‘Friend-shoring’: Biden signs up new allies to hedge against China

The Biden administration’s new trade strategy is taking shape as it seeks to de-couple from China while reducing the impact on inflation of Donald Trump’s trade wars. Along with the “re-shoring” of strategic activity it is now putting in place the plans for a series of “friend-shoring” alliances.

Late last year, the first of those agreements was struck with the European Union when the US and EU struck a “metals alliance”.

Apart from allowing some volumes of EU steel exports into the US free of the duties Trump imposed as part of his administration’s trade war on everyone, including America’s traditional allies, the agreement restricted access to the new allies’ markets for “dirty” and dumped steel.

US President Joe Biden is seeking to reduce America’s reliance on Chinese imports.Credit: Bloomberg

Given that China produces about 60 per cent of the world’s steel and has long been accused of flooding the global market with subsidised and carbon-intensive products, the deal was clearly targeting China.

It also represented further progress in the thawing of the trade relationship between the US and Europe that had been frozen by Trump’s waving of the transparent banner of “national security” as justification for imposing punishing tariffs on America’s closest allies.

This week, the US struck another “friend-shoring” deal with another ally, signing a very similar deal with Japan.

The US will suspend its 25 per cent tariff on Japanese steel imports, up to 1.25 million tonnes a year (the average of the two years of imports that preceded Trump’s 2018 tariffs) and the countries will co-operate to tackle over-capacity in the global market created, they say, by subsidies in non-market economies.

That, of course, means China. In fact, the parties were quite open about their ambition of working together to “combat China’s anti-competitive, non-market trade actions in the steel sector.”

As with the deal with the EU, there will also be a focus on reducing the carbon intensity of the steel industry (another, less visible, shot at China).

The US is also in discussion with the UK over lifting tariffs on its steel exports, although those talks are complicated by the Biden administration’s use of trade as leverage to influence the outcome of Britain’s decisions on whether or not there will be a post-Brexit trade border in Northern Ireland.

Leaving most of the tariffs in place, encouraging supply from allies, encouraging and investing in onshore production and only importing Chinese products as yet unavailable competitively from elsewhere is an attempt to balance economic and climate objectives.

The next obvious “friend” on the list would probably be South Korea, which recently had a victory at the World Trade Organisation after it successfully challenged Trump’s tariffs on its exports of large residential washing machines.

Last week, Biden announced an extension of Trump’s tariffs on solar panel imports but doubled the volume of solar cells that could be imported duty-free and flagged talks with Canada and Mexico about completely removing the tariffs on their solar product exports to the US.

While that’s a policy shift driven by the administration’s environmental goals, China dominates the production of solar panels.

Leaving most of the tariffs in place, encouraging supply from allies, encouraging and investing in onshore production and only importing Chinese products as yet unavailable competitively from elsewhere is an attempt to balance economic and climate objectives.

There is little likelihood that Biden will scrap the Trump tariffs on about $US360 billion ($504 billion) of China’s exports to the US, even though the administration has conceded that they hurt Americans more than they do the Chinese because their cost – estimated at more than $US100 billion a year -- is borne by US companies and consumers and contributes to America’s elevated inflation rate.

The domestic politics of the relationship with China would make it impossible for Biden to be seen as soft on China in an environment where the relationship has become increasingly adversarial.

That’s despite the reality that China has failed to live up to the much-vaunted (by Trump) truce agreement it signed with the US in 2020.

China has bought less than 60 per cent of the American products it committed to buy in 2020 and 2021 – its purchases have been lower than they were before Trump started the trade war.

The pandemic does provide an excuse, but the Trump administration was deluded if they truly believed China would buy products greatly in excess to its needs, or risk angering other major trading partners by diverting purchases on any meaningful scale.

The Biden trade team has maintained talks with its Chinese counterparts, but there is little likelihood of the “phase two” deal envisaged by its predecessors (to replace the initial deal when it expired at the end of last year) being agreed.

Despite their cost, the administration sees the tariffs as leverage in the wider relationship with China.

Its strategy, as it was with the decisions on the solar tariffs, is to be more discriminating and to exclude products seen as essential to the US economy and the administration’s goals from the tariffs, while at the same time maintaining levies on non-essential or less-essential products and trying to broaden America’s product supply by reducing the weight of tariffs on its allies’ exports.

The re-building of old alliances and the repair of trade relationships has been aided by China’s belligerence and its attempts to use access to its economy as a coercive tool in its non-trade relationships with other countries.

Australia and the EU, on behalf of Lithuania -- which has seen more than 90 per cent of its exports to China shut out and countries which it supplies with components threatened with sanctions on their exports if they continue to deal with it after it allowed a “Taiwanese Representative Office” to be established in Vilnius) - have both taken cases to the WTO over alleged breaches of world trade rules.

Regardless of whether or not those cases are successful, or settled, China’s actions have hardened attitude towards it and are making it easier for the Biden administration to sign up friends to new trade policies that target the subsidies and state direction – and the steel sector – that are at the heart of China’s economic model.

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