May 2022 Volume 4

WASHINGTON UPDATE

Welcome to the Post - Post-Cold War Trade Policy Era! By Alex Perkins

The reaction of the world to Russia’s invasion of Ukraine makes it abundantly clear where countries stand. On the one side of the ledger, you have major market democracies – the United States, the European Union nations, as well as the United Kingdom, Canada, Japan, Korea, Australia, and New Zealand, among others. These are the nations that are coordinating closely to inflict economic harmon Russia, even when it would impose collateral economic damage at home. On the other side of the ledger, you have China, purportedly neutral in the conflict, yet doing nothing to press Russia to abandon the war and even undermining others’ efforts to do so. In the middle, you have a number of “non-aligned” economies, including Indonesia and Israel, South Africa and Saudi Arabia, Brazil and India. The conflict previews what we might expect to see should U.S.-China tensions escalate in the future. This dynamic also indicates that we have entered the post - post Cold War trade policy era. We have moved from an emphasis on hyperglobalization to a focus on near- and on-shoring. Instead of free trade, policymakers are consideringmanaged trade.Multilateralism is out and market democracy-led coalitions are in. There is a lot less talk about “just-in-time” supply chain efficiency and a lot more discussion of “just-in-case” supply chain resiliency. Policy makers care more about manufacturers than consumers. Unlike the past, when the White House and Congress launched initiatives to open the Chinese market, they are now pushing measures designed to limit exposure to China. In this new era, the question is whether the United States stays the current course or goes big. Going big would mean pursuing a novel approach to economic integration and strategic economic and security partnerships involving like-minded market democracies in the Western Hemisphere, Europe and the Indo-Pacific – what this author has coined the “Strategic and Economic Alliance of Democracies” (SEAD), a binding, enforceable arrangement that would go beyond the scope of a traditional free trade agreement. Fundamentally, the aim would be to (1) make it as attractive as possible to join SEAD, (2) make it unattractive to oppose SEAD members and (3) reduce vulnerability/exposure to China and others opposed to the SEAD. The idea, while ambitious, reflects the level of the economic and national security threat posed by China. However, without adequate (bipartisan) sustained political will in the U.S. and other market democracies involved in any negotiations to create the SEAD, success is unlikely.

Staying the current course means pursuing non-binding initiatives with friends and allies like the Indo-Pacific Economic Framework, the U.S. – EUTrade and Tech Council, the Summit for Democracy, the Quad, and AUKUS. On the plus side, the approach is flexible, and any negotiated outcomes do not require Congressional approval. But it also means that these initiatives will have limited impact. Moreover, such an approach lacks the “carrots” (i.e., U.S. market access) necessary to entice meaningful participation. Finally, the lack of unenforceability raises concerns about how meaningful any commitments agreed to really are. There are lot of reasons that justify going big and pursuing the SEAD. One important reason: China, whose unreliability has been on full display since the Russian invasion of Ukraine, is the United States’ principal source of strategic and critical minerals, metals and materials as well as a key source of goods and subcomponents in a range of sectors, including information and communications technology. U.S. supply chain exposure is especially severe in materials used to make renewable energy products, including lithium-ion batteries, wind towers, and solar panels. We are not the only nation in this precarious situation. In fact, most of our allies’ supply chains are as reliant on China as the United States, if not more so. This dynamic poses a grave economic and national security threat to the U.S. and to other market democracies. It is not realistic to think we can onshore every supply chain that currently runs through China. First, we simply lack sufficient domestic supply of many inputs, including several critical and strategic minerals, to meet anticipated demand. Second, while resourcing Chinese goods in the United States would provide increased resiliency, single sourcing from any supplier (or nation) creates risk. To truly mitigate supply chain resiliency risk, multiple, redundant sourcing options from reliable sources –including the U.S. friends and allies – are needed. The Biden Administration seems to recognize this reality. In several fora, from the U.S. – EU Trade and Technology Council to the soon to be formally launched Indo-Pacific Economic Framework negotiations, promoting supply chain resiliency is identified as a top priority. In materials released as part of the Administration’s one year supply chain review, it states “The United States cannot make, mine, or manufacture everything ourselves. We must cooperate with our allies and partners to foster and promote collective supply chain resilience.”

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FIA MAGAZINE | MAY 2022