The Next President and the Tradeoffs in U.S. Economic Policy

In April 2023, U.S. National Security Adviser Jake Sullivan delivered a critique of the neoliberal consensus that had served as the foundation for international economic policy for nearly a century. In a prominent speech, Sullivan suggested that the United States was moving on from an agenda of global integration and trade liberalization. “After the Second World War, the United States led a fragmented world to build a new international economic order,” he acknowledged, adding that “the last few decades revealed cracks in those foundations.” To protect Americans and to take on China, Sullivan contended, Washington would no longer shy away from raising tariffs, imposing restrictions on exports and foreign investment, and engaging in domestic industrial policy. It was an important speech for a number of reasons, not the least of which was that it was delivered by the national security adviser, not the treasury secretary, commerce secretary, or U.S. trade representative.

The long-held Washington consensus—a package of largely free-market policies promoted by the United States since World War II—was on life support well before Sullivan’s speech. President Donald Trump withdrew the United States from the Trans-Pacific Partnership immediately after taking office and went on to impose broad-based tariffs on China and more targeted ones on allies and partners. President Joe Biden maintained most of those tariffs. He also mobilized public investment in domestic manufacturing capacity in high-priority sectors while restricting China’s access to critical U.S. technology and investment.

Consistent with Sullivan’s framework, the Biden administration has embraced a range of economic tools: export controls, restrictions on inward and outbound foreign investment, tariffs, industrial policy, and antitrust enforcement. Many of these tools enjoy broad bipartisan support. If they are to form the basis of a new, enduring Washington consensus, however, the next president—whether Trump or Kamala Harris—will need to develop a more systematic approach to using them. That means understanding their limitations, developing principles to guide their use, and grappling fully with the tradeoffs they involve. Otherwise, these tools of economic statecraft are likely to be applied on an ad hoc basis and in response to special pleading. That, in turn, would run the risk of endless expansion with limited effectiveness—and too little consideration of their costs.

THE NEW MOOD

For much of the last century, in response to the disastrous 1930 Smoot-Hawley tariffs, the United States’ international economic policy was focused on liberalization and integration. Competitiveness, efficiency, and growth were the metrics of success. This framework achieved many of its objectives, contributing to the biggest reduction in poverty in human history, opening vast new markets to U.S. exports, and greatly strengthening the comparative advantage of U.S. firms. At the same time, the approach had some obvious limitations—above all, the insufficient attention it paid to particularly vulnerable groups of workers and their communities. The advent of China as a strategic competitor further highlighted the limitations of that approach. The rules-based system was not designed to accommodate an economy that is so large and so integrated and yet is determined to follow a fundamentally different set of rules.

For trade, in particular, liberalization was seen to exploit comparative advantage and economies of scale, stimulate trade and investment, expose domestic firms to competition and larger export markets, and provide consumers with more choice and cheaper goods. This is not to say that competitiveness, efficiency, and growth were the sole considerations of trade policy. From the 1990s to my tenure as U.S. trade representative during the Obama administration, liberalization was not about tariff reductions alone; rather, it was also a means to larger ends, such as stronger labor and environmental protections, enhanced rules around technical and food standards, greater protection of intellectual property rights, and strengthened ties to countries critical to U.S. security and competitiveness.

Increasingly, however, U.S. policymakers are prioritizing values other than competitiveness, growth, and efficiency. They are seeking to make supply chains more resilient and redundant in order to reduce dependence on China for manufacturing in general or on Taiwan for semiconductor chips in particular. They are seeking to boost domestic capacity for producing goods deemed strategic and to create jobs associated with that production. And they are seeking to mitigate the national security implications of trade in sensitive sectors.

Resilience, redundancy, diversification, and national security are legitimate values to pursue, particularly in the wake of the COVID-19 pandemic and the intensifying rivalry with China. But the goals of competitiveness, efficiency, and growth cannot be thrown out entirely. Washington needs to strike the right balance among its various goals because pursuing each comes at a cost. And in striking that balance, policymakers should address the tradeoffs directly so they can ensure an enduring base of public support for the new approach.

YARDS AND FENCES

Any administration should develop a guiding framework for whether and how the government should intervene in the economy in the name of economic security. When it comes to restrictions on exports, the Biden administration has taken a relatively targeted approach. Borrowing former Secretary of Defense Robert Gates’s notion of a “small yard, high fence,” it seeks to prevent China from gaining access to the most advanced semiconductor chips and other critical technologies while allowing normal trade in other areas—“de-risking,” not decoupling. The administration has announced a similar targeted approach for screening outward foreign investment, although there is much ambiguity about how it might be applied in practice. Its industrial policies, meanwhile, have focused either on correcting market failures, such as the failure to incorporate the cost of carbon into investment decisions, or on making sure that the production of critical goods is not overly dependent on a single point of potential failure, as is the case with Taiwan’s dominance of advanced semiconductor production.

There are risks to this approach, however. The “small yard” risks growing larger, tariffs risk getting bigger and more widespread, and investments in domestic industries risk becoming more diffuse. No matter who is elected in November, the next president would be wise to draw clear lines on state support—deciding, for example, in which sectors the United States needs domestic production capacity and in which it can rely comfortably on neighbors and friends. Once the door is opened to such interventions, politics has a way of getting in the way of sound policy, and there is no guarantee that any administration will be so disciplined.

Consider the complicated choices Washington needs to grapple with regarding export restrictions. These measures are nothing new. The United States and its allies used export restrictions extensively during the Cold War to deny the Soviets Western technology. But China poses a fundamentally different kind of challenge than the Soviet Union did. A legitimate argument can be made for restricting the export of technologies that contribute directly to China’s military or intelligence capabilities. Or policymakers could go further, also restricting the export of technologies that contribute to China’s economic competitiveness more broadly. But the two approaches point to yards of different sizes and fences of different heights. And either approach requires the cooperation of allies to be effective, because if a restricted product is available from countries beyond the United States, then U.S. controls alone will be ineffective and will harm only U.S. companies.

Tariffs, for their part, can have multiple purposes: to complement industrial policy, to buy time for U.S. producers to establish themselves, or to reduce overdependence on a strategically important good. Tariffs imposed indiscriminately on strategic and nonstrategic goods alike, however, could carry costs well exceeding any potential benefit. Consider the proposal that Trump has floated on the campaign trail: a 20 percent tariff on all imports coupled with a 60 percent punitive tariff on those from China. Economists estimate that these new duties would cost the typical U.S. household more than $2,600 a year. And that figure does not take into account a range of indirect costs, including the effects of slower economic growth.

WEIGHING THE COSTS

One of the lessons of the old Washington consensus is that international economic policy cannot stand on its own; it must be accompanied by a strategy to help workers succeed in a rapidly changing economy. While trade has supported millions of high-paying jobs in the United States, it has also contributed to the effect that technology has had in hollowing out communities across the country. Just as northern England lost the textile industry to Massachusetts beginning in the nineteenth century, Massachusetts eventually lost it to North Carolina, and North Carolina lost much of it to Central America, Asia, and Africa. In the first decade of this century, the so-called China shock caused by cheap Chinese imports—along with advances in automation and the rise of the service sector across wealthy countries around the world—accelerated the trend of deindustrialization. Now the prospect of the widespread deployment of artificial intelligence has fueled new anxieties about the future of work and the viability of the American dream.

Yet the U.S. government’s social safety nets and programs for displaced workers—such as the halfhearted Trade Adjustment Assistance program—have proved entirely inadequate. Even the new Washington consensus has not really answered the question of how to help workers succeed in a rapidly changing economy, whether the change comes from trade, immigration, or technology. Any worker-centric trade policy or foreign policy for the middle class is incomplete without a domestic policy that provides for lifelong learning and retraining, place-based strategies that meet the needs of specific locales, and other interventions to ensure opportunities for workers and communities. The Biden administration has proposed a number of ideas in this area, but few of them have made it into law. A Harris or Trump administration focused on improving the well-being of American workers and on ensuring that the benefits of economic growth are broadly shared will need to finish this unfinished business.

Finally, as policymakers grapple with the new consensus, they must recognize that there are costs that cannot be wished away. Every policy comes with a price. Consider the tension between reducing dependence on China and combating inflation. The actions taken to address the first—tariffs, reorganizing supply chains, reshoring—are likely to exacerbate the second. That might well be a tradeoff worth making, especially for strategically important sectors or inputs. But it is highly questionable whether it makes sense to impose tariffs on, say, clothing and toys. The costs of tariffs are ultimately born by the purchaser, whether that is a household paying more for consumer goods or manufacturers paying more for inputs. In the case of basic goods, tariffs tend to hit low-income Americans harder, since they spend a higher proportion of their income on such products.

The new Washington consensus has not really answered the question of how to help workers succeed in a rapidly changing economy.

In the same vein, U.S. tariffs on Chinese-made solar panels, electric vehicles, and other clean energy goods are intended to spur the development of an American industry in those sectors. Arguably, a strong domestic electric vehicle industry could be as important to the U.S. economy as the traditional auto or steel industries were over the last century. But if policymakers are going to pursue that objective, they should do so recognizing that it will come at a cost—including adding time and expense to efforts to address the time-sensitive threat of climate change.

In a more general sense, every dollar spent on subsidizing an industry is a dollar not spent on another domestic program, on defense, or in the private sector. Every incremental dollar raises the national debt, which many economists believe is already on an unsustainable trajectory. Each individual investment might well be justified on its own terms, but policymakers need to weigh them collectively against other priorities and the sustainability of the United States’ fiscal situation.

NO TRADE POLICY IS FREE

One of the more difficult costs to assess is the effect of the new approach on the rules-based economic system—the norms and institutions that govern how countries and companies do business with one another and promote fair competition. Although certainly imperfect and in need of updating, this system has offered predictability and stability, with most countries following most of the rules most of the time. But now the largest economy in the world is beginning to operate outside that system, at least in spirit.

The shift in Washington risks generating three categories of costs: the direct costs of implementing protectionist measures, the costs imposed by other countries when they retaliate against those policies, and the costs that arise when other countries follow the United States’ example in selectively adhering to the rules. It is hard to estimate how much damage these actions may do to the rules-based system, but what is certain is that most countries, including the United States, have benefited enormously from that system. It took the better part of a century to create it. Washington should ensure that it weighs the benefit of alternative approaches to international economic policy against the potential harm of returning to the beggar-thy-neighbor environment the country experienced before World War II.

There are many legitimate answers to the tradeoffs inherent in economic policymaking. But no one should pretend that any given measure is without cost. All require tradeoffs—in terms of efficiency, costs, alliances, and competitiveness. After the Trump administration, my successor as U.S. trade representative, Robert Lighthizer, wrote a book titled No Trade Is Free. A more appropriate title might have been No Trade Policy Is Free. (And a lack of trade policy isn’t free, either.) Tradeoffs are inevitable. The next administration must work through them, develop a framework for making judgments about them, and then optimize for the values it seeks to pursue.