This article was originally published by Joseph Solis-Mullen at The Mises Institute.
As it always does, the State of the Union (SOTU) address dominated the media cycle for several days before and after. Now that the period has (gratefully) passed, and the issues raised have faded from the headlines into the background, it is worth taking a look at some of the policies that featured heavily in Biden’s speech, and which have reemerged to become so vogue among both Democrats and Republicans.
Specifically, protectionism.
Indeed, with practically the only bipartisan moments of applause during Biden’s SOTU coming after the predictable paeans to the great moral virtues of “Buying American,” the protectionism made mainstream by Trump looks set to continue.
So how are these efforts faring?
Further, why have the policy, business, and political establishment suddenly climbed on board, as is evidenced by Biden’s wholesale adoption?
Let’s start with the latter: why, with the American public having been generally somewhere between lukewarm to resistant to so-called “free trade” deals for over thirty years, have the decision-making elite of both parties finally come around?
For example, as he spoke the other night, tying the nation’s loss of “pride and self-worth” to “the loss of manufacturing jobs,” ignoring the dubious causal link, one must ask as a supporter of the North American Free Trade Agreement (NAFTA) and increased trade with China whether Joe Biden really is senile, stupid, or thinks we’re stupid.
The politically opportunistic choices of Biden’s speechwriters aside, and the general lack of commitment to firm principles, which more than anything else has so defined Biden’s six-decade career as a politician, a confluence of other factors have combined to essentially see the field ceded to the protectionists of both parties and their respective interest groups.
First, Hillary Clinton’s abandonment of her own free trade agreement, the Trans-Pacific Partnership, on her way to losing the White House showed domestic political resistance was becoming increasingly costly to overcome.
Second, and relatedly, the strategy of trading American manufacturing jobs for geostrategic advantage was beginning to run the other way; first covid and then the Russian invasion of Ukraine saw massive supply shortages and exposed critical weaknesses in global capitalism’s intricate networks of interrelated producers. Girding for the next round of great power conflict, Washington was embarrassed to find its own industrial base greatly diminished and strategists clambered aboard the protectionist bandwagon in the name of national security, hence the CHIPS Act.
Critically, free trade’s historically biggest champions, big business, have been largely absent from the field. Frankly, many in the corporate world have undergone a change in thinking regarding China: while it was nice increasing profit margins by offshoring factories to exploit the cost savings of cheaper labor and lower environmental standards, the real prize was always open access to the Chinese domestic market.
Like the mid-nineteenth-century British imperialists who daydreamed about British manufacturers selling each of China’s billion residents a “mere square inch” of Lancaster fabric, they ignored intellectual property theft and blatantly unfair trading practices in pursuit of access to a Chinese market that they finally realized was never forthcoming—at least not on anything like acceptable terms, with heavily subsidized Chinese companies already having secured dominance in their domestic market by churning out replicas of Western products.
With the consensus of free trade having been abandoned by the business community, the race among interest groups to line up at the public trough was always going to commence in earnest. With small, powerful, coordinated interest groups easily able to shape legislation to tax the mass of uncoordinated and uninformed voters, it is little surprise more corporate welfare than usual has been piled into such recent “landmark” bills as the so-called Inflation Reduction Act.
As an aside, while its name may have fooled a significant portion of the domestic audience, the passage of the Act caused enough consternation that it was one of the primary subjects of Emmanuel Macron’s visit last year to Washington.
Credit the Europeans, they know subsidies when they see them.
And while the Europeans’ complaints are that their sellers face an unfair advantage, US consumers are the ones who actually pay the (unseen) tax, which results from the increased market power of sheltered domestic firms.
As a fact, freer trade will produce lower prices and more goods than similar, more autarkic arrangements, where the priorities of the state and crony patronage networks matter more than actual prices and demand.
Of course, NAFTA and similar agreements are not “free trade” agreements in any real sense. A real free trade agreement could fit on a bar-napkin: it would say no tariffs, so subsidies, no quotas, etc. While NAFTA, the EU common market, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership seek to standardize certain regulations and taxes to facilitate easier commerce between private businesses within each participating state, the agreements run thousands of pages precisely because they also include plenty of protection for political favorites (think US and French farmers).
Using trade to pander to domestic political constituencies has increasingly given way, however, to weaponizing trade in the name of geopolitical advantage. For example, Trump’s trade war with China has been taken to the technological cutting edge, with the Biden administration seeking to prevent China from making or having access to the high-grade microchips necessary for the most advanced computer and military technology.
And while the Biden administration has trumpeted it’s ramping up of pressure on the governments of, ostensibly independent, states like the Netherlands and United Kingdom, to prevent or block the actions of domestically based private companies that might dare to do business with Chinese counterparts in these critical wares, American observers should note two things: First, China has taken note and objected at the World Trade Organization to Washington’s drastic escalation of its existing trade war; and second, and that in the digital age trying to cut China off from its supply of high-grade microchips is the functional equivalent of cutting 1930s Japan off from oil and mineral resources.
Apart from the dangerous and bullying nature of such tactics, and their negative effects on US-China relations and American soft power, such apparent power to redistribute and rearrange reality at will by government fiat produces less than impressive results in reality.
For example, though Biden’s SOTU remarks fell on fertile domestic soil, his “Buy American” mandates are already running into trouble. Apparently, per the Washington Post, no one bothered to check whether anyone produced a given product or part before mandating that no projects could proceed without purchasing the necessary factor of production from the (nonexistent) domestic producer.
Though the state may command, as a nonproductive entity itself it must rely on market participants adjusting to the changed market environment brought about by the abrupt change in state policy. Investment, plant construction, and skills training take time to put in place. Apart from the opportunity cost, the government’s sudden distortion of the market can cause potential headaches even for those that stand to benefit. Expanding capacity to meet the sudden surge in demand could prove disastrous were that demand to be withdrawn, after all.
In practice, however, once in place the concentrated benefits and diffuse costs of these corporate entitlements makes them extremely difficult to eradicate. They create their own interest groups, whose own existence in turn becomes predicated on the continuing existence of the appropriation in question. In the case of those industries and sectors related to Washington’s pursuit of great power conflict with Russia and China, they create a perverse incentive whereby a cessation in hostilities would be a major hit for shareholders: hence their sponsoring of the “think tanks” whose experts regularly call for more and more military spending to counter the fake threats of Chinese and Russian world domination.
Language matters and Americans should understand that calls by Washington to reshore, to “friend shore,” to “Buy American,” and to protect domestic producers are not due to some sudden desire to further the welfare of the average American manufacturing worker or producer. Whatever their political window dressing, these autarkic policies are intended to further state power and to insulate the American population from possible disruptions to the economy resulting from Washington’s pursuit of conflict abroad.
Just say no.