As Prepared for Delivery

Thank you for inviting me to speak to you today about one of the areas of our work that I find especially compelling these days: the evolution of US international trade policy.

There are numerous reasons why this work is so fascinating right now.

First, the largest and most advanced economies are engaged in real time in rethinking this policy set. I’ll discuss my take on why that’s occurring in a moment, but here in the U.S., which will be the focus of most of my comments, we are pursuing President Biden’s vision of worker-centered trade and an industrial strategy designed to promote greater economic security, more resilient supply chains, and the build-out of domestic production in key areas related to addressing climate change.

But we are not alone. Europe is confronting similar challenges motivated by both Russia’s war against Ukraine and some of the same competitiveness issues with which we are dealing, particularly regarding China. Countries in the EU have faced both Russia’s weaponizing of critical energy flows, along with exposure to high levels of Chinese exports of EVs and solar panels. In fact, China EV penetration has been much deeper in Europe than here in the US.

Second, 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 US jobs in tradeable sectors.

There was and is evidence for both—evidence that no one should ignore—but 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 that I’ll speak to later in my talk.

It is now undeniably clear that the economic and political fallout from these mistakes have been deep and ongoing. And much of what I will discuss today comes from that realization.

That said, let me start by underscoring the following:

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

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.

Another reality, one that is both changing the parameters of international trade and motivating our industrial policy, is the existential threat of climate change. Though the private sector is now a much larger player in this space in ways that are both positive and consequential—what was a market-induced headwind to these policies is now more of a tailwind—climate change still has strong market-failure characteristics, such that even standard economics argues for internalizing the relevant externalities.

This is the impetus for our historical policies that President Biden has managed, against tall odds, to legislate, including the Bipartisan Infrastructure Law and the Inflation Reduction Act, measures that are designed to achieve rapid decarbonization by spurring both supply and demand-side incentives and crowding in private sector investment.

It is, of course, early days, but it is hard, even for a skeptical old hand like me, to avoid feeling optimistic about where this is headed given what we’ve seen thus far. First, the crowding in of hundreds of billions of private capital, far more than we expected, reveals that these policies are tapping powerful, latent elasticities. Look at this figure showing investment in domestic manufacturing facilities largely in the areas subsidized by our legislation.

Other than temporary countercyclical policy or maybe the Affordable Care Act, I’m hard pressed to recall seeing such a quick, deep reaction to a public policy, one that’s a lot more complicated than sending out checks or boosting unemployment benefits.

From a trade perspective, note that this private investment is from both domestic and foreign sources. The next slide, from a forthcoming CEA paper, shows the growth of both domestic and FDI inflows into clean-energy manufacturing investments.

It is also important to note where, geographically, these investments are taking place. That same piece shows that the announced investments sit fairly closely on top of the places that were hit by the China shock, leading our analysts to posit that new manufacturing investments are “likely to contribute to manufacturing employment gains in regions that historically experienced disinvestment.”

Again, it is too soon to make firm conclusions, but what you see here is the early evidence of what we think of as our “both/and” approach: tapping both the benefits and costs of trade and financial flows in ways to promote domestic and foreign direct investment in targeted, strategic sectors critical to transitioning from a fossil fuel-based to a renewable energy-based economy. Moreover, the approach must be worker-centered, targeting good jobs, often union jobs, with an emphasis on places that have been heretofore left behind, places that often are themselves transitioning from old to new sectors.

How does our relationship with China factor into this strategy? Simply put, we cannot afford a China Shock two-point-0. 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.

Concerns about a second China Shock are predicated by China’s continued macroeconomic imbalances – weak household consumption fueling excess savings accompanied by large-scale government support for chosen sectors. This is especially concerning to us in areas we’re working to develop, such as solar, batteries, and chips. As Secretary Yellen has warned “China is now simply too large for the rest of the world to absorb this enormous capacity.”

We also learned an important lesson about the non-resiliency of supply chains that was so clearly exposed during the pandemic. This insight requires us to wake up to the risks embodied in excessive production concentration that inculcate single-source dependencies along supply chains.

All of these insights and revelations underscore the rationale for an industrial strategy that seeks to build domestic capacity and diversify global supply chains for critical clean energy technologies. That, in turn, requires us to protect our investments in this space against a glut of underpriced exports in these strategic sectors. Again, we must strive to exist in the realm of both/and. We must value and support trade flows that push out our domestic supply curve while blocking flows inflated by non-market competition, flows that jeopardize the exciting and on-going build out of new, critical sectors.

That all sounds fine, at least I hope it does, but what does it look like in everyday, granular policy actions? Well, one good, recent example is the targeted tariff increases following the Section 301 4-year review in strategic sectors, including EVs, batteries, solar, critical minerals, and more. To me, this closely tracks our “both/and” agenda, as these interventions were truly narrowly targeted at $18 billion in
Chinese imports, 4% of the total, in ways we believe 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.

I would like to conclude with a final reason why I find this such an exciting time to be thinking about the changing ways countries are pursuing globalization. This one, I grant you, is highly abstract, but its foundational importance requires us to try to bring it down to earth. It is this: what used to be called the Washington Consensus regarding international trade is, if not dead, certainly no longer a consensus. While it is not clear what will replace it, I believe what I have just described to you is a version of what is emerging to take its place.

The old consensus, which, for the record, embodied some economically positive characteristics, focused largely on what was referred to as trade liberalization, meaning increased and less restricted trade flows, privatization, and market-driven exchange rates. The purveyors of the consensus would, and do, look very much askew at the industrial policy I’ve described today.

Why the consensus fell out of favor is beyond my scope today. A recent essay by Antara Haldar argued against a “one-size-fits-all approach” that “often amplified macroeconomic events” with highly negative outcomes. Haldar also cites examples of countries with strong development profiles, including—South Korea, Taiwan, Singapore, China—that “all departed from the Washington Consensus by making government an active participant in development.”

To be clear, that citation is not intended as an endorsement of any development model that departs from the earlier consensus. All such models have costs and benefits and the lesson to take from this history is that we must be sure the model we choose is consistent with our principles, values, and goals.

We must also be careful not to leave out the equities of those without a seat at the table. Enacting a model of trade that leaves out the considerations of workers in tradeable sectors, unions, small businesses, and the communities in which they live in is a recipe for blowback, dissent, and resentment of globalization.

What’s important now, in this period of change, is to think carefully about our own guiding principles and values of a trade model that’s evolving as we speak. From the Biden/Harris perspective, here’s how I would characterize some of those principles:

–Our citizens are not only consumers. They are also workers and the quality of their lives depend in part on jobs with dignity that provide them with a fair share of the pie they’re helping to bake. This is core precept of Bidenomics, and it is one reason why full employment labor markets and union power are so important to us, as they helped to ensure that fair slice is served up. But in the trade space, it means we will shape policy to block unfair trade that undermines key sectors of our workforce.

–Fighting climate change requires significant government intervention and international cooperation. I’ve stressed the importance of our policy agenda in this space, but this is obviously an area where we continue to work closely with our trading partners. Working together with G-20 and more countries to row in the same direction is always a challenge, but we have no choice. And we’ve made real progress, in no small part because there is a recognition of the urgency of this challenge.

–Trade policy is not just economics. It’s political economics. Like the old adage, those who ignore history are bound to repeat it, those who ignore the social and political fallout from non-worker-centered trade policies should expect to live with a politics dominated by xenophobia, isolationism, and authoritarianism.

–Unfair trade exists. Obviously, “unfair” is a highly unspecific term, but the recent overcapacity debate I noted earlier is a highly tangible example. There is a deep and important literature on mercantile trade regimes, beggar-thy-neighbor, or in its more contemporary vintage, savings-glut economics. In such cases, and China is once again a salient example, countries suppress consumer spending, thereby boosting savings. Those excess savings are then exported in the forms of excess capacity and/or bubble-inducing financial flows. As economist Michael Pettis has long stressed, the true and powerful economics of comparative advantage are thwarted when countries don’t export to import, but export to build market share through economically large and persistent trade surpluses, matched by equally persistent current account deficits held by their trading partners.  

So, I hope you share my view that this is a particularly exciting and consequential time to be thinking about trade policy.

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