Katherine Tai Talks Reshoring, Decoupling, and China Tariffs

USTR Katherine Tai outlined this week the administration’s next steps in dealing with the bilateral relationship between the U.S. and China as the phase one trade deal ends on December 31. Speaking to a masked audience of think tank staff at the Center for Strategic and International Studies, the new USTR called our relationship with the Chinese government and its economy one of “profound consequence” that impacts the entire world and “billions of workers.”

While much of her hour-long discussion, hosted by Bill Reinsch, Senior Adviser and Scholl Chair in International Business at CSIS, centered on the big picture with China, she did zero on something closer to home: Buy American rules.

“We need to do Buy American up and down the supply chain,” she said, marking the second time she has been quoted saying that in the last week. Her comment later in the day on the World Trade Organization, however, means the likelihood of what Rep. Donald Norcross of New Jersey calls the “Swiss cheese Buy American Act” ruling will remain full of holes. Buy American is designed for two things – local sourcing, and allowing allies, which is almost all of Europe, to participate in government contract bids.

“We support the WTO,” she said, but there was some nuance to her comment that could be interesting. She said the U.S was heavily focused on the WTO in China’s first 15 years as a member, “and as much as we seek to bring reform to the WTO, we need to be agile and be open-minded and think outside the box with respect to how we can be more effective in dealing with China inside the WTO on trade.”

Tai’s Four Pillars:

She said she will be meeting with Chinese trade leaders in the months ahead, and listed four main pillars from their in-house review on China that will hold up the foundation of the conversation. As promised in her first few months at USTR, tariff exclusions will get a review.

  1. Discuss with China its performance under the Phase One agreement;
  2. Start a targeted tariff exclusion process and ensure that the tariffs work and that there will be more tariff exclusions as warranted;
  3. Go after China’s non-market policies. Continue to “Use the tools we have and develop new ones to defend U.S. industry from harmful policies and practices;
  4. Work with allies in the market economies and democracies.

CPA opposes further exclusions for the 301 China tariffs. Multinationals have had over three years to move their supply chains out of China. Their failure to do so is their problem, not the government’s problem. The primary interest is to keep pressuring China to change their IP theft practices, stop rewarding them with continued market access and insulate us from their bad behavior. A worker-centric trade policy cannot include placing the interests of stateless multinationals at the top.

Tai used the language of the Administration and danced around a lot of Reinsch’s questioning. At one time, when asked about the Section 301 tariffs, he told her she did not answer his question and then moved on to decoupling.

Love ‘Em or Leave ‘Em?

On decoupling, she took a more pragmatic approach. It is clear the Biden administration is not interested in decoupling.

“I don’t have a good understanding about what people mean or if there is a common definition of decoupling,” Tai said. “I think the concern is whether the U.S. and China need to stop trading with each other. I don’t think that’s a realistic outcome. But I think the issue, perhaps, is how you can recouple, like how you can have a trade relationship with China where we are also occupying strong and robust positions in the supply chain, and not dependency.”

However, a better answer would be to include the fact that we want to reverse the decades-long offshoring trend and stop rewarding China’s behavior in Xinjiang, where hundreds of thousands of Muslims are held captive. The region has been banned from selling cotton into the U.S. apparel supply chain; and at least one company was banned from selling polysilicon for use in products, like solar panels, that are made for the U.S. export market.

Reshoring: “I Don’t Know.”

Reinsch asked her if Buy American laws were sufficient leverage to localize goods from China? Her response was academic, if not sincere given the time constraints.

“I don’t know the answer to that,” Tai told him. “I think in a lot of people’s minds, manufacturing is something that comes from an earlier era, that if we lose it, it is okay. But what a lot of people don’t appreciate is that the act of making things is critical to the resilience of an economy – just look at the scramble for basic goods during the pandemic. With a critical level of manufacturing activity, then an economy has more adaptability.”

The Buy American rule is subject to the WTO’s Government Procurement Agreement of which some 40 nations are signatory. Hong Kong is one of the countries whose goods are considered American for government purchasing. Why Hong Kong is in the GPA and allowed to bid for a U.S. government contract given that Beijing has ruled Hong Kong is just another mainland city is another one of the moon-crater-sized holes in that decades-old Swiss cheese government procurement policy the Buy American Act is wedded to.

“We don’t want to inflame relations with China.” — Katherine Tai, October 4, 2021, during CSIS speech and Q&A session.

Buy American rules only relate to government contracts, most of it for services and not manufactured goods like electrical components for a fighter jet, or hospital gowns and masks for Veterans Administration hospitals. The bulk of private industry is less likely to reshore if they receive favorable labor and regulatory arbitrage elsewhere, subsidies, and their strong dollar at home allows them to invest more capital abroad than here.

The New TPP

Tai was asked by a member of the audience what the U.S. approach would be regarding the CP-TPP – the Comprehensive and Progressive Agreement on the Trans-Pacific Partnership. China has bid for membership. Canada and Mexico are members. The new U.S. Mexico Canada Agreement would implode if China became a member in full standing of the CP-TPP. But Tai did not address this issue in her remarks. Instead, she remained steadfast in her position that TPP and CP-TPP are old trade agreements and a lot has changed since their formation.  In other words, they are not workable as they are now.

She said that we have to remain “fully engaged” in the Asia Pacific region but “address the realities of the challenges.” This does not fully take TPP off the table, though CPA believes that China’s joining it might be a blessing in disguise as it would upend the deal completely, because it puts the USMCA at risk.

CPA believes the TPP in any form, including without China, would continue the consistent trade agreement trend of moving supply chains offshore with vague hopes that Wall Street could sell financial services to Vietnam and Indonesia.  TPP is a mammoth trade deal that should be opposed by the Biden administration if they are committed to their worker-focused trade agenda.

“What’s best for American workers is growing the American economy with better jobs and higher wages,” she said, which is counter to shipping jobs to countries whose currencies are worth pennies to the dollar. “I intend to deliver on a worker-center trade dynamic relationship with China. We will create trade policy that benefits a broad range of stakeholders.”

All of this is fine, but if a broad away of stakeholders includes the same corporate giants that have benefited from every other trade deal, as noted recently by the International Trade Commission, then the wins for some big stakeholders will trump those wins, if they are even measurable, granted to the smaller stakeholders.

The Race to China: On Cornering Markets

Tai knows what’s at stake in such gigantic, corporate-led trade deals. It’s the old Ross Perot “giant sucking sound” that she will hear long after she is gone from her post at USTR.

“China pours billions into targeted industries, hurting the U.S. and the world’s manufacturing base. Look at steel. We used to employ 136 thousand people across the country. Then China built steel plants, low priced China steel drove out businesses in the U.S. and worldwide and left hundreds of workers without livelihoods, small communities devastated, with falling real estate prices,” Tai said. Some of her talk was too focused on “allies” and the economic woes felt by other countries.

Today, China is 60% of global steel production. They produce more steel in one month than the U.S. and most countries produce in an entire year, she noted. Employment in the U.S. steel industry has fallen 40% since 2000.

She also called out the solar industry, a favorite of the Biden administration.

“In solar cells, we used to be a global leader. But as China built out its own industry our companies were forced to cut staff and closed doors and now China runs 80% of the solar market and in some parts of the supply chain you cannot find products in the US,” Tai said.

She warned that semiconductors are the market China’s aiming to corner next.

In 2014, China issued a new industrial plan to establish itself as a world-leading semiconductor manufacturer by 2030. They have reportedly spent upwards of $150 billion on this effort, located in a zone of China they call, not ironically, the Greater Bay Area.

“China’s intentions are clear, just as they were with steel and solar. China’s growth and prosperity come at the expense of U.S. and other countries,” she said. “We need a new, holistic and pragmatic approach in our relationship with China for the near term and the long term. Our tactics to defend our interests must evolve,” she said, something we suspect refers to an industrial policy of sorts which includes subsidies and large grants to key sectors of the economy – like semiconductors and solar.

Tariffs helped solar. We cannot out subsidize China or Asia on that and the USTR would be wise to think the same.

Tai signaled that the Biden administration is not willing to rock the boat with Beijing too much as trade talks are set to begin next year.

“Our object is not to inflame our trade relations with China,” Tai said.

There is an acute sense that the Biden camp is trying to play both sides of the field where we only have one endzone to defend and only one in which to score points. “We must defend our economic interests and that means taking all steps necessary to protect ourselves from the damage that has been caused over the years,” she added.

It is worth remembering that none of this has ever been achieved by giving China the long-term benefit of the doubt. It has not been achieved by taking wait-and-see approaches. And we have failed to avoid hurting Beijing’s feelings, all in order to shield American multinationals looking to sell new brokerage accounts, widgets, gadgets, and movies to the locals next quarter.



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