Why Is America Fighting Trade Wars With Its Allies?

Kaush Arha

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American subsidies intended to boost domestic electric vehicle production have driven a wedge between Washington and its traditional European, South Korean, and Japanese allies. These subsidies have hit key U.S. partners where it hurts during a time of great economic vulnerability, sparked in part by the energy market volatility that has emerged in the wake of Russia’s invasion of Ukraine. What’s more, the Biden administration took this step while aggressively calling for solidarity from its European and Indo-Pacific allies to counter Russia and China. It is a curious turnabout for the Biden administration, which criticized the previous administration for engaging in trade wars with allies and is now promising that “America is back” and engaging in “relentless diplomacy.”

At its core, the Biden administration’s imprudent and shortsighted decision signals a lack of probity in addressing the Chinese threat seriously. The administration’s relentless diplomacy appears to fall short both on substance and style in fortifying alliances and rallying friends to counter China, which the recent National Security Strategy identified as the greatest threat in the world.

Former Vice President Al Gore suggests allies should offer their own green subsidies. It is an astonishing statement in the face of the economic and trade history of the last fifty years. Actual, not aspirational or rhetorical, gains from climate policies will be achieved within the reality of geopolitics and geoeconomics—not outside of it. The Chinese climate czar underscored this point to his American counterpart when the latter attempted to detach U.S.-China climate negotiations from their systemic rivalry. In green industries or otherwise, Made in America, Made in Europe, Made in India, and Made in Japan policies are stronger collectively and weaker individually in countering Made in China.

U.S. economic policies should always be driven by national interests. This includes strengthening economic relations with allies and like-minded nations to collectively be less dependent on the Chinese Communist Party. This requires the constant and conscientious balancing of benefits to the American economy with harm to close allies in search of optimizing the collective impact. The Inflation Reduction Act subsidies appear to have escaped such a review. If shoring up alliances is necessary to prevail against China, then such reviews need to be routine.

Our European and Indo-Pacific allies are far from shrinking violets in economic gamesmanship, and quite a few excel at it to the United States’ detriment. Current American actions encourage such self-centered economic behavior among allies to the detriment of the whole. Instead, the United States should lead from the front in bolstering economic alliances to counter China. Indeed, Russia’s invasion of Ukraine and China’s threat of the same toward Taiwan call for constant economic diplomacy among the United States and its allies across three reinforcing efforts.

First, engage in constant economic dialogue and coordination with European and Indo-Pacific allies across the G7, the Indo-Pacific Quad dialogue, and the U.S.-European Union Trade and Technology Council (TTC). These forums should foster frank and open discussions on domestic actions taken by member states that may have a disproportionately negative impact on other members of the group. Domestic politics will always remain the prime driver for economic policies, as they should. However, these forums can be better utilized to forewarn and mitigate economic fallout among allies. The Quad and the TTC are relatively new institutions and will benefit from maturation as the primary economic and technology coordination forums for strengthening the U.S. economic partnership with European and Indo-Pacific nations. Given the prominence of the TTC and the Quad, the G7 should be updated for additive value. Specifically, the G7 should be expanded to the G10 by bringing together America’s European and Indo-Pacific partners, including India, Australia, and the EU as members.

Second, prioritize real progress on climate action among the United States, Europe, and Indo-Pacific nations with explicit recognition of the systemic rivalry between the free world and the China-Russia nexus, which also includes Iran and Venezuela. Europe is fast exchanging its fossil fuel dependence on Russia for dependence on Chinese manufacturing to secure its green energy future. Instead of credibly addressing climate change, the United States and Europe are often found holding self-congratulatory climate talks announcing fund transfers to politicians in developing nations while subsidizing their own domestic green industries. America, with its European and Indo-Pacific partners, should collectively help developing nations meet their present economic and energy security needs while charting a greener future.

Finally, the United States should pressingly revive trade negotiations with its European and Indo-Pacific partners. None of the three can individually counter China’s preeminence as a trading nation; Beijing is the top trading partner of over 120 nations. China is the biggest winner from a U.S. trade dispute with its allies. The inability of the United States and its allies to reorder the global trading architecture relinquishes the space to their systemic rival—the world’s leading trading nation—China. Focusing on individual sector supply chains alone is both an economically and intellectually inefficient substitute. The United States and its allies cannot beat China at industrial policy. Realigning the global trade architecture is essential for America to prevail over China in a systemic economic contest.

It is unbecoming of America—the nation most responsible for the modern economic revival of Europe, Japan, and South Korea, and whose military today guarantees their security—to then undermine its allies’ automotive industries while lecturing them to wean themselves off Chinese markets. The United States has a choice: lead the free world’s economies to stand in solidarity against Chinese state capitalism, or signal its allies to pursue their own industrial policies.