Last month, U.S. national security adviser Jake Sullivan gave a speech declaring that the “Washington consensus” in favor of neoliberal economic policies was officially dead. Previous U.S. administrations have extolled free trade, open capital flows and fiscal discipline as the answer to economic woes both at home and abroad. The administration of President Joe Biden disagrees. These policies, Sullivan argued, have proven unequal to tackling both the dislocation and inequality caused by globalization and the threat that U.S. policymakers see from a rising China. As a result, a new consensus, one much less rooted in neoliberalism, is needed to replace them.
Sullivan’s speech is the most sophisticated defense yet of the Biden administration’s approach to international economics, but the policies themselves are not new. Since its earliest days, the Biden administration has been skeptical of the benefits of globalization and focused on shaping the U.S. and global economies through targeted interventions. Their new approach can best be understood as consisting of three planks.
The first is to de-emphasize markets and free trade, while rehabilitating industrial policy and protectionism. As Biden’s top economic official Brian Deese explained last year, the administration is not willing to accept “that the individualized decisions of those looking only at their private bottom lines will put us behind in key sectors.” Instead, the administration will “engage in strategic investment in those areas that will form the backbone of our economy’s growth over the coming decades.” So far, the administration has used the power of the government to stimulate investment in three strategic sectors that it feels are not adequately served by private finance: infrastructure, semiconductors and green energy.
The second plank is an attempt to rewire global supply chains, based on a similar logic. Under the old Washington consensus, manufacturing was offshored to wherever it could be carried out most cheaply. But the Biden administration argues that market-driven supply chains lack resilience in the face of geopolitical shocks. It is therefore seeking to replace offshoring with “friendshoring”—a concentration of strategic supply chains in countries allied with Washington. “Ultimately,” Sullivan argued, “our goal is a strong, resilient, and leading-edge techno-industrial base that the United States and its like-minded partners, established and emerging economies alike, can invest in and rely upon together.”
The third plank of the new Washington consensus is economic warfare. The techno-industrial base that the U.S. wants to build is not blind as to ideology or geopolitics. The Biden administration, Sullivan said, wants to ensure “that next-generation technologies work for, not against, our democracies and our security.” In order to maintain its own military and technological edge, the U.S. is weaponizing the international economic system against autocratic countries like China to hobble their development. The administration has already imposed measures to limit China’s access to semiconductor technology, and it will soon roll out new rules limiting investment between the two countries.
As well as raising tensions with wealthy allies, the Biden administration’s new approach to trade policy risks appearing hypocritical and callous to less developed nations.
The administration views these new policies as necessary not only to manage China’s rise, but also to address inequality at home. When it entered office, the Biden administration promised a “foreign policy for the middle class.” It argues that the economic dislocations caused by globalization led many U.S. citizens to lose faith in the country’s democracy, fueling support for former President Donald Trump and other populist movements. Inserting the state more forcefully into the management of the economy, Biden administration officials argue, will help create new manufacturing jobs and make sure the benefits of economic growth are more widely shared, defusing the appeal of populism.
The administration’s new international economic policy is a bold departure from the old Washington consensus, which allowed far too many decisions to be made outside the realm of politics, determined solely by the market. But the Biden administration’s new vision has problems of its own.
Perhaps the most significant is geopolitical risk. The administration has been careful to claim that its actions are precisely targeted, rather than an attempt to wage broad economic warfare against China, but this may be a distinction without a difference in Beijing. Especially now that the administration has articulated the philosophy behind its vision—calling it a “new Washington consensus,” no less—China’s leaders have been served notice that additional measures targeting the Chinese economy may be announced at any time.
The new Washington consensus also has troubling implications for Washington’s relations with the rest of the world. Although Treasury Secretary Janet Yellen has said that the U.S. will coordinate its actions with its allies “when possible,” the new international economic policy that Sullivan formally articulated last month has been wholly “Made in America,” not through a process of allied consultation.
As well as raising tensions with wealthy allies, which now have to compete with the United States’ subsidized industries, the Biden administration’s trade policy risks appearing hypocritical and callous to less developed nations. For decades, Washington decried Beijing’s industrial subsidies and restrictions on foreign investment, while browbeating developing nations into liberalizing their own economies. But now that globalization no longer seems to serve U.S. strategic interests, policymakers in Washington have turned against it.
U.S. subsidies make it harder for less-wealthy nations to develop competitive industries of their own, while also forcing them to make a stark geopolitical choice. If the new techno-industrial base that the Biden administration wants to construct is only accessible to the U.S. and its allies, then membership in the U.S.-led alliance system will be a prerequisite of enjoying its benefits. But given the changeable nature of U.S. foreign policy, countries like India and Brazil may be unwilling to reorient their foreign and domestic economic policy around a promise from Washington that could be withdrawn after any given election.
It is also questionable whether the benefits of the new Washington consensus will live up to their hype. Economist Adam Posen has argued that given a domestic skills shortage and strong political opposition to increased immigration, the total number of workers employed in manufacturing is unlikely to increase, with existing workers simply moving between jobs instead. Nor are global supply chains based on security and political logic necessarily more resilient than those based on economic logic, for the simple reason that political and security calculations can change.
But perhaps the biggest drawback of the new consensus is what it leaves out. Offering access to the U.S. market is the primary carrot that U.S. policymakers have in their trade negotiations with other countries. Open trade has lifted hundreds of millions of people in the Global South out of poverty in recent decades. It’s also a key tool for strengthening partnerships that might help shape China’s economic and geopolitical behavior, as the Trans-Pacific Partnership, which the U.S. abandoned, was intended to do. The new Washington consensus, by contrast, seems instead to consist mostly of sticks.
It is also notably more pessimistic and zero-sum than the worldview it replaces, discarding the aspiration—however imperfectly realized—of globally inclusive growth with one of competing economic blocs. Whether the new policy is successful or not will depend a great deal on how it is implemented. And while the Biden administration claims to be careful about not taking economic coercion too far, its successors may not be. Either way, the global economy is in for a bumpy ride, and one from which the U.S. will not necessarily emerge richer and stronger.
Andrew Gawthorpe is an expert on U.S. foreign policy at Leiden University. He writes a newsletter called America Explained.