The Seismic Shift in the US Trade Agenda

The U.S. economic war against China has become entrenched still further as the Biden administration adds more tariffs to critical goods crossing its borders. The decision is not without its critics within the United States. But how countries across the Indo-Pacific respond is another factor that will determine whether or not Washington will ultimately be able to reach its goal to protect key U.S. industries.

Since taking office three years ago, President Joe Biden has largely kept the economic policies toward China adopted by the Trump administration. The rhetoric toward China has been more nuanced, however, and there has been more effort to coordinate with regional partners to push back against Chinese economic dominance.

The Biden administration’s decision to impose export controls on advanced semiconductor manufacturing technology in late 2022 furthered that stance and by the following year, both Japan and the Netherlands followed suit. Coordinated efforts to curtail China’s rise in advanced technology had begun in earnest. But that is not to say there is a complete alignment of how China is seen as an economic threat, even among the most solid of U.S. partners.

Washington’s decision on May 14 to raise tariffs on semiconductors and solar cells to 50 percent from 25 percent, and to quadruple tariffs on Chinese EVs to 100 percent, shook the world. While the White House has focused on highlighting China’s unfair trade practices of state subsidies and exporting overcapacity, the tariffs are ultimately designed to protect the nascent critical industries within the United States.

While the White House stressed the need to push back against “China’s unfair trade practices concerning technology transfer, intellectual property, and innovation… flooding global markets with artificially low-priced exports,” there is growing concern outside of the United States about Washington’s seismic shift in trade policy. After all, the latest tariffs have as much political as economic motivation, if not more.

Neither Democrats nor Republicans have had much appetite to pursue new trade deals, especially for multilateral agreements that could lead to the United States to compromise its interests. At the same time, concerns about China’s threatening U.S. economic growth and leadership in innovation has been a force unifier in an otherwise all too often divided Congress.

It is unclear just how the latest tariff surges would actually stimulate the expansion of the U.S. semiconductor and EV industries, and whether it would hurt or help innovation in these critical sectors moving forward. There are also concerns about the prospect of inflationary pressure resulting from such steep tariff increases, which could ultimately hurt consumers by raising costs of key products considerably. Then there is the prospect of Chinese retaliation in kind that could hurt U.S. exports to the country.

For U.S. partners and supporters in the Indo-Pacific, meanwhile, there is growing concern about the fallout of protectionist measures, which may well continue to expand and intensify in coming months and indeed years. True, the latest round of steep tariffs could incentivize key countries, including Japan and South Korea, to step up efforts to invest directly in the United States so that their U.S. manufactured products are immune from such tariffs in the future. But that will not eliminate the underlying issues at play.

Washington has enhanced the latticework of security partnerships across the region by expanding existing institutions such as the Quad and establishing new ones such as AUKUS. Its efforts to further ties with Southeast Asia are particularly noteworthy. However, in sharp contrast to the United States’ ability to enhance the network of partnerships to deter Chinese military aggression in the region, when it comes to enhancing economic coordination among countries in the region, success has been elusive.

For one, there is no shared threat perception. For middle income countries that are seeking to move up the value chain, U.S. technology competition with China actually limits opportunities for innovation and economic expansion. The competition between Washington and Beijing, which is increasingly leading to a bifurcation of economic systems, is seen to hamper third countries’ own growth prospects, regardless of who may or may not win.

Another concern is the possibility that U.S. protectionist measures will not be limited to China, but could be expanded across the region. That had been the case for steel, as the Trump administration imposed tariffs on imports across the board – including on U.S. allies Japan and Australia.

As the Biden administration continues to press for higher tariffs to protect the U.S. industrial base, it is vital for Washington to reassure its allies and partners in the Indo-Pacific about the scope and goals of such measures. Given that the United States cannot stave off the Chinese military ambitions or economic aspirations alone, it is critical for the Biden administration to clarify its intent and build trust in its actions from partners that are taking stock of the seismic shift in U.S. trade policy.