Transcript: Has the US declared economic war on China?

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This is an audio transcript of the Rachman Review podcast episode: ‘Has the US declared economic war on China?

Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. This week’s podcast is about US foreign policy and the Biden administration’s swingeing new tariffs on China. My guest is Michael Froman, the president of the Council on Foreign Relations in New York. President Biden’s just announced a tariff of 100 per cent on Chinese electric vehicles. So has the US just declared economic war on the People’s Republic of China?

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Voice clip of Joe Biden
Because we’re not going to let China flood our market, making it impossible for American auto manufacturers to compete fairly. Folks, look, I’m determined that the future of electric vehicles will be made in America by union workers.

Gideon Rachman
That was President Joe Biden, announcing huge new tariffs on Chinese electric vehicles, as well as batteries and other forms of green tech in which Chinese goods have a cost advantage. Biden’s actions seem to run counter to his administration’s pledge to accelerate the green transition, and it’s also a further retreat from America’s traditional role as a promoter of free trade around the world. But these new tariffs may make sense as a political move. Biden is fighting hard for votes in the presidential election, and autoworkers are important in swing states like Michigan and Pennsylvania. The new tariffs also have to be seen in the context of the growing geopolitical and technological rivalry between the US and China. Mike Froman’s perfectly placed to comment on all these issues. He was the US trade representative under President Obama from 2013 to 2017. So I began our conversation by asking Mike Froman if the new tariffs imposed this week by President Biden are a turning point in economic relations between the two largest economies in the world, the US and China.

Michael Froman
Well, I think it’s more the next step in a process. I think the logic behind them is that in areas where the US is investing a great deal — we are now engaged in industrial policy when it comes to promoting electric vehicles, other clean energy technologies, batteries, et cetera — if we’re going to spend public dollars in building out that sector in the United States, then we don’t want it to then be undermined by the dumping of cheap and subsidised product from China. And so it’s sort of the other side of the coin of our program to encourage the development of an EV and related clean energy sector in the United States. It does come, as you mentioned in your introduction, with the trade-off between how fast we can deploy and how cheaply we can deploy clean energy products like EVs, versus making sure that we’re building a robust industry around the EV sector in the United States. And that’s a trade-off that the Biden administration has had to wrestle with.

Gideon Rachman
But it’s a very big move, isn’t it? Because, I mean, yes, President Trump initiated tariffs and President Biden hasn’t taken them away. But this is the sector of the future. It’s one the Chinese feel they have an advantage in. Do you expect them to retaliate?

Michael Froman
Well, I think that’s always the risk when you impose tariffs, when you engage in protectionism, there are really three risks. One is the direct cost itself, just by raising the cost of products that consumers or intermediate manufacturers need to buy. The second is the cost of retaliation. And China may well retaliate, although they already have tariffs on a lot of US products. And since we export to them much less than they export to us, there’s only so many products they can put tariffs on. And the third cost of protectionism is imitation, which is that other countries say, well, if the United States can do this, then we can do it as well. And that can lead to more and more protectionism around the world. But I think I have to go back to the first principle. I think this is not so much a furthering of the Trump tariffs. It’s a strategic application of tariffs to sectors where the administration through the Inflation Reduction Act, the infrastructure program, the Chips Act has already determined that we’re going to spend money to build a US industry. And this is part of that package of building a US industry is making sure the US has the time to get up and running and be competitive. And that over the long run is very good for the energy transition, the green transition, to have and not being totally reliant on just China for those products. But in the short run, as you pointed out, it will delay and or cost more to engage in that green transition.

Gideon Rachman
And the other classic argument against protectionism, or another classic argument, is that by shielding your industries, you make them less competitive. You know that China has other problems in its economy, but in this sector they’ve been very good. And isn’t it just an invitation to US manufacturers to not be as efficient.

Michael Froman
Well, they have been very good and China produces a lot of very good electric vehicles, but they do so with enormous subsidies from their government as well. So that theory of competitive advantage and of trade helping to ensure that other industries are competitive and are innovative, that was all based on the fact that everyone is playing by the same set of rules. If one big economy is playing by a different set of rules and is subsidising and dumping their products into the market, then it’s not really going to have the desired effect of encouraging the US industry to be competitive. It’s going to put the US industry out of business. We’ve seen that in one sector after another. I think what the Biden administration is trying to do, I believe, is get ahead of the curve this time. Right now, we import very few electric vehicles from China. So this is not an issue of dealing with a surge of imports all of a sudden. It’s to say this is the sector of the future. We want to have a significant industry in this sector. We’ve invested now tens of billions of dollars or hundreds of billions of dollars in it through tax credits and direct subsidies. And therefore, we want to make sure the US industry has the time and the capacity to get up and running and be competitive and be a global player in this critically important sector without feeling the pressure of Chinese dumping of subsidised products.

Gideon Rachman
Yeah. And I in the introduction I used a deliberately provocative phrase about economic warfare. But the reason I did it is, reminded me of a conversation I had about 18 months ago with a senior US official and a colleague and my colleague Ed Luce had used the phrase economic warfare, and the senior official said, that’s ridiculous. That’s not what we’re doing. It’s much more targeted. And they use this phrase about small yard. I there’s a small thing that they’re protecting in a high fence. This, you know, is a big yard. Now even if in the US’s own mind it’s not economic warfare, it’s bound to be perceived as that in China, isn’t it?

Michael Froman
I don’t think China is under any illusions about this. I think, first of all, the administration has, part of the engagement with China over the last year or two has been to be very transparent and visible about action. So China gets communication quite early on. This is what we’re considering doing. This is what we’re going to do. This is what we’re doing. This is why we’re doing it. This is the limits of it. This is what it means and what it doesn’t mean. And I think the Chinese appreciate that and understand that if the US is going to try and be investing in this sector, it’s also going to ensure that it is protecting its market from unfair trade as well. I don’t view it as economic warfare per se because it is targeted. Now, we can say, where’s the slippery slope? Where does the yard get bigger and bigger? It’s not an indiscriminate application of increased tariffs on everything coming from China. There’s a lot of imports coming from China that are not strategic. And there’s a strong trading relationship that can and should exist and continue to grow between the United States and China in non-strategic goods. The question is when it becomes a strategic good, a critical technology and new technology, technology that has potential implications for American competitiveness, for national security, which is not the case with electric vehicles, but in some of the other issues, like chips. Then, how do we make sure that we’re dealing with those issues as well? Up until recently, the entire trading system and really the whole practice of economics, the field of economics has been built around the principle of efficiency of producing goods at the cheapest price, creating the greatest choice for consumers. And that has been an important value. But it’s not the only value. And we now have discovered we care about resilience of supply chains, redundancy, diversification, which is an important risk management tool, diversification of supply chains and security, national security. And those issues are now being taken into account as other values. The challenges we don’t really have a framework for balancing how much efficiency versus how much national security, and at what cost are we willing to trade off one versus the other? As a result, some of these decisions look rather ad hoc. But I think it is that effort to say it’s not just efficiency we care about. We also carry out diversification of our supply chains, that we care about national security.

Gideon Rachman
And there is a national security argument that’s being deployed on EVs. I wonder what you make of it, which is that there are these sort of giant data-collecting sets of computers on wheels and that therefore people will be able to know, you know, where Mike Froman is driving and do something.

Michael Froman
I’m not sure that that’s interesting, to be frank. Look, I’m not privy to any intelligence that would suggest how much of that is a real threat or a real risk or not. Frankly, I would prefer that we just be explicit and say, here are sectors that we think are just so important to the US economy, we’re going to protect them. We’re going subsidise them, we’re going to protect those, and we’re going to protect others and be very clear and transparent about that, and then let the rest of the trading relationships develop as the market dictates.

Gideon Rachman
But there is a kind of whole new world, even from when you were a US trade representative, 2013 to 17, you were still doing classic things like trying to negotiate new trade agreements, the TPP and so on, which Trump pulled America out of on his first day in office. Is that, well just gone now, we in a new world of protectionism where all these different things apply and nobody’s going to be negotiating a free trade agreement, certainly from the west for quite a while.

Michael Froman
Well, look, I think the rules-based trading system, which I think has served the world quite well, it’s lifted hundreds of millions, if not a billion plus people out of poverty. It’s allowed developing countries to emerge as emerging markets. You know, if you go back as far as the postwar period, it helped Europe and Japan rebuild. I think all these have been very important contributions of the rules-based trading system. I think the challenge is that the rules that we put in place, including through the WTO, were not terribly well suited for an economy as big and important as China’s that follows a very different set of rules. So if you look at the WTO rules, they’re not very strong on subsidies. They’re not very strong on state-owned enterprise disciplines. And I think China was able to exploit the weaknesses in the global trading system and then just violate a number of the rules as well, in its effort to really build out its economy by manufacturing for the rest of the world and driving others out of those markets. And I think that’s what people are now reacting to. It’s not a nostalgia for the old system, because the old system really wasn’t able to deal with the particular challenge that China posed to the trading regime.

Gideon Rachman
Do you think that China is going to find itself what it is, I think now effectively shut out of the American market in EVs. But presumably they do have all these very cheap products which are, by all accounts, pretty good. Do you think they’re going to hoover up the rest of the world while America protects its own market?

Michael Froman
Well, I think the US will keep the electric vehicles out of its market from China. As I said, it doesn’t import very much to begin with. I mean, the real question is what happens in Europe, where you have a number of important auto manufacturers in Germany and France and the UK. Will they also engage in protectionism to keep China’s EVs out of this market? Or will they allow them in at whatever cost it imposes on the domestic industry? We’ve already seen some investigations begin by the European Commission on subsidies. And you hear rumblings of this, but you know, particularly Germany and to a certain degree, France have been a little schizophrenic in terms of their approach to China, wanting to differentiate themselves from the United States, not wanting to have a trade war with China. But at the same time, working very hard to protect their own domestic auto industry. The challenge that we face is that China is facing these significant economic headwinds. They could address those headwinds in a number of ways, and they could engage in domestic reform, move towards domestic demand-led growth, deploy their savings more efficiently. Those are all ideas that have been suggested to them that they know they need to do over the long run. But instead, they’ve decided to go back to the playbook of manufacturing and exporting to the rest of the world, trying to export their way out of the troubles. And you know, for years we used to tell the Chinese, just remember that their capacity to export their way towards growth rested on the notion of a benign international environment that was willing to take their exports. That environment has now changed. It’s certainly changed in the United States, I think has changed to a great degree in Europe. I also think, by the way, in major emerging economies, India is the number one user of anti-dumping rules against China. I think countries like Brazil very concerned about Chinese dumping. And so I think they’re going to find that more and more markets are going to be closed off to them. And of course, outside of the US and Europe, there isn’t necessarily the infrastructure for electric vehicles. And so that’s going to be another obstacle to this. So I think we’re heading for a bit of a train crash where they’re determined to double down on exporting their way out of this crisis through overcapacity and electric vehicles, at the same time that the US, Europe and many other major economies are going to be reluctant to take their electric vehicles.

Gideon Rachman
Yeah. And yet, as you say, there is a kind of ambivalence in Europe. And one of the things that’s been interesting for me is that the German car manufacturers, who, you know, my first thoughts are, of course, they’re going to demand protection. Actually, on the contrary, they seem to be lobbying not to do this because the China market is so important for VW and Daimler, and they don’t want to be shut out of it, even though their market share is dwindling. So how do you think Europe’s going to play this?

Michael Froman
Europe has always had somewhat more difficulty in engaging in explicit protectionism than the US has, I would say. And I think this is going to really put them to the test, because you’re right, Germany very much is dependent on the Chinese market. They rely a great deal on producing for the Chinese market in China and exporting from Germany to China. And they worry about the retaliation that could come from China on German products if the EU were to engage in protectionism on Chinese EVs. On the other hand, they are likely to see, as you said, dwindling market share in China as the Chinese EV market continues to develop. They have very good products. They have a lot of manufacturers, have many models and they’re subsidised. And so they’re being sold quite cheaply. And as they turn to Europe to export their excess capacity, they’ll undermine the German and French car manufacturers in Europe and their market share in Europe. And the question will be: at what point will Europe close this market to defend what’s left of its auto industry, or will it maintain an open market at whatever cost comes with that?

Gideon Rachman
Yeah, and one, I guess, obvious solution (inaudible) to this is that the Chinese will do what the Japanese auto manufacturers did in the 80s and 90s, which is manufacture in the market they’re intending to sell. And we’ve seen China saying that they’re going to open up in Hungary, which is in the EU, that’s just about and they’re talking about maybe having a plant in Spain. I’m told that Emmanuel Macron is interested in the BYD plant opening up in France. Do you think that’s the way it’s going to happen? And actually, if the Chinese were to do something similar in the US, would that be a way around the tariffs? They just opened a big plant in Georgia or wherever.

Michael Froman
Well, that is the way that the Japanese, and to a certain degree the Koreans, enter the US market when they face protectionism. I think that there would likely be more hostility to China doing that than there was even for Japan and Korea. If we would go back to the early 90s, there was a lot of hostility to Japan generally. But they think they did a very good job of changing their profile, in part through the very significant investment in production in the US. I think now we’re sort of seeing greater concern about that. In fact, we’re seeing greater concern about Chinese investing in Mexico and in Vietnam and exporting from there, while Chinese exports to the United States in general. And I’ll tell you about electric vehicles right now, has gone down in some significant ways, about $70bn. Exports from Vietnam and Mexico, two of the major destinations for Chinese company investment, have gone up by about twice that. And so we’re seeing Chinese companies sort of circumvent restrictions by going to other markets. There’s increasing concern about that, as well. So I don’t think China will have as much success as the Japanese and Koreans did in the United States and Europe. Of course, it’s a different story. And the question will be if they come in and they engage in subsidised practices. And I know the EU now has a new trade mechanism to look at the subsidies, not only of products being imported, but products being made in the EU by foreign companies. There’s been some investigations of Chinese firms under that trade mechanism, whether they call themselves subject to that.

Gideon Rachman
Do you think looking at the sort of bigger picture that we’re going to move to a world economy that some significant extent is split in two, in which you have a sort of west world — Europe, the US and allies — and then a sort of China Belt and Road world. And although that continues to be some trade between them, increasingly, these two blocs, sort of slightly separate from each other.

Michael Froman
You know, I think that probably is an overstatement of the direction we’re heading in, because as I said, I think there’s a lot of trade that can happen between China and the US, and China and the EU that should be uncontroversial. A win-win for all involved. The question is: where does one draw the line between non-strategic and strategic trade? And I think there again, it would be helpful if we had a better framework for thinking about that, because the risk is the yard becomes larger and larger. So in this . . . 

Gideon Rachman
I remember the French were once satirised for saying that yoghurt was strategic. Do you remember that? 

Michael Froman
Exactly. And so, you know, at what point does yoghurt become a strategic issue again between France and China? And so those are the sort of things, I think, that we need to really focus on is where to draw the line. When it comes to export controls, so the technology is being exported from the United States to China, I think the administration has been quite focused on the most significant, the most advanced semiconductors and other equipment that’s necessary for AI development and for technologies that could be used both for military and intelligence purposes, as well as civilian purposes. When it comes to restricting foreign investment, outward foreign investment and, they’ve identified a fairly narrow set of topics. When it comes to trade protectionism, that’s where I think the risk is that it becomes a slippery slope. And even in this recent announcement from the administration, you had not only electric vehicles and battery technology. You had solar cells, you had cranes. Yeah. You had syringes, needles and PPE. You know, I understand particularly post-Covid a view that well we need our domestic PPE industry in the United States, or we don’t want to be completely reliant on China for our PPE. But whether or not you need a protectionism to do that, or whether there’s an incentive for our neighbours, our trading partners, to produce that for us is another issue.

Gideon Rachman
And people obviously have pointed to the election and Biden moving now because protectionism has always been Trump’s issue. Do you think the election did play a part in this? And do you think it’s going to work? Because I guess people, if they want protectionism, we’ll go to the original. I mean, nobody’s going to out-protection Donald Trump.

Michael Froman
Yeah, I think, I mean, look, politics always plays a role in these things. And trade has become very political over the last couple administrations. You know, having said that, I think the Biden administration’s approach is to say we’re not being protectionist for protectionism’s sake, we’re not imposing a tariff on every country.

Gideon Rachman
And indeed, Trump has talked about a 60 per cent tariff on everything China produces.

Michael Froman
And a 10 per cent tariff globally. In this case, the Biden administration is saying here are some critical sectors where we feel the need to pair our industrial policy, investing in these sectors, with the protection that’s necessary for these industries to get up and running.

Gideon Rachman
Mmm. What about the kind of broader geopolitical implications? Because, again, you know, if you think about the classic arguments for trade, there was a sort of slightly simplified, maybe naive argument that trade leads to peace. And, you know, people have shot that down. But I think it is the case that if you look at what went wrong in the 1930s alongside the rise of fascism, et cetera, you had to retreat into protectionism.

Michael Froman
Absolutely. Absolutely.

Gideon Rachman
And does that worry you that …

Michael Froman
It does, it does. I mean, the retreat into protectionism, isolationism, nativism, all of these things that we saw in the 1930s we see being replayed now and not just in the US, but in other markets, including and in many European countries. You’ve got nativist and isolationist parties that are articulating those points of view. So I think that is something to be concerned about and why there needs to be some discipline put around it so that we there are parameters for saying when is it appropriate and when is it not appropriate. But I also think we shouldn’t overstate this trend, because at the same time that we’re seeing this in the US, Europe and the challenges with China, you know, in the last several years, you’ve seen Africa adopt a free trade agreement of the continent, and you’ve seen further integration in the Asia-Pacific with the CPTPP and the UK joining the Comprehensive and Progressive Trans-Pacific Partnership. And so there are still efforts under way to further integrate and the EU itself continuing to work on the single market, which is imperfect, and then to deal with some of those imperfections. So I don’t think this is a wholesale rejection of trade, of integration, even of trade liberalisation. I would say sometimes — this is somewhat heretical as a former trade negotiator — I think sometimes there’s too much attention put on traditional free trade agreements and on tariffs. Tariffs affect the trade in goods. Many economies, including the US, including the UK, are largely services-related economies. And there it’s not so much the issue of tariffs, but rules and standards that can allow countries to trade services and to integrate further with each other. And those are going to become increasingly important, particularly as we continue to develop the digital economy. Issues like data, data flows, rules around the digital economy, those may end up being a lot more important to job creation, economic growth, and the integration of economies than just the level of tariffs. The US has an average applied tariff of something like 3.5 per cent. We’re already a very open economy. So they go from 3.5 per cent to zero. You know, that is not a terribly meaningful move when foreign exchange can wipe that out. And, you know, in a day, I think therefore, maybe a little less attention should be paid to those concerns. Are more attention paid to what else can we do to further aggregate our economies, support our workers and others, and ensure that we’re getting the most out of the trading system while dealing with the cost that inevitably come from trade as well?

Gideon Rachman
I mean, on the other hand, obviously the administration is now coming to a close. There’s an election in November. Everybody is focused on the idea that Trump may win. He’s ahead in the polls, and I’ve just spent a couple of months in Japan where they even have a special word for it, moshitora, which means “what if Trump”. So what if Trump? Do you think that outsiders, American allies, can continue to rely on a degree of continuity in American foreign policy? Or do you think actually everything’s up in the air if he wins?

Michael Froman
Well, first of all, I think one needs to have a certain degree of humility and speaking about what President Trump might do, because I think other than people immediately around him and himself, I’m not sure any of the rest of us, have terrific insight into that. But I’d say, I think there are certain areas where there’s likely to be continuity or continuity with some degree of variation. China, I think there’s a bipartisan consensus on China in the United States. So they may take slightly different approaches. He has a 60 per cent tariff on everything. The Biden administration has targeted tariffs on critical sectors, but up to 100 per cent, for example, on EVs. I think on the Middle East, there’s likely to be a fair degree of continuity supporting Israel in its defence, and its capacity to secure its borders, get its hostages back and debate Hamas as a military threat on its southern border, while at the same time working with the region — Saudis, Emiratis, others in the region, the Jordanians and Egyptians — to create a strategy for the day after. And what happens to Gaza? What is the longer-term prospects for the Palestinians and how to deal with that issue? I think probably a fair degree of continuity there. I think where you might see discontinuity is around Ukraine, where President Trump has said he would end it in a day and has raised questions about his support of Article 5 of Nato. I think you might see some changes and Europe will have to react to that and figure out how much it can do on its own or with less US support than maybe there right now. And I think the overall approach to allies and partners is one that really defines the Biden administration. The Biden administration is really focused on strengthening alliances in Europe and the Indo-Pacific around the world, and investing in those relationships and partnerships with India and others. President Trump has been shown to be perhaps more willing to go it alone, without necessarily working as closely with allies and partners as the Biden administration has done.

Gideon Rachman
I mean, you have a good bedside manner. I feel rather calmer having listened to you, but there are a lot of people who say, actually, you know, this is a disaster. I mean, they’re Americans. Bob Kagan’s just written a whole book. Anne Applebaum, who say, essentially, American democracy is on the ballot in November. Do you believe that?

Michael Froman
Well, look, I think there’s serious issues around the health of American democracy. And again, it’s not about one candidate or another. I think it’s more about sort of what the dynamic is in the country right now, the polarisation, the, disinformation and misinformation, the lack of faith in institutions, including our electoral system. We have serious issues to work on in terms of building American confidence in our institutions that are so critical to preserving democracy.

Gideon Rachman
OK, last question about your current job. The Council on Foreign Relations is sort of the epitome of the American foreign policy establishment, and that has been bipartisan. Your predecessor, Richard Haas, who did the job for 20 years, worked mainly for Republican administrations. You’re a Democrat. So there was an American foreign policy establishment. But in this new environment, do you think there is still meaningfully a foreign policy establishment that the rest of the world can engage with and sort of feel it knows where it’s coming from?

Michael Froman
The council is rigorously non-partisan. We have a lot of Democrats, we have a lot of Republicans, we have a lot of independents who work at the council, who are members of the council, serve on its board, or are part of our larger network. And I still think there is a broad group of Americans on the right and on the left who share some fundamental principles about the importance of US leadership in the world, US engagement in the world. And there are some on each party who don’t. And in the case of the Republicans, it may be the leader of the party who doesn’t. But that doesn’t mean that the entire right-of-centre community has given up on that. There are a lot of Republicans who still believe it’s very important for the US to be engaged in the world and to show leadership. And, you know, we’re going to continue to work with those. We were founded in 1921, really in the context of that isolationism that you referred to, to make the argument, do the analysis about the cost of isolationism and to promote and strengthen US engagement in the world. And we’re going to continue to do that going forward.

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Gideon Rachman
That was Michael Froman, the president of America’s Council on Foreign Relations ending this edition of the Rachman Review. Thanks for listening, and please join me again next week.

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