Commentary on Political Economy

Tuesday 27 June 2023


US has buyer’s remorse for the world it built

Jake Sul­li­van has called for a new ‘for­eign policy for the middle class’. But what does that really mean?

When the US talks, the world listens. It is, after all, the world’s most influ­en­tial power. This is not due only to its size and wealth, but also to the potency of its alli­ances and its cent­ral role in cre­at­ing the insti­tu­tions and prin­ciples of today’s order. It played the decis­ive part in cre­at­ing the Bretton Woods insti­tu­tions, the Gen­eral Agree­ment on Tar­iffs and Trade and the World Trade Organ­iz­a­tion. It pro­moted eight suc­cess­ive rounds of mul­ti­lat­eral trade nego­ti­ations. It won the cold war against the Soviet Union. And from the early 1980s, it pushed for a deep and broad open­ing of the world eco­nomy, wel­com­ing China into the WTO in 2001. Whether we like it or not, we all live in the world the US has made.

Now, suf­fer­ing from buyer’s remorse, it has decided to remake it. Janet Yel­len, US Treas­ury sec­ret­ary, out­lined the eco­nomic aspects of the new US vis­ion in a speech delivered on April 20. Seven days later, Jake Sul­li­van, the national secur­ity adviser to Joe Biden, gave an even broader, albeit com­ple­ment­ary, speech on “Renew­ing Amer­ican Eco­nomic Lead­er­ship”. It rep­res­en­ted a repu­di­ation of past policy. It could just be seen as a return to Alex­an­der Hamilton’s inter­ven­tion­ism. Yet, this time, the agenda is not for a nas­cent coun­try, but for the world’s dom­in­ant power.

What was Sul­li­van say­ing? And what might it mean for the US and the world?

The start­ing point is domestic. Thus, a “shift­ing global eco­nomy left many work­ing Amer­ic­ans and their com­munit­ies behind. A fin­an­cial crisis shook the middle class. A pan­demic exposed the fra­gil­ity of our sup­ply chains. A chan­ging cli­mate threatened lives and live­li­hood. Rus­sia’s inva­sion of Ukraine under­scored the risk of over-depend­ence.” More nar­rowly, the admin­is­tra­tion sees itself as con­front­ing four huge chal­lenges: the hol­low­ing out of the indus­trial base; the rise of a geo­pol­it­ical and secur­ity com­pet­itor; the accel­er­at­ing cli­mate crisis; and the impact of rising inequal­ity on demo­cracy itself.

In a key phrase, the response is to be “a for­eign policy for the middle class”. What, then, is this sup­posed to mean?

First, a “mod­ern Amer­ican indus­trial strategy”, which sup­ports sec­tors deemed “found­a­tional to eco­nomic growth” and also “stra­tegic from a national secur­ity per­spect­ive”. Second, co-oper­a­tion “with our part­ners to ensure they are build­ing capa­city, resi­li­ence, and inclus­ive­ness, too”. Third, “mov­ing bey­ond tra­di­tional trade deals to innov­at­ive new inter­na­tional eco­nomic part­ner­ships focused on the core chal­lenges of our time”. This includes cre­at­ing diver­si­fied and resi­li­ent sup­ply chains, mobil­ising pub­lic and private invest­ment for “the clean energy trans­ition”, ensur­ing “trust, safety, and open­ness in our digital infra­struc­ture”, stop­ping a race to the bot­tom in cor­por­ate tax, enhan­cing labour and envir­on­ment pro­tec­tions and tack­ling cor­rup­tion.

Fourth, “mobil­ising tril­lions in invest­ment into emer­ging eco­nom­ies”. Fifth, a plan to pro­tect “found­a­tional tech­no­lo­gies with a small yard and high fence”. Thus: “We’ve imple­men­ted care­fully tailored restric­tions on the most advanced semi­con­ductor tech­no­logy exports to China. Those restric­tions are premised on straight­for­ward national secur­ity con­cerns. Key allies and part­ners have fol­lowed suit.” It also includes “enhan­cing the screen­ing of for­eign invest­ments in crit­ical areas rel­ev­ant to national secur­ity”. These, Sul­li­van insists, are “tailored meas­ures” not a “tech­no­logy block­ade”.

This is indeed a fun­da­mental shift in the goals and means of US eco­nomic policy. But both the depth and dur­ab­il­ity of these shifts depend on how far it reflects a new Amer­ican con­sensus. Where it is nation­al­ist and pro­tec­tion­ist, it already surely does. Where it down­plays the pri­or­it­ies of busi­ness and the role of mar­kets, it could also prove dur­able. Don­ald Trump’s pop­u­list Repub­lic­ans could surely accept almost all of this.

Do the new object­ives make sense? In some fun­da­mental respects, yes. Hav­ing just pub­lished a book called The Crisis of Demo­cratic Cap­it­al­ism, I agree that the anger and dis­ap­point­ment of what Amer­ic­ans call “the middle class” is a dan­ger­ous real­ity. I agree, too, that cli­mate is an import­ant pri­or­ity, sup­ply chains need to be resi­li­ent and national secur­ity is a legit­im­ate con­cern in trade policy. Rus­sia has surely taught us that.

Yet will it work to make Amer­ic­ans and the rest of us bet­ter off and safer? One doubt con­cerns the scale. Sul­li­van states, for example, that it is “estim­ated that the total pub­lic cap­ital and private invest­ment from Biden’s agenda will amount to some $3.5tn over the next dec­ade”. That is at most 1.4 per cent of GDP over that period, which is far too little to be trans­form­at­ive. Another is it is hard to make indus­trial policy work, espe­cially for eco­nom­ies on the tech­no­logy fron­tier. Another con­cerns how dis­rupt­ive this new approach will be for eco­nomic and polit­ical rela­tions with the rest of the world, not­ably (but not only) with China, espe­cially on trade.

In par­tic­u­lar, it is going to be hard to dis­tin­guish purely com­mer­cial tech­nol ogies from ones with secur­ity implic­a­tions. It is also going to be tricky to dis­tin­guish US friends from foes, as global reac­tions to Rus­sia’s inva­sion of Ukraine shows. Not least, it is going to be hard to per­suade China that this is not the begin­ning of an eco­nomic war upon it. Yet China already holds many cards in such a fight, as Har­vard’s Gra­ham Allison has noted for the case of solar pan­els. Rare earths are another such case.

Above all, the new approach will only work if it leads to a more pros­per­ous, peace­ful and stable world. If it leads to a frac­tured world, envir­on­mental fail­ure, or out­right con­flict, it will fail in its own terms. Its authors need to be care­ful in cal­ib­rat­ing the exe­cu­tion of their new strategy. It could back­fire badly.

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