Biden Administration’s Big Manufacturing Push Could Transform Global Trade

In just over a year, the U.S. has passed three huge budget measures aimed at transforming its domestic economy—by rebuilding infrastructure, accelerating a clean-energy transition, and boosting manufacturing in semiconductors and the automotive industry.

Each of these initiatives is focused on strengthening the U.S. economy and on boosting U.S. competitiveness in the world. But there is another crucial consideration as well: How these three policies are implemented in the months ahead could reshape global trade relations for years to come.

If U.S. policy makers use this opportunity to promote domestic industries at the expense of foreign competitors, other governments are likely to respond with their own protectionist policies, leading to a costly breakup of global trade, government officials and trade specialists say.

But, these same experts say, if instead the U.S. is more welcoming to products from friendly nations, and works with them to achieve what some call “friend shoring”—shifting production of critical materials to friendly nations, away from adversaries including China and Russia—the countries could continue to enjoy the benefits of trade while strengthening their supply chains, these people say.

“Friend-shoring is a rebuttal to those who argue that economic security can be achieved only through protectionism,” U.S. Treasury Secretary

Janet Yellen

wrote in December in an essay on Project Syndicate, a website that carries opinion pieces.

Three bills

America’s most significant industrial-policy push in decades takes the form of three bills Congress passed since November 2021. The roughly $280 billion Chips and Science Act promotes domestic semiconductor research and production. The measure known as the Inflation Reduction Act directs about $369 billion to clean energy and energy-security programs. And much of the $1 trillion infrastructure bill will be spent on boosting the U.S.’s economic competitiveness. Calling them down payments for the future, Biden administration officials have said the policies will fuel growth, rebuild fragile supply chains, address climate change, shore up domestic manufacturing and provide good-paying jobs for U.S. workers.

“Add these developments to the ongoing trade friction between the U.S. and China, and global trade is likely to look very different in 2023 and beyond than it did just a few years ago,” says Ted Murphy, a trade lawyer for the Sidley Austin firm.

Mr. Murphy expects each initiative to contain various forms of preferential treatment for domestic U.S. manufacturers of critical products, likely causing other governments to pursue their own domestic-production incentives and subsidy programs. This will make it harder for some companies to sell products produced elsewhere, he says.

“Where you produce is increasingly going to matter more, “ Mr. Murphy says.

Washington’s renewed focus on domestic industry comes after the pandemic, Russia’s invasion of Ukraine and rising tensions with China all highlighted the fragility of global supply chains and the danger of relying on a small number of suppliers in a few countries for critical products such as medical supplies, natural gas and advanced semiconductors.

The shift in policy is also a clear departure from the U.S. longstanding promotion of global trade to lower production costs and the price of goods.

U.S. Trade Representative

Katherine Tai

said in an October speech that the traditional approach to trade, marked by market liberalization and tariff elimination, had imposed “significant costs” on America’s economy and society. Among them, she said, were concentration of wealth, fragile supply chains, deindustrialization, offshoring and the decline of manufacturing communities. “The need for correction is clear, and industrial policy is part of that rebalancing act,” she said.

Quick pushback

Nevertheless, criticism of the shift in U.S. policy has quickly emerged. The European Union, Japan and South Korea all have demanded the U.S. revise its electric-vehicle tax-incentive program, saying the local-assembly and local-content requirements to qualify for tax credits of up to $7,500 per vehicle discriminate against their companies and might violate World Trade Organization rules.

European Commission President

Ursula von der Leyen

said in a Dec. 4 speech that the U.S.’s EV program could “redirect” investment flows of manufacturers to the U.S. from Europe at a time when the European economy is reeling from an energy crisis caused by the war in Ukraine.

In a joint paper issued Dec. 19,

Bruno Le Maire,

France’s finance and economy minister, and German Economy Minister

Robert Habeck,

proposed urgently experimenting with ideas for subsidies and tax credits for key industrial sectors. “We will mobilize all relevant national and European tools and instruments,” they wrote.

The Chips act as well must compete with EU, Japanese and South Korean plans to promote domestic semiconductor industries. Economists and industry executives warn that expanded production fueled by uncoordinated subsidy programs would result in global overcapacity.

Moves by rich nations to retrench from global trade have alarmed international organizations tasked to oversee global economic growth. Officials at such agencies have warned that such steps would only increase inflationary pressure and declines in economic growth and living standards over time. People in developing nations, in particular, are seen as getting hurt.

“If we want to deal with climate change in a collaborative fashion, if we want to deal with preparing for the next pandemic and so on, let us dial down the talk on decoupling and fragmentation,”

Ngozi Okonjo-Iweala,

director-general of the World Trade Organization, said on a December panel at the International Monetary Fund. “It will be very costly to the global economy,” she said.

The WTO recently lowered to 1% its projection for growth in total exports and imports for 2023, down from 3.4%.

Ms. Hayashi is a reporter in The Wall Street Journal’s Washington bureau. She can be reached at [email protected].

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

In just over a year, the U.S. has passed three huge budget measures aimed at transforming its domestic economy—by rebuilding infrastructure, accelerating a clean-energy transition, and boosting manufacturing in semiconductors and the automotive industry.

Each of these initiatives is focused on strengthening the U.S. economy and on boosting U.S. competitiveness in the world. But there is another crucial consideration as well: How these three policies are implemented in the months ahead could reshape global trade relations for years to come.

If U.S. policy makers use this opportunity to promote domestic industries at the expense of foreign competitors, other governments are likely to respond with their own protectionist policies, leading to a costly breakup of global trade, government officials and trade specialists say.

But, these same experts say, if instead the U.S. is more welcoming to products from friendly nations, and works with them to achieve what some call “friend shoring”—shifting production of critical materials to friendly nations, away from adversaries including China and Russia—the countries could continue to enjoy the benefits of trade while strengthening their supply chains, these people say.

“Friend-shoring is a rebuttal to those who argue that economic security can be achieved only through protectionism,” U.S. Treasury Secretary

Janet Yellen

wrote in December in an essay on Project Syndicate, a website that carries opinion pieces.

Three bills

America’s most significant industrial-policy push in decades takes the form of three bills Congress passed since November 2021. The roughly $280 billion Chips and Science Act promotes domestic semiconductor research and production. The measure known as the Inflation Reduction Act directs about $369 billion to clean energy and energy-security programs. And much of the $1 trillion infrastructure bill will be spent on boosting the U.S.’s economic competitiveness. Calling them down payments for the future, Biden administration officials have said the policies will fuel growth, rebuild fragile supply chains, address climate change, shore up domestic manufacturing and provide good-paying jobs for U.S. workers.

“Add these developments to the ongoing trade friction between the U.S. and China, and global trade is likely to look very different in 2023 and beyond than it did just a few years ago,” says Ted Murphy, a trade lawyer for the Sidley Austin firm.

Mr. Murphy expects each initiative to contain various forms of preferential treatment for domestic U.S. manufacturers of critical products, likely causing other governments to pursue their own domestic-production incentives and subsidy programs. This will make it harder for some companies to sell products produced elsewhere, he says.

“Where you produce is increasingly going to matter more, “ Mr. Murphy says.

Washington’s renewed focus on domestic industry comes after the pandemic, Russia’s invasion of Ukraine and rising tensions with China all highlighted the fragility of global supply chains and the danger of relying on a small number of suppliers in a few countries for critical products such as medical supplies, natural gas and advanced semiconductors.

The shift in policy is also a clear departure from the U.S. longstanding promotion of global trade to lower production costs and the price of goods.

U.S. Trade Representative

Katherine Tai

said in an October speech that the traditional approach to trade, marked by market liberalization and tariff elimination, had imposed “significant costs” on America’s economy and society. Among them, she said, were concentration of wealth, fragile supply chains, deindustrialization, offshoring and the decline of manufacturing communities. “The need for correction is clear, and industrial policy is part of that rebalancing act,” she said.

Quick pushback

Nevertheless, criticism of the shift in U.S. policy has quickly emerged. The European Union, Japan and South Korea all have demanded the U.S. revise its electric-vehicle tax-incentive program, saying the local-assembly and local-content requirements to qualify for tax credits of up to $7,500 per vehicle discriminate against their companies and might violate World Trade Organization rules.

European Commission President

Ursula von der Leyen

said in a Dec. 4 speech that the U.S.’s EV program could “redirect” investment flows of manufacturers to the U.S. from Europe at a time when the European economy is reeling from an energy crisis caused by the war in Ukraine.

In a joint paper issued Dec. 19,

Bruno Le Maire,

France’s finance and economy minister, and German Economy Minister

Robert Habeck,

proposed urgently experimenting with ideas for subsidies and tax credits for key industrial sectors. “We will mobilize all relevant national and European tools and instruments,” they wrote.

The Chips act as well must compete with EU, Japanese and South Korean plans to promote domestic semiconductor industries. Economists and industry executives warn that expanded production fueled by uncoordinated subsidy programs would result in global overcapacity.

Moves by rich nations to retrench from global trade have alarmed international organizations tasked to oversee global economic growth. Officials at such agencies have warned that such steps would only increase inflationary pressure and declines in economic growth and living standards over time. People in developing nations, in particular, are seen as getting hurt.

“If we want to deal with climate change in a collaborative fashion, if we want to deal with preparing for the next pandemic and so on, let us dial down the talk on decoupling and fragmentation,”

Ngozi Okonjo-Iweala,

director-general of the World Trade Organization, said on a December panel at the International Monetary Fund. “It will be very costly to the global economy,” she said.

The WTO recently lowered to 1% its projection for growth in total exports and imports for 2023, down from 3.4%.

Ms. Hayashi is a reporter in The Wall Street Journal’s Washington bureau. She can be reached at [email protected].

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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