One of the few bright spots free marketers could look forward to from Joe Biden’s White House was supposed to be trade: fewer trade wars with allies, more internationalism, an end to tariffs and protectionism. Unfortunately, the early indications from the Biden administration suggest more of the same on trade policy, with even the same rhetoric applied in some cases. The policy can perhaps be described as labor and environmental mercantilism. This could mean even worse deals for our trading partners who need them most.
So far, it seems that Biden’s trade policy will be determined by two issues seemingly more important to the president than the welfare of American consumers: labor and the environment, or more precisely the demands of labor unions and environmental lobbyists. Both issues have been growing in importance since the North American Free Trade Agreement (NAFTA) included side agreements on them in the 1990s. These days, trade agreements such as NAFTA’s replacement, the United States–Mexico–Canada Agreement, incorporate them fully into the text. The European Union’s (EU) trade agreement with Japan last year was touted as being primarily about the environment.
Labor unions, it should be noted, were often in favor of Donald Trump’s trade policy, even when it caused trade wars with allies. Thus, while the European Union has called on President Biden to end the Trump administration’s damaging steel and aluminum tariffs, the United Steel Workers have called upon him to keep them in place. One of the president’s first major acts was to issue a new “Buy American” executive order, requiring government-procurement services to buy not just American-made goods, but goods made by union workers. Traditionally, such orders allowed some exemptions to Canada, America’s closest trading partner, but the new order significantly curtailed them. Prime Minister Trudeau has expressed displeasure at this.
Canada got hit by another early Biden trade decision, this time on environmental grounds. The cancellation of the Keystone XL pipeline will make it more difficult for Canada to export its oil, and the more-costly alternatives to the pipeline, such as train or barge, will probably lead to more emissions. For an administration that was supposed to rebuild international bridges, hitting Canada twice in a week isn’t a terribly auspicious start.
But the effects of environment-based trade decisions go far beyond Canada. Tariffs are likely to be used to reduce imports that involve higher emissions in their manufacture. These carbon tariffs will be just as damaging to trade as protectionist tariffs but will carry the added harm that their likeliest targets are developing countries. These are countries that simply cannot afford to pay as much attention to emissions as more developed ones can. Hitting them with “carbon adjustments” will negate their comparative advantage in trade. The effects on the global South could be devastating.
Elevating labor and environmental policy over trade policy essentially re-creates a system of mercantilism — the idea that (union-made) exports are good and (carbon-intensive) imports are bad. Such a system is superficially attractive, but one of the key insights of economics is that it makes everyone except the politically connected worse off.
Moreover, the administration has its work cut out when it comes to dealing with traditional allies. France has already imposed a Digital Services Tax on American tech companies, and other countries are threatening to follow suit. The Trump administration left a decision on retaliatory action up to its successor, and it is far from certain that an easy reconciliation is possible. The long-running feud with the EU over subsidies for Airbus and Boeing will continue. The recent EU–China agreement on trade ignored Biden’s requests to the EU to wait for him to get settled into the Oval Office, which suggests that a united front on the China trade question will be more difficult to achieve than most people think.
As for the World Trade Organization (WTO), it is worth remembering that the Obama administration was skeptical of the organization’s value and blocked several appellate-judge appointments to that body. Today, China has more clout at the organization, which means that more decisions are likely to go against the United States, which historically has won most of its cases. Thus, the WTO may not help form the united front necessary to reestablish the importance of free trade.
In the 1990s, my organization’s founder, Fred Smith, warned that side-agreements to NAFTA on labor and the environment would derail free trade. Paul Krugman said much the same thing. Now it appears that both were right. The trade agenda coming out of the Biden White House is at least as offensive to free-trade principles as that from Trump’s White House, and may actually turn out worse.