How America is reshaping the global economy

There has been an unprecedented revolution in America’s approach to international economics. As new thinking emerges, it is reshaping the global economy and the Western alliance.

approach was laid out most clearly in a speech By Jake Sullivan on Apr 27. The fact that Sullivan is National Security Advisor to President Joe Biden is a clue. Central to the new thinking is the strategic rivalry with China.

But Sullivan’s speech went beyond geopolitics. It was a highly ambitious attempt to pull together the Biden administration’s domestic and international goals — and weave them into a coherent whole. The US intends to use a new strategic industrial policy to combat climate change and establish a sustainable technological lead over China, as well as revitalize the American middle class and American democracy.

Many of America’s allies fear that what slipped off the table were foreign interests. They worry, in particular, that the hundreds of billions of dollars in subsidies for US industry and clean technology set out in the Inflation Reduction Act will come at the expense of producers and workers in Europe and Asia. Some also fear that the pressure to “risk-free” trade with China will seriously constrain international trade. And many are concerned that the US demand for reform of the World Trade Organization will paralyze the defenders of free trade.

US officials bristled at these suggestions – pointing to Sullivan’s repeated references to Western allies and the interests of the global South in his speech. He argues that the US is finally leading the fight against climate change – and should be welcomed around the world.

Sullivan is also at pains to emphasize that “de-risking” does not mean cutting China out of global supply chains. Speaking to me last week, he said: “We are trying to create a world in which there is more than one source for important products. , , We’re not saying that China shouldn’t make iPhones or produce solar panels, but that other countries should too.

Sullivan is keen to persuade America’s friends that this “New Washington Consensus” can work for everyone. He believes the US has made great progress at the recent G7 meeting in Hiroshima – arguing that the summit has achieved a “really important step forward”. In particular, he believes that America’s allies are now convinced of their plans to subsidize the green transition and have adopted a similar approach. The campaign for clean energy, he argues, “is going to be more a source of cooperation than friction going forward”.

There was clearly a significant convergence of language and approach at the G7 releases On issues ranging from de-risking to supply chain.

But, talking to US allies – both in the G7 and outside it – it is clear that there is still unease about US policy. A recurring concern is that the US will continue to take measures aimed at China that its “allies and partners” will come under immense pressure to adopt.

Lawrence Wong, Deputy Prime Minister of Singapore – America’s closest ally in Southeast Asia – warning most recently that: “If de-risking is taken too far . . . we will end up with a more fragmented and isolated world economy. In Europe, there is still concern that a The new global economic order will inevitably favor American producers and workers.

Different US allies are responding in different ways. There has always been a lobby within the European Union that supports the creation of European champions through industrial policy. That lobby has been fueled by America’s inclination towards industrial policy. Last December, the EU committed itself to “an ambitious European industrial policy” for a green and digital transformation.

But there are also Europeans who are concerned that if the EU goes down the subsidy route, it will undermine its own single market. The EU has far less financial firepower than the US government, so could be blown out of the water in the subsidy race.

US allies outside the European Union – such as Britain, Japan and Canada – have a different concern. He worries that those outside the two main blocs will be at a disadvantage if negotiations between the US and the EU become the main way of building consensus in the “Global West”. As one diplomat puts it, the EU and the US are “like two giant pandas”. They rarely have sex. But, if they do, it threatens to be an exclusive relationship (although, technically speaking, pandas are not monogamous).

In response to the PANDA problem, Canadians are investigating giving the G7 a formal role in proposing and framing new rules for the global economy.

The British are astonished by Sullivan’s talk of an “Innovative New International Economic Partnership”. On his visit to Washington this week, UK Prime Minister Rishi Sunak will explore areas where the UK could pursue that kind of partnership with the US – including the regulation of defense technology and artificial intelligence.

Hovering over all these economic discussions is a cloud of geopolitical fear. Russia is waging war on the borders of the European Union. The Japanese are afraid of China. All sides look to Uncle Sam for military protection. America’s allies still have their doubts about the Sullivan Doctrine. But this is not the time to argue with America.

gideon.rachman@ft.com