Washington’s new narrative for the global economy

Two competing agendas currently collide to shape America’s domestic and foreign economic policies. One of the programs focuses on building an inward-looking and inclusive, resilient, prosperous and sustainable American economy. Another focuses on geopolitics and maintaining US primacy over China. The future of the global economy depends on the outcome of this conflict and the coexistence of these competing priorities.

US President Joe Biden’s administration represents a radical departure from previous Democratic administrations, pursuing ambitious industrial policies to revive domestic production and facilitate a green transition. He has taken a tougher stance on China than any previous administration, including former President Donald Trump, who has seen the Chinese regime as an adversary and imposed export and investment restrictions on technology.

Until recently, however, the Biden administration has not articulated a unified vision that integrates these disparate elements and reassures other countries, including China, that its economic strategy is not focused on confrontation, unilateralism, and protectionism. But recent comments from US Treasury Secretary Janet Yellen and National Security Adviser Jack Sullivan indicate that the administration is now taking steps to address the issue, signaling the emergence of a new Washington consensus.

Management’s approach to the global economy reflects a broader intellectual shift. Senior US politicians now believe that the post-1990 model of globalization, which prioritized free trade and free markets over national security, climate change and middle-class economic security, has undermined the socio-economic foundations of healthy democracies.

In his remarks, Sullivan laid out five pillars of the administration’s international economic agenda, which he called “a foreign policy for the middle class.” The first pillar is the “Modern American Industrial Strategy,” which aims to encourage private investment in sectors deemed critical to America’s prosperity and security. Second, working with other developed democracies and developing countries to ensure that US allies adopt similar policies to promote “capacity, resilience, and inclusiveness.”

Third, the United States will move away from traditional trade agreements focused on market access and embrace “new international economic partnerships” that address global challenges such as climate change, digital security, job creation, and corporate tax competition. And the United States seeks to invest billions of dollars in emerging economies and provide aid to heavily indebted countries.

While each of these areas presents unique challenges, some are particularly controversial because other countries view certain policies, such as the administration’s “Buy American” requirements, as protectionist. But Sullivan’s fifth pillar, which focuses on “protecting our foundational technologies,” could have the biggest impact on the future of the global economy.

The most obvious manifestation of this pillar is the Biden administration’s dramatic export restrictions, designed to prevent China from gaining access to advanced semiconductors. The administration plans additional restrictions on U.S. investment in Chinese technology companies, particularly in strategically important sectors such as microchips.

Chinese officials, including President Xi Jinping, have accused the US of imposing a “technical embargo” on the country. Financial Times columnist Edward Luce agrees: By isolating China’s technology sector, the US is engaging in “full-scale economic warfare.”

But Sullivan offered a different perspective. Comparing the policy to “a small yard and a tall fence,” he described the administration’s actions as “carefully crafted regulations” driven by national security concerns and aimed at a “short sliver” of cutting-edge technology.

Yellen’s speech at the Johns Hopkins School of Advanced International Studies in late April anticipated Sullivan’s message a week later. He argued that export controls would be “limited and targeted” with the aim of addressing national security concerns. He emphasized that the United States is not trying to undermine China’s economic growth and technological development.

The clarifications from Sullivan and Yellen indicate that the administration understands the risks of imposing excessive restrictions on trade and investment in the name of national security. Such actions would harm the global economy and backfire by provoking China’s retaliation.

A sustainable world order is based on norms and practices that recognize the right of each country to protect its national interests. Rules of the road are needed to ensure that the protection of these interests is well-calibrated and does not harm other countries. Getting there is difficult, but not impossible.

When governments pursue national security goals through unilateral policies that negatively affect other countries, policymakers must clearly articulate their goals, keep lines of communication open, and provide narrowly targeted remedies to mitigate the adverse effects of these policies. Policies should not be pursued for the express purpose of punishing or weakening the other party in the long run, and failure to reach an acceptable compromise in one area should not become a pretext for retaliation in an unrelated area. As Stephen Walt and I have argued, self-imposed limits on acceptable policies can serve to prevent escalation and, on the other hand, reluctant acceptance.

Recent reports from Yellen and Sullivan suggest that the foreign economic policies of the Biden administration will be consistent with these policies. But some important questions remain unanswered. For example, are export controls on advanced chips well-calibrated, or do they go too far in undermining Chinese technological capability without sufficiently benefiting US national security? And, as restrictions extend to other important fields like artificial intelligence and nuclear fusion, can they still be described as targeting only a “narrow slice” of technology?

Moreover, it is unclear whether the “simple” national security concerns cited by Sullivan and Yellen are real or just a pretext for unilateral action. Is the US ready to accept a multilateral world order in which China has the power to make regional and global rules? Or is the administration still committed to upholding America’s primacy, as Biden’s national security strategy suggests?

Actions speak louder than words and will reveal the answers to these questions. But Yellen and Sullivan’s comments are reassuring to those who believe the U.S. can address its legitimate national security concerns without undermining the global economy.

By Dani Roderick
Professor of International Political Economy at the Harvard Kennedy School.