The International Economic Policy Challenges for the Biden Administration

I'm going to talk about the Biden Administration: the challenges they face, my forecast of what they are likely to do and the political and economic constraints they are under. For the record, I am not a member of the Biden team, I am not likely to be nominated for any government jobs at this time, but I am in touch with a number of people who are either going into or advising the Biden team.

U.S. presidents rarely want to focus on foreign policy—Democratic presidents in particular—and even more rarely do they want to emphasize international economic policy. Biden's priorities are very domestic: recovery from the pandemic and raising the incomes of working people. That said, there are significant international issues: vaccine distribution and improving pandemic management, climate change, regulatory supervision of digital industries, conflict with China and increasing concern about taxation not just of digital firms but also multinational firms. All of these issues are quite important to the Biden administration and all of them are inescapably international. There are also other issues that the Biden team will want to address that are not necessarily priorities, including the productivity slowdown and poverty in low and middle-income economies.

US international economic policymaking faces political constraints. Voters are very divided and so is Congress as a result. There is a bipartisan fear of the threat China poses. I think it is somewhat excessive because China's external ambitions and ability to harm the U.S. are more limited than some think. However, across Congress, the executive branch and the intelligence community, they're very scared about China.

I think a key constraint going forward is the loss of reputational soft power: the U.S. is not considered to be as dependable, credible or competent. I think there are also ongoing constraints from the remnants of Trump's policies. The Biden Administration is not going to just rescind the tariffs. In addition, Trump escalated the anti-China rhetoric and the Biden administration will not want to look soft. Trump also did a lot to hurt the civil service. A number of departments have lost a lot of very good senior, mid-career people, notably the State Department and the Treasury. The biggest problem is the enormous executive order power of the presidency. Biden can reverse many of Trump's orders immediately but this will be contested in the courts, which have been packed with judges appointed by Trump and Bush.

We shouldn't exaggerate or overhype these constraints. The idea that there's a huge backlash against trade or globalization is not supported by the data; it's not a key issue for most American voters. There's also concern about what you can get through Congress. This is also real but exaggerated. Under Trump we were able to get not just the U.S.-Japan FTA through Congress but also the USMCA to revise NAFTA. Biden also has comparatively few fiscal constraints due to the very low interest rates.

Globalization should be thought of as a multi-layered web of connections. Trade is important but it's only a small part of these relationships. Investment across borders, the sharing of R&D, business networks, the recognition of qualifications, human capital and relationships matter as much or more than trade to economic growth. The news on globalization from this viewpoint is not great. It's been corroding for the last 15 years or so. The Trump Administration is trying to claim that they were successful in their approach when in fact their international economic policy was a complete failure. The tariffs were paid for by the American consumer and to a small degree American business, not by the exporting countries, and they did nothing to diminish the trade deficit. Unilateral sanctions and threats succeeded only in diverting trade from the U.S.; it didn't really affect anyone's behavior. The number of jobs in heavy industry that came back was very small. The huge drop in immigration because of Trump's policies also failed to suddenly create employment.

The share of world GDP that's traded rose up to the financial crisis and basically plateaued before starting to increase again. However, in the case of the U.S., it has declined, and that decline accelerated under Trump. The U.S. is more closed than it used to be. Foreign direct investment in the U.S. has declined overall and immigration is now at more than a decade-long low. The Biden administration will certainly be less barbaric and cruel, but to my surprise they went further proposing major immigration and amnesty legislation in his first week as President. We've also seen a collapse in foreign student enrollment because of orders put in place by Trump. This is an instance where the Democrats' views on China are going to reinforce or extend the Trump policies. Senator Mark Warner wants to essentially kick out all Chinese students from American universities, which would be devastating to the workforce. That's likely to happen. The U.S. is unfortunately likely to continue disengaging.

Manufacturing as a share of U.S. employment has been steadily declining basically since the war. There continue to be improvements in manufacturing productivity but not in jobs. The data on Germany and Japan is not that different. Despite this, Biden has unfortunately said that he will continue and in fact probably extend the so-called "Buy American" policies: restrictions on what goods and services federal, state and local governments can procure from foreign suppliers. What the U.S. is doing is not only deeply costly but it's bad for resolving trade problems.

The U.S.-China trade targets released by the Trump Administration and the Chinese government a year and a half ago were impossible to meet. They imposed very specific targets in very specific areas. I fully expect the Biden administration to discard most of these specific targets and try to replace them with efforts to affect Chinese behavior. Despite fear of China in the U.S. and the recent announcements by the Trump Administration, foreign investment in China keeps expanding. The EU has concluded but not yet ratified a bilateral investment treaty with China. Portfolio investment continues to flow and U.S., Japanese and European financial firms will have to manage and encourage that. This level of integration does not seem likely to unwind. We are seeing continuing financial integration between the U.S. and China and between the world and China.

The Committee on Foreign Investment in the U.S. (CFIUS) oversees all foreign direct investment in the U.S. It was used in various political ways against Japanese investors in the 80s and early 90s. Starting about two years ago, the law was revised in a bipartisan initiative in the Senate to make it more anti-China. CFIUS now oversees a much wider range of deals than they used to: potentially a 10- to 50-fold increase. The Biden administration is unlikely to reverse this and are probably supportive of it.

A number of U.S. allies, including Japan, the UK, Germany and Australia, have created similar kinds of reviews for foreign investment, although none are as complex or as aggressive as those in the US. Some people going into the Biden administration hoped to create a united front with these other countries to deal with technology transfers: Chinese firms buying up smaller high-tech companies. The EU's announcement last month that they're going ahead with the bilateral investment agreement with China came as a surprise to many in the Biden administration. This indicates a couple of things. First, the Biden administration merely saying that they're going to work with allies may rule out some of the very stupid destructive things that Trump did, but it doesn't solve the basic problems. Second, we don't know yet whether the EU has decided to go ahead with the China deal because they find the U.S. to be less dependable and reliable and are not waiting to see whether Biden changes that.

There have been similar efforts to restrict access to semiconductors, resulting in disruptions in auto supply chains and manufacturing. Where the U.S. imposes export controls on a very specific, narrowly defined technology, it can be effective, but the more important and integrated it is into civilian production, the more likely unforeseen economic effects are. The U.S. Congress and the Biden administration will continue trying to pursue aggressive policies like this, and they will to some degree backfire.

For 30 or 35 years, the share of U.S. patents going to multi-country invention teams has been trending upward. R&D is now increasingly being done outside the G7 in countries like China, India and Israel. The degree to which R&D should be integrated will be an ongoing issue, particularly if the U.S. government continues to threaten to interfere with R&D.

I expect the Biden administration and the U.S. Congress to continue to be increasingly aggressive in imposing constraints to prevent Chinese technological advancement, but these efforts will probably not be effective and are likely to have negative side effects on the U.S. I'm not going to say that this is necessarily wrong. I think some constraints on allowing China and other potentially hostile powers access to U.

S. technology are correct. I and my colleagues have tried to convince the Biden people that it's best to have a small garden with a very high fence: a very limited number of sensitive technologies with very strong restrictions. This makes it more likely that you'll be able to get allies, including Japan, to comply with those restrictions and it also minimizes the economic damage. However, they are unlikely to be as limited as I have advised.

On trade deals, the U.S. underestimated the will of Japan, Australian and other leaders on CPTPP and then completely underestimated RCEP. RCEP is slightly higher quality than we would have expected. It seems to be more binding, intrusive and leveling than I expected. I think the one chance the U.S. has to get a Biden administration that's aggressively positive on trade is this sense of the U.S. being left behind by Asian regional growth. I find it extremely unlikely that they will do anything to join or align with CPTPP for at least two or three years. The U.S. is extremely unlikely under the Biden administration to do any trade initiatives. They're going to focus on enforcement issues with China and some less important issues such as Airbus and Boeing.

The U.S. cannot currently legitimately charge China, let alone Japan, with currency manipulation. A number of smaller economies are doing it, particularly Korea. And if you add up the amount of current account surpluses bilaterally that they have and the official flows causing those surpluses, it's in the hundreds of billions of dollars, and a lot of it is vis-à-vis the U.S. This will be given attention but in the end, they will not make this a priority unless either Japan or China breaks the G20 agreement on unilateral intervention. I think the currency issue will remain very much on the back-burner.

Can president-elect Biden's stated priorities of creating good jobs, growing manufacturing, increasing security vis-à-vis China and enforcing U.S. values abroad be achieved through some kind of international economic policy? International economic policy can only get you part of the way. Some of these goals are better pursued through domestic means and multilateral means rather than through the policies that are being proposed. Cooperation with allies is good but you need to have actual common pursuits with mutual benefits. Japan played a huge role in 2018 at the WTO ministerial in Argentina and there was a draft agreement between Japan, the EU and the U.S. on whether there could be a common multilateral subsidies approach to China. I and others have been encouraging the Biden administration to make that one of their first agenda items in this sphere. However, even ex-Obama officials and forthcoming Biden officials, who overlap, have negative views on the WTO, particularly on the multilateral trade rounds but also on the appellate body, that are surprisingly strong.

I would encourage you to think about there being three "buckets," or collections of issues, in China-U.S. relations. There are issues related to confrontation with China. This includes things like the treatment of human rights in the Uighur territories and of Muslims in China and the safety of Taiwan. On the other extreme are issues of cooperation, and climate change is clearly the foremost issue on which the Biden team wants to cooperate with China. They've been very clear that they essentially want to increase confrontation on some issues and cooperation on others. Trump's approach was actually the mirror image of that. He didn't bother to try to get cooperation, he certainly didn't care about climate change. He wasn't principled in talking about confrontation with China. He obviously encouraged Japan's self-defense efforts and the U.S.-Japan military relationship proceeded, but he was not exactly confrontational with North Korea or China. In the "middle bucket" of negotiable economic issues, the Biden approach is going to be some combination of diminishing the central economic issues and increasing the importance of the other two buckets. I fear they're going to try to overuse the economic issues as an incentive structure. It is better to utilize a largely non-politicized negotiable economics bucket as ballast for stabilizing the China-US relationship as confrontation and cooperation are tried and fail.

There is plenty of room for mutually binding and beneficial changes in government behavior. We want to get away from the 1978/1985 Plaza Accord-type summits and focus on areas where all the participating countries are moving in the same direction at the same time. We had examples of this during the global financial crisis, during the G20 summits of 2009-2011, but we've also had it in the agreement with China, including Japan, on currency since 2012 and we had it just this past year at the start of the pandemic economic shock when all the central banks agreed on swap lines. The idea is to pick areas where the commitments are largely the same and simultaneous.

What does Japan do if both the U.S. and China are unreliable in the future? The Biden administration's commitments could be reversed after the Congressional elections in 2022 or after the 2024 presidential election. How can we make improvements when the U.S. is contributing to the corrosion of globalization I mentioned and we have an environment of slower growth? I think we need to create different geometries: plurilateral clubs and groupings based on principles, rather than political affinities, that can make globalization more modular and less vulnerable to inconsistencies in China and the U.S.

I think those trying to affect the Biden administration need to take advantage of some of the bad news. Japan has shown itself to be very well governed on economic matters over the last decade plus. Given that the Chinese Communist party is also damaging its reputation around the world, I think there is a way for us to move forward.

Q: You sent us a very clear message that the new administration will be extremely unlikely to return to the CPTPP. However, I think countries like those in Southeast Asia are very carefully watching to see whether the U.S. will return to the region economically or in terms of trade policy. Do you have any views on that which could reassure countries in the Asia-Pacific?

Adam S. POSEN:
I think reassuring allies in Southeast Asia as well as Japan will ultimately play a big role in the Biden administration's thinking and will ultimately be the argument that brings them back to the CPTPP or other measures. You will probably get quiet assurances from Biden administration envoys that they want to join the CPTPP, but they will have to be very careful about not doing it publicly because the left wing of the Democratic Party and others will attack them if they say it too soon. I also think that the Biden administration will probably continue the extensive defense cooperation with Japan and, if anything, they may become more explicit in their guarantees for Taiwan and some other neighbors and allies of Japan and the U.S. I think it's important that Japan and Southeast Asian countries continue to make the case for wanting the U.S. back in, but I don't think a formal trade agreement or initiative with the CPTPP is likely within the next couple years.

Q: There are reports that the GDPs of the United States and China will reverse by 2028. What kind of discussions are there in the U.S. about the U.S.-China reversal in economic terms?

Adam S. POSEN:
Most Americans, including most American officials, couldn't care less. The per-capita GDP gap remains enormous. The demographics in China are changing to something much more unfavorable more quickly than the U.S, even with the changes in immigration. Parts of China remain significantly underdeveloped. More attention will be paid to competition in specific technological areas. Will China be a leader in artificial intelligence? Is China developing its own semiconductor capacity? Is China a leader in autonomous cars? Is China doing something new on green energy? That is where the comparisons are going to be more relevant than the GDP comparisons.

Q: It is said that a top risk in 2021 is President Biden. The new occupant of the Oval Office is opposed by half of the country. What are your comments on this?

Adam S. POSEN:
I wouldn't take that very seriously. We are a very divided society with significant issues, but getting into these broad generalizations about Biden being seen as illegitimate is not useful. I think what we have to focus on is what happens in Congress, what happens in the 2022 election, how much violence there is and how the police respond to it. If you have 50 plus one in the Senate and you have a majority in the House, just as happened with Trump, you can do a lot.

Q: Do you expect macroeconomic and policy coordination among advanced economies under the Biden administration?

Adam S. POSEN:
I think the soft coordination we've had for the last couple years will continue: agreement that interest rates should be kept low, currency manipulation is off limits and fiscal austerity should be avoided. I think that there's a real chance that the Biden administration will pursue agreements with the IMF and the World Bank on issues like vaccines and debt forgiveness. I think the agenda is going to be much more about agreements on the macroeconomic picture and then potentially agreements on digital, multilateral and international taxation.

Q: How will the U.S. work with the EU on border climate adjustment measures or the tax policy of decarbonization?

Adam S. POSEN:
The EU is going to move ahead. The U.S. is behind. It will now do some things thanks to Biden but not as much as the EU is doing. This will lead to a gap between the pace of decarbonization and the price of carbon in the EU versus the U.S. I had a discussion the other day with someone who was very, very senior in climate policy for Obama and who is close to president-elect Biden, and I raised exactly this issue with him. Biden already made a statement criticizing Brazil for its lack of rainforest protection, but what happens when the EU criticizes the U.S? What happens when the U.S. is in the middle, rather than a leader in the field? The official I spoke with said on the border adjustment issue, and I think this does represent the Biden position, that in principle we agree with border adjustment taxes and we think that we're going to want to use them. The Europeans will do it basically through carbon price. The U.S. under Biden is likely to do a lot of industry-specific subsidies and targeted incentives. There will have to be some kind of technical discussion between the U.S. and EU about how you match up those different approaches.

I spoke with another Biden advisor who said that they're going to appeal to the EU for time through the 2022 Congressional elections because if the EU starts hitting the U.S. with border adjustment taxes before then, the Democrats may lose certain energy-producing states. There is going to be very strong political pressure within Europe to put the border adjustment taxes in place. I also think that the Biden administration will try to change the discussion to one about putting border adjustment taxes on developing countries like Brazil and India. I think that act of hypocrisy is not going to go down well internationally but that would be consistent with some of the things that the Democratic Party and the previous Obama administration did.