(Source: twitter.com/BrookingsInst/)
Moreover, Sullivan’s words imply that this revision is not to be cosmetic or superficial, but to concern the fundamental assumptions of the functioning of a global order — which, after all, the United States itself created after the end of World War II and then maintained for the following decades.
However, while Yellen’s aforementioned speech focused to a large extent on explaining the US position towards China and presenting the logic determining Washington’s behaviour towards Beijing in a strictly economic dimension, Sullivan wanted — as he himself stated — to show “a look at US economic policy from a broader perspective” and outline the changes the Biden administration believes need to be made both within itself and throughout the international economic system. That international economic order (“created by the United States after World War II,” in which the US “led a fractured world into a system that lifted hundreds of millions of people out of poverty … and allowed for great innovation and enabled America and many other nations to rise above to new heights of prosperity”) has begun to crumble in the last few decades. Changes in the global economy have led to impoverishment in the US; the financial crisis has “shaken the American middle class”; the pandemic has exposed the fragility of supply chains; the Russian invasion of Ukraine has highlighted the negative consequences of interdependence. The US industrial base has been drained as private capital moves abroad; with the emergence of the belief that “markets always allocate capital most efficiently”, trade liberalisation became an end in itself. The effect of this, in turn, was “relocation of the entire supply chain of critical technologies outside the US.” This shift was the result of a belief that “all economic growth is good” and a preference for the financial services sector at the expense of industry or investment in infrastructure. The assumption that economic integration will lead to political and ideological integration (and, of course, Sullivan did not use this word, co-optation) of countries such as China or Russia also turned out to be untrue.
In other words, the old order has become obsolete – and therefore, according to Sullivan, there is a need to develop a “new Washington consensus” – based on ideological foundations and assumptions fundamentally different from those that guided the original. Incidentally, the logic expounded by Sullivan is another example confirming the thesis already put forward by the author that at the moment the US itself is becoming – at least in terms of economic policy – a revisionist state, actively striving to change the basic rules of the game that have been in force in the international system since 1945 – and definitely in the aftermath of the dissolution of the USSR.
Announcing a retreat from the principles of neoliberalism (at least neoliberalism in the sense that President Biden’s advisor seems to adopt), Sullivan emphasises that it will be a return to the policies pursued by Barack Obama, whose efforts to take a “different approach … fighting climate change, investments in infrastructure, expansions of social institutions … have been blocked by Republican opposition.” These actions put Sullivan in opposition to Reagan’s “trickle down economics”, including decreasing taxes, cutting public spending or limiting the role of trade unions. It is difficult to avoid the conclusion that at least part of Sullivan’s speech was written for the purposes of current domestic politics in the US – that is, next year’s presidential election, in which Joe Biden will be running (incidentally, he announced his intention to seek re-election the day before Sullivan’s speech at Brookings).
First of all, Sullivan bluntly states that the means to the goal of restoring the ability “to build and deliver public goods such as physical and digital infrastructure”, to improve geopolitical resilience and to restore the American middle class, is the introduction of a new industrial policy. This, in turn, means a growing involvement and interference of the state in the economy on a scale unprecedented in the US for decades.
And when it comes to industrial policy, it’s impossible not to start (as Sullivan does) with microprocessors and substrates needed to manufacture electric batteries. The fact that the US microprocessor manufacturing industry is declining and concentrated in countries geographically distant from America creates “critical economic dangers and a threat to US national security” – as is the case with rare earth metals. Sullivan notes that the US currently produces 4% of the world’s lithium, 13% cobalt, and no graphite or nickel to meet current demand (we must point out that current demand has nothing to do with demand in a few years, unless, of course, there will be no abandonment or at least a significant reduction of ambitions related to the electrification of the economy). Moreover, Sullivan admits that 80% of critical minerals are “processed by one country: China.” This, in turn, poses a problem for the US, because “energy supply chains can become a leverage tool in the same way as oil in the 1970s or natural gas in Europe in 2022.”
However, Sullivan points out that the goal of US policy is “not autarchy” but the creation of “resilient and secure supply chains.” Therefore, rebuilding the production capacity of some technologies and critical substances “is the first step, but the efforts must extend” beyond the borders of the United States. That’s why, Sullivan argues, the US “want to be joined by their friends … because creating a secure and sustainable economy in the face of the current economic and geopolitical situation requires our allies and partners to give more.”
The problem is that, for the time being, revolutionary theory diverges from revolutionary practice. Restoration of the industrial base in the United States is taking place less at the expense of China and more at the expense of US allies. An example of this is the syphoning of investments from Europe to the United States, which has been taking place since the adoption of the Inflation Reduction Act by the United States, as a result of which a number of European companies have already transferred investments from Europe to the US (encouraged not only by subsidies offered by the federal government but also by delegations of individual US states making pilgrimages to Europe). This, of course, raises – openly expressed – ire of EU bureaucrats and European politicians, to which Washington reacts with innocent astonishment, promises to “look at” the reservations of Europeans – and that’s the end of the matter.
Another example of negative economic consequences is the US’s demand that allied countries stop supplying China with the technologies needed to produce microprocessors. This action has at least three negative consequences. The first, painful mainly for these US allies, is the inevitable decline in revenues; let us remember that for a number of companies from the microprocessor sector, the most important and the most lucrative market is the Chinese market (for several years now China has been paying more for microprocessors than for oil). The consequence of this policy is the limitation of funds that could be allocated to R&D. Moreover, in the context of losses incurred due to the reduction of presence on the Chinese market, the subsidies offered by the US CHIPS and Science Act may prove insufficient. Let’s remember that the CHIPS Act’s funding to expand its microprocessor manufacturing capacity is valued at $39 billion over five years. On the surface, these may seem like significant funds, but let’s remember that building a factory for advanced microprocessors costs $20-25 billion. Just one 2nm microprocessor factory to be built in Japan is expected to cost $37 billion; in turn, the industrial complex envisaged by Samsung, focused on the production of microprocessors, is set to cost $228 billion.
The third consequence will be that if the US fails to “suffocate” China’s microprocessor manufacturing sector, China will create a parallel system – even if it will be based not on the production of the most advanced integrated circuits, but on legacy ones. Then the US and its allies will have to compete with Chinese companies that are subsidised and therefore not guided by economic calculations.
It is all the more amusing that Sullivan, while emphasising the “allied dimension” of the new Washington Consensus, referred to Ursula von der Leyen and her words spoken during her recent visit to Washington, while omitting the voices of a number of European leaders – from Macron to Josep Borrell – criticising the consequences of US industrial policy industry. What is noteworthy – although it is also not a novelty, because this was the position previously taken by representatives of the Biden administration – Sullivan emphasised that the US does not intend to limit cooperation to “highly developed democracies”. Biden’s adviser mentioned India, Angola, Brazil or Indonesia – and these are also quite controversial examples, the telecommunications infrastructure in Indonesia having been “built” by Huawei, which is the company that was recently praised by Brazilian President Inácio “Lula” da Silva, adding that he hopes to deepen cooperation with China in the construction of telecommunications infrastructure.
At this point, Sullivan gets to what we consider the most important element of his speech, the crux of what the “new Washington Consensus” is supposed to be and how it differs from the “old” consensus. US strategy assumes “a departure from traditional trade agreements in favour of new forms of international partnership, responding to the challenges of our time.” Sullivan continues: “… the main element of the economic design of the 1990s was to reduce tariffs … but the vision of the 2020s and 2030s is different … The real question is how international trade fits into our international policy.” Seeing the problem through the narrow prism of tariff reduction is a mistake, according to Sullivan. It is worth noting that Sullivan makes it clear that how the US manages trade relations will be determined by US national security interests – and that in the relationship between trade and national security, the latter is paramount. Yes, it has always been so – after World War II, the United States, of course, did not open its market to European products, nor did it invest in rebuilding Europe from the devastation of war out of heart. The reconstruction of Europe and the mutual liberalisation of market access not only allowed the United States to make a relatively smooth transition from war production to peace production (providing markets for American industry) but also minimised the risk of radicalization of Western European societies. Eyre Crowe wrote in his memorandum that “nations have always valued the possibility of conducting unlimited trade on world markets. In proportion to England’s commitment to protection and free trade, she endears herself to other countries, or at least makes them less concerned about the dominance of her navy than would be the case if that control were exercised by a protectionist power.”
Now the US wants to “solve current problems: create resilient supply chains, mobilise private and public resources to create a just transition to green energy and sustainable economic growth, creating good jobs … ensuring the trust, security and openness of digital infrastructure … stopping the race to the bottom in taxation.” In addition, Sullivan mentions the Biden administration’s campaign for other countries to implement labour rights and labour standards. According to Sullivan, the means to achieving these goals and a new model of economic interactions between the US and other countries is to be the IPEF (Indo-Pacific Economic Framework) – 12 countries of East and Southeast Asia are involved here. The initiative aims to “accelerate the clean energy transition, introduce fair taxation, fight corruption and guarantee more secure supply chains for goods and critical materials.” Sullivan states that the goal of IPEF and similar initiatives (like the less-covered Americas Partnership for Economic Prosperity, which is the Caribbean and South American counterpart of IPEF) is to coordinate industrial policies and avoid unhealthy competition – and to achieve these goals, the traditional model , based on the conclusion of FTAs, is inadequate. “Trade policy must be fully integrated with US economic policy” at the national and international level.
The problem with IPEF – as Sullivan himself seems to notice – is that it has no means of dispute resolution and no arbitration bodies; and for good reason, since the agreement operates without congressional approval – and thus is susceptible to political change in the White House. Secondly, as Sullivan rightly pointed out, it is not a “classic” FTA – and thus does not offer facilitated access to the US market, eliminating the main element to encourage states to participate in it. In turn, the Biden administration’s focus on fair partnership, avoiding a “race to the bottom” in taxation and labour rights, will result in levelling out the comparative advantages of poorer countries over the United States. Therefore, it is not known exactly what these countries will gain from participating in the pact.
It is also worth noting that Sullivan says that the US is always ready to remain a member of the WTO and remains committed to its principles. However, there are “serious challenges, primarily non-market-based practices, that threaten” the WTO – and as such, the US “is working with many WTO members to reform the multilateral trading system so that it responds to workers’ needs, takes into account legitimate national interests and makes it possible to solve problems not yet covered by this organisation, such as sustainable development or the transition to renewable energy sources.” Thus, here too, Sullivan repeats the reservations voiced earlier by American officials as to the shape of the WTO regulations and the nature of this organisation, which, according to Americans, creates the need for reform. Recall the recent words of Katherine Tai, who stated – in response to the WTO’s unfavourable stance on the conflict over US tariffs on China, conditioned by Washington on national security interests – that this organisation “is walking on thin ice,” or the policy initiated by the Trump administration and maintained by the Biden White House of blocking the selection of new members to the WTO arbitration body, which in practice led to its paralysis.
Intriguingly, because it is really new, and meeting the reservations about the lack of benefits from accepting the new Washington Consensus, is the announcement of a “fourth step” in the new US strategy, namely “mobilising trillions of dollars of investment in the economies of developing countries through solutions created by these countries, but with capital mobilised by a new type of American diplomacy.” What exactly that means we don’t know, but Sullivan mentions the intention to bring about “changes in development banks and in the World Bank.” This, in turn, would result in “increased access to quality financing for low- and medium-developed countries”, allowing, for example, for the implementation of “significant investments in infrastructure.” According to Sullivan, one of the tools to mobilise capital is to be PGII (Partnership for Global Infrastructure and Investment), in practice a “repackaged” plan of the Biden administration Build Back Better World, i.e. the plan announced in June last year by the G7 countries to allocate $600 billion for investments, especially in developing countries. The PGII would consist of four pillars – investments in climate and energy security, in digital infrastructure, in health care systems and in gender equality; however, as noted by CSIS, it is unclear whether investments under the PGII would include “hard” infrastructure, just as it is unclear whether the private sector (and it is supposed to provide the majority of funds) will be ready to invest in developing countries in times of economic slowdown and their sovereign debt risk. So for now, this is more a vague announcement than a real plan to mobilise capital that could be an alternative to Chinese investments under the Belt and Road Initiative.
The final theme Sullivan touches upon is technology controls; according to President Biden’s national security adviser, the US intends to “enclose a small garden with a high fence.” This means that they intend to block access – primarily to China – to advanced technologies (as is currently the case with microprocessors), but they will be selectively selected so that they cannot be used in a way that would undermine the interests and national security of the United States. “This does not mean, however, that the US is striving for full decoupling and is not, as Beijing claims, a technological blockade (…) They focus on a small piece of technology and a small group of countries that can threaten us militarily. Thus, the US does not seek confrontation and conflict with the PRC. We want to manage the competition responsibly (…) but this requires a responsible approach on both sides and a degree of strategic maturity to keep lines of communication open.” Once again, the question is whether China will not recognise that however selective US policy may be, its goal is to contain and limit development opportunities anyway. Then CCP officials may conclude that strategic stability is not in their interest. It is also worth mentioning that Sullivan has hinted, albeit indirectly, that the White House is working on legislation to limit US investment in China, another suggestion of this kind coming from the lips of high-ranking representatives of the American administration.
The United States therefore intends to apply a policy of “diversification and risk minimisation” in trade relations with China, trying to avoid unilateral dependencies that the Middle Kingdom could use as a tool of pressure. When talking about derisking, Sullivan used the words of Ursula von der Leyen, who used this term to describe the EU’s philosophy in the context of economic cooperation with China. It was not the only time that Sullivan in his speech referred to the cooperation of the USA with the president of the European Commission – which is understandable, because von der Leyen seems to largely share the opinion of the Americans both on the intensification of transatlantic cooperation and risk management in relations with China.
To a large extent, then, Sullivan’s speech is nothing new; both in word and in deed, the United States had been following the political line outlined therein for some time. In a word – because we have already heard suggestions from American officials that the US is not interested in maintaining the existing model of economic relations with other countries based on the lifting of protectionist restrictions and free exchange of goods – the words of Sullivan himself from May 2022, when he first announced the creation of IPEF. At that time, it was said that the US is seeking to establish a new model of economic cooperation agreements, replacing the free trade agreements concluded by America so far. The intention of the US to pursue an industrial policy – although this term was avoided in official communication for a long time – was, in turn, implemented in practice by both Donald Trump and Joe Biden – because what is the CHIPS Act or the Inflation Reduction Act?
However, neither the words nor the actions of the American administration can be deduced how the Americans intend to successfully implement a policy that will allow them to rebuild their own industrial base, regain the advantage vis-à-vis China in new technologies, and finally secure the favour of the rest of the world and its readiness to participate in the “new Washington Consensus” – which is a sine qua non condition for achieving these goals. The promise of investing in developing countries is vaguely worded and does not provide, at least for now, a clear answer to the question of how the capital for these investments will be raised. Industrial policy (although the US certainly needs a new moonshot to gain a noticeable advantage over China in terms of new technologies) is unsatisfactory; here it is enough to mention once again the size of the investment under the entire CHIPS Act, which is the equivalent of a single fab built by a consortium of Japanese companies. The Inflation Reduction Act – the foundation of Biden’s industrial policy – for the time being serves as a tool to syphon investment out of Europe, which Washington treats like an ugly duckling unable to formulate effective policies to curb this phenomenon. At the same time, the United States expects the same countries to give up (or significantly reduce) their lucrative trade with China – without actually offering anything in return and not even trying to sweeten their potential loss of access to Chinese markets. An interesting statement was made by Sullivan during the closing question and answer session in Brookings. Asked about incentives for US allies that could induce them to accept a policy of limiting China’s access to key technologies – which will inevitably result in financial losses – Sullivan announced that this situation is analogous to NATO’s defence spending. “Sometimes you just have to pay the cost to keep yourself safe.” According to Sullivan, such dedication allows “any alliance to function effectively.”
This is the problem with the new consensus; The old one was accepted because the USA, apart from the ideological narrative, offered real benefits from participation in it – access to its own market, investments and security. What makes anyone believe that the new one will be just as effective?
Autor
Albert Świdziński
Director of Analysis at Strategy&Future.
Strategy&Future
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