America is leading a dangerous global trend towards subsidies, export controls and protectionism. It is logical that the country does not want to make itself dependent on China, but this makes other globalization issues all the more important.
Since 1945, the system of the world economy has been functioning according to a set of rules and standards under American leadership. It produced unprecedented economic integration that fueled growth, lifted hundreds of millions of people out of poverty, and helped the West defeat Soviet Russia in the Cold War. This system is in jeopardy today.
Countries compete to subsidize green industry, depriving both friend and foe of production and restricting the flow of goods and capital. Mutual benefit is out, national gain is in. The age of zero-sum thinking has arrived.
The old system was already under strain when the global financial crisis of 2007-2009 prompted a rethink in the United States. Now that President Joe Biden has dropped free-market economics for more aggressive industrial policies, the pressure has risen again. America has provided massive $465 billion in subsidies for green energy, electric cars and semiconductors. Linked to this is the demand for local production.
Bureaucrats tasked with scrutinizing foreign investments to prevent undue foreign influence on the economy now have their own say over sectors that account for 60 percent of stock market value. At the same time, the responsible authorities are increasingly restricting exports – especially of high-end chips and chip manufacturing systems to China.
The muscle flexing of American industrial policy exerts a certain attraction in Washington. It could secure America’s technological supremacy over China, which has long sought self-sufficiency in key areas through government intervention. The imposition of a CO2 price is not politically enforceable, but the promotion of decarbonization is. That the state could intervene where private enterprise has failed, thereby reindustrializing America’s heartland, makes the new course all the more interesting.
As an immediate consequence, however, a dangerous trend towards global protectionism has emerged. Whoever builds a chip factory in India receives half of the state support; in South Korea there are generous tax breaks. If seven other market economies that have announced stimulus measures for “strategic” sectors since 2020 spend a similar proportion of GDP as the US, total spending would be $1.1 trillion.
Almost a third of the cross-border deals that caught the attention of European authorities came under scrutiny in the last year. Countries with raw materials needed to manufacture batteries are currently considering export controls. While Indonesia has halted nickel exports, Argentina, Bolivia and Chile may soon be pooling revenues from their OPEC-style lithium mines.
A trade war between China and the US seems inevitable. As China became increasingly integrated into the world economy around the turn of the century, many in the West prophesied that the country would become democratised. The dying of that hope—along with the shift of a million manufacturing jobs to China—has also cost America its love of globalization. The Biden government is now concerned about becoming as dependent on China’s batteries as Europe was on Russian gas before the Ukraine war.
America’s falling behind in the chip industry in favor of Taiwan, Democrats and Republicans alike fear, could also hamper the advancement of artificial intelligence, which they predict future armies will rely on for strategic missile planning and guidance.
Some are only concerned with preventing China from prospering – but the impoverishment of 1.4 billion people is unlikely to boost morale or peace. Others are taking the wiser route, focusing on the resilience of America’s economy and maintaining military strength. Reindustrialization of the heartland, they argue, will give new impetus to market capitalism. Until then, America, as a global hegemon, could easily cope with any objections from the other countries.
However, this is a fallacy. If the zero-sum policy is counted as a success, it cannot easily be abandoned. In reality, even if it disrupts American industry, it will do more damage by undermining global security, slowing growth and making the green transition more expensive.
The associated additional economic costs are problematic. The Economist estimates that replicating the cumulative investments from global tech hardware, green energy and battery companies would require $3.1 to $4.6 trillion (3.2 to 4.8% of global GDP). Reindustrialization will raise prices and hit the poor hardest. Duplication of green supply chains will further drive up the cost of decarbonization in America and around the world. A look at history shows that large amounts of public money are at risk.
Another problem is the resentment of friends and potential allies. The strength of American policy after World War II was the awareness of the benefits of open world trade. Although the USA generated almost 40% of the world’s gross domestic product up to 1960, globalization resulted from this awareness.
With a current market share of 25%, America needs its friends now more than ever. The export stop for Chinese chip manufacturers will only work if the Dutch company ASML and the Japanese company Tokyo Electron stop supplying them in the same way. The supply of batteries will also be better secured if the democratic world acts as one. American protectionism, however, has angered its allies in Europe and Asia.
America should also make an effort to attract the emerging economic powers. Goldman Sachs estimates that by 2050 India and Indonesia will be the third and fourth largest economies in the world. Both are democratic states, but they are not among America’s close friends. By 2075, Nigeria and Pakistan will also have gained economic strength. If America demands that other countries exclude China without opening up a sufficient part of its own markets, it must reckon with rejection from the new economic powers.
A final hurdle is the increasing spread of economic conflicts, which make global cooperation more difficult. As the race for green technologies rages on, the question of how to support emerging economies in decarbonization is a hot topic. Meanwhile, China, a big creditor, is blocking bailouts for countries with debt problems like Sri Lanka. As long as countries do not work together, these problems will remain insoluble – and this will be felt on a global level.
Nobody is asking America to go back to the 1990s. The country is rightly striving to maintain its military supremacy and avoid risky dependence on Chinese economic power. However, this makes other forms of global integration all the more important. America must seek the closest cooperation between countries that is possible given their respective values.
This currently requires a series of collaborative forums and ad hoc agreements. In this context, America’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an Asian trade pact that builds on an earlier agreement that America helped draft but then abandoned, would make sense.
In view of the protectionist turn in American politics, saving globalization seems almost impossible. But the assistance provided to Ukraine by Congress has shown that voters are not becoming insular. Polls suggest free trade’s popularity is recovering. There are strong indications that the Biden administration is trying to address concerns from its allies about the subsidy.
To save the global order, America must act bolder and finally reject the false promise of zero-sum thinking. There is still time for this before the system collapses completely, countless livelihoods are destroyed and the roots of liberal democracy and market capitalism are endangered. The task is daunting and urgent; she could hardly be more important. And time is running out.
This text first appeared in The Economist and was translated by Cornelia Zink.
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*The contribution “A devastating new logic threatens our economy” is published by The Economist. Contact the person responsible here.
