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Your guide to what the 2024 US elections mean for Washington and the world
The first Trump administration reversed America's position on global trade. Then Joe Biden doubled down on Donald Trump's tariffs, adding industrial policy to the mix. Now his parting gift to Trump is a new trade ruling calling for US government support for the maritime, logistics and shipbuilding sectors in the face of Chinese competition. This will be the first big test of whether Trump's second term will focus on the economic desires of his base, or the “tech-industrial complex” that Biden denounced in his farewell speech.
The timing is no coincidence. The investigation, issued by the US Trade Representative under Section 301 of the Trade Act, demonstrates how China has used non-market practices to control the global maritime industry. While Biden supported addressing such practices, not everyone in the Democratic Party was keen on making this shift. By publicizing the issue four days before Trump's inauguration, the outgoing administration made sure it would not be derailed by Democrats who prefer to stay away from the issue of Chinese mercantilism. She also threw down a challenge to Trump. Will tariffs be his only tool? Or will it support industrial policy and American workers in more effective and sustainable ways?
Whether you support the Section 301 measure or not, it is difficult to read the case and say that China's shipbuilding behavior is not discriminatory. There are the usual problems, such as huge government loans and access to non-market surplus capacity in raw materials. Then there are the distortions in the Chinese labor market that make it almost impossible for market economies to compete in the maritime sector, where China now has a market share of more than 50%.
One of the most interesting sections of the report delves into… Hoku system. In this, Chinese citizens are classified as rural or urban residents, and cannot access state benefits such as education, housing, or health care outside the jurisdiction in which they were born. Since many rural residents migrate to coastal areas for work, the result is that half the population resides in urban areas, but only a third has an urban classification.
This has a greatly distorting effect on Chinese and global labor markets. As one scientist mentioned in the report, Hoku This system creates “a huge class of industrial workers who are highly exploitable, but highly mobile or flexible for China's new economy, and who are now closely integrated into global trade networks.” It is essentially a massive state transfer of labor to capital owners, which is one reason Chinese economists interested in boosting domestic consumption want to get rid of it (Hoku Reform is happening, although not as quickly as many would like.
It is also one of many ways in which the Chinese system conflicts with the Bretton Woods trading system as it exists today. “There is no doubt that China's very different economic model makes it difficult to have a system of globalization based on WTO rules,” says Nobel Prize-winning economist Michael Spence. In fact, this is why Biden's trade representative, Katherine Tai, said: I paid (albeit to no avail) for a new trade model based on setting a floor, not a ceiling, of environmental and labor standards.
Trump certainly won't care much about the former, but politically, he will need to care about the latter. Divisions between MAGA's base and the billionaire class who occupy the top positions of his administration already appear. If he chooses not to heed recommendations to support shipbuilding left by his predecessor, unions and hardliners alike will oppose it, which could spark significant discontent in his first 100 days.
But I bet the Trump administration will take up this issue, and perhaps even offer stronger support, than Democrats might. Trump loves shiny objects, and nothing is brighter and shinier than a new aircraft carrier.
More importantly, there are legitimate national security and commercial supply chain reasons to build more non-Chinese maritime capabilities. Nearly half of America's goods and 80 percent of global trade are transported by ship. China can greatly influence ship prices and availability given its market share. It is difficult to imagine that this force would not be used as a weapon in the event of any conflict between the United States and China. Trump has already suggested that the United States build ships with allies such as South Korea.
There is no doubt that increasing naval capacity represents a heavy burden in the long term. However, the success of the CHIP Act, which restarted U.S. semiconductor production in less than two and a half years, shows that it is possible to create more flexibility and redundancy in critical industries when the political will is there. The question is whether Trump will get any of it. Imposing tariffs on adversaries and allies alike is much easier than formulating a multifaceted industrial policy.
However, the political attraction towards it will be pressing. Much of the Biden administration's stimulus went to red states. The CHIP Act supports the construction of new semiconductor factories in Ohio, Texas and Arizona, all of which voted for Trump. The bipartisan ship bill passed last month provides a road map for maritime industrial policy. Whether or not Trump follows through will tell us a lot about the direction in which his second term will go.
