Biden’s America First Economic Policy, With Edward Alden
Edward Alden, the Bernard L. Schwartz senior fellow at CFR and Ross Dist Visiting Professor at Western Washington University, sits down with James M. Lindsay to discuss how the Biden administration’s economic policies are creating rifts with some of the United States’ closest allies.
James M. LindsaySenior Vice President, Director of Studies, and Maurice R. Greenberg Chair
Transcript
LINDSAY:
Welcome to The President's Inbox, a CFR podcast about the foreign policy challenges facing the United States. I'm Jim Lindsay, director of Studies at the Council on Foreign Relations. This week's topic is Biden's America First Economic Policy.
With me to discuss how several of the Biden administration's economic policies are creating rifts with some of America's closest allies is Edward Alden. Ted is the Bernard L. Schwartz Senior Fellow at the Council. He specializes in U.S. economic competitiveness, trade in immigration policy. He is also the Ross distinguished visiting Professor of Business and Economics at Western Washington University. He's the author of the book, Failure to Adjust: How Americans Got Left Behind in the Global Economy. Ted is a columnist for Foreign Policy where he recently wrote a piece titled Biden's America First Economic Policy Threatens Rift with Europe. Thanks for coming back on The President's Inbox, Ted.
ALDEN:
Yeah, it's great to be here with you, Jim. Thank you.
LINDSAY:
As you wrote in your recent Foreign Policy piece, there's growing unhappiness in Europe, in an Asia, I would say as well over several of President Biden's recent economic initiatives. The Inflation Reduction Act tops the list. That law which Congress passed this summer has been hailed here in the United States as the most significant step yet in addressing climate change. That's an issue that Europeans have been imploring Americans to take more seriously for quite some time. So why is the Inflation Reduction Act now a source of conflict?
ALDEN:
Thanks very much, Jim. I think the reason it's such a source of conflict is that the timing for Europe turns out to be very unfortunate. I mean, the U.S. has finally got its act together on the climate agenda at exactly the time that Russia's invasion of Ukraine has sent energy costs soaring in Europe. I mean, if you look at Germany in particular, you have an economic model there that was premised on inexpensive gas coming from Russia, and those days are over. So costs for European business have soared. So even in the absence of the legislation, the Europeans would be fretting deeply about their competitiveness and worried that their companies would be relocating to the United States and elsewhere.
The Inflation Reduction Act throws fuel on that fire because there are a number of provisions in the law that very explicitly state that the subsidies coming from American taxpayers will only go to companies that are manufacturing their products in the United States. In other words, no imports from Europe. You're out of luck, South Korea and other places. And so on top of the very fundamental challenge that Europe is now facing from its rising energy costs, this legislation has really angered the Europeans and given them the sense that maybe we're not all in this together, we're cooperating on Ukraine, we're cooperating more and more on China. But when it comes to Europe's economic position, the United States is looking after its own and leaving the Europeans out in the cold.
LINDSAY:
Ted, can you tell me a little bit about what the subsidies are specifically? My understanding has a lot to do with tax credits in the law for the manufacturer of electric vehicles, but a little fuzzy on exactly how the law's supposed to operate.
ALDEN:
I mean, there are several different forms. The largest subsidies are actually direct producer subsidies to various forms of clean energy, solar power, wind power, battery production for electric vehicles. So there are a lot of straightforward industrial subsidies that understandably are only going to go to companies that are actually making those products in the United States, I don't actually even think the Europeans are making as big an issue out of that.
The electric vehicles pieces garnered most of the attention, and it says there will be generous subsidies for American buyers of electric vehicles up to about $7,500, but contingent on both vehicles and critical components of those vehicles, batteries being the most important being manufactured in the United States. So I think this hits the Europeans, and we could throw in the South Koreans here in the Japanese and others on sort of two levels.
One, to the extent that they're exporting finished vehicles from abroad, they won't qualify for any of the tax credits that they'll be out in the cold. So that's a big competitive disadvantage. Of course, most European vehicles are actually assembled in the United States. I mean, Volkswagen and BMW and others have big assembly operations in the United States. But the provisions on components are going to disadvantage those companies because they will tend to import components from Europe to integrate it with the European operations. Those components won't be eligible for the tax credits. So there's sort of a double whammy here that the Europeans and French President Macron, when he was here recently made a big issue out of this that they're very concerned about.
LINDSAY:
But cars made or products made in North America, made in Canada and in Mexico are exempted from these rules?
ALDEN:
That is correct. The language in the Inflation Reduction Act is a little fuzzy, and here's where there might be some wiggle room, which is that countries that are free trade partners with the United States may be eligible for these tax credits. This was a change made explicitly to accommodate Canada and Mexico. I don't know if any of our listeners remember, but you go back a year ago, at the end of 2021, it looked like there was a chance to pass this legislation all in negotiations with Joe Manchin of West Virginia, and the version at that time was a buy-America-only version. And the Canadians and the Mexicans went crazy over this. I mean, Canada's deputy Prime Minister, Chrystia Freeland, wrote the nastiest Canadian letter I have ever read in my life threatening basically nuclear war with the United States if this provision goes ahead.
And Joe Manchin was largely on their side, and so that got rewritten to very clearly include Mexico and Canada, which of course makes a lot of sense. You have an integrated auto supply chain here in North America as our colleague Shannon O'Neil has written about so well, but that language did not include this broader circle in Europe and Asia. And so the Canadians and the Mexicans are sitting back and saying, we're fine. But you have other countries saying, no, this really does hurt our companies.
LINDSAY:
So Canada, Mexico get exempted under this law because they do have a free trade agreement with the United States used to be called NAFTA, the U.S., Mexico, Canada Agreement, but the United States doesn't have anything labeled a free trade agreement with the EU.
ALDEN:
That is correct though. Again, a lot of this will depend on how the regulations are written. And during the dinner and the summit with President Macron, President Biden was rather encouraging that there might be changes in the regulatory process that would find ways to include the Europeans. So the language is very vague. I mean it is press conference, President Biden actually said, oh, the Congress really didn't mean free trade partners, it meant allies. Well, that's not what it says. It says free trade partners.
LINDSAY:
Well, let's talk a little bit about that, Ted, because President Macron comes here to Washington for a state visit. As soon as he lands in Washington, he heads to the French Embassy, he gives a speech. Much of the speech is devoted to the long history of U.S.-Franco relations or long-standing alliance. But then he got to the point, he's very unhappy about the Inflation Reduction Act. He talked about how it and another piece of legislation, the so-called CHIPS Act could fragment the West. So there was clearly telegraphing to the White House what he was most concerned about. As you note, President Biden admitted that there were some glitches, as he called it in the law, and he promised some tweaks. But my sense is that the amount they can tweak using presidential discretion is quite limited because it is a law. And my sense is people over on Capitol Hill aren't particularly seized to this issue that they would want to address it.
ALDEN:
Yeah, I think that is correct. And I'm going to give one broader piece of context before we talk about the tweaks and the broader piece of context here is that we, we the world, are in the midst of a historic reshuffling of supply chains. And a lot of this has to do with growing American and broader Western concern over the threat posed by China and the United States has made it very explicit: we don't want to be dependent on China for critical inputs, be they military inputs or inputs into the next generation of clean energy. So U.S. policy, let's call it what it is, its industrial policy is aimed at bringing a lot of those production processes back home.
But there's a second piece of this, and this was very much part of my book, Failure to Adjust, that you were generous enough to mention at the beginning, the United States feels in different ways, like it's been screwed by trade for the last ten or fifteen years. That production's gone overseas, that China and many other countries have done much better than the United States. So there's a secondary goal here of just bringing manufacturing back to the United States. So going back to President Macron and the press conference, Europeans are pretty solidly on board. I say pretty, the Germans have got some wavering here, but pretty solidly on board with trying to bring critical supply chains away from China. But very opposed to the buy America piece of this. They're like, "We're your allies. We're here." In this effort, you mentioned the CHIPS Act. There are a whole series of sanctions against China aimed at preventing China from acquiring advanced semiconductors. The Europeans have largely been on board with that, and they're like, "Hey, we're with you in this undertaking, so you can't screw us on the more limited pieces that have to do with the exact location of supply chain."
So that's the big context here. Getting back to your particular question, I agree with you. I don't actually think the legislative language allows for the fixes that President Biden promised during that meeting. There'll be people who have pushed back the steel industry and others are going to be very upset about this. And you've got a U.S. trade representative who's very tight with the labor unions. So there's going to be a pretty strong internal debate about do we really want to open this up or does the United States in fact want to make sure that its companies, its workers, enjoy the lion's share of the benefits from these subsidies?
LINDSAY:
Well, it's hard to see that Congress is going to reopen its handy work because it's quite proud of the bill it passed. And I would note that Senator Manchin, who will remain an important vote given how narrowly divided the United States Senate will be when it begins its new session in January. He was blunt on this score. He said, "We passed the IRA to help the United States of America. It was all about the United States of America." And I know Ron Wyden, Senator from Oregon who helped champion the bill, is essentially signaled no interest in reopening it and revising it. So at least in terms of the Inflation Reduction Act, that irritant in U.S.-European, in U.S.-Allied variations more broadly doesn't appear to be going away.
But I want to draw you out on this issue of industrial policy because essentially from 1980 on industrial policy was a phrase you were not allowed to utter because America was unleashing the power of the markets and that power of sort of free commerce was going to lift all boats. Now, after forty years of it, forty years after Ronald Reagan ushered in what people in our business like to call neoliberal economics, we've decided we actually like government intervention in the marketplace. You mentioned that there's a strong sentiment here in the United States that some people feel that the United States has been taken advantage by others. And I would note that Europe has long had subsidies for its industries. They would say the United States has had them too, even if we tend not to notice them or talk about them, one of the things that comes up a lot is how much Europe has subsidized Airbus, maker of jet airplanes. So is the United States just leveling the playing field here?
ALDEN:
I think that's what a lot of people would argue. I think that's what a lot of people in the Biden administration would argue. They probably wouldn't point the finger at Europe as much as they would point the finger at China, which is of course, the world's most generous provider of industrial subsidies. And I think the administration, and this was true in the Trump administration as well, right? This is not a partisan issue. You have to say that the Trump administration very much started the U.S. down this path, and there were even elements at the end of the Obama administration, which is, look at the Chinese are going to play this way. We have to play this way too. It was an economic argument for a long time, but increasingly, it's become a security argument that a strong position in these industries is critical for U.S. security.
So that just adds a lot more momentum to a new consensus that says, yes, indeed the government should be intervening in the economy all over the place to try and tilt it in directions that we believe will be favorable. To be clear, we're going to waste as a country hundreds of billions of dollars on this. I mean, industrial policy is rarely well targeted. You could argue that it's necessary. The transition to clean energy is of such importance given the critical problem of climate change that is worth wasting some money over. But it is striking to just see, you sketched the history there very nicely. How much the pendulum has swung from free markets will sort this all out to no, we need massive, expensive government intervention to deal with the problems we're currently facing.
LINDSAY:
Ted, I'm glad you raised the issue of China, its use of subsidies. The concern that the challenge China poses is not simply an economic one, but a national security one, because it also ties back into this potential rift between the United States and its friends, partners and allies. And I will note back in October, the Biden administration basically put an exclamation point on the end of the era of strategic engagement with China. The idea that we would encourage economic exchange because that would lead China to become, borrow a term popular during the George W. Bush administration, a "responsible stakeholder" in the international order. And the Biden administration ended that era by announcing a ban on the export of advanced semiconductor chips and the technology used to make them on China. That ban applied not just to chips and technology manufactured in the United States, but anywhere in the world if they're produced by using U.S. technology.
That was an announcement, as I understand it was made largely without consultation with our closest friends and allies. I recently had a conversation on this topic with Sebastian Mallaby. His basic point is that this strategy for limiting Chinese rise really depends upon getting allied cooperation, but it's not obvious that the White House is going to get that cooperation. As you note in your piece recently in Foreign Policy, Netherlands is the home to ASML, which is one of the leading companies in terms of making the equipment used to make cutting edge semiconductors. And you quote the minister of economics for the Netherlands as saying the Netherlands is very positive about its relationship with China and should have its own strategy for dealing with Beijing. So are we likely to see the Biden administration pursuing a series of policies that are alienating the countries that it wants to join in its initiative to limit China?
ALDEN:
I mean, this is exactly the delicate dance that is being done by and large, Europe, Japan, the Koreans and the other advanced industrial economies will fall in line to the extent they are persuaded that there are critical security issues related to these technologies. And you remember during the Trump administration, there was an effort to get other countries on board with banning purchases from Huawei, the big China telecoms maker, and by and large, Europe, Canada, Australia, Japan others did indeed follow the U.S. lead on that. I think that will happen again. The problem is where you draw the line and what is the judgment of, okay, this technology is so critical to the development of artificial intelligence and has such important potential military applications that yes, indeed we need to control this. But then there are a whole other raft of products you could say, no, really these are basically commercial issues.
And you're going to see big fights, I think, between the Europeans and the Americans and others over where to draw these lines. And I think one of the challenges here in the United States is that the pressure from Congress, and I think the administration is largely on board with this, is to expand these controls farther and farther and farther and farther.
I mean, the latest up is we're talking now about banning TikTok, the social media app, in various ways. And you come up with arguments about why there's concerns over TikTok, but it's very hard to say, okay, here's a reasonable place to draw the line and to get back to the Europeans, they would draw the line in very different places, right? Have a very, very narrow set of controls on critical technologies. But other than that, they want not to disrupt the European commercial relationship with China. I'm not sure, that's a consensus here in the U.S. I think you'd find a fair number of people up on the hill who would basically say, "No, we shouldn't be trading with China. China's a threat. China has massive human rights violations. We don't want to do anything to support that regime." That's not where the Europeans are.
LINDSAY:
I think you're quite right in that point, Ted, about where the American political debate is. I think that's going to accelerate once we get to the new session of Congress. I think you're going to see basically cooperation between Democrats and Republicans for a variety of reasons to push China even harder on these issues. And there's going to be very little sensitivity paid to how this might have consequences for friends, partners, and allies because we're going to be very much domestically focused in doing this. And as you point out, this is happening in a time in which Europe feels under tremendous stress because of the war in Ukraine. There's been a lot of grumbling recently coming out of Europe that the United States is not bearing the kind of cost that the Europeans are on the ground, both in terms of refugees, in terms of energy prices going up and the rest. And again, their fear being that the Americans are going to benefit from something that is costing Europeans.
ALDEN:
Yeah, I mean, I'm nodding vigorously here.
LINDSAY:
We have a very visual podcast.
ALDEN:
There was recently a statement from you mentioned Airbus, the European jet maker that some would argue was sort of subsidized into existence and became a major competitor to Boeing. Well, European chief executives now saying, look, the situation regarding energy prices in Europe and the potential subsidies available in the United States, we're going to expand our production in the United States significantly. So for the Europeans, this really is something of an existential threat to their economy. They're going to have their own homegrown responses. I mean, my background is very much in trade and for years, countries tried to limit subsidies because they distorted the free market. As you were talking about it. Europeans actually took the lead on this in their so-called State aids code, which very much restricts what member states can do in terms of subsidies to try to steal business from one member state to another.
Well, Europeans are saying, we're going to tear up the State aids code. We need to be able to go toe to toe with the Americans in the Chinese in terms of subsidies. So I really think we are in the early stages of a global subsidies war, but it's hard to think that that's very good for either the United States or Europe. And where I do have some sympathy for the Europeans on this is that there ought to be efforts at coordination.
I mean, you mentioned the CHIPS and Science Act, right? This is going to lead, we're already seeing it here in the United States, to the construction of new advanced fabrication facilities for semiconductors. Well, these things are extraordinarily expensive, and if we subsidize them heavily, and the Europeans subsidize them heavily, and the Chinese are going to continue to, we're going to end up with massive oversupply in these industries. There's going to be enormous and costly fallout. There ought to be coordination between the United States and the Europeans and other Asian partners on this. So I'm very sympathetic to the Europeans on this point. This sort of go-it-alone-we'll-figure-out-our-own-way approach that's very popular here in the United States right now is not good for alliance relations, but also doesn't make a lot of economic sense.
LINDSAY:
Well, let's explore that a little bit more deeply, Ted, because all of this is coming against the backdrop of the fact that Joe Biden has kept many of the Trump-era tariffs in place, even though he and many Democrats were critical of those tariffs when Trump actually imposed them. We see an administration that is critical of the World Trade Organization, which just handed down a ruling saying that the Trump decision to impose tariffs on imports of steel and aluminum for national security reasons violated trade law. The Biden administration's response was to criticize the WTO and argue that the national security exemption to trade law should not be reviewable by the WTO, but that effectively would put a core principle of international trade at risk because countries could say whatever we do is for a national security reason. It doesn't appear that the administration has made it a high priority to reform the WTO, still blocking appointments to the so-called the appellate body, which reviews decisions made by the WTO. And we already see China running to the WTO on the semiconductor ban. So what is actually happening with the Biden Administration's trade policy?
ALDEN:
Yeah, this is a great question, and I will say I was rather stunned by the USTR response to the WTO decision on the Trump steel and aluminum tariffs. I mean, I parsed that whole case in great detail trying to find a shred of a national security justification for the Trump tariffs. And there wasn't one, it was made up out of whole quad-
LINDSAY:
And these are tariffs that were placed on American allies.
ALDEN:
Oh yeah. So this was Europe, this was Brazil, it was Canada, it was Mexico, it was others. And so when the WTO panel says what's obvious to any thinking person that there was no national security justification for those actions, and the Biden administration says, "Oh my God, the WTO can't tell us how to defend our national security." That's just a ridiculous response. And it blows an enormous hole in what's left of the WTO rules because as you say, if the steel tariffs are justified on national security grounds, any tariffs a country can imagine could be justified on national security grounds. So the question here becomes what is the administration's strategy on trade? And all those of us in the trade community are scratching our heads over it and not really being able to make any sense of it. I'll take a stab at it here, right?
The administration does not really believe in the multilateral rules anymore. It thinks we're in a new era of great power conflict and can't afford to be constrained by those rules. The administration doesn't want to cut tariffs or offer additional market access to the United States. It thinks that'll just increase imports and harm American workers. So the question becomes, what if anything, does the United States have to offer the rest of the world on trade? And that gets back to our conversation over the course of this podcast, which is what it has to offer is the chance to be inside this circle. The administration, most notably Treasury Secretary Janet Yellen, has called this "friend-shoring," which is we are going to build these new supply chains around our friends, around trusted countries. The question is, who gets to be in that circle?
And just to make one last point on this, the one significant trade initiative this administration has right now is the IPEF, the Indo-Pacific Economic Framework, which involves about a dozen countries in Asia. The administration, said, "No, this is not going to be about market access. We're not going to talk about cutting tariffs, we're going to talk about supply chain cooperation and labor rights and other things we want to talk about." The only thing that makes the IPEF attractive to any of those countries potentially is a U.S. that says you're going to be a favorite supplier as we are redesigning the supply chains to deal with this new world.
So I think the administration is grappling at this, but it gets back to the core dilemma. You cannot have a vigorous, robust buy America, America first economic policy and at the same time say, "Oh, we're going to friend-shore and we're going to work with allies on these new supply chains." You can't do both of those things simultaneously. And the reason the administration does not have a sensible trade policy is that it's trying to do both of those things simultaneously.
LINDSAY:
I take your point, and it seems to me that the Inflation Reduction Act attest to the challenge because it in essence puts some of our major trade partners outside the circle of trust. They don't get the brakes, their producers can't sell products that will be eligible for tax credits and things like that. But Ted, your sort of assessment of the Biden trade policy really ties into the bigger question of where the Biden administration is going in foreign policy. Because Joe Biden came to office saying, essentially America's number one priority in foreign policy is meeting the China challenge. If there are any doubt about that, the national security strategy that the Biden administration released in October said, "China is the only country with the capacity to upend the existing world order. The United States intends to meet that competition." But doing that requires getting others to want to work with us. Biden promised to put aside the Trump administration's unilateralism and protectionism to mobilize the community, the world community, to deal with the challenge posed by China, but is pursuing a number of individual policies that in essence pushed countries away. Can the circle be squared?
ALDEN:
Yeah, I don't know. The only part of that statement I would disagree with a little bit is the notion that Biden promised to turn away from protectionism. I mean he didn't. He was quite explicit during the campaign that he wasn't going to negotiate anymore trade agreements. He didn't like them any more than Donald Trump did. So I think the administration was always in a position of saying, "Look, we're not going to go back to the trade policy of the last forty or fifty years."
LINDSAY:
I'm sure that they talked about having a foreign policy for the middle class. He was not going to go back into TPP, which is now the CPTPP understood. But generally speaking, his argument was, we have to deal with China. The way we do it is by assuming leadership, mobilizing the community to deal with it. But it seems a number of those steps that they've taken since coming to office really have created challenges for that goal.
ALDEN:
Yeah, there's no question. And I think the big reason is a fundamental one, which is China is a very important economy. I mean, China is now the largest trading partner of more countries than is the United States. And so most countries in the world don't want the choice that the Biden administration is offering, which is essentially get inside our circle or go with China. The countries don't want to do that. They want to be able to trade with both. I mean, at the G20 meeting in November in Indonesia, Indoensia and many other nations we're very explicit about this: "Don't force us into this choice." And this same dynamic is playing out in the discussions with the Europeans. They have no interest in going very far down this road of decoupling with China. I'm not sure, I've got a good answer to your question of is it possible to pull this off?
The problem at the end of the day is whether the United States has enough to offer economically, you go back to the Cold War with Russia and back to the '50s and '60s and '70s when China was still on the other side as well. The U.S. economy was just so powerful and so important that we had enough to offer the rest of the world to build a pretty strong alliance against China and the Soviet Union. Relatively speaking, we are not that big anymore, and we're not going to be able to fill the hole if countries find their economic relations with China cut dramatically. So I agree with you. There isn't an easy path from here to where the administration wants to be. I think there's going to be a lot of difficult trade-offs that still have to be made.
LINDSAY:
I want to stress the point you make Ted, about countries preferring not to have to choose. I was recently in Southeast Asia and the message I came away with in my many conversations is that these countries don't want to choose, but if the United States wants them to choose, it's got to put a much better offer on the table because they don't see the United States offering them very much. My sense is that IPEF was largely received with politeness, but no excitement because they don't see a lot of there, there. And there is a great deal of puzzlement among men and the people I talked to who like the United States, are sympathetic to the United States, that the Biden administration hasn't been more forthcoming in producing a package that would be more attractive to countries in the region. Countries that are poor have all kinds of economic challenges and would want to have deeper economic relations with the United States, but they don't see them on top.
ALDEN:
Yeah. The piece of this that will be really interesting to watch over the next couple of years, you mentioned the TPP, the Transpacific Partnership now without the United States. Donald Trump pulled out on his third day in office the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. I blame the Canadians for that horrible mouthful, but it's a TPP without the United States. The logical way to signal what the folks you were talking to in Southeast Asia want to see is for the United States to rejoin the TPP.
There's a very good briefing just out recently from Wendy Cutler at the Asia Society, who was the U.S. lead negotiator on the TPP. She wrote with Clete Willems, who was a trade official in the Trump administration, arguing for steps the United States could get back into the TPP that would send a strong message, but boy does it come up directly against the union-friendly positions of the administration because the unions hated the TPP. They played a big role in killing it, and it just doesn't seem to me that the Biden administration is willing to pay the political price to take that step. But if it's not, then what you were hearing remains the case, which is that the U.S. offer is pretty anemic, and why should countries opt for our side of this particular economic conflict if that's the best we can do?
LINDSAY:
On that note, I'll close up The President's Inbox for this week. My guest has been Ted Alden, the Bernard L. Schwartz Senior Fellow here at the Council on Foreign Relations. Ted as always, thanks for chatting with me.
ALDEN:
Great to be here, Jim. Thank you.
LINDSAY:
Please subscribe to The President's Inbox on Apple Podcast, Google Podcast, Spotify, or wherever you listen. Leave us a review, we love the feedback. You can find the books, articles, and podcasts mentioned in this episode, as well as a transcript of our conversation on the podcast page for The President's Inbox on cfr.org. As always, opinions expressed in The President's Inbox is solely those of the hosts or our guests, not of CFR, which takes no institutional positions on matters of policy.
Today's episode was produced by Ester Fang with Senior Podcast Producer Gabrielle Sierra. Special thanks back to Michelle Kurilla for her assistance. This is Jim Lindsay. Thanks for listening.
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