When the Rule-Maker Breaks the Rules

The United States frequently champions the “rules-based international order,” but what happens when leaders in Washington are themselves undermining some of the rules? 

Many U.S. allies and partners have asked this question in response to a series of U.S. economic actions, particularly the Inflation Reduction Act. In Washington last week, French President Emmanuel Macron called the Act “super aggressive” against European companies. More specifically, the European Union has criticised nine of its tax credits. South Korean officials have even labelled the legislation a “betrayal” (it doles out tax credits to U.S.-made vehicles and batteries). And the World Trade Organization’s Director General, Ngozi Okonjo-Iweala, warned “subsidies that are being given for the electric vehicles may be discriminatory.”

This is hard to square with the administration’s insistence on upholding the rules-based economic order. In her recent remarks at the Massachusetts Institute of Technology, U.S. Commerce Secretary Gina Raimondo blamed China for a series of unfair practices. Indeed, China is violating a host of economic rules and norms. The Chinese government engages in widespread intellectual property theft to benefit its own private companies and state-owned enterprises. Meanwhile, Beijing has provided massive subsidies to its domestic industries and barred many foreign companies from operating in China. The Communist Party also has lower labour, environmental, and other standards than many of its competitors.

Yet, for all the valid criticism of China’s economic behaviour, the Biden administration is itself pivoting to greater reliance on industrial policy via state subsidies. Ms Raimondo insists that “our economic competitiveness and national security depend on a bold domestic investment agenda in strategic and critical sectors.” The U.S. National Security Strategy asserts that “strategic public investment is the backbone of a strong industrial and innovation base in the 21st century global economy.” And President Joseph Biden himself recently promised that “instead of relying on chips made overseas in places like China, the supply chain for those chips will be here in America.”

The Biden administration will have to work harder to persuade U.S. allies and partners that selective decoupling is not simply another form of protectionism.

It is entirely logical for foreign countries to adopt their own industrial policies to compete with China. Ideally, this would be done through what Secretary of the Treasury Janet Yellen has called “friend-shoring” — strengthening economic ties with allies and partners to decrease over-reliance on unreliable governments. This is an appealing concept. But U.S. allies worry that some recent U.S. actions — like the Inflation Reduction Act — appear to prioritise re-shoring over friend-shoring. At times, Washington has even adopted policies that threaten to re-shore from friendly countries.

When allies have challenged American leaders on this principle, U.S. leaders have sometimes suggested that foreign leaders adopt their own industrial policies. Yet, this could start a vicious cycle. As Secretary General of the European External Action Service Stefano Sannino recently warned, it would not be rational to end up in “a situation where the United States is subsidising on one hand and the European Union is subsidising on the other hand.” This risks a race to the bottom, in which efforts to compete with China would undermine core principles of the global economic order.

The Biden administration often gets its rhetoric right. Secretary Yellen has argued that the U.S.’s industrial policies are “not an attempt to completely paralyse China’s economy and stop its development.” The National Security Strategy insists that “the United States must once again rally partners around rules for creating a level playing field that will enable American workers and businesses — and those of partners and allies around the world — to thrive.” But U.S. actions have undermined these messages. The Trump administration cited “national security” when placing tariffs on allies. The Biden administration is treading the same track, using national-security grounds to reject the World Trade Organization’s recent ruling that found such tariffs in violation of international trade rules and continuing to freeze the WTO’s dispute settlement mechanism. U.S. leaders have also been unwilling to embrace new trade agreements. 

The Biden administration will have to work harder to persuade U.S. allies and partners that selective decoupling is not simply another form of protectionism. Selective decoupling from China makes the most sense in those sectors that have obvious military applications. National Security Advisor Jake Sullivan has committed the U.S. to protecting “technology advantages” in three areas: computer-related technologies, biotechnologies and biomanufacturing, and clean energy technologies. Computing has clear military applications, but the links to the latter two are less obvious. 

The U.S. government is pursuing two main lines of effort: subsidies for industrial policy and encouraging diversification through selective decoupling. The former relies on positive incentives (at least for U.S. companies) and the latter on the threat of negative penalties. If coordinated with allies and partners, these two policies could reinforce one another and strengthen global economic rules. If conducted unilaterally, however, these two tools will be in tension. In this case, many U.S. allies and partners will continue to express frustration that the United States is violating some of the very economic rules that Washington helped to write in the first place.

In her recent speech, Secretary Raimondo promised “to re-shore or friend-shore core parts of our supply chains.” For many U.S. allies, the concern is that Washington’s policies may stimulate more re-shoring than “friend-shoring”. As for Southeast Asian countries who choose to be friends of both the U.S. and China, both “re-shoring” and “friend-shoring” may cut them off from critical supply chains and “shut off avenues for regional growth and cooperation”, as warned by Singapore Prime Minister Lee Hsien Loong. In the State of Southeast Asia Survey released early this year, the region put high hopes on the Biden administration to champion global free trade. As 2022 winds down, they might not be so sure anymore. 

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