How to Save Free Trade

As the U.S. presidential election approaches, President Joe Biden and former President Donald Trump have found common cause in their opposition to new trade deals. In the final months of 2023, the Biden administration postponed a decision on the trade pillar for the long-planned Indo-Pacific Economic Framework and withdrew long-standing U.S. support for digital trade provisions at the World Trade Organization. The deferral of IPEF—which is the administration’s key initiative for deepening U.S. economic relations with partners across the Pacific—leaves the Biden administration without a signature trade agreement, and the decision on digital trade means that Washington no longer has a clear position on whether it supports or opposes restrictions on global data flows. As the Republican front-runner in this year’s presidential election, Trump has made a 60 percent tariff on imports from China and a ten percent tariff on imports from everywhere else, including such partners as Germany and Mexico, signature proposals of his campaign to win back the White House.

This bipartisan pivot away from trade has caused consternation across Washington’s foreign policy establishment, which has long regarded trade deals as an important tool for building geopolitical coalitions. According to this view, the United States’ failure to pursue trade accords plays into the hands of its major rivals, who are busily negotiating them. A Washington Post editorial summarized this perspective last year: “To compete with China, the U.S. should put real trade deals on the table.”

But treating trade as a necessary evil in an era of intensifying geopolitical competition is no longer a winning argument. Few policymakers and analysts—and relatively few members of the public—seem convinced of the virtues of free trade. This is not least because, as Robert Lighthizer, the U.S. trade representative during the Trump administration, memorably quipped at a congressional hearing, the Beatles taught him in the 1960s that “money can’t buy me love.” Indeed, trade’s limited ability to create goodwill has become increasingly clear over the past decade. Despite close trading relationships with Russia and China, the United States was unable to stop the former from invading Ukraine, and tensions with the latter have soared. The belief that trading ties reliably produce geopolitical goodwill has faded. Nor, with the U.S. economy enjoying the strongest performance of any major developed country since the COVID-19 pandemic, do trade deals seem essential to the United States’ prosperity. Even in the absence of new deals, American trade with allies has boomed as Trump’s China tariffs, Russia’s war, and the global trend of relocating supply chains away from Beijing have shrunk U.S. trade with China while expanding it with other countries.

The United States is not alone in moving away from traditional trade pacts that grant another country full market access. Indeed, the same instinct is seen in many other countries. This does not mean that there are no longer deals to be made. But rather than pursue bilateral or regional trade deals driven by geopolitics, policymakers should begin to craft deals in specific sectors to tackle discrete global challenges. For instance, by working to agree to new rules, tariffs, and subsidies related to the transition to green economies, the United States and like-minded countries could better address the threat of climate change. Governments could negotiate similar arrangements on artificial intelligence, the digital economy, pharmaceutical products, and medical supply chains. In the process, the political debate over trade would be transformed. A climate and energy deal, for example, would not simply continue long-standing political debates between labor unions and multinationals over cutting tariffs. Instead, it would draw support from activists and young people deeply worried about the threat of climate change. Agreements on such sectors could appeal both to U.S. allies and domestic voters by refocusing the trade debate on solving the world’s most pressing challenges.

A WEAK CASE

U.S. leaders have long struggled to convince voters that trade deals are in their interest. Beyond supporting the military, the American public has rarely been willing to incur substantial overseas costs for national security objectives. Accordingly, U.S. spending on nonmilitary foreign assistance as a percentage of GDP routinely ranks among the lowest of wealthy countries. Recent events have shown that political support for even first-order national security interests, such as military assistance to Ukraine, is dwindling. Insisting that trade agreements are needed to help allies has never been an effective way to win votes in the American heartland.

In recent years, moreover, proposed trade deals offered only small benefits to the U.S. economy. The Obama administration’s own projection of the economic benefits of the Trans-Pacific Partnership—which President Barack Obama signed in 2016 and from which Trump withdrew in 2017—was an increase of just 0.15 percent in U.S. GDP after a decade. There is no reason to expect that the IPEF or other mooted deals—including ones that Trump discussed with Kenya and the United Kingdom—would bring greater economic gains.

Meanwhile, Washington’s ability to negotiate trade accords has been complicated by the fact that the United States is in the middle of its most substantial rethinking of domestic economic policy in decades. A growing number of the rules of the road that the United States long promoted are no longer rules that Washington supports. With legislation including the CHIPS and Science Act to boost semiconductor production and the Inflation Reduction Act to spur clean energy manufacturing, Washington has embraced industrial policy on a scale not seen since the height of the Cold War. Regulators across the U.S. government want to crack down on the largest technology companies, reduce their market power, and increase oversight of their business activities. The Biden administration recently went so far as to threaten to seize some drug patents from pharmaceutical firms in a bid to lower medical costs. Many of these emerging domestic policy preferences are in tension with the trade rules U.S. negotiators have fought for since at least the early 1990s. The United States is in no position to promote rules abroad that differ from the ones it is implementing at home.

NEW GREEN DEALS

A new approach to trade deals is needed, one that is consistent with the United States’ new domestic industrial policy and capable of attracting voters’ support. Washington should forge accords with other governments in specific areas of trade that align with clear U.S. interests. Rather than comprehensive bilateral deals that address trade across most or all areas of the economy, these deals should target specific sectors and bring together relevant countries to solve the problems associated with those sectors.

A deal regarding the green transition and energy security would be a good place to start. Voters of both major political parties want action to solve the climate crisis. But Washington cannot do this alone: the United States was responsible for only about 12 percent of global greenhouse gas emissions in 2022, and its share of global emissions is falling. China, on the other hand, accounts for about a third of total emissions, and its share is rising. Meanwhile, the production and transport of globally traded goods accounts for an estimated 20 to 30 percent of global emissions. A deal that imposes tariffs on imports from countries that are failing to reduce their emissions would pressure highly polluting countries to cut pollution and could generate revenue to fund green projects at home.

Of course, for an accord to work, there must be incentives for countries to join. These could be negative: in exchange for taking steps to reduce domestic emissions, countries that join the agreement could be exempted from, or even get credit against, new tariffs on polluting imports. These incentives could also be positive. Traditional trade deals have typically sought to eliminate industrial subsidies, but this one should encourage governments to adopt subsidies to promote low-cost manufacturing of key green technologies. It should spur countries to grant reciprocal access to each other’s domestic subsidies as well as coordinate on subsidy rates to prevent a situation in which allied governments work at cross purposes and companies play one government off another.

Countries participating in such a deal should also commit to collaborate on specific projects. For example, developing countries could agree to expedite permits for mines and processing facilities that produce the metals needed for batteries and other green technologies. In return, the United States could pledge to assist them on the road to a net-zero emissions future by providing necessary financing.

Washington could also clear some red tape for its allies. Currently, Japanese and Korean carmakers are at a disadvantage when investing in companies producing zero-emissions vehicles because investments from foreign firms get entangled in the U.S. national security review process. Although Toyota and Kia may compete fiercely with U.S. carmakers, their investments in U.S. zero-emissions vehicle companies do not threaten U.S. national security; indeed, they help make the country stronger by boosting the U.S. economy and creating jobs. As part of a clean energy deal, the United States should commit to grant expedited or waived national security reviews of specific firms in partner countries’ investments.

SIGN ON THE DOTTED LINE

A deal on artificial intelligence and the digital economy offers another important opportunity. AI has the potential, for good or ill, to transform economic and social life, and Washington has a strong interest in seeing it regulated in a harmonized fashion across aligned countries. The United States has shifted from its laissez-faire position on the unfettered flow of information and increasingly embraces restrictions on transfers of data to China and other competitors. Consequently, Washington should use trade agreements to persuade allies and partners to adopt similar approaches to data flows. Such deals could include provisions on digital infrastructure standards; the United States has a clear interest in its allies and partners using trusted network infrastructure providers for 5G and cloud services rather than those provided by Chinese companies that may be engaged in espionage. The United States and European countries could offer financial commitments in such a deal to help developing countries purchase information technology equipment from trusted Western vendors rather than from Chinese competitors such as Huawei.

Other, lower-profile sectors may also be ripe for deals. The pharmaceutical sector is an obvious priority, given that the United States and its allies have a strong interest in reducing their current dependence on China for key products. A sectoral deal could help ensure that Western countries do not become dependent on Beijing for higher-end drugs, even though near-term shortages of some medications sometimes force the United States to increase imports from China. For example, member countries could agree to give preference in government health-care programs to drugs made by one another rather than by nonmember countries such as China. Such an agreement could also strengthen medical trade and supply chain resilience among European Union countries, India, Israel and the United States while reducing their collective dependence on Beijing.

These sectoral deals, would, unlike traditional trade deals, demonstrably be to U.S. voters’ benefit. After all, the economic case for such traditional agreements has grown weak. Trade with partners such as India, Mexico, Vietnam, and the European Union is up, whereas China’s share of U.S. trade is in sharp decline. Supply chain pressures that spiked in the wake of the COVID-19 pandemic and drove inflation in 2021 and 2022 have faded. U.S. exports are on the rise, with values now well above pre-pandemic levels. The construction of domestic manufacturing facilities is undergoing a historic boom. Real wages for lower-income U.S. citizens grew strongly in 2023, exceeding the rate of increase for higher-income U.S. citizens. Women and Black Americans made historic gains in the labor market. No case for a free trade agreement can be made with statistics like these. But these increasingly prosperous voters care about arresting climate change and the effective regulation of AI. And therein lies the opportunity.

Deals focused on specific sectors can move the trade debate away from the old, unproductive clash between geopolitics and economics and instead focus on solving global problems. The agenda can be transformed, bringing in different stakeholders, including those, such as environmental groups, that have often been skeptical of traditional trade accords. In this way, new constituencies for trade deals can be created across the United States, shoring up domestic political support. To ensure that these sectoral deals are successful and win widespread support will require artful negotiation and a creative calibration of incentives. Regardless, a sectoral trade approach would be better aligned with U.S. geopolitical interests than the current alternatives—and that will be true whoever wins the White House in November.