countries that stand to benefit from such a paradigm shift may find themselves squabbling over the details, as exemplified by the unresolved tensions between the European Union’s CBAM, the U.S.-EU GASSA, and other proposals such as the German government’s climate club. And even if these matters can be resolved, the interaction between green industrial policy and trade rules remains contested and unresolved.
What is the future of market access?
Perhaps the Biden administration’s sharpest pivot from previous administrations’ trade policy has been its cautious approach in pursuing new or revisiting existing free trade agreements or to engage in any trade negotiations that could result in enhanced access to the U.S. market by trading partners. USTR Tai has called FTAs “20th century tools,” and the major initiatives the Biden administration has pursued to date have sought to innovate away from the conventional trade agreement model that has dominated U.S. and international trade deals for much of the past 30 years.
IPEF, for example, is unprecedented in that it seeks to deepen U.S. economic engagement and strengthen U.S. presence across a strategically vital region without using the tools of a traditional FTA—that is, market access linked to constraints on state regulation of covered goods and services backed by a dispute resolution framework. The U.S.-Taiwan trade initiative and the recently announced APEP emulate the IPEF model in seeking to align regulatory practices in a way that strengthens worker power and climate action while facilitating financial flows to important sectors. The GASSA, while still lacking public detail, is ultimately about imposing market barriers—that is, imposing higher tariff rates on certain steel and aluminum exporters that engage in highly polluting manufacturing or unfair market practices. Notably, none of these initiatives require congressional approval.
It seems unlikely that the executive branch—either under this administration or successive ones—will permanently foreswear market-access-driven trade agreements.
But it seems unlikely that the executive branch—either under this administration or successive ones—will permanently foreswear market-access-driven trade agreements, for a number of reasons. First, many of the country’s most important geostrategic and economic partners—including Taiwan, the United Kingdom, and Kenya, among others—are actively seeking such agreements and view them as a barometer of the vitality of bilateral relations. Second, sourcing of key inputs for the technologies and industries that will power a green transition or ensure national security may require market access arrangements not presently facilitated by global trade networks; the European Union’s recent Green Deal Industrial Plan included strengthened trade relations with key partners, and the United States may find itself needing to pursue a similar approach, particularly as it involves market access for critical raw materials. Third, despite their historically deregulatory role, FTAs have the potential to raise labor, environmental, and other standards and promote climate action if designed or updated with those goals in mind.
At minimum, there is ample reason for the United States to seek to renegotiate existing FTAs to eradicate some of their most pernicious, investor-tilted elements and strengthen their labor and environmental provisions. The USMCA, which resulted from renegotiation of NAFTA, contains far stronger labor rights enforcement provisions—including by allowing governments to file formal disputes over labor rights violations that occur at an individual factory, rather than requiring that violations be widespread and occur in a sustained and recurring manner. Political limitations foreclosed a similar level of improvement on the enforcement of environmental violations under the agreement. The United States could pursue stronger, yet similar improvements in other existing FTAs and preferential trade agreements. One clear opportunity for such reforms would be in the renewal of the terms of the African Growth and Opportunities Act (AGOA), slated for 2025; meanwhile, the governments of Colombia and Chile have given signs they are open to renegotiating their FTAs with the United States, presenting another opportunity to advance a new model for market access.
How does industrial policy relate to trade policy?
One of the biggest questions facing U.S. trade policy does not, at first blush, appear to be a trade issue at all. Industrial policy is defined by the Roosevelt Institute as “any government policy that encourages resources to shift from one industry or sector into another, by changing input costs, output prices, or other regulatory treatment.” The purpose of industrial policy, as set out by former Director of the National Economic Council Brian Deese, is to use “public investment to spur private investment and innovation” in “areas where relying on private industry, on its own, will not mobilize the investment necessary to achieve our core economic and national security interests.”
Industrial policy has been at the heart of the Biden administration’s major legislative achievements. These include the Inflation Reduction Act, the CHIPS and Science Act, and the IIJA—which in different ways seek to restructure the American economy through a combination of direct subsidies, tax incentives, and support for research and innovation.
Industrial policy does not always have significant implications for economic relations with foreign partners and can be focused solely on developing domestic economic capacity—for example, investments in transportation infrastructure and extraction of raw materials that are used in domestic manufacturing. But to the extent that industrial policy appears to encourage domestic production of goods or advantage domestic-made products over foreign ones, it may give rise to allegations from trading partners that it runs afoul of long-standing principles of “national treatment” embedded in most FTAs and the WTO charter.
The modern American industrial policy
The Biden administration adopted industrial policy as part of its broader economic strategy before the passage of multiple pieces of legislation last year. This can be seen by the quick movement on executive orders that directed agencies to expand utilization of domestic manufacturing and incorporate high-quality jobs standards across decision-making. This commitment intensified last year with the passage of three monumental pieces of legislation—the IIJA, the CHIPS and Science Act, and the Inflation Reduction Act—as well as with the establishment of the Made in America Office and the deepening commitment to the Buy America initiative and the thorough focus and analysis of place-based investing and policy. In particular, those three pieces of legislation incorporated core tenets of industrial policy that will seed further growth of these ideas in years to come:
- The Infrastructure Investment and Jobs Act: The IIJA’s main thrust is a massive investment in domestic infrastructure, but those investments include broad domestic content standards and labor standards for construction jobs. Additionally, the legislation in its Build America, Buy America section codified the Made in America Office and strengthened and updated the Buy America initiative for the 21st century. It also targeted infrastructure investments to industries that will drive the U.S. economy and the global economy into the future. This notably includes electric grid modernization and a massive expansion of electric vehicle charging network.
- The CHIPS and Science Act: This bill went through multiple iterations, some better than others, and landed on a version that provides significant investment in semiconductor research and development as well as direct support for building production facilities of semiconductors. These chips are critical to multiple industries, most especially the auto industry, as we learned during the supply chain crunch of 2021. This research and development, plus direct support to construct, is clearly targeted to expand the country’s domestic foothold in the industry and alleviate its overreliance on global supply chains for this critical product.
- The Inflation Reduction Act: This piece of legislation devotes more than $350 billion toward climate policies that are essentially a collection of consumer-focused tax incentives and subsidies for consumption of clean technologies or support for production of those technologies, alongside some direct support to help existing manufacturing decarbonize. Most of these incentives have labor standards attached to them that will help ensure that the construction jobs created will be good, union jobs, with efforts to diversify the industry and support workers from historically disadvantaged backgrounds. The incentives for renewables and electric vehicles also have varying layers of associated domestic content provisions. Finally, many investments in the Inflation Reduction Act are place based and regionally focused in supporting energy communities.
These laws each work through different pathways and with different goals, but they are mutually reinforcing, and the sum of their impacts will greater than their parts. As Secretary of Energy Jennifer Granholm has remarked, the IIJA is the “backbone,” the CHIPS and Science Act the “brain,” and the Inflation Reduction Act the “lungs” of U.S. industrial policy.
Read more on the Biden administration’s industrial policy decisions
How Biden’s American-Style Industrial Policy Will Create Quality Jobs
America’s most important trading partners are no strangers to industrial policy. In the latter half of the 20th century, Korea, Japan, France, and other major economies galvanized industrialization and promoted durable economic growth through state intervention and investment in the economy. Even today, many European trading partners have tariffs on key goods, such as automobiles, that are significantly higher than U.S. tariffs on the same goods. This has not prevented these trading partners from expressing serious concerns, bordering on outrage, over certain provisions of Inflation Reduction Act that they claim to be protectionist—that is, favoring domestic goods and manufacturing over foreign imports. Specifically, the European Union alleged that eligibility requirements for nine tax benefits under the law violates international trade rules. The Korean government has also expressed frustrations with provisions of the law that it views as protectionist. Despite these concerns, the European Union has announced its own Green Deal Industrial Plan that includes more than 200 billion euros in subsidies and other industrial policy mechanisms such as procurement standards and funding for research and innovation.
Tension between the U.S. and its trade allies
Significant amounts of ink has been utilized discussing the ongoing tension between the United States and its trading allies, mainly over the industrial policies within the Inflation Reduction Act since its passage. It is true that the law is constructed to support domestic manufacturing; that was purposeful and important to its passage, as well as to the ongoing success of domestic efforts to take on the climate crisis. However, the breadth of these industrial policies is often mistakenly considered to be wide reaching across the whole legislation.
In fact, domestic content mandates (or restrictions) on subsidies only apply to one section, 30D: the electric vehicle tax credit—and those mandates are not even fully domestic. They state that to receive the full $7,500 credit: a) the electric vehicle must be assembled in North America, eventually including the battery, and b) the critical minerals within the battery must be sourced from the United States or a nation with which the country has an FTA.
The other provisions that support domestic manufacturing are either bonus credits, as is the case for equipment associated with producing renewable energy, or direct support to manufacturers that produce components for solar and wind energy, inverters, battery components, and critical minerals. These provisions do subsidize domestic industry, but they do not involve any further restrictions on consumer facing credits, outside of Section 30D.
The direct support for key industries, and notably the production of goods for those industries, is large and impactful on a global competitiveness scale. This was intentional and critical to winning support for the legislation, as well as for supporting American workers. These provisions helped the Biden administration live up to promises from back in the campaign and come from years of policy development and advocacy.
The Biden administration has exhibited some limited flexibility on some of the contested Inflation Reduction Act provisions, but the overall financial incentive structure of the law, which encourages building up domestic and North American supply chains and onshoring/friend-shoring, is not likely to change. Meanwhile, the European Union’s ambivalent attitude toward its own industrial policy suggests there remains substantial daylight between the two sides. The outlook of other major trading partners is even less clear.
There are significant questions looming over these frictions: Does trade policy need to be reconciled to industrial policy as a general matter? Is it sufficient to carve out certain areas of industrial policy from trade disputes, or should the rules be updated even if the outcome means some forms of industrial policy may still be disallowed? What would a carve-out look like? Would a “green subsidy race” be a bad thing? These questions are not academic, as the G-7 countries consider a “climate peace clause” at the upcoming summit in May. There are strong arguments for supporting a pivot to green industrial policy even if they clash with existing trade rules and institutions, but building global consensus around such a paradigm shift will be an uphill battle requiring sustained diplomatic effort with key U.S. partners and the support of key players in labor and implicated industries, such as renewable power generation.
What is the endgame with China?
It would not be an overstatement to say that concerns about China’s role in global supply chains and in cross-border commerce and investment are a primary, if not predominant, driver of most of U.S. trade policy. The GASSA’s goal of raising market barriers for steel and aluminum that is either produced in a carbon-intensive manner and/or originates from nonmarket economies engaged in unfair trade practices is first and foremost a response to China’s steel and aluminum industries, which have flooded the world with dirty, cheap exports. Likewise, IPEF seeks to deepen U.S. economic engagement in the Indo-Pacific as a counterweight to regional economic integration with China, which is being pursued under a number of bilateral and multilateral trade agreements—most notably the Regional Comprehensive Economic Partnership and the CPTPP. Some observers have even characterized APEP as a response to deepening Chinese trade and investment ties in the Western Hemisphere, specifically through the Belt and Road Initiative, which includes 21 countries in the region. Finally, as the United States seeks to build new and more robust supply chains as an alternative to China’s current monopoly on critical materials necessary to achieve widescale adoption of renewable power generation, zero-emissions vehicles, and clean tech, it will need to deepen economic ties with exporter countries and coordinate with other major importers.
It would not be an overstatement to say that concerns about China’s role in global supply chains and in cross-border commerce and investment are a primary, if not predominant, driver of most of U.S. trade policy.
A key question hovering over these initiatives and imperatives is whether U.S. trade policy, and the version of international economic order the United States is pursuing, is seeking to change Chinese behavior or rather to insulate U.S. and partner markets from Chinese economic dominance that is viewed as harmful to U.S. national security, the well-being of U.S. workers, and domestic industrial decarbonization. It already seems clear that the United States is prepared to pursue a far more robust decoupling with China than U.S. partners in Europe or Asia, which continue to seek access to the Chinese market and appear to have apprehensions about the stringency of U.S. controls on the export of key technologies to Chinese firms announced in October. This divergence could create friction in how the United States and its partners seek to cooperate in strengthening supply chains, addressing carbon leakage, sourcing critical minerals, and onshoring manufacturing in key sectors, such as semiconductors. It may also give rise to accusations of double standards as the United States seeks deeper economic connections with countries whose manufacturing practices are similar to those of China.
Do we need a less efficient global trading system?
Perhaps the broadest uncertainty surrounding the future of the global economic order is the appropriate balance between efficiency in the movement of goods and capital and other priorities that may in some cases require a less efficient configuration of trade structures and supply chains. This question is, of course, broader than trade policy, but it implicates trade. As USTR Tai recently observed at the World Economic Forum in Davos, “We’re looking at a less efficient world,” one in which a “premium” will be paid for “trust” in economic ties as an “insurance policy” against unexpected disruptions and conflicts. Although most influential global actors now recognize the need for some measure of redundancy in supply chains and industrial policy to prevent a recurrence of the shortages and price fluctuations produced by COVID-19 and Russia’s invasion of Ukraine, the question of how—and how far—to move past the neoliberal paradigm will be a key arena of negotiation and contestation in the years to come.
The potential for misalignment is greatest in negotiations over the future of the WTO and other multilateral venues for setting international economic policy, such as the G-20. In December, the United States flatly rejected WTO panel reports regarding steel and aluminum tariffs imposed by the Trump administration and sustained by the Biden administration on the grounds that “issues of national security cannot be reviewed in WTO dispute settlement and the WTO has no authority to second-guess the ability of a WTO Member to respond to a wide-range of threats to its security.” Although this position reflects long-standing U.S. policy, the flat rejection of WTO jurisdiction, alongside the United States’ sustained policy of declining to appoint members to the WTO’s highest dispute resolution body, signals a different vision for management of trade relations than that held by even many of the United States’ closest geopolitical and economic partners. For example, the European Union, in its Green Deal Industrial Plan, states expressly that it will continue to support the WTO, including through reforming the institution, in order to “promote stability in international trade and strengthen legal certainty for investors and companies.” Regardless of the success of WTO reform proposals, the most likely scenario in the immediate and medium term is one in which shifts in norms and rules around trade percolate upward from ad hoc, bilateral, or minilateral trade arrangements and initiatives, rather than the kind of top-down, multilateral consensus that defined much of the post-Cold War period.
The result of this shift is that the United States and other advanced economies will have more flexibility to design a more equitable, climate-friendly, and worker-empowering global trade system—one that can coexist with similarly equitable and empowering domestic policies—but the fruits of that effort may be a more fragmented, less efficient international economic architecture. In this scenario, middle-income countries that have benefited from a climate-agnostic set of trade rules that privilege a narrow notion of efficiency—above all, China—may seek to undermine or circumvent the updated paradigm offered by the United States and those who share its vision. How to manage those tensions in a way that secures the prosperity, security, and resilience of the U.S. economy without tossing aside the worker-centric advancements in climate action will be the key challenge for U.S trade policy and U.S. foreign policy more broadly going forward.
What role for the Global South?
As the United States and other advanced economies move toward a more robust industrial policy aimed at jump-starting a green transition, securing supply chains of key commodities and goods, and onshoring well-paying jobs, countries of the Global South are right to ask whether they will be left further behind in the global development gap and deprived of the resources and knowledge to compete in a decarbonized future economy. This concern has already emerged in discussions over whether least developed countries will be excluded from carbon tariffs—there is no such exclusion in the EU CBAM—and whether the WTO should grant intellectual property (IP) waivers to facilitate pandemic response; a compromise agreement reached in June 2022 has been criticized by civil society groups and Global South governments as falling short of what is needed. This dilemma is likely to grow more acute as advanced economies and major exporting countries seek reliable sources of critical minerals, the majority of which are located in Global South countries, and as low- and middle-income countries seek technology transfers and other IP related to clean tech and renewable energy generation.
Going forward, the United States could generate global goodwill and set an important precedent by pairing its industrial policy with investment, foreign and technical assistance, and deepened trade ties with key partners in the Global South. This must include appropriate financial assistance, starting with what has already been committed—notably the Green Climate Fund and the Loss and Damage Fund established at the 27th U.N. Framework Convention on Climate Change Conference of the Parties (COP27). It would additionally be beneficial for the United States to coordinate with Europe and other advanced economies over sourcing of critical minerals from—perhaps aligning with the European Union’s proposed Critical Raw Minerals Club—and technology transfers to Global South countries. It could also entail reinvigorating existing trade arrangements, such as AGOA, to better reflect the needs and aspirations of low-income countries in attracting overseas investment and strengthening their energy insecurity, and possibly pursuing a new FTA with an emerging economy such as Kenya. On the level of diplomacy and economic relations, the United States would do well to explain how its industrial policy will unlock economic opportunity around the globe, and not just at home, as a piece by three senior Biden administration officials recently laid out.
Under President Biden, the United States has pursued innovative trade policies aimed at fostering cross-border commerce that strengthens U.S. national security, empowers workers, and supports climate action. To build on this momentum, U.S. policymakers will need to make tough decisions on key questions of global economic governance and U.S. economic relations with key partners.
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