New View On Globalization Is Drifting Away From Old Consensus On Free Trade

New View On Globalization Is Drifting Away From Old Consensus On Free Trade

The free trade consensus of economists, politicians, and financial pundits operating in polite society is fracturing. 

It is hard to know when that fracture began. Some might say it began in the early 1990s with Ross Perot’s warnings about NAFTA, soon to be the biggest free trade zone in the world. Others might point to more recent times. The Trump presidency threw a monkey wrench into the machinations of globalization, installing tariffs on our number one source of imports – China – and causing mild panic attacks among experts writing in the Financial Times and The New York Times. It still gives them heartburn. The Economist lamented Biden’s extension of the Trump-era Section 301 tariffs in May, saying he’s “out-Trumped Trump”, which is akin to mudslinging and name calling in certain social circles.

Like them or not, tariffs, quotas, and tax incentives to keep manufacturers invested locally, are now a tool that Democratic and Republican Presidents are using. The WSJ called tariffs a “tool of geopolitics”.  If trade was remotely free (it’s not), or fair (it isn’t), none of these tools would be required. If the U.S. wants to have an industrial base, just being an innovator is not enough.

It is hard for a country to innovate on products it no longer makes.

“In many ways, people are stuck in the days when they studied economics in college, where we were taught that tariffs are distortive. Today, we have to understand that the marketplace itself is distorted. Tariffs are a response to those distortions,” Beth Baltzan, a senior advisor to USTR Katherine Tai said in a sit-down interview with CPA’s CEO Michael Stumo during the Annual Meeting in May.

What Biden’s Chief Economic Counsel Says About Trade

From the time Biden chose him to lead the White House Counsel of Economic Advisors, Jared Bernstein said he was a firm believer in what Tai calls worker-centric trade policy. That view portends that big trade deals like NAFTA were not a boon for U.S. labor. Most blue-collar workers who used to make Ford sedans in Detroit or Carrier air conditioners in Indianapolis know this. Economists, pundits and politicians figure it out much later.

“Even before Brexit, it was clear that the perception, one that had some grounding in truth, that elite thinkers and politicians were in denial about the downsides of globalization, had strong and impactful reverberations. Expanded trade from the 1990s through the mid-2010s was sold to the public on two broad principles. First, increased supply would lower costs, and second, opening up markets for our exports would promote U.S. jobs in tradable sectors. The extent to which this bargain put our blue-collar workers in competition with workers from countries with much lower pay and labor standards was too often ignored. The assumption that competitors would trade fairly was also belied by so-called strategic devaluations and savings glut dynamics.”

Worker-centered trade has been how Biden repackaged and added onto Trump’s trade policies. At least two laws signed by Biden, the Inflation Reduction Act and CHIPS Act, use tax incentives to attract local investment.  For Biden, however, this focus has centered on steel and goods related to clean energy (like solar) and new EVs.

It is safe to assume that manufacturing tax credits in the CHIPS Act have led to massive investment in computer electronics.

A new economic view of globalization is taking shape. It is no longer a Trump idea to impose tariffs on countries or enforce trade laws among allies like Mexico. Europe is talking about tariffs on wind turbines and EVs from China, and Turkey imposed a 40% tariffs on Chinese cars this week, with a minimum tariff of $7,000.

“Recognizing and taking action against the negative impacts of globalization does not imply rejecting globalization. A renewed, robust, worker-centered focus on industrial policy should not be conflated with reduced trade or less financial openness. In fact, the evidence shows that such flows remain robust,” Bernstein said.

“We continue to value strong trade and financial flows, but we aim to maintain them in a way that no longer undermines workers, that no longer hollows out their communities, that no longer allows unfair trade to capture market share through non-market tactics. We are happy to import disinflation. We will not import deindustrialization.”

“We will not accept deindustrialization” is a powerful statement by Jared,” said Jeff Ferry, chief economist at CPA. “It suggests to me that inside the Biden administration, the worker-centric trade faction has vanquished the free trade faction.”  

Bernstein noted in his speech that cheaper imports were not worth the deindustrialization that spread throughout the country since China entered the World Trade Organization in 2001.

“We cannot afford a China Shock 2.0,” he said. “Widely accepted economic research shows that the shock of the sharp increase in Chinese import penetration in the 2000s led to lasting damage in many American communities, especially those that lost manufacturing jobs and the factories that previously anchored their communities. Yes, cheaper imports lowered costs for consumers throughout the land. But in some parts of the country livelihoods were lost and disinvestments in localities spanned decades.”


Read CPA’s take on China Shock 2.0 and its impact on world markets. 


Bernstein praised the recent extension of the 301 tariffs, and some $18 billion in new tariffs against solar and EV supply lines made in China. Why? Because with the IRA subsidies, and China investments here because of them, the U.S. risks falling far behind in the clean energy space, whether it is in solar or EV batteries. The U.S. does not have any EV battery makers. China leads, followed by South Korean and Japanese corporations. 

“The Section 301 four-year review in strategic sectors, including EVs, EV batteries, solar, critical minerals, and more tracks our ‘both/and’ agenda, as these interventions were narrowly targeted,” he said. “We believe (these tariffs) will protect our investments in key industries and provide our firms the space they need to erect new, diversified supply chains that move us away from single-source dependencies.”

The old consensus embodied some economically positive characteristics, such as less restricted trade flows and privatization of often inefficient state assets. Bernstein said market-driven exchange rates were also a positive, but even with these we have a peso trading at roughly 18 times less the value of the dollar, and a Japanese yen that is worth half a penny.

For the free traders in Congress, Bernstein said Washington must enforce and create trade rules that block “unfair trade” that undermines “key sectors of our workforce.” These key sectors are likely to be steel, semiconnductors and the clean-tech items supported by the IRA. Other sectors not mentioned in his speech, are just as key, such as generic drugs, for example. 

There are many more sectors that are open to debate, leading Congress to wonder what sectors to protect, why are they worth protecting, and which ones to throw to the whims of the big corporate buyers interested in saving a dollar per widget. If that means it is made in Mexico, then so be it.

“It’s great to see Jared saying our citizens are not only consumers,” said Ferry. “They are also employees and producers. How you earn a living is as important to most people as how they spend it.” As far as the climate change-related industries go, Ferry said the surge in new IRA investments is great, “but the jury is still out on how all these investments will play out.”


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