Washington’s new narrative for the global economy

Two competing agendas are currently vying to shape the United States' domestic and foreign economic policies. One agenda is inward-looking, focusing on the creation of an inclusive, resilient, prosperous, and sustainable American economy. The other focuses on geopolitics and on maintaining US primacy over China. The future of the world economy depends on the outcome of this conflict and whether these opposing priorities can coexist.

US President Joe Biden's administration represents a radical departure from previous Democratic administrations, pursuing ambitious industrial policies to revive domestic manufacturing and facilitate the green transition. It has also adopted a tougher stance on China than any previous administration, including former President Donald Trump's, treating the Chinese regime as an adversary and imposing export and investment controls on critical technologies.

Until recently, however, the Biden administration did not articulate a coherent vision that combines these various elements and reassures other countries, including China, that its economic strategy is not centred on confrontation, unilateralism, and protectionism. But recent remarks by US Treasury Secretary Janet Yellen and National Security Adviser Jake Sullivan indicate that the administration is now taking steps to address this issue, potentially signalling the emergence of a new Washington Consensus.

The administration's approach to the world economy reflects a broader intellectual shift. Senior US policymakers now believe that the post-1990 model of globalisation, which prioritised free trade and free markets over national security, climate change, and the economic security of the middle class, has undermined the socioeconomic foundations of healthy democracies.

In his remarks, Sullivan laid out the five pillars of the administration's international economic agenda, which he called "a foreign policy for the middle class." The first pillar is a "modern American industrial strategy" that aims to catalyse private investment in sectors deemed critical to US prosperity and security. The second involves working with other developed democracies and developing countries to ensure that US allies adopt similar policies to improve "capacity, resilience, and inclusiveness."

Third, the US will move away from traditional trade deals that focus 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 US will seek to generate trillions of dollars in investments in emerging economies and provide aid to countries facing debt distress.

While each of these areas presents unique challenges, some are particularly contentious, because other countries view some 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 greatest impact on the future of the global economy.

The Biden administration's sweeping export controls, designed to prevent China from accessing advanced semiconductors, are the most explicit manifestation of this pillar. And the administration is reportedly planning additional restrictions on US investments in Chinese tech firms, particularly in strategically important sectors like microchips.

Chinese officials, including President Xi Jinping, have accused the US of imposing a "technological blockade" on the country. Financial Times columnist Edward Luce concurs: by isolating China's tech sector, the US is engaging in a "full-blown economic war."

But Sullivan offered a different perspective. Likening the policy to "a small yard and a high fence," he described the administration's measures as "carefully tailored restrictions" motivated by national security concerns and aimed at "a narrow slice" of advanced technologies.

Yellen's speech, delivered at the Johns Hopkins School of Advanced International Studies in late April, anticipated Sullivan's message a week later. The export controls, she argued, are meant to address national security concerns and will remain "narrowly scoped and targeted." The US, she emphasised, is not trying to undermine China's economic growth and technological modernisation.

The clarifications offered by Sullivan and Yellen indicate that the administration understands the risks of imposing overly broad trade and investment restrictions in the name of national security. Such measures will hurt the global economy and likely backfire by provoking China to retaliate.

A stable global order rests on norms and practices that recognise every country's right to protect its national interests. It also requires rules of the road to ensure that the defence of these interests is well-calibrated and does not harm other countries. Achieving this can be challenging, but it is not impossible.

When governments pursue national security objectives through unilateral policies that negatively affect other countries, policymakers should clearly articulate their goals, maintain open lines of communication, and propose narrowly targeted remedies intended to mitigate the adverse effects of those policies. Policies should not be pursued with the express purpose of punishing the other side or weakening it in the long run, and a failure to reach an acceptable compromise in one area should not become a pretext for retaliation in an unrelated domain. As Stephen Walt and I have argued, such self-imposed limits on acceptable policies could help prevent escalation and even elicit grudging acceptance from the other side.

Yellen and Sullivan's recent statements suggest that the Biden administration's foreign economic policies will align with these principles. But some important questions remain unanswered. For example, were the export controls on advanced chips well-calibrated, or did they go too far in sabotaging Chinese technological capacity without sufficiently benefiting US national security? And, given that the restrictions are being expanded to other critical sectors, such as artificial intelligence and nuclear fusion, can we still describe them as targeting only a "narrow slice" of technology?

Moreover, it is unclear whether the so-called "straightforward" national security concerns cited by Sullivan and Yellen are genuine or merely a pretext for unilateral action. Is the US ready to accept a multipolar world order in which China has the power to shape regional and global rule-making? Or is the administration still committed to maintaining US primacy, as Biden's national-security strategy seems to suggest?

Actions speak louder than words and will reveal the answers to these questions. But Yellen and Sullivan's remarks provide some reassurance to those who believe that the US can address its legitimate national security concerns without undermining the global economy.

Dani Rodrik. Illustration: TBS

Dani Rodrik, Professor of International Political Economy at Harvard Kennedy School, is President of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017).