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The first Trump administration changed America’s position on global trade. Joe Biden then doubled down on Donald Trump’s tariffs, adding industrial policy to the mix. Now his parting gift to Trump is a new trade ruling that speaks to the US government’s support for the shipping, logistics and shipbuilding sectors in light of Chinese competition. It will be the first major test of whether Trump’s second term will be focused on the economic desires of his base or the “tech-industrial complex” that Biden denounced in his farewell speech.
The timing is no accident. The investigation, released by the US Trade Representative under Section 301 of the Trade Act, lays out how China has used non-market practices to dominate the global shipping industry. While Biden supported rejecting the practice, not everyone in the Democratic Party was willing to make the change. By announcing the case four days before Trump’s inauguration, the outgoing administration ensured it would not be derailed by Democrats who would prefer to steer clear of the issue of Chinese mercantilism. It also threw down the gauntlet to Trump. Will tariffs be his only tool? Or will it support industrial policy and American workers in more effective and lasting ways?
Whether you support Section 301 action or not, it’s hard to read the case and argue that China’s shipbuilding behavior isn’t discriminatory. There are the usual problems, such as huge government loans and access to unmarketable excess capacity in raw materials. There are also 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 percent.
One of the most interesting parts of the report dives deep into hukou rustling. In this, Chinese citizens are classified as rural or urban residents and cannot receive government benefits such as education, housing or health care outside the jurisdiction in which they were born. Since many rural residents migrate to coastal areas to work, the result is that half of the population lives in urban areas, but only a third has an urban classification.
This has a huge distorting effect on the Chinese and global labor market. As one scientist was quoted in the report, hukou the system creates “a vast class of super-exploited but highly mobile or flexible industrial workers for the new Chinese economy, now closely integrated into global trade networks”. It is essentially a massive state transfer from labor to the owners of capital, which is one of the reasons why Chinese economists concerned about strengthening domestic consumption would like to get rid of it (hukou reform is happening, although not as quickly as many would like).
It is also one of the many ways in which the Chinese system is incompatible 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 globalization system based on World Trade Organization rules,” notes economist and Nobel laureate Michael Spence. Indeed, this is why Biden’s trade representative, Katherine Tai, push (albeit unsuccessfully) for a new trade model based on setting a floor, not a ceiling, on environmental and labor standards.
Trump certainly won’t care much about the former, but politically he will care about the latter. Fractures between Mago’s base and the billionaire class that inhabited the highest ranks of his administration are already showing. If he decides not to accept the shipbuilding support recommendations left by his predecessor, unions and Maga hardliners alike will be at loggerheads, which could cause major discontent in his first 100 days.
But I bet the Trump administration will take up the issue and perhaps even offer more vigorous support than the Democrats might. Trump loves bright shiny objects, and nothing is brighter and shiny than a new aircraft carrier.
More importantly, there are legitimate national security and commercial supply chain reasons for building more non-Chinese naval capacity. Almost half of US goods and 80 percent of global trade are transported by ship. China can significantly influence ship prices and availability given its market share. It is hard to imagine that this force would not be armed in the event of any US-China conflict. Trump has already suggested that the US build ships with allies like South Korea.
Of course, increasing maritime capacity is a long-term, difficult task. Still, the success of the Chip Act, which restarted US semiconductor manufacturing in less than two and a half years, shows that it is possible to create greater resilience and redundancy in critical industries when the political will is there. The question is whether Trump will have them. It is much easier to impose tariffs on adversaries and allies than to actually create a multifaceted industrial policy.
In addition, the political force will be great accordingly. 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. A bipartisan shipping bill introduced last month provides a blueprint for maritime industry policy. Whether Trump follows him will say a lot about the direction of his second term.
