US feels buyer regret for the world they built – 6/27/2023 – Martin Wolf

When America speaks, the world listens. After all, it is the most influential power in the world. This is not only due to its size and wealth, but also to the strength of its alliances and its central role in creating the institutions and principles of the current order.

The country played a decisive role in the creation of the Bretton Woods institutions, the General Agreement on Tariffs and Trade and the WTO (World Trade Organization). Promoted eight successive rounds of multilateral trade negotiations. Won the Cold War against the Soviet Union. And since the early 1980s, it has pushed for a wide and deep 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 United States made.

Now, suffering buyer’s regret, he decided to remake it. Janet Yellen, the Secretary of the Treasury, outlined the economic aspects of America’s new vision in a speech given on April 20. Seven days later, Jake Sullivan, Joe Biden’s national security adviser, delivered an even broader, if complementary, speech on “Renewing America’s Economic Leadership.”

It represented a repudiation of past policies. It could just be seen as a return to Alexander Hamilton’s interventionism. However, this time, the agenda is not for a nascent country, but for the dominant power in the world.

What was Sullivan saying? And what could this mean for America and the world?

The starting point is domestic. Thus, a “changing global economy has left many American workers and their communities behind. A financial crisis has rocked the middle class. A pandemic has exposed the fragility of our supply chains. A changing climate has threatened lives and livelihoods. The invasion of Ukraine by Russia highlighted the risk of over-reliance”.

More specifically, the government faces four major challenges: the emptying of the industrial base; the rise of a competitor in geopolitics and security; the acceleration of the climate crisis; and the impact of growing inequality on democracy itself.

In a key phrase, the answer is “a foreign policy for the middle class”. What, then, must this mean?

First, a “modern American industrial strategy”, which supports sectors considered “fundamental for economic growth” and also “strategic from the point of view of national security”. Second, cooperation “with our partners to ensure they too build capacity, resilience and inclusion”. Third, “going beyond traditional trade agreements to new innovative international economic partnerships, focused on the main challenges of our time”.

This includes creating diverse and resilient supply chains, mobilizing public and private investment for “the transition to clean energy”, ensuring “trust, security and openness in our digital infrastructure”, halting a race to the bottom in corporate taxation, improving protections for workers and the environment and fighting corruption.

Fourth, “mobilize trillions in investment in emerging economies”. Fifth, a plan to protect “key technologies with a small backyard and a tall fence.” Thus: “We have implemented carefully tailored restrictions on exports of the most advanced semiconductor technology to China. These restrictions are premised on direct national security concerns. Major allies and partners have followed suit.” It also includes “improving the screening of foreign investments in critical areas relevant to national security”. These, Sullivan insists, are “specific measures”, not a “technological roadblock”.

This is, in fact, a fundamental shift in the aims and means of US economic policy. But both the depth and durability of this shift depend on the extent to which it reflects a new American consensus. Where it is nationalist and protectionist, it certainly already does. Where it downplays business priorities and the role of markets, it can also be durable. Donald Trump’s populist Republicans could certainly accept almost any of that.

Do the new goals 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 also agree that climate is an important priority, supply chains need to be resilient, and national security is a legitimate concern in trade policy. Russia has certainly taught us that.

However, will it really work to make Americans and the rest of the world better and safer? One question concerns the scale. Sullivan claims, for example, that “the total public capital and private investment agenda of President Biden is estimated to reach about $3.5 trillion over the next decade.” That’s at most 1.4% of gross domestic product over that period, which is too little to be transformative. Another is that it is difficult to make industrial policy work, especially for economies at the technological frontier. Another concerns how disruptive this new approach will be to economic and political relations with the rest of the world, notably (but not only) China, especially in trade.

In particular, it will be difficult to distinguish purely commercial technologies from those with security implications. It will also be difficult to distinguish between America’s friends and enemies, as the global reactions to Russia’s invasion of Ukraine show. Not least, it will be difficult to convince China that this is not the start of an economic war against it. However, China already has a lot of cards in this fight, as Harvard’s Graham Allison noted in the case of solar panels. Rare earths are another 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 on its own terms. Your authors need to be careful when calibrating the execution of their new strategy. It could backfire, and ugly.

Translated by Luiz Roberto M. Gonçalves