Is American trade policy protectionist?

The US and UK work together, closely, on many important areas of mutual trade. Certainly, this is true of financial regulation, data and technology and financial innovation, all of which have bilateral mechanisms in place. 

Meanwhile, in the States, there’s a lot of talk about protectionist trade policy. Not without cause. On May 14th, President Biden announced a 100% tariff on all imported Chinese electric vehicles (EVs).  

Protectionism is, of course, the introduction of trade barriers. Often tariff-based, it is a policy designed to inoculate capital stock (domestic supply) and wages (domestic demand) from foreign competitors. After that, protectionists don’t much care what happens abroad. In its purest form, therefore, American protectionism has been linked to periods of isolationism.

For example, America used protectionism in the 18th century. Back then, it had split away from Britain. One of the first laws President Washington ever signed, on July 4th 1789, introduced tariffs. Another example is the 1930s. The Smoot-Hawley Tariff Act, of 1930, was accompanied by political disinterest in both European and Asian affairs.

But does that description really capture what’s happening in the US today? I’m not so sure. To that end, let’s examine today’s US trade policy - what it is and what it’s not. 

What’s eating Uncle Sam? 

In 2018, the Trump administration began introducing tariffs on Chinese goods. After decades of the US promoting a low tariff global environment, this was a pivot. President Trump then added tariffs on global metals imports. Among allies, this was controversial. Nonetheless, the subsequent Biden administration has retained Trump’s China tariffs in full.

When it comes to trade, President Trump’s “America First” and President Biden’s “Buy American” are brothers, maybe even twins.

Now these siblings are competing. As we said, on May 14th, President Biden announced a 100% tariff on all imported Chinese electric vehicles (EVs), plus new tariffs on solar products, medical items and steel. Former-President Trump’s response was clear: he would choose a 200% tariff on Chinese EVs. Not so much a race to the bottom as to the top. 

But while both men are trying to protect certain US industries (and win an election), they have not entirely cut America out of the global economy. Quite the opposite. This is why we can’t really call American trade policy pure protectionism.

From shore to shining shore 

America is not fully retreating from trade. Yes, it is displaying some protectionist tendencies. But while it is reducing its exposure to foreign trade in some geographies and markets, it is enhancing it in others.  

Look at “on-shoring”, “near-shoring”, “friend-shoring” and so on. These are the opposite of protectionism. Rather than cutting America out of trade, they are efforts to maintain American economic security through trade. Each type of “re-shoring” is different. But any kind hard-wires foreign supply into the American economic machine.

It’s having an effect. In 2022-2023, Mexico overtook China as America’s number one source of foreign goods. Mexico sent $475 billion worth of goods to the US, up 5%, versus China’s $427 billion, down 20%.

Of course, there was a practical reason for “re-shoring”. The pandemic of 2020 showed how disruptions to the global supply chain can impose rapid upward price pressure in the US economy.

But, pandemic and inflation aside, here’s the point. The US is as much betting on trade with Mexico as it is against trade with China. Witness the enhancement of NAFTA, now USMCA, under President Trump. That was not protectionist per se. In this context, there is a case for “family shoring” - protecting and enhancing - US-UK capital markets too.

Sanctions, dear boy 

What other aspects of US trade policy part company from traditional protectionism?

In 2022, the US imposed several sanctions on Russia following its unprovoked aggression in Ukraine. These sanctions have, at various stages during the war, been expanded. Meanwhile, the G7’s Russian crude oil price cap, of $60, remains in operation. 

These policies are also not protectionism. As we said, protectionism has very little interest in what happens abroad. But sanctions reach into foreign economies. The same is true of export controls.
  

In August 2023, the US imposed such controls on certain high-end technology. Back then, President Biden’s executive order was designed to slow, or prevent, another economy’s technological capabilities. But again, that was not protectionism per se. That’s state craft. 

Industrial policy... abroad? 

Finally, the Inflation Reduction Act (IRA) 2022. Not strictly trade policy, this law is perhaps better described as industrial policy. Nonetheless, it has had effects on America’s trade patterns. 

In short, the law subsidizes green technology in the US. Some in the European Union (EU) have described these subsidies as a distortion to trade and, too, even against the rules of the World Trade Organization (WTO). America passed the IRA to replace Chinese imports, not necessarily European, and to turbo-charge its domestic energy transition. Nonetheless, Europe has been affected. 

Was this protectionist? Yes and no. Yes, because it presents new disincentives for cross-border exchange. No, because the IRA’s ultimate aim was addressing climate change and boosting novel industries. 

Conclusion  

Why does any of this matter for UK financial services? Are disruptions to goods and commodities trade relevant?  

In under ten years, we have witnessed a steady retreat from free trade principles. For anyone in financial services, the real issue is whether this trend will eventually impact cross border capital flows. We’ll deal with that, and assess the wider evidence for deglobalization, in future posts.  

For now, if forecasting US trade policy, don’t assume it’s purely protectionist. Some US trade policies are quite the opposite. In fact, US trade policy is one part protectionist, one part activist. When it comes to foreign economic exposure, America is not wholly shutting off. That’s very far from classic protectionism. As such, US-UK market integration can and will remain close. In fact, get closer still. British and American policymakers - and markets - have every interest deepening our ties. 

About the author

Ed Price joined the City of London Corporation as its new Managing Director US in January 2024. Before that, he was Principal for Geopolitical Forecasting at Ergo, a risk consultancy, and served in the British Consulate New York between 2017 and 2021.

Ed is also a non-resident Senior Fellow at New York University, where he teaches classes in International Political Economy. He holds a degree in International History from the London School of Economics, a Master's degree in German History from University College London and a Master's degree in Finance and Economic Policy from the University of London.