''The World Will Regret Its Retreat From Globalization "Essay America’s Zero-Sum Economics Doesn’t Add Up""
U.S. Trade Representative Katherine Tai counters critics who say the United States is fostering unfair competition.
March 2, 2023, 11:29 PM By Ravi Agrawal, the editor in chief of Foreign Policy.
U.S. Trade Representative Katherine Tai in her office in Washington on March 15. Jesse Dittmar photos for Foreign Policy
It’s no surprise that international trade is experiencing turbulence. After the global financial crisis began in 2007, a decades-old trend of increased globalization first decelerated and then started to reverse course. The COVID-19 pandemic emerged in 2020, instantly snapping supply chains. Countries and companies focused on so-called “nearshoring” and “friendshoring .. https://foreignpolicy.com/2022/12/30/new-geopolitics-vocabulary-popular-buzzwords-2022/ .” Then Russia invaded Ukraine, and geopolitics began to impact trade even more. Add in a brewing cold war between the United States and China, as well as a wave of nationalism around the globe, and one can start to see why the world seems to have embarked on an era of industrial policy. From the United States to China, India, Europe, and beyond, major economies are turning inward, favoring domestic expansion over free trade and the global flow of goods.
If the United States is turning protectionist, it is hardly the only country to consider its own interests above those of others. But it raises questions about whether a subsidies race represents sound economics. After the initial sugar high, will the world end up sacrificing the benefits of efficiency and innovation? Who benefits from a new era of great-power competition?
To understand Washington’s part in fostering industrial policy, I sat down with U.S. Trade Representative Katherine Tai, the Biden administration’s top official tasked with mapping out and implementing the White House’s trade policy. Our conversation was broadcast on FP Live, the magazine’s forum for live journalism. FP subscribers can watch the video interview here. What follows is an edited and condensed transcript.
Foreign Policy: Ambassador Tai, European policymakers look at the IRA or the CHIPS Act and smell unfair competition and protectionism. How do you respond to their criticisms?
Katherine Tai: The CHIPS Act and the IRA are significant accomplishments. Finally, after many years of inability and neglect, we are investing in ourselves. For a very long time, we have pursued a liberalization policy to integrate ourselves with the rest of the world without paying attention to the needs that we have here.
The criticism that you describe is more what I read in the press rather than what I hear in the room. It’s delivered to me as concerns from our partners. That’s an important distinction.
-------- We take extremely seriously the concerns that our partners and our allies are sharing with us. --------
Take the Inflation Reduction Act. In all of my conversations with partners and counterparts in Europe, the conversation always begins with congratulations to President Biden for an incredible accomplishment—the largest contribution we have ever made to battling the climate crisis. The reason why the conversation starts there is an important fact to keep in mind: The United States and Europe are completely unified in recognizing the significant challenge that we are all facing as an entire planet with respect to a changing climate and its impacts on the sustainability and the future of our economies.
We take extremely seriously the concerns that our partners and our allies are sharing with us. It is important to recognize that while the IRA is a signature and significant contribution to the fight against climate change, it is also a product of a democratic rule-of-law system that we have here. The partners that we are in conversation with and working with most closely are also democracies. Democracies are coming together in the work we are doing and are seriously grappling with the challenges that we are facing to figure out how we can do this together. In that overall context, the IRA is not going to be the thing that solves [the economic sustainability challenge]. It is an important motivator to incentivize technologies and economies to meet the challenge. This may be the first, but it will not be the last significant policy contribution that will need to be made.
Left: Tai meets with Republican Sen. Mike Crapo on Capitol Hill on March 14. Right: Tai meets with Belgian Foreign Minister Hadja Lahbib in Washington on March 14.
FP: You’re addressing the criticism from Europe, but there’s also a macroeconomic angle. Economists worry about the world embarking on an era of industrial policy. They say that unlike free trade, industrial policy can be inefficient in the long run. They also say that when you subsidize large industries, that can stymie innovation.
KT: The first challenge that the IRA is responding to is the climate crisis, but we are encountering the urgency of this crisis at a time of significant world economic disruption and volatility. What we have seen through the pandemic, through Russia’s decision to invade Ukraine, is a fragility in the world economy that we’ve got to navigate.
The global economy is also experiencing a significant distortion from the rise of a very large and growing economy that has an incredibly important role to play in the world economy but structurally does not operate the way that our economy does.
FP: You’re talking about China.
KT: I am talking about China. That is a factor that we absolutely cannot ignore in terms of the challenge to the fundamental premise of the globalization project that has been going on for the past several decades.
To your point about subsidies being inefficient—to the extent that we are providing subsidies or tax incentives—they’re meant to operate in a market system and to influence firm behavior. The types of subsidies and state support that we see powering the Chinese economy are of a completely different scale. In fact, they power the economy; they are not about creating incentives in a market system. There is a direct through line between the state and expression in the economy. And that is a really important aspect of another shared challenge we have with our European friends and other partners around the world in terms of a sustainable path to economic growth and development. In a version of globalization where the field is not level, we are having to figure out how to adapt. We will need to adapt together.
Tai rides with her aides to a meeting on Capitol Hill in Washington on March 14.
FP: It always seems to me that so much of U.S. domestic and foreign policy is filtered through the prism of competition with China. Is the United States already decoupling from China?
KT: There are a couple of words used in questions I get asked that I always fight against. Decoupling is one of them, and deglobalization is another one. If you mean by decoupling that we are trying to completely divorce our economies, even if that were the desired goal, I think it would be extremely difficult to make that happen.
What we are trying to do is to ensure and to identify where the risks and vulnerabilities are—in the version of globalization that we see right now. The supply chain challenges we experienced through the pandemic are instructive. Whether it was personal protective equipment, masks, gloves, or ventilators early in the pandemic or the semiconductor chip shortage that impacted all of us, we see global supply chains that were designed for efficiency, chasing the lowest cost, without recognition that concentrations of supply and production create significant risks and vulnerabilities.
Our focus is on what I hear my European friends call de-risking, and that is actually quite a helpful way of thinking about things. From my perspective, it is to build resilience in our supply chains and to create incentives to ensure resilience for our economies. Because whether it is geopolitical, climate-related, or epidemics, there will be more crises that we will encounter. What we need to do to be constructive and productive through this period of time is to figure out how to adapt and prepare the global economy to be able to withstand and cushion future shocks. I wouldn’t call that decoupling. It is really about ensuring that we all have more options.
Tai walks down a hallway on her way to a briefing with Crapo on Capitol Hill in Washington on March 14.
But staying on China: If part of U.S. policy is to contain China or to slow its rise, doesn’t that have negative impacts on the global economy itself?
KT: From my perspective—at least in the trade and economic lane—it isn’t about containing China. It is about lifting up America. Lifting up our workers in certain sectors who felt as if they have been very much invisible in the pursuit of efficiency in global economic integration; lifting up our infrastructure, which is really still coasting on investments that we made a couple of generations ago; and pulling ourselves up to make sure that we can run faster and jump higher. That is probably the most useful lens through which to view our economic policies, including our trade policy.
FP: Of course, your role is to look at America’s interests first. But again, there are economists who will say that in a world in which big countries are building up their own resilience—their own industrial policies—what often ends up happening is that smaller economies end up suffering. The global south doesn’t win in an era where the United States, China, and Europe are looking inward. How do you think through that in your role?
KT: You said “America’s interests first,” and that triggered another pet peeve around [former U.S. President Donald Trump’s policy of] America First. All countries are looking after their interest, right? But I would distinguish the Biden administration approach. It’s not America first and only. It’s also about how America can lead and how America can partner. We need to invest in ourselves, but how do we not do it alone? Because that just isn’t the kind of world that we want to live in, that we would be doing things alone.
To your question about what happens to smaller countries or developing economies: All along the spectrum of least developed to middle-income countries, in order to be able to be a leader, as befits the largest economy in the world, we necessarily have to take good care of ourselves while never losing sight of the need to be a good partner.
In trying to facilitate the creation of a new, more resilient version of globalization, there is an important element that we’ve got to innovate in, which is how the United States can improve on previous models of partnership between large, developed economies and smaller, less developed economies.
You are absolutely right that the global economy does feel as if it is in flux, but we all have a certain prejudice against change because change is scary and there’s no guarantee in terms of what the change will look like.
Tai leads an all-hands meeting to prepare for upcoming congressional testimony at her offices near the White House in Washington on March 14.
FP: What is the long-term goal of U.S. trade policy with respect to China?
KT: I gave a speech on the U.S.-China trade relationship a little over a year ago. I stand by everything that is in it, which is that we need to find a way that we can coexist and compete fairly and continue to be able to thrive and to safeguard the institutions and principles that we hold dear that are really core to our political and economic DNA. And that is to ensure that we have the space to continue to have a strong democracy and thriving economy based on market competition principles.
How do we accomplish these goals, given that the second-largest economy in the world operates on a very different system, has a lot of heft, is its own sovereign, and makes its own decisions? This is one of the most important issues that we will grapple with as the United States, along with our partners and allies, who are looking to create the space to safeguard and to thrive in the ways that we are.
FP: I have one last question, and I’m going to make it a personal one. I’m an Asian American. You’re an Asian American. Here’s a question I grapple with myself: How do you think through your cultural heritage, your multiple identities, and the many hats that you wear? I should add that you are a fluent Mandarin speaker as well, one of very few in the administration. How do all of these factors inform your policymaking, given that America’s interests are what you were hired to defend but you also have this global outlook that isn’t always the case for people in your position?
KT: Being the child of immigrants, having grown up speaking a different language at home, I love to learn languages. I think I can ask, “Where is the bathroom?” in many languages, and I might be able to understand the response in at least two or three. It underscores an important aspect of the work that we do at the Office of the U.S. Trade Representative but also the Biden administration’s outlook internationally, which is that you have to be able to build bridges and you have to be able to bridge gaps—in communication and in understanding. I spend so much of my time seizing opportunities, like this one with you, to have the conversation and be able to elaborate on and explain our thinking and what we’re trying to accomplish.
In terms of our partners in Asia, including China, a very large, important partner with which we have a quite complex relationship, you always have to start with being able to communicate your point of view and then also being able to listen and receive that communication. This is a skill set that is really important to policymaking on the domestic side as well. These differences aren’t just limited to national outlooks. Something that I take particular pride and a sense of responsibility in is maintaining a bipartisan outlook on how we advance American trade policy, because it really is in the title of my job and in the title of our agency: We are the Office of the U.S. Trade Representative, and it is the interest of all of America, all the component parts of the economy and communities and regions, that we need to drive and formulate policy for.
Ravi Agrawal is the editor in chief of Foreign Policy. Twitter: @RaviReports
Paul Krugman: The Inflation Reduction Act Is “A Very Big Deal” For The Climate
"The World Will Regret Its Retreat From Globalization"
The New York Times columnist and Nobel Prize-winning economist describes the importance of the Inflation Reduction Act, with its $369 billion for decarbonization.
By Carolyn Fortuna Published August 12, 2022 23 Comments
Paul Krugman is excited. The 2022 Inflation Reduction Act (IRA) seems certain to pass the US House of Representatives and be signed into law by President Joe Biden. The package, which represents the largest climate investment in the nation’s history, is “mainly a climate change bill with a side helping of health reform,” according to Krugman.
Acknowledging that “the act isn’t, by itself, enough to avert climate disaster,” the New York Times media columnist feels, nonetheless, that “this is a very big deal.”
Who is Paul Krugman?
Paul Krugman is an international trade theorist with a special interest in economic geography. He is renowned for founding or co-founding several new disciplines in international economics, from New Trade Theory and New Economic Geography to models of financial crises and exchange rate movements.
Krugman is a Neo-Keynesian economist — a believer that prices and wages are “sticky,” causing involuntary unemployment and monetary policy, both of which have a significant impact on the economy. In 2008, Krugman was the sole recipient of the Nobel Memorial Prize in Economic Sciences “for his analysis of trade patterns and location of economic activity.” This Nobel Prize is awarded yearly to individuals making exceptional contributions to the field of economics research that have been validated over time.
The Evolution to the Inflation Reduction Act
The IRA was formerly known as the Build Back Better Act (BBB). For about 18 months, Biden’s climate agenda was in question, as the White House and Democrats held fiery negotiations with Senator Joe Manchin III (D-Coal) over the BBB.
Krugman originally was worried about the consequences if the original BBB didn’t make it, commenting that there would “be huge human and, yes, economic costs if Biden’s moderate but crucial spending plans” fell apart. The confluence of a better future for the US was “resting on a political knife edge” instead of grabbing onto the highly productive environmental investments that would, in all likelihood, pay for themselves over time.
“Reducing our dependence on fossil fuels wouldn’t just reduce emissions of greenhouse gases,” Krugman wrote .. https://www.nytimes.com/2021/12/13/opinion/build-back-better.html .. in late 2021. “It would also reduce other forms of pollution, notably nitrogen oxides and sulfur, that have negative effects on death rates, illness, and crop yields.”
* It will catalyze progress in green technology. * Its economic benefits will make passing additional legislation easier. * It gives the US the credibility it needs to lead a global effort to limit greenhouse gas emissions.
Discounting “cynics eager to denigrate the achievement,” Krugman says that “actual experts on energy and the environment are giddy over what has been accomplished.”
Serious economists — like Krugman — aren’t worried about the effect on inflation. Why is that?
The environmental side: Krugman acknowledges that many people assume that President Biden’s BBB environmental agenda .. https://cleantechnica.com/2022/07/19/higher-ambition-for-climate-action-post-manchin-looks-to-locals/ .. has been greatly watered down in the IRA legislation. With concessions to Manchin and giveaways to fossil fuel interests (like aid for a controversial natural gas pipeline), the new version must be a mere fraction of the BBB vision. Or so lots of people think.
Actually, Krugman explains, energy analysts believe that any adverse climate effect from these concessions will be more than offset by gains from tax credits for clean energy. The REPEAT Project .. https://repeatproject.org/ , which provides independent environmental and economic evaluation of federal energy and climate policies as they’re proposed and enacted, offers a side-by-side comparison of emissions cuts under the IRA and the earlier House version of BBB. They have calculated that, by 2035 the IRA will produce more than 90% of the emissions reductions that BBB would have achieved. Krugman concludes that, “after all that legislative drama, Biden’s climate policy has emerged essentially intact.”
The integrity of the IRA isn’t a nice coincidence. The Biden administration chose to articulate its climate policy in positive incentives to do the right thing, not penalties for doing the wrong thing. Krugman says this strategy has “been vindicated,” as it’s politically feasible in a way that another approach, such as implementing a carbon tax, wouldn’t have been.
Political dividends for the future: Citing an August, 2022 study .. https://www.nber.org/papers/w30332?utm_campaign=ntwh&utm_medium=email&utm_source=ntwg22 .. of green energy jobs, Krugman summarizes the authors’ findings: “The growth of renewable energy leads to the creation of relatively high paying jobs .. https://cleantechnica.com/2022/01/03/green-jobs-the-global-skills-gap/ , which are more often than not located in areas that stand to lose from a decline in fossil fuel extraction jobs.” Today’s transition to a low-carbon, resource-efficient economy requires systemic changes that will result not only in new products and services but also in changes in production processes, business models, skills required, and tasks involved in existing occupations. Green jobs will foster green skills .. https://cleantechnica.com/2022/07/07/i-want-my-child-to-grow-up-to-be-a-doctor-lawyer-or-environmental-economist/ — those attributes that comprise the knowledge, abilities, values, and attitudes needed to live in, develop, and support a sustainable and resource-efficient society.
Final Thoughts on Paul Krugman, the IRA, & Progress toward Zero Emissions
The title of the original Krugman New York Times editorial poses the question, “Did Democrats Just Save Civilization?” With sweeping potential for good job creation, renewable energy fixes, and tools to mitigate climate change, Democrats have delivered on their climate promises, “more or less in full,” Krugman argues.
According to a summary released by Senate Democrats, some of the funding aimed at consumers includes:
* $9 billion in home energy rebate programs to help people electrify their home appliances and for energy-efficient retrofits, with a focus on low-income consumers * 10 years of consumer tax credits to make heat pumps, rooftop solar, electric HVAC, and water heaters more affordable, which make homes more energy efficient * $4,000 in consumer tax credits for lower- and middle-income individuals who buy used electric vehicles and up to $7,500 tax credits for new EVs * $1 billion grant program to make affordable housing more energy efficient
Yes, in order to win Manchin’s approval, the IRA thrust an olive branch of concessions to oil and gas production. Yet the legislation, which no Senate Republican supported, “passed in spite of their spite,” Krugman noted.
“And the world is a more hopeful place than it was just a few weeks ago.”
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