Biden has signed globalisation’s death warrant

Xi Jinping Biden China US trade war
Biden's tariffs against China could make Americans worse off - SAUL LOEB/AFP via Getty Images

Whatever the merits or otherwise of Joe Biden’s latest package of tariffs on Chinese goods, they signal the final death of early 21st century globalisation.

About time too, many will say. For too long, Western economies have been the victims of Chinese mercantilism. Trade with like-minded regimes by all means, but not with those that peddle an autocratic alternative to Western liberalism and democracy.

By inviting China into our free trade system, we have created a monster that lies, cheats and steals its way to economic advantage, and now threatens the West with economic ruin.

With its professed “strategic autonomy”, the European Union tries desperately to steer a middle course between China/US superpower rivalry, but it looks to be an ever more unsustainable path.

Countries are asked to pick a side. That’s why President Xi Jinping chose Paris as one of his three European destinations in a recent whistle-stop visit: France’s Emmanuel Macron is showing signs of going the same way as Biden, and Beijing hopes to dissuade him.

As it is, diversifying away from China is proving far from easy.

Since the onset of the war in Ukraine, there has already been a significant decline in trade and foreign direct investment between countries perceived to be in the two rival spheres of influence, and a corresponding surge in trade and FDI between countries within the same bloc.

The biggest such realignment seen so far is Russia’s switch, under pressure from sanctions, from trade with the West to trade with China.

If the supply chain disruptions of the pandemic, and Russia’s later invasion of Ukraine, taught us one thing, it is not to be reliant on potentially hostile regimes for our basic needs in goods and energy. Biden’s shock tariff action, building on what Donald Trump had started, takes this new world order a stage further.

If fragmentation has so far been relatively small, the Biden tariffs suggest it is about to get much worse.

Support for this conclusion comes from a recent paper by Gita Gopinath and a number of her International Monetary Fund colleagues. Drawing on experience during the Cold War, the IMF argues that trade and cross border capital flows could be severely affected if current tensions worsen further.

Since international trade helps to keep inflation low and galvanises innovation, any such deterioration implies both higher global inflation and reduced productivity growth, neither of which would be welcome in an already struggling world economy.

I wrote last weekend about the implications of the new tariffs for the UK and wider European auto sectors. If the US market is closed, China will hope to dump its excess production of electric vehicles on European markets instead – displacement, in the jargon.

This might force Europe into its own protective measures. And if the EU acts, China will then focus its attention on the UK, making it a dumping ground for what it is unable to sell at home. Inevitably, the UK will be forced to fall in with whatever the EU decides to do.

This is how protectionism spreads: once one major economy sets up barriers to entry, it forces others to do the same, regardless of whether they think it sensible or not. Political pressures, if not economic, make it unavoidable.

Growing estrangement between the US and China is also visible in the capital markets. Anticipating dollar debasement similar to what occurred in the 1970s, China has been progressively reducing its once mighty holding of US Treasuries, and is buying gold instead.

It’s the end of an era, with China’s share of the US government bond market reduced to a fraction of what it once was – an estimated 3pc today against 14pc at its peak in 2011.

It’s also, as far as I can see, the end of the World Trade Organisation, whose rules are routinely treated by the US and China as an irrelevance. Biden’s latest package of tariffs are a clear breach of the WTO’s “most favoured nation” clause, which seeks to stop countries discriminating against individual regimes with targeted tariffs. Yet he has no qualms about flouting it, arguing that the old rules of engagement no longer apply.

He’s right, sadly. The WTO was made for an altogether more benign world, where free trade was genuinely thought to be the best guarantor of progress, peace and stability. China’s growing challenge to US hegemony has swept those assumptions away.

For President Xi Jinping’s “Made in China 2025” initiative we had first Donald Trump’s “Make America Great Again” mantra, and latterly Biden’s “Made in America” policy initiatives, designed to increase reliance on domestic supply chains and reduce the taxpayer dollars spent on foreign goods.

As I say, the effect has so far been less than dramatic. Since the financial crisis, which ended the prior period of “hyperglobalisation”, the ratio of goods trade to GDP has fluctuated between 41pc and 48pc, but it hasn’t fallen off a cliff.

“Near shoring”, “friend shoring” and “onshoring” of supply chains have become buzz terms for reduced dependence on China. Yet in many cases, imports have merely switched to low-wage economies that continue to have strong supply chain links to China, or so-called “connector” countries.

As with the Cold War, trade and investment between rival geopolitical blocs is decreasing compared with what’s happening within blocs, but thus far the degree of deglobalisation is small compared to what happened back then.

This would suggest that the process has much further to run, particularly if Europe more fully falls into line with the US on tariff action, as now seems likely.

Even so, root and branch decoupling would be difficult to achieve. As the IMF points out, such is the interconnected nature of global trade today that diversifying supply chains does not necessarily increase resilience, or lessen strategic dependence. Connector countries can be as dependent on Chinese supply chains as we are, even if they are more sympathetic to the West than China.

In a paper titled “China shock” published in 2016, the economists David Autor, David Dorn and Gordon Hanson found that the surge in US trade with China in the early part of the century had cost around two million US jobs in exposed industries and regions.

But this doesn’t mean protectionism offers solutions. In a recent update, the writers conclude that the Trump era tariff war “has not to date provided economic help to the US heartland: import tariffs on foreign goods neither raised nor lowered US employment in newly protected sectors; retaliatory tariffs had clear negative employment impacts, primarily in agriculture; and these harms were only partly mitigated by compensatory US agricultural subsidies”.

The wider point is, I suppose, that by imposing tariffs, countries reduce competition and increase prices for their own consumers, making them worse off, and invite retaliatory action that can cost jobs via reduced exports.

In any case, protective measures seem to have been rather more effective politically than economically.

“Residents of regions more exposed to import tariffs became less likely to identify as Democrats, more likely to vote to reelect Donald Trump in 2020, and more likely to elect Republicans to Congress,” the paper concluded. “Foreign retaliatory tariffs only modestly weakened that support.”

So there we have it. The economics of Biden’s new front in the tariff war with China may or may not be suspect, but the politics are unarguable.

Protectionism is a vote winner, and probably necessary if politicians are to carry voters with them on challenging net zero targets. If all the benefits in terms of new industries and jobs are seen to go to China, then there’s very little prospect of achieving them.

This article is an extract from The Telegraph’s Economic Intelligence newsletter. Sign up here to get exclusive insight from two of the UK’s leading economic commentators – Ambrose Evans-Pritchard and Jeremy Warner – delivered direct to your inbox every Tuesday