Bidenomics and Its Contradictions
Competition with China has reinforced President Biden’s commitment to industrial policy, but his vision for government intervention carries risks for the U.S. economy and allies
Jake Sullivan, President Joe Biden’s national security adviser, is usually preoccupied with threats from abroad, like the Russian invasion of Ukraine or China’s designs on Taiwan. In April, however, in a speech at the Brookings Institution, he took aim at what he sees as a threat from within, an idea that has reigned for too long among elites in Washington: that “markets always allocate capital productively and efficiently.”
Sullivan’s target was what some in the policy world call neoliberalism: the free-trade, laissez-faire economic priorities shared by Republican and Democratic administrations for decades. This doctrine, in his view, has hollowed out the U.S. industrial base, undermined America’s middle class and left the country dangerously vulnerable to climate change, Covid-19 and the weaponization of supply chains by hostile nations. To deal with these problems, Sullivan said, the U.S. needs a new approach, a “modern American industrial strategy” in which a more assertive federal government guides investment, industry and trade to bolster both the middle class and national security.
Since the 2020 election, Biden’s team has tried to come up with a unified theory for the administration’s economic policies. What sets apart Sullivan’s recent remarks is his assertion that Biden’s domestic goals and foreign policy, focused on the threat posed by China, form an integrated whole. It is the most definitive statement to date of what we can call Bidenomics. It also reveals a number of blind spots and contradictions in the administration’s policies.
Three pillars of Bidenomics can be distilled from Sullivan’s writings over the years and interviews with people close to both him and Biden.
First, the quality of economic growth matters more than the quantity. The old view was that “all growth was good growth,” Sullivan said in his speech. It didn’t matter if growth came from the financial sector, where the U.S. excelled, or the production of semiconductors, where other countries rose to the top. Bidenomics implicitly cares not just about higher GDP growth but whether that growth brings higher median incomes, less inequality and more domestic investment in sectors crucial to national security or the environment.
Second, laissez-faire is out, industrial policy is in. Markets allocate capital to achieve the highest return to private investors, but as Bidenomics sees it, they don’t take account of issues like climate change, fragile supply chains or geopolitical vulnerability. That is why Germany became dangerously dependent on Russian natural gas and China dominates the supply of many critical minerals and pharmaceutical ingredients.
To correct these market failures, Bidenomics aims to direct private capital toward favored sectors via regulations, subsidies and other interventions. “Advocating industrial policy…was once considered embarrassing—now it should be considered something close to obvious,” Sullivan and Jennifer Harris, a colleague in both the Obama and Biden administrations, wrote in a 2020 essay in Foreign Policy magazine.
Third, trade policy should give priority to American workers, not consumers. Neoliberalism assumes that increased global market access for U.S. and foreign companies promotes competition, lowers costs for consumers and provides better jobs for workers. That arrangement, Sullivan maintains, has worked out much better for companies than for workers.
Under Bidenomics, by contrast, U.S. foreign policy champions a range of economic interests, from workers’ rights to climate policy and tax compliance. Consumers and competition are not primary concerns.
Bidenomics accepts the value of markets but sees market failure all around.
Sullivan, 46, has a long pedigree in Democratic policy circles. He advised both Secretary of State Hillary Clinton and Vice President Biden during the Obama administration before serving as chief foreign policy adviser to Clinton’s presidential campaign in 2016. He was, he later wrote, “steeped in the centrist politics” of the 1980s and 1990s.
In interviews and conversations with associates, Sullivan has said that he sensed something was wrong with this centrist consensus when Clinton nearly lost the Democratic nomination to Bernie Sanders’s insurgent, hard-left challenge and then lost the election to Donald Trump, whose populist campaign targeted elites.
Like many Democrats, Sullivan spent the next few years trying to figure out how the party had alienated the working class. The 2007-09 recession had “laid bare the failure of our government to protect its citizens from unchecked market excess,” he wrote in 2018 in Democracy, an online progressive magazine.
He reserved his harshest criticism for free trade, which both parties, in his view, had embraced without regard for working-class communities or China’s rule-breaking. When establishment gurus would argue for a return to the 12-nation Trans-Pacific Partnership (TPP), an ambitious free-trade pact that Obama had negotiated and Trump repudiated, Sullivan would ask if they even knew what was in it.
Sullivan’s diagnosis of domestic failings later merged with a growing conviction that the U.S. policy of engagement toward China, dating from the 1990s, was failing. Instead of becoming more open, liberal and market-oriented, China under Xi Jinping had become more repressive and was using every available tool to pursue technological dominance.
To Sullivan’s mind, the obvious economic template for competing with China is how the U.S. met the challenge of the Soviet Union. He and Harris wrote in their 2020 essay that the architects of American strategy during the Cold War believed “that out-competing the Soviets called for discarding the laissez-faire economic philosophies” from before the Depression.
Unlike Donald Trump, Biden isn’t seeking to tear up existing free trade agreements. But neither is he interested in new ones.
In the postwar era, federal investment in infrastructure such as interstate highways and technology such as semiconductors and satellites countered the Soviet threat while spurring broad-based economic growth and innovation at home.
Sullivan recognizes that the analogy is imperfect. China is “more formidable economically, more sophisticated diplomatically and more flexible ideologically than the Soviet Union ever was,” he wrote in Foreign Affairs in 2019 with Kurt Campbell, now Biden’s top Asia adviser. Nonetheless, they wrote, meeting China’s threat “will require the kind of domestic mobilization that the United States pursued in the 1950s and 1960s.”
Sullivan found that his new views on economics converged with Biden’s, which had never meshed well with the neoliberals in the Obama administration. Sullivan and colleagues like Brian Deese, who headed the White House National Economic Council until February, have framed Biden’s achievements as components of a modern industrial strategy, including laws earmarking $1 trillion for public infrastructure, $53 billion for semiconductor fabrication and research, and as much as $1 trillion for electric vehicles and renewable energy.
One policy they don’t consider a part of Biden’s industrial strategy is new restrictions on the export of semiconductor technology to China. Sullivan said in April that such restrictions are solely aimed at national security, adhering to the principle of “a small yard and a high fence”: a narrow set of technologies where the U.S. imposes very strict restrictions. “We are simply ensuring that U.S. and allied technology is not used against us. We are not cutting off trade.”
But the restrictions clearly complement the larger thrust of Bidenomics. The migration of technological know-how to China has been a factor in U.S. deindustrialization, and export restrictions are one of the drivers of surging semiconductor investment in the U.S.
Sullivan and other Biden advisers have shown the ambition of Bidenomics by trying to have it encompass so much of the administration’s agenda. In doing so, however, they have also highlighted many problems with that agenda.
For example, basic economics tells us that capital and labor are finite, so they need to be allocated in a way that maximizes productivity and growth. Experience has shown, painfully, that governments are much worse at this than markets. Market failures exist, of course, such as pollution or military vulnerability, but they are exceptions.
Bidenomics accepts the value of markets but sees market failure all around, in everything from regional, racial and gender inequities to the lack of rural high-speed internet and affordable child care.
When market failure is so broadly defined, there is effectively no limiting principle on government intervention. And indeed, Biden and other leading Democrats have argued for special treatment for countless products and industries with only the most tenuous connection to military or economic security, such as the drywall and lumber used in infrastructure.
Ro Khanna, a progressive who represents Silicon Valley in Congress, wants the sort of subsidies now directed to semiconductors to go also to aluminum, steel, paper, microelectronics, auto parts and climate technology. “America needs to be able to make basic things here. I would go to factory town after factory town and see what we can do to revitalize that place,” he said in April.
But the U.S. doesn’t have the capacity to supply everything it now imports. Diverting workers to make things that can be imported more cheaply raises costs and takes scarce workers away from industries that might be more productive. Industrial policy “does not create jobs; it merely shifts jobs from one place to another,” wrote Adam Posen, president of the Peterson Institute for International Economics, in a recent critique. “As for idle workers with the right skills,” he continued, “they don’t really exist.”
Solar-panel production illustrates the problem of reconciling the administration’s divergent priorities. Biden has set the goal of 100% carbon-free electricity in the U.S. by 2030, which he maintains will help the climate and create well-paying American jobs. The U.S. has long imposed tariffs on imports of solar equipment from China in response to its subsidies and “dumping” (selling at unfairly low prices). But U.S. production is still too small to supply U.S. needs. So at the behest of utilities and solar installers, Biden paused tariffs last June on solar panels imported from Asia, earning praise from environmental groups but condemnation from domestic manufacturers and a bipartisan vote in the Senate to block the move.
Unlike solar panels, semiconductors are critical to both civilian industry and military defense, and even many neoliberals support subsidies to reduce U.S. dependence on China, Taiwan and South Korea. But in keeping with Bidenomics’ broad definition of market failure, the Commerce Department has said the subsidies are contingent on the willingness of recipients to meet a range of other administration goals: to offer child care, pay union-scale wages, hire unionized workers, refrain from buying back stock or investing in China, and share profits with the federal government. Saddling industrial policy with so many ancillary goals dilutes its impact.
The foreign and domestic arms of Bidenomics are also at odds with each other, despite Sullivan’s insistence that they are complementary. While seeking solidarity with like-minded partners against Russia and China, the buy-American policies of the Biden administration discriminate against those same partners.
Biden credits last year’s Inflation Reduction Act for a boom in newly announced electric-vehicle and battery factories in the U.S., but other countries have complained because the law’s most generous subsidies go only to vehicles assembled in North America. “The U.S.A. is our partner of shared values, but at the same time there is an enormously protectionist economic policy,” German finance minister Christian Lindner told a German newspaper.
Those complaints have since subsided as the Biden administration has opened negotiations with allies over common standards for critical minerals used in batteries, and interpreted the law in a way that allows in more foreign EVs. But the latter move upset some Democrats in Congress eager to support domestic manufacturing.
Unlike Donald Trump, Biden isn’t seeking to tear up existing free trade agreements or to raise tariffs. But neither is he interested in new trade agreements or lowering tariffs. His Indo-Pacific Economic Framework seeks cooperation with allies in the region on labor conditions, climate policy, tax compliance and corruption, but it doesn’t offer increased access to the U.S. market in return, as the TPP, its rejected predecessor, did. To foreign trade partners, it’s an underwhelming proposition. Instead of a carrot and stick, “it’s a stick and a stick,” one Indonesian official said.
So what’s the alternative to Bidenomics? By itself, more generous access to the American market won’t win over more Asian countries to the side of the U.S. in confronting China. But like the Cold War, the contest with China will be a long game. Without “a proactive trade strategy with the region, the U.S. absence creates a vacuum that makes China the only game in town, and the U.S. loses influence,” said Doug Irwin, a trade policy historian at Dartmouth College.
Singapore Prime Minister Lee Hsien Loong told The Wall Street Journal’s editorial board a year ago that when the U.S. abandoned TPP, “you left the door open, and somebody else is now knocking on the door.”
Even if the U.S. stays out of TPP, there are ample other ways to deepen trade ties. Rahm Emanuel, who served under both Bill Clinton and Obama and is now the U.S. ambassador to Japan, has argued for exporting Alaskan liquefied natural gas to Japan, though that runs counter to Biden’s long-run climate goals. Asian countries “want our military leadership, our diplomatic leadership and our economic leadership,” Mr. Emanuel said in an interview.
Indeed, that’s a Cold War lesson that Bidenomics has failed to learn. Until very recently, U.S. presidents thought that trade and investment, by binding other countries more closely to the U.S., helped to sustain the U.S.-led international order. “Our maintenance of Western political unity depends in equally large measure upon the degree of Western economic unity,” President John F. Kennedy said in 1962, asking Congress for expanded authority to negotiate trade agreements.
This approach failed to make China friendly and free, but it worked spectacularly with Western Europe, Japan and South Korea. It explains why, despite their unhappiness with aspects of Bidenomics, these countries have stepped up to join Biden’s coalition for confronting China and Russia too.