ONSHORING, “FRIENDSHORING” AND THE BALANCING ACT OF “MADE IN AMERICA”

A sharp escalation in U.S.-China tensions – sparked by the balloon incident but dramatically intensified by U.S. warnings over the prospect of Beijing providing military aid to Moscow – represents a fresh challenge to official U.S. policy on China: “Invest, align, compete.”?

It is also the latest move away from open, rules-based economic integration, and toward trade policies that favor national security – which The Economist, under the banner “Zero Sum,” calls “the destructive new logic that threatens globalisation.”?

The Biden Administration’s CHIPS act – providing subsidies for the onshoring of semiconductor manufacturing – and President Biden himself, calling in his State of the Union address for infrastructure materials to be “made in America. Made in America. I mean it,” are part of the same dynamic.?

There is a fine balance that must be struck. National security implications are a critical component of global trade, and rebuilding U.S. semiconductor capabilities is a logical and necessary response to the fragility of global supply chains exposed by the coronavirus pandemic and other threats. But the dangers posed by going full-bore on onshoring or what is called ‘import substitution“? in emerging economies – an obsolete concept that has been proven time and time again to be flawed –? cannot be overstated.??

We have seen these dangers before. As my colleague Mark Kennedy and I wrote recently, in the aftermath of the First World War, the Treaty of Versailles brought on two decades of economic and political isolationism – and led the world directly into the Second World War. It was only after that vastly more destructive experience that the free world settled on the so-called “Washington Consensus” – a set of policy recommendations that, Kennedy wrote, “advocated for market-driven domestic economies and an openness to trade and investment.” It was this era of global engagement that established a global rules-based economic system, and that in turn led to unprecedented growth and prosperity for everyone including China.?

China’s continued rise has coincided with a backlash against global trade, as Kennedy describes at length in the Winter 2023 issue of The Wilson Quarterly. This backlash was driven largely by the misperception that globalization costs jobs and threatens prosperity. While there were certainly jobs lost due to global trade specialization (what economists call comparative advantage), American real incomes are 9% higher than they would otherwise have been as a result of trade liberalization efforts since the Second World War. ?

American disengagement from the global scene in the last decade has left a vacuum on the global stage that other nations, including allies and trading partners, have filled with their own regional trading alliances. These alliances further limit the positive impact of global trade.?

What is the alternative? In view of multiple, very real threats to national security, we cannot simply (or simplistically) embrace unrestricted trade with Beijing. But it would be equally mistaken to overcommit to economic nationalism and a 100% “tough on China” policy across the board. Truly global trade is an established path to prosperity. And China seeks global power but also economic growth – as it must, with its massive, aging population and a per capita GDP less than one-fifth of the US’s. The opportunity exists to confront China where we must, compete with it where competition makes sense, and engage with it when there is mutual benefit. By selectively participating in China’s economy, by seeking strategic investment opportunities in technology, infrastructure and the environment, and by reinvigorating global and regional institutions such as The World Bank, The Asia Development Bank and our own Development Finance Corporation (DFC) we have the best prospect of improving and strengthening?the international rules-based system. History tells us that a policy of pure confrontation can quickly spiral out of control, with potentially disastrous consequences. The Biden Administration’s “invest, align, compete” policy should continue to be our rule of engagement. ?