For those who believed that the American era was over, 2022 was a rude surprise. Faced with the biggest land war in Europe since 1945, the United States led a multi-country effort to assist Ukraine. Faced with a belligerent China, the United States embarked on a concerted strategy to arrest Beijing’s military-industrial rise. The Biden administration improvised new tools of statecraft: the freezing of Russia’s foreign currency reserves; the capping of the price paid for Russia’s oil exports; the embargo on semiconductor exports to China. Sweden and Finland opted to join an invigorated NATO. Japan, South Korea, Australia and India were drawn deeper into U.S.-led arrangements aimed at containing China.
So much for that moment in February when the Russian and Chinese leaders announced a “no limits” partnership, issuing a joint declaration that attempted to define a supposedly post-American order.
And yet, impressive though the administration’s foreign-policy performance has been, President Biden faces a challenge. During the first half of his tenure, he has shared with Donald Trump the dubious distinction of being one of only two postwar presidents not to support freer trade. Now, for both economic and foreign-policy reasons, he must change direction. Like his predecessors during the Cold War, Biden must deploy free trade as a weapon for isolating enemies and cementing friendships. And to manage the attendant political costs, he must reframe the nation’s attitude to globalization.
The task of rekindling America’s appetite for free trade might seem hopeless, except that the Biden administration has already accomplished the near-impossible. Taken together, its efforts against Russia and China during 2022 have restored the United States to a position of international leadership not seen since the aftermath of the 2001 terrorist attacks on the Pentagon and World Trade Center.
Consider the Ukraine conflict: Faced with a war that could have been viewed as Europe’s problem, the administration has committed $24 billion in military assistance to Ukraine, fully 60 percent of all pledges provided by outside powers. Congress has just approved a significant increase in defense spending for a second year in a row, ending a period of minimal growth between 2015 and 2021 and putting the Pentagon budget on track to hit its second highest level since World War II as measured in inflation-adjusted dollars. The chaotic withdrawal from Afghanistan, which seemed to signal an “America First” determination to shed foreign commitments, has been replaced by a willingness to stand up to an expansionist czar who tramples the global order.
The U.S. example has helped to galvanize allies. Some had little choice: because they share a border with Ukraine or are particularly exposed to Russia, five front-line states — Estonia, Latvia, Poland, Lithuania and Slovakia — have committed the most assistance (military plus humanitarian and financial) relative to the size of their economies. Estonia’s commitment, at 1.32 percent of gross domestic product, is more than five times larger as a share of its economy than the U.S. commitment of 0.23 percent.
But according to the Kiel Institute for the World Economy, 21 other countries have pledged a higher share of GDP to Ukraine than has the United States. Even the laggards whom then-Defense Secretary Donald H. Rumsfeld once derided as “old Europe” have come forward. Germany, France and Italy have committed 0.33 percent, 0.28 percent and 0.27 percent of GDP, respectively.
The United States and Europe have also forged agreements on sanctions targeting Moscow. Within days of the invasion, the allies froze a large portion of Russia’s foreign-currency reserves and excluded an array of Russian banks from the international payments system. As a result, Russian imports crashed in the first three months of the war, depriving the country of supplies for both its military and civilian sectors. Even though China and Turkey have since emerged as artful sanctions dodgers, Russian imports remain about 25 percent below their pre-invasion level, according to analysis by Matthew C. Klein of the Overshoot newsletter.
The alliance will face internal stresses in the months to come, but for the moment what’s striking is how well it has held together despite partisan division in Washington, populist pressures in Europe and Russia’s retaliatory natural-gas embargo, which threatens to tip Europe into recession. For the first time since 2001, the United States has stood at the helm of a broad and resilient military coalition.
Consider, next, the Biden administration’s approach to China, a far more challenging adversary than Russia. China’s population is larger, its technological capabilities more advanced, its markets more important to western businesses. More than half of the world’s countries trade more with China than with the United States, and China is now the world’s largest international lender. Measured based on purchasing power parity, China’s economy is the largest on the planet.
Moreover, China’s provocations are far subtler than Russia’s, allowing foreigners to lull themselves into thinking that confrontation is unnecessary now. China may have subjugated Hong Kong and the ethnic minorities of its western states. Xi Jinping, the country’s supreme leader, may have warned foreigners that if they try to slow his country’s progress, they will have their “heads bashed bloody against a Great Wall of steel.” But Xi has yet to launch a military invasion of a neighbor. Just as Western European governments increased their reliance on Russian natural gas after Russia’s 2014 annexation of Crimea, so today it would be easy for the West to pursue see-no-evil business-as-usual with China.
But Biden’s strategists have refused to be deluded. They have connected the dots between Chinese rhetoric and Chinese behavior, recognizing that it may be only a matter of time before Beijing tries the equivalent of a Ukraine invasion.
In terms of rhetoric, Xi has said that Taiwan’s self-governing status is an anomaly that cannot “be passed from generation to generation.” The Xi government has border disputes with neighbors, including Japan and India, and claims sovereignty over 90 percent of the vast expanse of the South China Sea, a vital commercial waterway. In “Danger Zone,” their unsettling prediction of war with China, Hal Brands and Michael Beckley recall an exchange between Xi and then-Defense Secretary Jim Mattis in 2018. “We cannot lose even one inch of territory left behind by our ancestors,” Xi insisted.
In terms of behavior, China has pursued an expansion of military spending unprecedented in modern history. Between 1990 and 2020, its inflation-adjusted military budget grew fully 10-fold. China has acquired the world’s largest ballistic missile force, largest navy and largest integrated air-defense system. It has built artificial islands in the South China Sea and armed them. It has sent quasi-official maritime militia into zones belonging to its neighbors. It is pursuing technologies with military use, from drones to artificial intelligence. The Biden team is right to plan accordingly.
All this being said, the plan that Biden’s strategists have chosen is shocking in its boldness. At its heart is the embargo on semiconductor exports announced in October and extended in December. Whereas Biden’s predecessor, Donald Trump, barred one Chinese company, Huawei, from buying U.S. semiconductors, Biden has blacklisted large chunks of Chinese industry.
The administration’s semiconductor export ban operates on four levels. First, it prohibits the sale to China of both advanced semiconductors made in the United States and advanced chips made in other countries with the help of U.S. inputs. Chips are at the core of modern economies, with the most advanced ones being used in everything from sophisticated communications equipment to artificial intelligence. Because most chip makers around the world rely on U.S. software or other U.S. technology, they dare not ignore the ban. China will therefore lose access to nearly all foreign suppliers.
Next, the Biden team has targeted China’s ability to produce its own semiconductors. This builds on a precedent from 2018, when the Trump administration successfully lobbied the Netherlands to prevent the Dutch firm ASML, the leader in semiconductor lithography, from selling its most advanced gear to China. The Biden administration now aims to widen the net. U.S.-based suppliers of chipmaking equipment will be banned from selling to China. Foreign ones are under pressure to follow.
Third, denied advanced chips and chipmaking gear, China will inevitably seek to develop its capacity to build chip-manufacturing equipment. The Biden administration has also targeted that option. The export ban extends to U.S.-made components that China might use to make advanced chipmaking machinery.
Finally, the embargo prohibits U.S. citizens, green-card holders, foreigners living in the United States and U.S. companies from working with China’s semiconductor sector. This restriction has already hit its mark. Chipmaking equipment often requires maintenance every few days, but Western suppliers have abruptly stopped servicing their fabrication equipment in China. Hundreds of engineers, many of them Chinese American, have been forced to choose between their passports and their jobs. The brute decoupling of the Chinese and Western tech sectors has begun.
The old rule in politics is watch what we do, not what we say. “We are not seeking a new Cold War,” Biden declared at the United Nations last year. “I absolutely believe there need not be a new Cold War,” he repeated after a summit with Xi in November. But Biden’s broad semiconductor embargo is a sharp reminder that his administration regards China as a competitor and that it intends to win.
Over the next year or two, the chip embargo is likely to achieve its goal. China will find it hard to source the advanced chips it needs for its military-technological complex. It will find it equally hard to build them.
But over time, the Biden strategy depends on the cooperation of European and Asian firms and governments. Because U.S. inputs are so important to the manufacture of advanced chips, the United States has the leverage to obstruct their export to China. But the same is not true of chipmaking equipment. If Dutch, German, Japanese, South Korean and Taiwanese policymakers do not support the embargo, equipment suppliers in their countries will accept the huge sums that China’s semiconductor industry will offer for technical assistance. “We recognize that the unilateral controls we’re putting into place … will lose effectiveness over time if other countries don’t join us,” a Biden official confessed to reporters.
And European and Asian suppliers will see plenty of reasons to help China. They will tell themselves that they can collaborate with China’s civilian companies without aiding its military; that an overly aggressive embargo increases, not reduces, the risk of military conflict; that they can best serve their countries’ national security interests by staying at the cutting edge of strategic technologies, and that this won’t be possible if they leave the Chinese market to others. Lacking the preoccupation with global security that comes with superpower status, other nations may not see in China the immediate threat to their interests that Washington does.
Recent signals have underlined how tempted foreigners are to break the U.S. embargo. The top two non-U. S. suppliers of chipmaking equipment — ASML and Japan’s Tokyo Electron — have both grumbled about extraterritorial U.S. sanctions. The Dutch and German leaders have both questioned the policy of decoupling from China. Intense lobbying from the Biden administration — or economic offsets — may persuade these allies to go along with the blockade, at least for a while. But it may be hard to stop the embargo from crumbling over the long term.
Such erosion has happened before. In 1999, concerned about leaks of U.S. satellite technology to China, the United States blocked U.S. firms from providing U.S. satellites to be launched on Chinese rockets. For a while, this set back the Chinese space program. But China pretty quickly identified other willing satellite suppliers, and its prowess in launching these on Chinese rockets caught up with American capabilities. Meanwhile, cut off from the Chinese market, the U.S. satellite industry faltered, and its share of global satellite exports crashed from 73 percent to 25 percent.
All of which means the Biden team has set off on an unproven and high-risk path. Its semiconductor embargo could turn out to be a masterstroke if allies sustain their support for it. But absent international backing, Biden’s sanctions could accelerate China’s progress toward semiconductor self-sufficiency and damage U.S. industry at the same time.
How could the Biden administration encourage U.S. allies to stick with the embargo? Part of the answer lies in the sort of leadership that Washington has shown on Ukraine — and on Asian defense collaboration. America’s willingness to commit military assets to Asian security is already paying dividends: Japan and South Korea have joined in trilateral missile-defense exercises; Japan and Australia have participated in naval exercises; Australia has signed up to buy U.S. nuclear-submarine technology and accepted the deployment of U.S. nuclear-capable aircraft at Australian bases. When the United States is generous in what it brings to the table, it earns the goodwill necessary to make alliances stronger.
To make its chip embargo stick, the Biden team must wrap its appeal to partners in more generous packages. Demanding that allies give up on China’s vast market without enhanced access to the U.S. one is not a sustainable strategy. But by offering the prospect of trade liberalization, the Biden team might change the allies’ calculus on the embargo. In a sign of how that carrot might transform the conversation, German Chancellor Olaf Scholz has recently called for a strengthening of trade ties between the United States and Europe. The Biden administration should seize on the idea — and pursue a similar strategy in East Asia.
This would build upon an old foundation. Negotiations for a Transatlantic Trade and Investment Partnership were held during the second term of the Obama administration. A parallel set of talks, initiated by George W. Bush and later touted by the Obama administration as the centerpiece of its pivot to Asia, culminated in the signing of a Trans-Pacific Partnership in 2016. Knitting together 12 countries, but pointedly excluding China, the deal covered everything from tariff reductions to joint standards on e-commerce and intellectual property rights. But Congress never ratified the pact and Trump abandoned it on his first day in office.
The Biden team should now revive both halves of this agenda. Scholz’s invitation signals that the moment is ripe in Europe, and the other 11 members of the Trans-Pacific pact have said that the door is open to the United States rejoining the club, which has gone ahead without U.S. participation.
The trouble is that, with a few exceptions, there is little appetite for freer trade among U.S. politicians. Trump turned the Republican Party in a protectionist direction. The Biden team, for its part, is led by policymakers who interpret Hillary Clinton’s 2016 defeat as a repudiation of globalization by swing-state voters. Following this logic, the administration has done the opposite of offering allies additional U.S. market access. It has combined its tough China strategy with an “America First” industrial policy that features subsidies for domestic chip manufacturers and homegrown electric vehicles.
This economic nationalism has infuriated allies, especially in Europe. In particular, the subsidies for North American-made electric vehicles and their components are resented as a ploy to divert auto investment from Germany and its neighbors. On a state visit to Washington in December, French President Emmanuel Macron complained that the subsidies had not been “properly coordinated” with allies. His economics minister, Bruno Le Maire, accused the United States of embracing Chinese-style policies. Thierry Breton, a top E.U. official, registered his irritation by boycotting a high-level meeting with U.S. colleagues. The Europeans are threatening to bring their grievance to the World Trade Organization’s tribunal.
The Biden team knows that it must manage this spat — and it recently delayed the implementation of some of the offending regulations and moved to offset some others. But it needs to go for a bold choice — as bold, in its own way, as the decision to arm Ukraine or to deprive China of semiconductors. That choice consists of drawing a new distinction between China-centric globalization, which can be justly criticized for its impact on American workers, and other forms of free trade, which the United States should support.
China’s extraordinary rise has affected Americans’ understanding of what trade entails. As well as being the world’s most populous nation, China has grown much faster than the other miracle economies of East Asia, and its growth has relied heavily on manufactured exports. In 1990, China’s merchandise exports accounted for just 1.8 percent of the world’s total. By 2020 the share had rocketed to 14.7 percent. This unprecedented transformation makes the globalization of the past 30 years anomalous. To condemn trade based on evidence from this period is to miss the reality that most experiences of globalization are far less traumatic.
To be sure, China-centric globalization has had some benefits. The country has lifted an extraordinary 800 million people out of poverty, accounting for almost three-quarters of global poverty reduction over the past four decades. Cheap and excellent Chinese manufacturers have boosted the purchasing power of Western consumers, especially poorer ones who spend a large share of their earnings on goods rather than services. Looking back on his 18-year tenure as Federal Reserve Board chairman, Alan Greenspan attributed the low inflation and solid growth of the late 1990s and early 2000s partly to China’s rise.
But the speed and scale of China’s export boom have created a version of globalization that is hard on workers in advanced economies. Big, fast trade disruptions are qualitatively different from gradual ones.
To see why this is so, start by accepting that all trade boosts growth by displacing workers. Trade creates the conditions for specialization, allowing countries to make more of what they excel at and less of what they do badly. As workers shift from inefficient sectors to more productive ones, their efforts generate more value. GDP rises.
This adjustment inevitably creates winners and losers. But until around 2000, low-skilled workers appeared on average to be managing the dislocation well. When economists tried to measure economy-wide wage losses from trade, they had trouble finding any. U.S. workers responded to import competition by shifting into the export sector or non-traded services. They were hired relatively quickly, and their incomes held up.
But this good-news story changed with China’s accession to the WTO in 2001. Competition from imports accelerated to the point where displaced U.S. workers found it hard to get new jobs. The problem was compounded by China’s large trade surplus, which was mirrored in a correspondingly large U.S. deficit. China was not buying enough U.S. exports to offset the jobs it was destroying in U.S. industries hit by imports.
As a result, regions that bore the brunt of the China shock became depressed — psychologically and economically. Communities built around the manufacture of furniture, textiles and shoes suffered devastating losses, and workers who lost jobs had no other local options. Rather than coping with import competition by moving to a new region, many workers, keen to stay put where they had been raised, lost hope: The opioid epidemic and the surge in “deaths of despair” were almost certainly bound up with this phenomenon. Researchers found that unemployment in areas hit by Chinese imports remained elevated for a decade or more. Workers’ lifetime earnings fell. Their marriage prospects declined.
The case for globalization is that trade boosts GDP, generating income with which displaced workers can be assisted. But in the era of China-centric globalization, this self-repairing cycle broke down. The U.S. political system has a hard time generating assistance programs that can compensate depressed areas when job losses surge. And China’s huge trade surplus blunted the boost to U.S. GDP that might have come from rising exports.
Over the past two decades, populists on left and right have been right to criticize China-centric globalization. This is the reality that Trump exploited, and it helps explain the Biden administration’s fondness for Buy America protectionism. But rising Chinese wages and the rapid aging of China’s workforce signal that the era of China-centric globalization is drawing to a natural close, and geopolitically driven decoupling from the West is ending it. Trade will grow more slowly, and the disruptions workers in advanced economies experience will be correspondingly milder. Despite the justifiable anger at lost industrial jobs and opioid addiction in recent years, America’s attitude to globalization must adjust to match the new reality.
If China-centric globalization is over, what will globalization be like in the next couple of decades? The answer lies in the second major shift in global commerce that accompanied China’s rise: the extraordinary growth of regional supply chains. As my Council on Foreign Relations colleague Shannon O’Neil argues in her new book, commerce within regions exceeds that with other continents. The experience of this kind of economic integration holds the key to understanding the next phase of globalization.
Consider the effects of the North American Free Trade Agreement (NAFTA). After it was ratified in 1993, continental commerce quadrupled over the next decade. But because this regionalization was more about supply-chain collaboration than head-on competition, studies have found little adverse effect on communities or jobs in the United States. Whereas trade with China involved the near elimination of regionally concentrated industries, NAFTA has fostered beneficial specialization in the making of complex products such as cars and pharmaceuticals across borders.
The innards of U.S. imports underscore this point. When the United States imports something from Mexico, U.S. workers share in the benefit. The average Mexican import — say, a car or a washing machine — is 40 percent U.S.-made, up from just 5 percent before NAFTA. For imports from Canada, likewise, the U.S. content share is 25 percent. In contrast, the average import from China is just 4 percent U.S.-made.
Another example can be seen in the synergy between San Diego’s biomedical research cluster and low-cost manufacturing in nearby Tijuana, Mexico. On the U.S. side of the border, a booming life-sciences industry employs some 65,000 scientists, lab technicians and patent lawyers. On the Mexican side of the border, 40,000 skilled workers churn out hundreds of millions of dollars’ worth of U.S.-designed medical equipment. Neither the U.S. inventors nor the Mexican manufacturers could succeed without the other. By combining their complementary strengths, they have built an industry that exports globally.
The bottom line is this: Outside the extraordinary case of an autocracy that increases its share of global exports eightfold in a generation, trade is almost always good for buyers and sellers. This is what the research on worker adaptation to trade showed before China’s accession to the WTO, and this is what O’Neil’s work on regional integration concludes also. And while regional manufacturing hubs may be especially advantageous, the United States should continue to seek and strengthen trade with other continents. Especially at a time when it must rally fellow democracies against Russia and China, the United States cannot turn its back on a tool that boosts U.S. growth and deepens U.S. alliances.
Trade liberalization is also more politically saleable than skeptics might argue. According to the Chicago Council on Global Affairs, 3 in 4 Americans think trade is good for the U.S. economy. As globalization becomes less China-centric, public support should broaden further. In addition to their geostrategic logic, Biden’s China sanctions therefore offer the political advantage that they will make trade with the rest of the world easier to sell.
This is an opportunity that the Biden administration must seize. By leveraging bipartisan support for a tough-on-China policy, and by tapping into the silent majority’s support for trade, Biden can lay out an international economic vision that is strategically and politically viable. He can make a case for a new kind of globalization, conceding that China’s admission to the WTO may have been a mistake, but explaining why globalization designed around allies will serve both American paychecks and national security.
If the president can pull this off, he will have achieved a remarkable trifecta: containing Russia, checking China and fashioning a fresh approach to global economic engagement. Each feat will reinforce the other two. It will be quite a legacy.
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