The New Economic Security State By Henry Farrell and Abraham Newman

The New Economic Security State By Henry Farrell and Abraham Newman

In April 2023, U.S. National Security Adviser Jake Sullivan begged his listeners’ indulgence for straying out of his lane by delivering a major address about economics. But his actual argument—that decades of free-market zealotry had weakened the country’s national security—was anything but apologetic. “Ignoring economic dependencies that had built up over the decades of liberalization had become really perilous—from energy uncertainty in Europe to supply-chain vulnerabilities in medical equipment, semiconductors, and critical minerals,” Sullivan said. “These were the kinds of dependencies that could be exploited for economic or geopolitical leverage.” Sullivan acknowledged both the costs and the benefits of markets but emphasized how the economic liberalization pursued by past U.S. administrations had not created peace. Instead, a simplistic faith in the magic of markets had hollowed out U.S. industry, welcomed a rising adversary (China) into free-trade arrangements, and riddled global supply chains with critical security vulnerabilities.

In the past decade, economics and national security have collided, turning government inside out and upside down. The definition of security has expanded beyond matters related to warfare and terrorism, as previously disregarded economic and environmental problems such as food insecurity, energy shortages, inflation, and climate change have moved to the “very core” of the official U.S. National Security Strategy. Sullivan’s duties now involve the global marketplace as much as they do missile systems, and international economics officials such as U.S. Commerce Secretary Gina Raimondo and U.S. Trade Representative Katherine Tai spend more and more of their time thinking about national security questions. They have little choice. Officials cannot easily disentangle trade and commerce from security when U.S. markets are intertwined with those of adversaries, consumer electronics are readily weaponized, and beefed-up graphics chips are the engines of military artificial intelligence.

The “new Washington consensus” of U.S. President Joe Biden’s administration, as expounded by Sullivan, attempts to escape two very different traps. It breaks from the conventional approach of the post–Cold War era, when politicians and pundits prioritized markets over security, hoping that economic liberalism and interdependence would underpin peace. But it also avoids reviving the prior Cold War–era assumption that security trumped markets, when the denizens of Washington feared that trading with the Soviet Union was tantamount to giving succor to the enemy.

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The economies of the United States and China are inextricably entangled, however much economic nationalists in both countries resent that fact. There is no plausible way to completely unwind this interdependence or detach the civilian and military economies from each other without causing irreparable harm to American society. That is why U.S. officials have borrowed European Commission President Ursula von der Leyen’s language about “de-risking,” the process of managing the vulnerabilities generated by an interdependent world. They see their job as keeping as much of the global economy intact as possible and solving shared problems while defusing the most urgent security threats.

This enormous task does not fall into the domain of either traditional national security or free-market economics. It is an effort to maintain economic security, one that looks to prevent economic shocks that could destabilize society and hopes to limit the growing use of interdependence as a tool of coercion. Protecting economic security means keeping an eye on the trajectories of growth and innovation while managing anticipated security threats and creating enough policy bandwidth to tackle unanticipated ones. It cannot be reduced to either missile systems or market regulations, and it involves messy tradeoffs and decisions over which economic restrictions will defuse threats without undermining growth and which measures might help tackle shared global problems, such as climate change, without substantially damaging American security and prosperity.

Security and economics have had separate policy lanes until the recent past, which is why the work that Sullivan, Raimondo, and Tai are doing has become so complicated. The United States is still tied to the legacy of the Cold War, when policymakers tended to think that security trumped economics, and to the legacy of the era of globalization that followed, during which they mostly assumed that economics trumped security. But the two eras have had an asymmetric effect on the present: although Washington bulked up its security muscles during the Cold War, its economic brain actively shrank during the giddy excesses of globalization, when everyone believed that markets knew best and that government should steer clear of trying to direct the economy. That dynamic makes it more likely that Cold War reflexes could hijack the new economic security agenda, pushing the country down a risky path of tit-for-tat escalation between the major powers.

To address the new problems of economic security and avoid a downward spiral that could threaten the global economy, U.S. officials must reckon with a major task: nothing less than a transformation of the U.S. government. The past offers the wrong guidance, and the current predicament calls for an exacting reassessment. Several U.S. allies, notably Japan and the European Union, have retained greater control over markets in the interest of economic security; the United States can learn from them. Only a considerably reformed economic security state will be suited to a world that is both highly interdependent and filled with security risks.

THE VISIBLE HAND
Over the last two years, the Biden administration has regularly turned to Cold War laws and institutions to strengthen the country’s economic security. When Biden declared limits on U.S. investments in China in August, he invoked emergency powers legislation from the 1970s. When he wanted U.S. industries to produce critical minerals for the transition to a post-carbon economy in 2022, he used the 1950 Defense Production Act. Washington’s new measures to deny Beijing access to the semiconductors it needs for military artificial intelligence were empowered and justified by the Trump administration’s reform of export control regulations. But that system of export controls itself dates back at least as far as the 1949 Export Control Act.

All these tools were crafted in simpler times, when the U.S. government was more powerful and when it subordinated markets to the needs of national security. During the Cold War, the government intervened directly in large parts of the economy, cutting off nearly all trade with the Soviet Union for extended periods. It saw itself as engaged in an existential conflict with an adversary committed to an alien way of organizing the economy and society and thus developed policy instruments to ensure that its own economy supported military power and limited interdependence with its enemy to a bare minimum.

Security and economics can no longer have separate policy lanes.
The Defense Production Act was originally one element of a vast military bureaucracy that was empowered to plan the security economy by allocating resources, controlling wages and prices, and even, in principle, seizing private property. Export controls were a linchpin of the Cold War economy. The U.S. diplomat and foreign policy thinker George Kennan had warned in his famous 1947 essay in these pages, written under the pseudonym “X,” that the Soviet Union saw trade as an economic weapon. As the scholar Bruce Jentleson has documented, U.S. policymakers listened, using export controls to minimize economic relations between the United States and the Soviet Union for decades. The export control regime was unimaginably strict by today’s standards, affecting the United States’ economic relations with its allies, too. The historians Mario Daniels and John Krige have found that by the mid-1980s, 40 percent of U.S. exports required government approval, and 90 percent of licenses were granted for trade with other “free countries.”

Defense production planning and Cold War export controls were wide ranging, but their aim was simple: to support U.S. military production and strangle the Soviet economy.

The United States routinely worried that its allies might become economically dependent on its adversary and did what it could to prevent such ties from forming. When European countries and the Soviet Union built a joint gas pipeline in the 1980s, the Reagan administration retaliated with sanctions and even threatened the Europeans with the withdrawal of the U.S. security guarantee.

REIGN OF THE MARKET
By the time the Cold War ended, Washington had already, under the administrations of Presidents Jimmy Carter and Ronald Reagan, moved away from economic interventionism. The collapse of the Soviet Union seemed like an unqualified victory for market openness over state planning. The original “Washington consensus” recommended that the state retreat from direct involvement in the economy and embrace the free movement of capital. Multilateral institutions, such as the International Monetary Fund, demanded radical economic changes in return for aid. Great-power competition seemed a relic of antiquity, and expanding interdependence the wellspring of a better world to come.

The result was that the United States didn’t simply stand by as globalization took hold. It vigorously encouraged it, betting that markets would not just increase prosperity but underpin security, too. A complex and interdependent global economy would mean that war—with all its economic disruptions—would be increasingly unthinkable, and warmongering dictatorships might become more liberal and peace loving as their economies became more free.

The gamble had sharp limits. The United States, after all, never abandoned its goal of military supremacy. But the belief that interdependence depressed the likelihood of conflict allowed U.S. officials to be initially sanguine about the vast increase in global trade, financial flows, and the complexity of supply chains. In their view, the widening and deepening of commercial ties would make the world safer, not more dangerous. Policymakers in the West broadly assumed that economic activities were best handled by private enterprise. Washington liberalized critical infrastructure, and the government looked on with indifference as U.S. telecommunications manufacturers, such as Lucent, were bought out by foreign firms or went under. The Department of Commerce subcontracted the key aspects of Internet regulation to the Internet Corporation for Assigned Names and Numbers, a nonprofit incorporated under California law. Governments across the globe increasingly outsourced core national security missions, such as those to do with space flight and satellite technology, to private companies, in the belief that businesses could do such work cheaper and better than could the state.

Biden speaking at a factory in Auburn, Maine, July 2023
Jonathan Ernst / Reuters
They weren’t completely wrong. Markets can indeed do some things better than states. But as Adam Smith, the founder of modern economics, observed in The Wealth of Nations, it was “the first duty of the sovereign” to protect “the society from the violence and invasion of other independent societies”; such responsibilities could not just be ceded to the marketplace. Businesses want to maximize profits, not provide loosely defined public goods for the citizens of a particular country.

Over the last few years, the consequences of these decisions have been clear for all to see. The COVID-19 pandemic illustrated how many businesses had failed to become resilient, sending shock waves through global supply chains. Russia took advantage of decades of somnolence in Europe to try to exploit its neighbors’ reliance on Russian gas after the invasion of Ukraine. But Russia also discovered that it, too, was vulnerable: in a matter of days, the United States and European countries cut off access to Russian central bank reserves held abroad.

Markets can provide great flexibility and adapt to shocks over time, but they no longer offer a general alternative to geopolitics as they seemed to in the wake of the Cold War. Indeed, great-power strategy and markets are thoroughly entangled. The United States and China are trapped in a feedback loop of action, counteraction, and hostile suspicion, but their markets are heavily enmeshed. And great-power competition and interdependence are combining to generate new problems. Companies such as the Chinese telecommunications giant Huawei could create a global telecommunications infrastructure with Chinese characteristics. The United States and Europe could do to China’s central bank reserves what they did to Russia’s. If China embargoed or attacked Taiwan, disrupting the operations of Taiwan Semiconductor Manufacturing Company, the world’s largest producer of semiconductors, the results would affect the entire world economy. Information networks, financial flows, and supply chains fueled explosive economic growth, but they also created new geopolitical vulnerabilities. The United States now has to manage its economic security in a highly interdependent and highly competitive world, where countries are inevitably tempted to exploit the weaknesses of others.

BRAWN OVER BRAIN
Even as the global economy became vastly more complex and more dangerous, the United States’ capacity to understand and manage it eroded. The Cold War version of the U.S. state sought to limit economic exchange with adversaries, and then the globalization-focused version sought to promote it. Now, policymakers have to grapple with interdependence, a vastly more complex task than that faced by U.S. officials in the past.

In the wake of the Cold War, manufacturing logistics were the domain of private industry, not government. Today, official Washington still has little understanding of global supply chains, even though they are critically important to economic security. The U.S. government has conducted reviews of supply chains across four areas it deems critical and has mandated that government departments review risks to relevant supply chains; yet it must rely on incomplete commercial databases and imperfect and nonstandardized information disclosed with great reluctance by private firms. Often, businesses themselves have a limited understanding of their own supply chain vulnerabilities. Even if they know what their suppliers are doing, they do not always have a clear view into the roles of their suppliers’ suppliers.

The United States’ capacity to understand the global economy has eroded.
Furthermore, as the United States seeks to limit China’s ambitions, it has to take complex and uncertain technological risks. The United States has adopted a “small yard, high fence” approach to technology control, with strong measures taken to restrict a limited set of products and techniques. Doing that well, however, requires a degree of surgical precision that would be hard to achieve even with a detailed understanding of the global economy and the likely future paths of innovation. It requires a deep understanding of the sectors involved. But the U.S. government does not have the institutions and structures in place to arrive at such an understanding, which would require gathering extensive market information, making it useful across siloed bureaucracies, and applying it to questions of national security.

Export control legislation passed by the U.S. Congress in 2018 mandated future presidential administrations to focus restrictions on “emerging and foundational technologies” without specifying any particular ones. The Commerce Department’s Bureau of Industry and Security is seeing substantial budget increases, but it still needs far greater scientific and decision-making resources to implement export controls effectively. Without these resources, it is hard to make more than educated guesses about the future direction of innovation and where chokepoints in the global economy might emerge. Perhaps it makes sense for Washington to hold back China’s ambitions for military artificial intelligence through export controls on specialized semiconductors. But it is also possible that doing so may spark successful indigenous investment in China, allowing Beijing not just to evade Washington but to outrun it.

The United States cannot assume that it is still the global technology leader across the board. In some areas, such as the development of batteries and photovoltaics that are essential for the green economy, China is clearly ahead. That fact leads to difficult decisions. The United States might be tempted to steal a page from China’s playbook and encourage inward investment by Chinese battery technology companies, so that it can learn from and emulate its rival. But such a move might just create new vulnerabilities and dependencies. China could deny the United States access to these technologies, which could pose a major headache.

Such dilemmas require both the application of policy muscle and, crucially, the intelligence to plan for unexpected consequences. Without such preparation, the risk is not just that the United States will make mistakes but that its preponderance of enforcement muscle may overwhelm its capacity to make intelligent decisions. When policymakers need to solve a problem, they usually build on whatever tools they have readily available, creating a feedback loop that short-circuits consideration of whether it might be better to start afresh. The result could then be that as the U.S. security state leans into economics, it overemphasizes those tools of coercion aimed at limiting interactions rather than those aimed at maintaining a healthy economic exchange. And if China and other adversaries respond similarly, as is likely, a mix of miscalculations and overreactions could dangerously imperil the global economy.

HAMMER, MEET NAIL
To understand the risk, consider the recent history of U.S. sanctions, which emerged as a favorite tool during Washington’s so-called war on terror. After the 9/11 attacks in 2001, the United States moved to take advantage of the many flaws and vulnerabilities in the global economy to promote its own security. The U.S. government compelled SWIFT, the financial messaging service, to provide it with data on its enemies and gradually deployed dollar power to cut Iran out of the global financial system. As under the Biden administration, these measures depended on old emergency powers and World War II– and Cold War–era institutions, such as the Treasury’s Office of Foreign Assets Control, which became the heart of U.S. sanctions policy.

These innovations led to some striking early successes, such as bringing Iran to the negotiating table over its nuclear weapons, but at the cost of a deeply worrying long-term dynamic. U.S. achievements were not the result of comprehensive planning but of continual improvisation, as underresourced policymakers adapted existing tools and institutions in a hurry, responding to urgent security needs. Sanctions, in particular, became a go-to solution, paving the way for what might be termed a “sanctions industrial complex” that advocates for ever more sanctions, with the benefit of little strategic thinking.

Some officials, such as Jack Lew, who served as treasury secretary during the Obama administration, worried that the overuse of sanctions might lead to the gradual undermining of U.S. financial power by encouraging countries to work around the U.S. dollar–dominated financial system. But sanctions have just kept expanding and have increasingly become Washington’s security tool of first resort.

Republican members of Congress are already sponsoring legislation to take authority over export controls away from the Department of Commerce and give it instead to the Department of Defense. The risk is that this shift will systematically skew decisions about economic security so that they overemphasize traditional security concerns, which focus on strangling adversaries, and undervalue the more novel aspects of security, such as building up the shared ability among the United States and its allies to coordinate innovative policy. If brawn overwhelms brain on sanctions and export controls, Washington could lose sight of the contributions that innovation, growth, and greater economic opportunity make to securing the United States.

LEARNING FROM OTHERS
Avoiding this scenario will require the U.S. government to create the institutions and capacities necessary for intelligent economic security policy. Luckily, it does not have to do this from scratch and can learn from both the solutions and the difficulties of its closest allies, countries that confront similar questions and have sometimes moved more rapidly to adapt to the new needs of a changing world.

It is no surprise, for example, that Japan has been quick to reorganize its state apparatus in recent years. Despite formidable U.S. pressure to liberalize in the 1980s and 1990s, the Japanese government never fully retreated from maintaining a strong role in economic planning. That helped Japan adapt to Chinese coercion in 2010, when a maritime dispute escalated into a possible crisis as China threatened Japan’s access to rare-earth minerals. The country’s high-tech sector relied on Chinese sources for over 90 percent of its supply, so the government pivoted to domestic seabed extraction as well as trade agreements with alternative suppliers. In just a decade, Japan was able to reduce its rare-earths dependency on China to under 60 percent, offering an example of how diversification can bolster economic security.

As the questions of economic security have grown more acute, Japan has also reshaped its bureaucracy. It appointed its first economic security minister to the cabinet in 2021 and followed up with a new national security strategy in 2022 that made “promoting economic security” a core objective. At the same time, the government passed new legislation, the Economic Security Promotion Act, which gives the administration the legal authority to coordinate an all-of-government effort, backed by a budget of roughly $7 billion, aimed at minimizing supply chain dependencies and promoting innovation in critical sectors. Crucially, the government is interested not just in safeguarding Japan’s security but also in generating economic growth. Because it has dedicated economic security institutions, Japan finds it easier than the United States, which also has passed large subsidy programs, to coordinate its actions to match both domestic economic goals and international security imperatives.

The Japanese government has also looked to protect its economy through global cooperation. At the G-7 summit in Hiroshima in 2023, the group agreed to “work together to ensure that attempts to weaponize economic dependencies by forcing G-7 members and our partners including small economies to comply and conform will fail and face consequences.” Japan, then, played a key role in getting several of the largest economies of the world to start thinking collectively. This, in turn, will help anchor the new U.S.–Japanese–South Korean initiatives that seek to coordinate technology policy in pushing back against China.

Responding to the coming challenges, however, will involve more than reorganizing bureaucracies. The United States needs to build a comprehensive economic security strategy. Sullivan’s speech rightly noted the ways in which economic interdependence has created new security vulnerabilities; he urged building greater resilience to address these weaknesses. U.S. officials, however, have said little about how they plan to do so.

The port of Keelung, Taiwan, February 2023
I-Hwa Cheng / Reuters
Here, U.S. policymakers can learn from the experience of the European Union, whose strengths and weaknesses are nearly opposite to those of the United States. The EU fell harder for free-market doctrine than even the United States did. It had little choice: its founding treaties were built around freedom of movement for goods, services, money, and people; they had little to say about security. Jealous member states prevented the EU’s precursor, the European Economic Community, from building any real national security muscle during the Cold War. Europe invested instead in those areas in which it had authority, creating a powerful economic bureaucracy responsible for its internal market and trade relations.

This combination of strengths and weaknesses led Europe to develop its own approach to economic security. Rather than leaning on Cold War defense authorities that it does not have, the EU has repeatedly repurposed market-building regulations toward new goals. In response to U.S. President Donald Trump’s misuse of sanctions, the COVID-19 shock, and China’s 2022 freezing of trade relations with Lithuania to punish the Baltic country for allowing the opening of a de facto Taiwanese embassy, European officials are turning the machinery of the single market to protect the EU. To map its vulnerabilities, the EU is developing an assessment tool to identify whether particular trade links carry high, medium, or low risks. That will enable the EU to pursue its policy of de-risking by fostering continued trade and exchange in low-risk areas and considering how best to protect itself when it comes to higher-risk ones.

Simply mapping out potential threats in this way makes it less likely that policymakers will slip into a spiral of decoupling, disrupting the world economy by recklessly severing ties with adversaries and rivals. Crucially, this approach assesses not just the risks generated by dependencies but also the risks generated by policy responses. That does not mean the EU will inevitably produce smarter policy; because the EU has little traditional security experience, it may underestimate some risks that straddle the military-economic divide, such as China’s civil-military fusion whereby the Chinese government seeks to unite the research capabilities and resources of its civilian scientific and commercial sectors with its military and defense industrial sectors.

The EU has also responded to mounting economic security threats through new legislation that will allow it to use its common trade policy to punish states that attempt to coerce it. It is also considering strengthening its so-called blocking rules, which would forbid European firms from complying with foreign sanctions to better dissuade hostile actions by others. Again, for better and for worse, the EU is more hesitant to use direct coercion than is the United States. EU officials told us that they hope they will not have to deploy these instruments and that the mere fact of their existence might be a sufficient deterrent. That is likely too optimistic, as deterrents are credible only when others believe that they will be used. The EU will almost certainly have to develop and use more coercion, perhaps changing the EU’s governing treaties to prevent rogue members such as Hungary from vetoing collective sanctions.

All this fits into the EU’s preference for de-risking (managing the risks of continued interdependence) over decoupling (detaching economies from one another as in the Cold War). Similarly, the EU’s new Economic Security Strategy, released in June, does not start from the sorts of traditional national security concerns that have motivated the United States. Instead, the EU strategy emphasizes that societies must prepare for economic shocks in addition to external attempts to exert influence on European economies and curtail the EU’s autonomy. Europe may still use tools such as sanctions and export controls to protect itself, but the emerging strategy could quite as easily direct the EU toward diversification through new trade agreements or subsidies for critical sectors. Like Japan, the EU seeks to reconcile the imperatives of growth and innovation with the needs of security.

REINVENTION, NOT REFORM
Drawing a detailed blueprint for the U.S. economic security state will require a lengthy and difficult debate. Still, Sullivan, Raimondo, and Tai—and those who succeed them—should address three priorities in particular.

Most obviously, the United States needs to set out its own comprehensive economic security strategy. Turning de-risking from a catch phrase to a coherent approach will require a lot of work—work that should be guided by a formal policy document that will send an important signal to the government agencies that will fulfill its mission as well as to the broader public. Different parts of the U.S. government have begun to examine specific policy tools, such as sanctions, even if these investigations have not gone nearly as far as some would like. Integrating these separate elements into a coherent policy will require an all-of-government approach as well as input from concerned parties, including both industry and civil society.

Making changes to carry out that strategy risks creating a bureaucratic morass, as happened when the Department of Homeland Security was created in the wake of the 9/11 attacks. Washington will need to get better at collective intelligence and decision-making, shifting authority around appropriately: to this end, the government should consider creating an economic security intelligence apparatus on a par with other intelligence arms of the U.S. government but with a very different mission. At a minimum, the United States needs to properly resource the sorely understaffed Office of Science and Technology Policy, which provides the executive branch with scientific advice, and revive the badly missed Office of Technology Assessment, which did the same for Congress.

Experts on bureaucracy, such as Jennifer Pahlka, have documented how rules and culture undermine the flexibility of the federal government, and senior officials lament how incredibly complex and time-consuming it is even to solicit advice from outside government. These are general problems, but once the government establishes what works and what does not and begins to intervene regularly in the economy, they have urgent consequences. New government powers would also produce new risks to civil liberties. The federal government may struggle to rein in abuses if it builds up its capacities for economic intelligence. A rogue president such as Trump could deploy detailed maps of the economy to help friends and hurt enemies.

To get economic security right, the U.S. government must reinvent itself.
The government also needs to draw on new ideas and new sources of expertise, as do the universities and think tanks that supply Washington with talent. That means hiring fewer economists and political scientists and more people who understand logistics, cybernetics, and material sciences. At a bare minimum, the United States needs to attract more people into government with a deep understanding of supply chains and global finance. In addition to bolstering the parts of the government that already have such experience and talent, such as the Treasury Department, this effort might involve new institutions along the lines of the U.S. Digital Service, which has attracted people from the information technology industry into government, to provide expertise across the different areas of economic security.

Finally, the U.S. government should consider creating an Economic Security Council to mediate between the National Security Council and the National Economic Council while drawing on and building up sources of expertise within the government, including the National Laboratories and the International Trade Commission. That might, in turn, support some more formal apparatus of coordination among policy principals in the various parts of the federal government that touch on economic security. Rather than creating another bureaucratic monstrosity, this should be as small and agile as the National Security Council was originally supposed to be, providing a switchboard to help connect the parts of the government that have an economic security mandate. Alternatively, some members of the National Security Council and the National Economic Council could wear two hats, informally integrating economic and national security discussions.

Such suggestions are only a starting point for debate, but that debate must start now. The Biden administration rightly wants to avoid a world in which the United States and China get drawn into a dangerous process of decoupling. The risk is that existing U.S. institutions may pull the country relentlessly in the direction that it wants to avoid. To get economic security right in a highly interdependent world marked by serious great-power competition, the U.S. government must reinvent itself.

The New Economic Security State By Henry Farrell and Abraham Newman

Source: https://www.foreignaffairs.com/united-states/economic-security-state-farrell-newman

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