Paradigm shift: The end of the Washington Consensus and the future of Australian economic statecraft

Foreword

The United States Studies Centre is pleased to publish this seminal assessment of the changing economic security landscape in both the United States and the world, as well as the implications for Australia’s own statecraft.

The Centre has made economic security a centrepiece of our work as this global transition has evolved, leveraging expertise and insights from the United States, Japan, South Korea and other like-minded allies and partners, and convening senior government officials and private sector experts. Since joining the Centre in 2023, Dr John Kunkel has been a leader in this effort, working with the Economic Security team to deliver major conferences and roundtables on the rules of the new order, the implications of artificial intelligence, the energy transition, and critical mineral supply chains. This report draws from those exchanges in addition to extensive consultations in Canberra, Tokyo and Washington. And, of course, it benefits from John’s own doctoral training in economics and extensive experience working in both industry and government.

The report provides a clear account of how the consensus behind the international rules-based economic order unravelled and highlights the best practices in economic security being pioneered by Japan and other governments. Tempered by the recognition that we do not yet know what is fully gone, what can be rebuilt, and where we must innovate — the report nevertheless offers an international context for assessing Australia’s own efforts at economic security with the Future Made in Australia industrial policy. The conclusions are a reminder that Australia cannot design these policies in a vacuum and would do well to align closely with Japan and other like-minded nations while keeping an eye on the opportunities to play a role in America’s unfolding debates on trade, secure supply chains and technology policy — which will ultimately be most consequential in defining the new tools and rules as geopolitical competition with China remains intense.

We hope that readers in all sectors benefit from the historical, economic and policy analysis in these pages. And we encourage you to continue following the economic security work at the Centre going forward.

This report was made possible through a generous grant provided by the Centre’s previous Chairman of the Board and current distinguished fellow, Mark Baillie. The Centre is grateful to Mark for his leadership and support for over a decade.

Dr Michael J. Green
Chief Executive Officer

Executive summary

The global economic order is in flux. Globalisation is not over, but it is fragmenting. Trade restrictions and industrial subsidies have surged, and the use of other tools of economic statecraft — including sanctions, export controls and investment restrictions — has never been higher. Governments are turning increasingly towards defensive measures and ‘economic security’ strategies to defend national interests.

At the heart of this Great Unravelling is the demise of roughly eight decades of US economic grand strategy. The nation that led the creation of a liberal economic order following the Second World War, with added ambition at the end of the Cold War, now views that order as a weaponised instrument of unfairness that has weakened the United States. The once-ascendant ‘Washington Consensus’ — a set of policy principles geared to fostering economic interdependence between nations through greater reliance on open trade, capital and technology flows — is in eclipse in its eponymous home.

The once-ascendant ‘Washington Consensus’ — a set of policy principles geared to fostering economic interdependence between nations through greater reliance on open trade, capital and technology flows — is in eclipse in its eponymous home.

A combination of external and internal forces shattered the political foundations of the old Washington Consensus in the early 21st Century, leading to a crisis in the American trade policy regime. In understanding this crisis, this paper directs attention to the intersection of a prolonged period of sluggish growth in living standards at the bottom and middle of the American income distribution and the concentrated hollowing out of US manufacturing jobs from the so-called ‘China shock’. The political pressures unleashed gained added potency in the wake of the global financial crisis (GFC) and the subsequent Great Recession, opening the door to Donald Trump’s assault on trade and globalisation at the 2016 US presidential election.

The challenge presented by a more powerful and ambitious China provided the coup de grâce to the old Washington Consensus in the second decade of the 21st Century. China’s rise to manufacturing dominance in key sectors and technologies and its more assertive grand strategy under Xi Jinping have prompted a profound rethink in Washington about the economic underpinnings of US power. A solid bipartisan consensus now sees globalisation and China’s unwillingness to ‘play by the rules’ of the postwar order as hollowing out US manufacturing, in the process destroying the livelihoods of millions of workers.

President Trump’s America First trade agenda broke with the established order. The first Trump administration embraced tariffs to a degree not seen since the 1930s. In 2018, President Trump launched a series of trade actions that ratcheted up tariffs on China and on select products from other trading partners, including US allies. Under the Trump administration, strategic competition with China moved to the centre of US national security policy, albeit conditioned by the president’s idiosyncratic approach to international diplomacy.

Following the 2020 election, Joe Biden’s expansive view of government cemented a new paradigm of state power grounded in rejection of liberal economic orthodoxies, acute aversion to market-opening trade agreements and strategic rivalry with China. The Biden administration left most Trump tariffs in place and deployed further targeted tariffs on China. ‘Bidenomics’ also saw the revival of a US tradition of active industrial policy via three major pieces of legislation — the Infrastructure Investment and Jobs Act, the CHIPS and Science Act and the Inflation Reduction Act. A comprehensive regime of export controls designed to deny the United States’ primary strategic rival access to advanced technologies would form a signature element of the Biden administration’s China policy.

President Trump’s return to the White House and his 2025 trade war have sanctified the overthrow of the old economic order. Politicians on both the left and the right in Washington, as well as thinkers and activists across the US political spectrum, have repudiated the ‘neoliberal’ project of the past half century in favour of a more state-directed, nationalist and security-oriented approach to economic policy. A shifting and indeterminate combination of tariffs, industrial interventions, investment screening, export controls and sanctions now forms the economic toolkit of the new Washington Consensus.

The Great Unravelling is not simply Made in America. China’s rapid emergence as the world’s major manufacturing power and its mercantilist model of state capitalism fractured old power structures and core assumptions of the post-Cold War economic order. The China challenge, in all its dimensions, is a key reason why governments across the Global West and the Global South have reshaped economic policies in recent years through a lens of resilience and security.

The rise of the “economic security state” has seen governments deploy new strategies and tools aimed at protecting domestic industries and technologies, boosting growth and competitiveness, accelerating the green energy transition, and defending national sovereignty and security in the face of heightened geopolitical threats. The quest for greater security and resilience through increased government intervention and guidance of the economy will remain deeply contested policy terrain, including in the United States. There will be no return to the status quo ante, but nor is there firm ground on which to plant a new economic paradigm as financial market volatility, court challenges and declining popularity of President Trump’s economic agenda after less than a year in office all attest.

The quest for greater security and resilience through increased government intervention and guidance of the economy will remain deeply contested policy terrain, including in the United States.

This new era of economic statecraft presents profound policy challenges for Australia, a mid-sized open economy with the United States as its cornerstone security ally and China as its largest trading partner. The Australian Government’s main policy initiative aimed at navigating geopolitical upheaval and economic fragmentation is the Future Made in Australia (FMIA) agenda. The two main goals of FMIA are to help Australia succeed in the global net zero economy and to reinforce national security and economic resilience amid increasing geopolitical disorder and economic uncertainty.

This paper argues that FMIA suffers from political overreach and an unbalanced emphasis on the green transition relative to core strategic challenges and interests. It recommends that future investments be guided by risk-based assessments of major economic security vulnerabilities and opportunities for Australian strategic advantage.

The Australian Government should enshrine ‘strategic indispensability’ as a core guiding principle for FMIA investments, taking a cue from Japan’s economic security strategy. Based on both strategic and economic grounds, Australia has a unique opportunity to make critical minerals and rare earths the fulcrum of a new era of successful industry policy that aligns national security and economic security interests.

A refashioned Future Made in Australia strategy will require Canberra to build enhanced analytical capability and policy muscle. To this end, the Australian Government should establish a new National Economic Security Agency (NESA) within Treasury to assess major economic security risks and to advise government on measures to mitigate such risks and to build critical national capability.

Building on existing agreements, the Department of Foreign Affairs and Trade, in coordination with NESA, should be charged with negotiating a new network of Economic Security Partnerships (ESPs). These partnerships would aim to strengthen key strategic and economic relationships, coordinate economic resilience initiatives among like-minded countries and unlock opportunities for Australian industry as global value chains are reset in coming years.

An Australia-Japan Economic Security Partnership would be the natural starting point of this initiative, given the close alignment of strategic and economic interests. The Australian Government should, at the right time, look to upgrade the Strategic Commercial Dialogue with the United States to put economic security discussions on a parallel footing with those on national defence and foreign policy.

1. Introduction

The global economic order is in flux. An era of deepening economic integration has given way to one marked by geopolitical upheaval, intensified great-power competition, resurgent economic nationalism and a diminished role for multilateral institutions, rules and norms. Globalisation is not over, but it is fragmenting.

The Trump trade wars that have lifted US tariffs to their highest levels in a century are one manifestation of a more fractured, contested and volatile global environment. China’s outsized manufacturing trade surplus and state subsidies are another, as the world’s second-largest economy looks to cement market dominance and self-sufficiency in key sectors and technologies. Other countries and regional groupings are turning increasingly towards defensive measures and active ‘economic security’ strategies to protect domestic industries and to secure geopolitical and economic interests. Bouts of economic warfare now characterise a new era of weaponised interdependence in the global economy.¹

This transformed global economic environment is roughly a generation in the making. The period since the 2007-08 global financial crisis (GFC) has seen a levelling-off of international flows of goods and capital and a surge in trade restrictions in the past few years (Figure 1.1).² Resort to active industrial policies, with targeted support for domestic sectors and firms, has grown markedly.³ The use of other tools of economic statecraft — including sanctions, export controls and investment restrictions — has never been higher.⁴

The sources of this Great Unravelling are deep-seated, complex and over-determined. The list of variables with some claim to explanatory power includes large and persistent macroeconomic imbalances, financial shocks, sluggish economic growth, disruptive technological change, rapid migration flows, discontent with the unequal benefits of globalisation, US foreign policy adventurism, China’s assertive projection of geopolitical, military and economic power, Russia’s external aggression, the threat of climate change and the COVID-19 pandemic.

This paper focuses on one Janus-faced vector of cause and effect — the retreat of the United States from leadership of the global economic order. The nation that led the creation of the post-1945 rules-based, liberal international order among Western democracies, with added ambition at the end of the Cold War, now acts as a grievance-laden disruptor of established rules and norms. The once-ascendant ‘Washington Consensus’ — a set of policy principles geared to fostering economic interdependence between nations with greater reliance on open trade, capital and technology flows — is in eclipse in its eponymous home (Box 1.1).⁵

1.1. From Trump’s tariffs to Bidenomics — and back again

With blind spots and exceptions, the United States played the leading role after the Second World War in fostering reciprocal liberalisation of trade along with a set of rules and norms designed to govern international trade relations — through the General Agreement on Tariffs and Trade (GATT) initially, and later via the creation of the World Trade Organization (WTO). For roughly eight decades, including through the long twilight struggle of the Cold War, a core objective of US foreign economic policy was to negotiate market-opening trade commitments in support of US commercial and geopolitical interests.

With the embrace of America First mercantilism, the first presidency of Donald J. Trump broke with this broadly bipartisan approach to international trade relations. As a New York real estate magnate outside of elite policy circles in the 1980s, Donald Trump railed against free trade, arguing the United States was being “ripped off” by other nations.⁷ The United States’ trade deficits were deemed evidence of unfair foreign practices, despite protestations of mainstream economists to the contrary. Economic relations between nations were cast as a zero-sum game of winners and losers. To citizen Trump, the United States was the biggest loser from past trade agreements. These beliefs would become foundational to Trump’s future political ambitions.⁸

As the party’s nominee and then president, Trump oversaw the Republican Party’s abandonment of free trade as part of its political platform and governing agenda. On his first full day in office in 2017, President Trump withdrew the United States from the Trans-Pacific Partnership (TPP) negotiated under President Obama. His administration set about renegotiating the North American Free Trade Agreement (NAFTA), and in 2018 Trump launched a series of trade actions that ratcheted up tariffs on China and on select products from other trading partners, including US allies and partners.⁹ “Trade wars are good, and easy to win,” President Trump declared on social media in March 2018.¹⁰

Joseph Biden came to office following the 2020 election, disavowing the transactional approach of his predecessor and promising a renewed focus on US alliances. Despite some course correction, however, free trade would remain politically friendless at the highest levels of the US Government. Trump-era tariffs were retained with a few exceptions and extended against China, Buy American provisions were championed, and the United States’ approach to the WTO continued to veer between indifference and malign neglect. Under both Trump and Biden, the new paradigm of US foreign economic policy would be grounded in rejection of liberal economic orthodoxies, acute aversion to market-opening trade agreements and strategic competition with China.

President Biden put his own stamp on the demise of the Washington Consensus with Bidenomics — a project of sweeping state ambition that encompassed expansive macroeconomic policy, large-scale investment in infrastructure and manufacturing, trade and technology policies geared to strategic objectives and the active use of the state to guide economic activity in favoured industries. The revival of an American tradition of industrial policy via three signature pieces of legislation — the Infrastructure Investment and Jobs Act (2021), the CHIPS and Science Act (2022) and the Inflation Reduction Act (2022) — would become one of the Biden administration’s proudest boasts.

Competition with China became central to the Trump administration’s national security strategy, albeit conditioned by the president’s erratic and highly personalised approach to policy making. The Biden administration cemented and extended this legacy, reinforced by a powerful bipartisan consensus in Washington on China policy. Sweeping US technology export controls, investment screening and outbound investment restrictions aimed at denying China access to advanced technologies would become a central thrust of this policy. Under the so-called “small yard, high fence” strategy, the United States sought to maintain as large a lead as possible in semiconductors, artificial intelligence (AI), quantum information and other strategic technologies.¹¹

President Trump’s return to the White House has sanctified the overthrow of the liberal rules-based order. The Trump trade wars of 2025 have seen the US average effective tariff rate rise roughly sevenfold in less than a year (Figure 1.2). President Trump’s so-called “reciprocal tariffs” and his administration’s slew of bilateral trade deals continue to ripple through global supply chains and trading relationships as supporters celebrate and critics bemoan the demise of one international economic order and the uncertain birth of another.¹²

The post-Cold War era of deep globalisation that hinged on binding countries into a US-led economic system is over. A shifting and indeterminate combination of tariffs, industrial policy interventions, investment screening, export controls and sanctions now forms the economic toolkit of a new Washington Consensus. A commitment to freer trade within a framework of multilateral rules has been banished as a cornerstone of US global economic engagement. The most-favoured nation principle — once a pillar of US leadership of the global trading system — has been discarded in favour of unilaterally-determined tariff rates and bilateral deals.

This new era of US economic statecraft has myriad (and often conflicting) policy goals. The reindustrialisation or ‘reshoring’ of manufacturing capacity is a key objective, alongside building more diverse and resilient supply chains. The reduction of economic dependencies on China serves as a key motivating factor, alongside measures aimed at denying the United States’ principal geopolitical adversary the commanding heights of technologies critical to national security and economic advancement. Forcing change in other countries’ economic and trade practices in the belief that this will drive down the US trade deficit continues to animate President Trump’s tariff crusade. The president’s highly transactional approach to deals and his embrace of tariffs as an all-purpose tool of geopolitical and economic leverage, and as a source of fiscal revenue, further complicate the already tangled links between US policy means and ends. Uncertainty is a feature (not a bug) of the Trump White House.

This report aims to unpack and understand the paradigm shift that has culminated in the second Trump presidency. It traces the origins and proximate drivers of this policy transformation, its evolving policy character and the contested global strategic environment in which it now operates. The implications for Australian economic policy are also explored.

1.2. Paradigm lost: The demise of the Washington Consensus

Two definitional questions are worth touching on briefly. What constitutes a paradigm shift? And why does this shift in US international economic policy justify this conceptual description?

Developed by Thomas Kuhn in the philosophy of science literature, the term was coined initially to describe a profound change or breakdown in intellectual systems that guide a particular domain of inquiry, when old systems and methods will not solve new problems.¹³ In political economy and public policy discourse, the notion gained currency where different constellations of economic ideas and policies arose in changing circumstances to command support eventually from both ends of the political spectrum.

Economist Dani Rodrik argues that paradigm shifts usually accompany crises that demand new answers and that a “new economic paradigm becomes truly established when even its purported opponents start to see the world through its lens.”¹⁴ He points to two notable examples in the modern political economy of Western liberal democracies. At its height following the Second World War, the Keynesian welfare state received as much support from conservative politicians as it did from social democrats. Similarly, while the turn towards economic liberalism in the context of 1970s stagflation (low growth and high inflation) was supported crucially by pro-market economists and politicians on the centre-right, it eventually became dominant with the incorporation of market-oriented policies into the governing agendas of centre-left political parties.

Together with others, Rodrik claims that new thinking on the need for a more active role for government in shaping the economy is now part of an emergent paradigm shift in mainstream economic thinking. This is seen as replacing “the market-liberal ‘Washington Consensus’, which for four decades emphasized the primacy of free trade and capital flows, deregulation, privatization, and other pro-market shibboleths.”¹⁵

Historian Gary Gerstle charts a similar trajectory but with the emphasis on the rise and fall of what he terms a “neoliberal political order.”¹⁶ Political orders are defined by Gerstle as based on a “constellation of ideologies, policies and constituencies” that shape politics in ways that endure for multiple election cycles. Like Rodrik’s economic paradigms, Gerstle associates political orders in the United States — in this case, the New Deal and neoliberal orders — with “the ability of its ideologically dominant party to bend the opposition party to its will.” He casts Ronald Reagan as the “ideological architect” and Bill Clinton as “key facilitator” of a neoliberal order that took shape in the 1970s and 1980s and achieved dominance in the 1990s and first decade of the 21st Century, before fracturing in the second decade.

For a new generation of US political actors and policy thinkers, an approach to China that prioritised engagement, closer economic ties and global trade rules is now seen as naïve and woefully inadequate in an era of superpower rivalry and weaponised interdependence.

The new Washington Consensus carries the hallmarks of a political-economic paradigm shift forged from a confluence of international and domestic forces. Evolving policy ideas and tools of state activism reflect a mix of structural drivers and events, often highly contingent ones, arising from long-run economic trends, shifting global power dynamics and domestic political disruptions linked to an American social contract frayed by sweeping economic and socio-cultural change. The upshot is that politicians on both the left and the right, as well as thinkers and activists across the US political spectrum, have repudiated the paradigm of economic liberalism and market-led globalisation in favour of a more statist, nationalist and security-oriented approach to international economic policy.

The structural rise of China, its progressive dominance of key manufacturing sectors and technologies and its more assertive grand strategy under Xi Jinping have catalysed a profound rethink in Washington about the economic underpinnings of US power.¹⁷ Globalisation and China’s model of state capitalism are seen universally within the US political system as hollowing out US manufacturing and destroying the livelihoods of millions of workers.¹⁸ For a new generation of US political actors and policy thinkers, an approach to China that prioritised engagement, closer economic ties and global trade rules is now seen as naïve and woefully inadequate in an era of superpower rivalry and weaponised interdependence.¹⁹

Donald Trump served as the indisputable lightning rod and agent of change in the shattering of the old Washington Consensus. Joe Biden would become co-author of an emergent new consensus on state activism, notwithstanding the polarisation and hyper-partisanship that beset modern US politics. Trump’s victory at the 2024 presidential election consolidates a historical transformation in US international economic policy and in the global economic order.

1.3. Outline of this report

The demise of the old Washington Consensus and the United States’ retreat from global economic leadership can be traced to structural shifts in the global economy, reordered power relations, specific economic shocks and their consequences filtered through domestic political agency and policy ideas. Section 2 argues that a combination of internal and external pressures shattered the political foundations of the old Washington Consensus in the early 21st Century, leading in turn to a crisis in the US trade policy regime. It places particular emphasis on the intersection of a prolonged period of modest growth in living standards among middle-class and low-wage American workers and the ‘China shock’ with its concentrated effects on US manufacturing employment.

The global financial crisis and the Great Recession magnified the political and ideological backlash against liberal economic policies, opening the door to Donald Trump’s assault on trade and globalisation. A more powerful, assertive and ambitious China under Xi Jinping further assailed prevailing assumptions of US grand strategy in the second decade of the 21st Century. Structural rivalry with China would henceforth become a binding agent for a new era of US economic statecraft.

Section 3 examines the paradigm shift in US policy in more detail, along with the instruments that have given it expression. The revival of tariffs, industrial policy and other forms of state intervention amounts to a rejection of past economic orthodoxy by the post-Reagan Republican Party and economic nationalists on the right and by Democrats and others on the progressive left critical of the party’s accommodation with neoliberalism. Technology competition with China is emblematic of this new Washington Consensus, as national security concerns have driven demands for the decoupling of US and Chinese technological ecosystems.²⁰

As outlined in section 4, pressures that have led governments worldwide to embrace more state-directed, interventionist and security-focused economic policies are far from simply Made in America. By the early years of the 21st Century, China’s model of state capitalism presented an unprecedented challenge to the liberal foundations of the US-led global economic order. The rise of what Farrell and Newman call the “economic security state” now stands as a defining feature of a more multipolar, less rule-bound global environment.²¹ Across the Global West and the Global South, governments have adopted new strategies and tools aimed at protecting vital industries, boosting growth and competitiveness, accelerating the green transition and supporting national sovereignty and security objectives.

This paper contends that the risks of geopolitical upheaval and economic fragmentation are such that Future Made in Australia requires significant rebalancing away from the green transition and towards strategic objectives.

Section 5 explores the implications for Australia of the demise of the postwar liberal economic order and the rise of a new era of economic statecraft. A middle power with enduring interests in an open, rules-based trading system, Australia finds itself navigating the most turbulent global environment in decades, marked by strategic competition between its cornerstone strategic ally (the United States) and its major trading partner (China).²²

The Australian Government’s main policy response to heightened geopolitical risk and geoeconomic fragmentation is the Future Made in Australia agenda.²³ Announced in 2024, it has the dual objectives of embedding Australia in a low-carbon global economy and supporting greater economic resilience and security.

This paper contends that the risks of geopolitical upheaval and economic fragmentation are such that Future Made in Australia requires significant rebalancing away from the green transition and towards strategic objectives. It offers a series of recommendations in connection with the wider renovation of Australian economic statecraft, one that strives for a new marriage between economic rationalism and state capacity geared to Australia’s unique strategic circumstances and national interests.

2. The anatomy of a paradigm shift

Support within the US political system for the post-Cold War Washington Consensus cracked in the first decade of the 21st Century before crumbling in the second decade. The radically reshaped US foreign economic policy that would emerge has its roots in long-run economic trends, changes in global power dynamics, specific shocks and domestic political agency and ideas tied to a powerful backlash against globalisation, open trade and engagement with China.

This study pinpoints the intersection of two variables tied to the US labour market as having particular significance in understanding this backlash. The first is relatively sluggish growth in living standards at the bottom and middle of the US income distribution over several decades, against a backdrop of steeply higher economic inequality. The second is the concentrated hollowing out of US manufacturing jobs in the 2000s in the wake of China’s rapid rise as a global manufacturing powerhouse.

These forces gained added political potency from the GFC and the Great Recession. The financial hardship and frustration felt by millions of Americans amid the greatest economic downturn since the Great Depression opened the door to new political entrepreneurs and narratives of grievance. This discontent would ripple through both major US political parties in the 2010s, shattering the fragile coalition that helped to sustain support for open trade and US leadership of a liberal economic order.

China’s assertion of geopolitical power, buttressed by its spectacular economic rise, would become a more prominent source of disruption in the second decade of the 21st Century. China’s expansive grand strategy under President Xi Jinping provided the coup de grâce to the old Washington Consensus, as the United States sought to respond to economic discontent at home and a rising great-power challenger abroad. In summary, economic stress in the American heartland, fractured political support for globalisation and the rise of a more assertive, ambitious China go a long way to explaining the demise of the old Washington Consensus and the eventual rise of a new Washington Consensus.

Several conclusions follow from this analysis. First, Donald Trump’s trade wars and Joe Biden’s industrial policy have similar structural origins. Second, while economic trends and shocks carry large explanatory weight in this account, political agency and ideas matter in understanding the timing and tools of policy transformation. Third, the scale and character of China’s rise and its mercantilist model of state capitalism subjected the liberal foundations of the postwar economic order to acute strain separate from Washington’s policy response.

2.1. Middle-class stagnation and its discontents

Faltering faith in the “American Dream” — the promise of each generation doing better than the one before it — helps to connect Donald Trump and Joe Biden to the demise of the old Washington Consensus. It is no coincidence that every successful presidential campaign in the past two decades — from Barack Obama in 2008 to Donald Trump in 2024 — has tapped a mood of economic frustration and anxiety tied to a narrative of hard-working Americans getting a raw deal from some mix of powerful economic elites, a broken social contract or unfair foreign economic practices.

As a rising star in the Democratic Party, Illinois Senator Barack Obama chose “Thoughts on Reclaiming the American Dream” as the subtitle of his 2006 bestseller, The Audacity of Hope.²⁴ President Obama won re-election in 2012 tagging his Republican opponent Mitt Romney as a consulting agent for outsourcing multinationals.²⁵ Announcing his bid for the presidency in 2015, Donald Trump told supporters: “Sadly, the American Dream is dead. But if I get elected president, I will bring it back bigger and better and stronger than ever before.”²⁶

The Democratic Party’s 2020 presidential election platform pledged a future Biden administration to forging a “new social and economic contract” with Americans, with Republicans accused of “rigging the economy in favour of the wealthiest few and the biggest corporations.”²⁷ Pitching his plan to voters in 2023, President Biden portrayed Bidenomics as “just another way of saying: Restore ‘the American Dream’.”²⁸ Donald Trump would again assail Democrats for killing the American Dream in the run-up to the 2024 election.²⁹

This theme — an American Dream no longer living up to its former promise — has been explored by numerous analysts and commentators from a variety of angles. In Ours Was the Shining Future: The Story of the American Dream, David Leonhardt of the New York Times laments a country “where most people’s incomes and wealth have grown slowly, where inequality has soared, where life expectancy has stopped increasing for most of the population.”³⁰ Historian Walter Isaacson describes the decline of the American Dream as nothing less than “the most important social issue of our era.”³¹ Writing in 2017, conservative columnist David Brooks singled out “middle-class wage stagnation” as “the biggest economic fact driving American politics.” It explains, he argued, “why the Democratic Party has moved from the Bill Clinton neoliberal center to the Bernie Sanders left. It explains why the Republicans have moved from the pro-market Mitt Romney right to the populist Donald Trump right.”³²

No one statistic or data series captures the deep-seated economic frustration that has reshaped US politics over recent decades.

No one statistic or data series captures the deep-seated economic frustration that has reshaped US politics over recent decades. Indeed, claims about middle-class stagnation are contested by some analysts who point to periods of robust economic activity, per capita income growth and living standards superior to earlier decades.³³ Yet the dominant picture that emerges from a variety of sources is of a large and growing share of US households finding it difficult to attain financial security and a middle-class lifestyle in the late 20th and early 21st Centuries. Narratives proclaiming the end of the American Dream have found fertile soil in weak earnings growth for workers without a college education, a squeezed middle class, increased income and wealth inequality and reduced social mobility.

Labour market studies point to modest wage growth across the middle and bottom of the US income distribution, with some cohorts experiencing flat or declining real wages for long periods at a time. Figure 2.1 illustrates trends in median wages and family incomes — the 50th percentile — relative to more robust overall per capita income growth. It shows real disposable per capita income growing by 1.8% per annum over a period approaching four and a half decades. Real median family income grew more modestly at 0.8% per annum, while median real earnings inched up even more slowly at only 0.2% per annum.

In the wake of 1970s stagflation, the data show relative stagnation in earnings in the 1980s, some growth in the second half of the 1990s and further income stagnation in the 2000s, before the severe impact on households of the GFC and the Great Recession. A period of steady improvement in earnings growth from the mid-2010s would be punctuated at the start of the next decade by the COVID-19 pandemic and the subsequent spike in inflation.³⁴

Analysis by the US Treasury in 2023 found that median real wages increased by 8% over the 40-year period between 1979 and 2019, with annual growth of only 0.2% per year.³⁵ Real median family income, including earnings of other family members, grew marginally better at 0.6% when account is taken of large increases in female employment and a rise in dual-earning households. The Obama administration’s Council of Economic Advisers concluded similarly that median real wages rose by only 8% between 1979 and 2014, while wages at the 10th percentile declined slightly.³⁶

The deterioration in economic prospects has been most dramatic for less educated men in the United States. A 2019 study, for example, found that real hourly earnings for the typical 25- to 54-year-old man with only a high school education declined by 18.2% between 1973 and 2015.³⁷ By contrast, real hourly earnings for college-educated men increased substantially.

Reinforcing a picture of a squeezed middle class is the discrepancy between the pace of income growth, on the one hand, and rising costs of housing, health care, education and childcare, on the other. These costs have consistently risen faster than median incomes, taking up a progressively higher share of household budgets. Studies show that health, housing and education are now a much larger burden than they used to be for the middle class, meaning middle-class aspiration has become relatively more expensive.³⁸ Health and housing are by far the largest categories, together making up close to 40% of total household expenditure. In the case of housing, median house prices in the United States have grown more than three times the rate of household income since the mid-1970s.³⁹

Efforts to sustain middle-class lifestyles have been financed in part by higher household debt, with debt-to-income ratios more than doubling since the 1970s, while also limiting the room for savings.⁴⁰ Other indicators of middle-class success have similarly deteriorated over time, with evidence that incomes have become more volatile, the amount of time spent on vacation has fallen and middle-class Americans appear less prepared for retirement.⁴¹

Rising inequality

Trends in income and wealth inequality in the United States are cited regularly as evidence that the middle class and the bottom 20% of households are worse off than they used to be, though such indicators rely necessarily on relative measures of economic well-being. Despite signs of stabilisation in recent years, long-run trends show income growth for most low-wage and middle-class households failing to keep pace with that of the top 20% of households, while their shares of total income and wealth have fallen.⁴²

Despite signs of stabilisation in recent years, long-run trends show income growth for most low-wage and middle-class households failing to keep pace with that of the top 20% of households, while their shares of total income and wealth have fallen.

Focusing on wage quintiles, a 2017 Brookings Institution study of the period from 1979 to 2016 found that real wages fell by 1.0% for the bottom 20%, rose by 0.8% for the lower-middle quintile and by 3.4% in the middle quintile.⁴³ By contrast, wages rose by 11.5% in the upper-middle quintile and by 27.4% in the top quintile (Figure 2.2). A picture of the middle class falling further behind the top 20% of households is apparent also when taxes and transfers are taken into account. On this basis, Congressional Budget Office analysis in 2019 found that the middle three household income quintiles experienced total income growth in real terms of 28% from 1979 to 2014. The top 20% saw their incomes grow by 95% over the same period.⁴⁴

Labour market studies have sought to explain the steep and persistent rise of earnings inequality and the erosion in the economic prospects of less educated workers in the United States and in other advanced economies. A broad consensus among economists points to the role of skill-biased technological change as the principal factor explaining sluggish wage growth at the bottom of the income distribution and rising wage inequality in the 1980s and 1990s. The revolution in computer and information technology is pinpointed as driving rising demand for skilled workers and a marked increase in the ratio of earnings of those with a college degree over those with a high school degree.⁴⁵

Widely-cited research on the US experience found that about two-thirds of the rise in earnings disparities between 1980 and 2005 was accounted for by the increased earnings premium associated with higher education and cognitive ability.⁴⁶ Other factors — globalisation and competition from developing countries, immigration and labour market institutional arrangements (including minimum wage settings and the role of unions) — tend to be grouped as secondary, even if they gain greater prominence in political debates.

Wealth trends also show marked divergence between low-to-middle-class and higher-income households. Drawing on Federal Reserve Board data, Brainard concludes that the wealth of middle-income households, adjusted for inflation, increased by an average of about 1% per year over three decades from 1989.⁴⁷ Meanwhile, the average wealth of households in the top decile of the income distribution rose three times faster on average, more than doubling over the period. As a result, the share of total wealth held by the 30% of households between the 40th and 70th percentile of income fell from 19% to 13%. The 10% of households with the highest incomes saw their share of national wealth climb from 47% to 57% — more than the remaining 90% of households combined.⁴⁸

The GFC and the associated housing crash had a particularly severe impact on middle-class financial buffers. Millions of Americans lost jobs and homes in the Great Recession. Median incomes failed to recover to pre-crisis levels until the middle of the following decade. Impacts on wealth across middle and low-income America were even more pronounced. Brainard notes that more than a decade after the financial crisis, middle-income US households still had not recovered the wealth they lost in the Great Recession, while lower-income families had a wealth shortfall of 16% compared with before the crisis (Figure 2.3).⁴⁹

Measures of intergenerational mobility have confirmed fears of an American Dream increasingly out of reach. Research by Harvard’s Raj Chetty using tax records finds that Americans born in 1940 had a 92% chance of obtaining a higher real income than their parents. For Americans born in 1980, that figure had fallen to around 50%.⁵⁰ Carol Graham of the Brookings Institution finds a widening prosperity gap translating into a widening gap between peoples’ beliefs and aspirations, with a large gap between the middle and top quintiles of the income distribution when it comes to optimism about the future and the idea that hard work gets you ahead.⁵¹ Polling data also points to increased economic frustration, dashed expectations and declining faith in the American Dream. A Wall Street Journal/NORC survey in November 2023 reported, for example, that only 36% of American voters regarded the American Dream as still holding true. This figure was down from results of similar surveys in 2012 (53%) and 2016 (48%).⁵²

On several measures, the US economy has performed strongly in the past decade compared with other advanced economies. Most groups experienced real income gains, at least prior to COVID-induced inflation, with some evidence of convergence in income and wealth disparities. Yet the longer-term trend remains one of Americans becoming less optimistic about future real income gains, with the measured drop most pronounced among middle-income households.⁵³

2.2. Globalisation and the “China shock”

The role of international trade and globalisation in shaping the economic fate of the US middle class has long been a contested issue, even as the Washington Consensus held to a view of liberal trade relations providing clear benefits to the US economy and the vast majority of Americans. China’s emergence as a global manufacturing superpower would shake this prevailing paradigm, including in elite policy circles, with enduring consequences for US politics and international economic policy.

The end of the Cold War and the collapse of communism in the Soviet Union and Eastern Europe saw US grand economic strategy enter a new phase. The failure of socialism and inward-looking development strategies led a host of nations to embark on liberalising economic reforms by the late 1980s. For US policymakers, the opportunity to lock in and extend market access gains in fast-growing emerging economies meshed neatly with the policy prescriptions of the Washington Consensus.

In February 1991, the leaders of the United States, Mexico and Canada announced their intention to start negotiations on a free trade agreement. This was an opportunity for the United States to improve cooperation with its southern neighbour and to secure new market access with few concessions. With most of its exports already entering the United States duty-free, Mexico would be called on to do most of the liberalisation. Even so, what became the North American Free Trade Agreement (NAFTA) touched off “one of the most contentious and divisive trade-policy debates in US history.”⁵⁴

Pro-trade business groups faced off against a coalition of forces including labour unions, environmental groups, human rights activists and domestic producers threatened by Mexican competition. With its sharpened focus on winners and losers from globalisation, NAFTA prefigured later US trade battles. The United States was negotiating a major bilateral trade agreement with a developing country for the first time. Clear divisions over trade were apparent not simply between US political parties, but within them as well. And, with the Cold War over, the debate over NAFTA showed that traditional foreign policy arguments no longer held the same traction in countering demands from constituencies opposed to liberal trade.

While initiated by Republican President George HW Bush, it fell to his successor, Democrat Bill Clinton, to navigate NAFTA’s congressional passage. During the 1992 election campaign, Clinton was equivocal on free trade, though he eventually supported NAFTA contingent on stronger labour and environment protections.⁵⁵ Opposition to the agreement conspicuously brought energy into the insurgency campaign for the Republican Party nomination waged by Pat Buchanan, as well as the third-party candidacy of H Ross Perot. Perot would go on to win 19% of the total vote in 1992, the strongest showing by a third-party candidate in 80 years.⁵⁶

On taking office in January 1993, President Clinton used a major speech to set out the case for continued US international economic leadership in striving to “open other nations’ markets and to establish clear and enforceable rules on which to expand trade.” The United States, he argued, “must compete, not retreat.”⁵⁷ However, the union-led campaign in opposition to NAFTA within the Democratic Party forced the Clinton administration to rely heavily on Republican votes in the House to secure passage in November 1993 with a margin of 234 to 200 votes. Democrats in the House voted 156 to 102 against the agreement. The Senate voted 61 to 38 in support of the legislation.⁵⁸

Success on NAFTA, albeit hard fought, provided impetus for the Clinton administration to conclude the Uruguay Round of multilateral trade negotiations in December 1993. After seven years of negotiations, this saw the expansion of trade rules into new areas and brought developing countries more squarely into the multilateral trading system. The Uruguay Round agreement placed new disciplines on agricultural trade policies, extended rules in areas such as services and intellectual property protection and established the World Trade Organization (together with a more binding dispute-settlement system). It would mark the high point of US efforts to forge a genuinely global liberal economic order shaped by American geopolitical and commercial interests. With US negotiators playing a lead role in concluding the round on American terms, opposition within Congress remained relatively muted when implementation legislation came to a vote in November 1994.

Two factors in roughly equal measure drove deeper global economic integration in the 1990s. The first was reformist liberalisation policies and international agreements such as the Uruguay Round that reduced government-imposed barriers to the movement of goods, services and capital. The second was new technologies that markedly reduced the costs of transport and communications.⁵⁹ These dual forces came together most powerfully in the transformation of China and its place in the global economy.

The “reform and opening” era initiated by Deng Xiaoping in the late 1970s propelled a dramatic acceleration in China’s economic growth and rapid expansion in its foreign trade. For roughly three decades from the start of the reform era, China’s economy grew at more than 10% a year, driven largely by rapid manufacturing development. The shift from economic self-reliance to export-led growth in manufactures saw the volume of China’s exports grow at 13% a year between 1980 and 1990 and then at 11% per annum from 1990 to 1999.⁶⁰

Between 1991 and 2013, China’s share of world manufacturing exports rose from 2.3% to 18.8%, with the manufacturing sector averaging 88% of China’s merchandise exports over this period. China’s share of world manufacturing value added increased sixfold, from 4.1% to 24.0% (Figure 2.4).

In the early 21st Century, China surpassed Japan to become the world’s second-largest economy, on its way to becoming the world’s largest manufacturing producer and exporter by the end of the 2000s. China’s accession to the WTO in 2001 proved pivotal to its deep integration into the global economy and to subsequent developments in US-China relations. Under the accession deal, China agreed to slash tariffs and certain non-tariff barriers while the United States agreed to phase out select textile quotas and, importantly, to grant China permanent most-favoured-nation trade status.

The Clinton administration made the case for China’s accession using both political and economic arguments. Speaking in March 2000, President Clinton argued that WTO membership “will not create a free society in China overnight or guarantee that China will play by global rules. But over time, I believe it will move China faster and further in the right direction and certainly will do that more than rejection would.”⁶¹ Describing the agreement as “the equivalent of a one-way street,” Clinton stated that it “requires China to open its markets — with a fifth of the world’s population, potentially the biggest markets in the world — to both our products and services in unprecedented new ways.”

Business groups, US multinationals and agricultural producers lined up to support permanent normal trade relations (PNTR) with China. In May 2000, the House of Representatives voted to award China PNTR, with 73 Democrats joining 164 Republicans to pass relevant legislation. In September, the Senate approved PNTR legislation by a vote of 83 to 15. This eliminated the ritual, in place since the Carter administration normalised bilateral relations in 1979, whereby Congress needed to formally approve normal trade arrangements with China each year.

For the better part of two decades from the early 1990s, rising trade with China was responsible for nearly all the expansion of US imports from low-income economies. Figure 2.5 shows the sharp rise in US imports from China after WTO accession in 2001, with a brief fall associated with the GFC. From less than 8% in 2000, the share of US imports from China grew to almost 20% by the end of the decade, with concentrated effects in the US manufacturing sector.

China’s surging export growth accelerated the decline in US manufacturing employment. The relative decline in manufacturing employment is common to all advanced economies. Prior to the 1990s step-change in globalisation, the share of manufacturing jobs in total US employment had fallen from around 30% in the late 1940s to roughly 15% by the time NAFTA came into force. As Irwin observes, however, the import and employment shock on the US manufacturing sector in the years following China’s accession to the WTO was significantly larger in magnitude than Japan’s in the 1980s or Mexico’s in the 1990s.⁶²

Enter Autor, Dorn and Hanson

Coining the term “China shock”, economists David Autor, David Dorn and Gordon Hanson examined the scale, geographic dimensions and localised impacts on US manufacturing in a series of academic papers beginning in 2013. Their findings challenged conventional economic wisdom that regarded losses from trade competition as diffuse and diminishing in a relatively short amount of time. The China shock, they found, exerted immense pressure on many US manufacturing communities in a way that was significant, highly concentrated and long-lasting.⁶³

In their seminal 2016 paper, Autor and his colleagues concluded that surging manufacturing imports from China between 1999 and 2011 displaced around a million US manufacturing jobs, with spillovers that cost up to 2.4 million jobs in total. They attributed around a quarter of the decline in US manufacturing jobs between 2000 and 2007 to the China shock. Employment fell sharply in industries most exposed to import competition, especially in relatively low-technology, labour-intensive sectors such as textiles, clothing, footwear and commodity furniture. These sectors had already experienced declines in employment due to automation and shifts in consumer demand, but the surge in imports from China greatly exacerbated these trends with large adverse impacts on local labour markets in the US Midwest and the South.

Figure 2.6 shows the sharp decline in US manufacturing employment associated with the China shock. In the period between 1999 and 2007 — regarded as ‘peak China shock’ — US manufacturing jobs fell by 22%, from 17.9 million to approximately 14.2 million jobs. The Great Recession saw a further marked decline before a period of modest recovery in the 2010s.

Many of the workers who lost jobs struggled to find reemployment in export sectors or other manufacturing industries and lacked the geographic mobility to move to regions that were creating jobs. Employment options among displaced workers were often confined to low-wage service sector jobs, while a cohort dropped out of the labour force altogether. Follow-up studies confirmed that offsetting employment gains often failed to materialise, with wages and labour-force participation rates remaining depressed and unemployment rates elevated for at least a decade after the China shock.⁶⁴

Adverse outcomes were more acute in regions that had fewer college-educated workers. Contrary to the expectation of labour markets adjusting within a reasonable period, the opposite was found to be the case among households under economic duress. The knock-on effects from the China shock were seen to go well beyond job churn and displacement. Earnings for low-wage workers fell, children became more likely to live in poor, single-parent households and “deaths of despair” among working-age adults — primarily due to drug overdoses among men — increased.⁶⁵

The China shock research, as economics writer/blogger Noah Smith has written, uncovered a level of disruption and faltering adjustment far more severe than conventional economic wisdom expected. The analysis, he observed, was “like a meteor crashing into the econ[omics] profession. Prior to Autor et al. (2016), ‘free trade is good’ was the most unshakeable consensus in the economics profession; after the paper came out, that consensus was shattered.”⁶⁶ The ripple effects of this economic disruption on US politics and the terms of debate over trade and globalisation would be even more far-reaching.

2.3. America First meets the Sullivan Doctrine

The China trade shock, on top of the long-run squeeze in living standards felt by low and middle-income Americans, cracked the foundations of US economic grand strategy in the first decade of the 21st Century. The economic and social scarring caused by the GFC and the Great Recession widened these cracks further with major political consequences.

The globalisation backlash was not immediate. The crisis in the US trade policy regime emerged over time. Trade issues did not figure prominently in the 2008 presidential election. Contenders for the Democratic party nomination, Senators Barack Obama and Hillary Clinton, sparred over who would be tougher in defence of US workers in the primaries, but neither sought to make trade a major election issue. As the party’s nominee, Obama attacked trade agreements initiated by President George W Bush, voicing traditional Democrat concerns about weak environmental and labour standards. For the most part, however, his views on trade remained ambiguous.⁶⁷

The China trade shock, on top of the long-run squeeze in living standards felt by low and middle-income Americans, cracked the foundations of US economic grand strategy in the first decade of the 21st Century.

The immediate challenge facing President-elect Obama at the close of 2008 was collapsing economic activity in the wake of the financial crisis. Unemployment in the United States climbed to 7.4% in December 2008, up from 5% a year earlier, on its way to reaching 10.1% in October 2009.⁶⁸ Obama drew on an experienced economics brains trust “rooted in the centrist, market-friendly economic philosophy of the Clinton Administration” to help formulate his economic rescue plan.⁶⁹ These personnel decisions reinforced continuity on international economic policy and, while Obama remained cautious on trade throughout his first term, the relative absence of new protectionist measures in response to the Great Recession signalled no obvious break from the past.

Similarly, the Republican Party through the turn of the decade retained a disposition towards freer trade. After gaining control of the House of Representatives at the 2010 midterm elections, congressional Republicans pushed to resurrect Bush era trade agreements with Colombia, South Korea and Panama that had languished since 2008. With mainly Republican support, the House and Senate passed the agreements in October 2011.⁷⁰

After winning the 2012 presidential election, and despite resistance within his own party, President Obama showed greater willingness to embrace pro-trade initiatives. With global trade talks under the Doha round stalled, the administration turned its focus to regional agreements. The major play — part of a broader strategic ‘pivot’ towards Asia — was the Trans-Pacific Partnership (TPP). Negotiations covered a broad suite of trade and regulatory issues, ultimately encompassing 12 partner countries — with the notable exception of China. In 2013, the Obama administration also embarked on new negotiations with the European Union on a Transatlantic Trade and Investment Partnership with a focus on improving regulatory cooperation.

Relying heavily once again on Republican votes, the Obama administration secured congressional support for new trade-promotion authority in June 2015. Negotiations on TPP concluded later that year, though talks with the European Union proved more difficult given unwillingness on both sides to compromise on health and environmental standards.⁷¹ Away from government negotiations over market access and subsidies, however, the political underpinnings of US foreign and trade policy had undergone a seismic shift.

The looming 2016 presidential election provided a platform for two self-styled political outsiders — Donald Trump and Bernie Sanders — intent on assailing Washington elites and overthrowing the policy directions of both major parties. Both the Trump and Sanders insurgencies gave voice to deep currents of grievance and resentment in US society located among those who felt left behind by rapid economic and socio-cultural change. Many saw themselves as victims of a system rigged in favour of the rich and powerful. Both insurgents challenged establishment political machines that acted as gatekeepers of party standard bearers and policy platforms. Both cast trade agreements and globalisation as major sources of economic dislocation and middle-class anxiety, though Trump would prove ultimately to have the most potent political message.

The Trump insurgency found fertile soil in the Tea Party revolt during the first Obama administration. This grassroots movement arose as a backlash against Obama initiatives during the Great Recession, portrayed as coming at the expense of middle-class voters forced to pick up the tab. Lightning rods included a plan to shield low-income homeowners from foreclosure and President Obama’s Affordable Care Act (Obamacare), a program seen as forcing some Americans to pay higher premiums and co-payments so those without insurance could afford it. Another Tea Party cause celebre was the perceived illegitimate use of government funds and services by illegal immigrants.⁷²

Tea Party groups helped to nominate candidates for the House and Senate in 2010 midterm elections. After Republicans won Congress but failed to repeal Obamacare, the movement turned its sights on the GOP establishment. To political analyst John Judis, the Tea Party is best viewed as a “rightwing rather than a leftwing response to the Great Recession and to neoliberalism.”⁷³ The animating ethos, familiar to populist movements in the United States and elsewhere, sprang from a sense that America was in decline and that the instincts of ordinary Americans were wiser and nobler than those of experts and elites. Trade and globalisation may not have been central to the Tea Party revolt, but the broader sentiment it embodied prefigured Donald Trump’s Make America Great Again (MAGA) campaign and support base.

“They’re laughing at us”

The Trump narrative on trade, honed over almost 30 years, mixed elements of grievance, betrayal, conspiracy and fact. Trade deficits supposedly meant that the United States was being ripped off by its trading partners, including its closest allies. The United States was bearing an unfair share of the burden of global security and its open market contrasted with other countries that did not play by the rules. Trade agreements — from NAFTA to the WTO — were symbols of a corrupt ‘globalist’ establishment pursuing utopian international projects and furthering its own interests at the expense of ordinary Americans.

For Trump, no one embodied this elite failure more clearly than his Democrat opponent in the 2016 election, Hillary Clinton. On the campaign trail, Trump attacked the former secretary of state for unleashing a “trade war against the American worker when she supported one terrible trade deal after another — from NAFTA to China to South Korea.”⁷⁴ He made a point of zeroing in on Ms Clinton’s previous support for TPP as the “gold standard” in trade agreements, as did her Democrat challenger Bernie Sanders. The Democrat front-runner would abandon the Obama administration’s Asian trade initiative in late 2015, a sign of an increasingly toxic trade debate and the collapsing centrist pro-trade coalition in Washington under the weight of attacks from the populist right and the progressive left.⁷⁵

Trump’s America First platform pledged to close trade deficits, bring manufacturing jobs back to the United States and put an end to one-sided trade agreements. As well as promising to withdraw the United States from TPP and renegotiate NAFTA, Trump spoke repeatedly of his determination to apply stiff tariffs to countries that cheat, especially China. “China has taken our jobs, our factories, our money. They’re laughing at us,” Trump told his supporters. He vowed to declare China a currency manipulator, bring trade cases against China and impose heavy tariffs on Chinese goods to deliver American workers a level playing field.⁷⁶

Republican presidential nominee Donald Trump holds a campaign rally in Warren, Michigan, October 2016.Source: Getty

By this time, the cracks in the old Washington Consensus were emanating from strategic vectors as much as economic ones, as China loomed as a full-spectrum rival to the United States with implications that went far beyond trade deficits and manufacturing jobs. The GFC again marks an inflection point when viewed through the prism of Chinese grand strategy.⁷⁷ An emboldened China emerged more confident in asserting its power and influence around an expanded set of international interests and objectives. No longer would it conform to Deng Xiaoping’s foreign policy dictum of “hiding capabilities and biding time.” China would use every element of statecraft to expand its regional and global footprint, armed by the conviction that “the East is rising and the West is declining.”⁷⁸

Through a series of political, diplomatic, economic and military initiatives, China set about building the foundations for regional hegemony in Asia and a more central role in global affairs. The coming to power of Xi Jinping in 2012 serves as a further landmark in Beijing’s projection of regional and global power. Internally, Xi moved to consolidate and centralise state power and affirm Chinese Communist Party (CCP) control over the economy with a renewed commitment to Marxist-Leninist ideology.⁷⁹ Ensuring private firms complied with the goals and diktats of the Party-state necessarily took priority over further moves towards economic liberalisation as market-driven growth gave way to a resurgence of the role of the state in resource allocation.⁸⁰ In the words of former Australian Prime Minister Kevin Rudd, Xi’s personal brand of Marxist nationalism “pushed politics to the Leninist left, economics to the Marxist left, and foreign policy to the nationalist right.”⁸¹

Externally, Xi’s declared quest for the “great rejuvenation of the Chinese nation” embraced the realisation of “unshakeable” territorial and sovereignty ambitions (including in relation to Hong Kong and Taiwan), expansive military, economic and technological goals, the displacement of the United States as the preeminent power in the Indo-Pacific region and the transformation of the international order to one more closely aligned with Chinese values and norms. Promoting a distinct “Chinese path to modernisation” lay at the core of Xi’s vision. China’s more assertive grand strategy took on tangible form at a speed and scale with few historical comparisons.

The flagship Belt and Road Initiative (BRI), launched in 2013, promised massive Chinese investment in infrastructure to promote connectivity between China and countries in Asia, Europe, the Middle East and Africa. The BRI became the leading example of a wider strategy geared towards building new economic and financial institutions as a counter to the Western-led institutions of the post-war order.⁸²

China’s quest for greater military power and presence saw accelerated investments in new aircraft carrier groups, amphibious vessels and overseas facilities. In 2013, China declared an Air Defence Identification Zone over the East China Sea. The following year, as part of its ambitions to become a maritime great power, China began building and militarising artificial islands in the South China Sea, while moving at the same time to establish its first official overseas base in Djibouti.⁸³

The release of the “Made in China 2025” plan in May 2015 marked a new phase in China’s ambitions to lead the world in the development and manufacture of critical technologies of the so-called ‘fourth industrial revolution’.

The release of the “Made in China 2025” plan in May 2015 marked a new phase in China’s ambitions to lead the world in the development and manufacture of critical technologies of the so-called ‘fourth industrial revolution’. Large-scale state subsidies would henceforth be directed towards ten high-technology industries, including semiconductors, electric vehicle batteries, biotechnology and robotics, quantum computing and AI, with explicit targets for self-sufficiency. This was part of a comprehensive strategy that included the acquisition of foreign talent and technology through both licit and illicit means and a drive to embed Chinese standards through the BRI and international standard-setting bodies.⁸⁴

Among more proximate triggers of Washington’s growing alarm were a series of cyber incidents on top of the large and growing list of complaints from US companies about Chinese cyber espionage and theft of intellectual property.⁸⁵ In 2014, the US Department of Justice launched the first-ever public criminal action against state military personnel for hacking when it indicted five Chinese PLA officials for cyber-enabled economic espionage. In 2015, it was disclosed that hackers had gained access to the personal data of more than 22 million federal employees via the Office of Personnel Management. Though not formally attributed, intelligence assessments pointed towards China’s Ministry of State Security (MSS) and affiliated entities.⁸⁶

The Obama administration’s 2011 pivot towards Asia, designed to strengthen alliances, expand US military presence in the region and create new economic partnerships through the TPP, was in no small measure a response to China’s growing regional influence and ambitions. At the same time, the Obama administration remained committed to an engagement strategy that had been Washington orthodoxy since the 1970s as it sought to enlist Chinese cooperation on international challenges from the nuclear ambitions of North Korea and Iran to climate change.⁸⁷ By the end of the Obama administration, however, the hope of China becoming more liberal, more market-oriented and more enmeshed in a US-led global order had faded from view. The geopolitical buttresses of the old Washington Consensus appeared as broken as the economic ones as China’s expansive ambitions reset the context for US grand strategy.

Donald Trump’s unexpected victory in 2016 would reshape the American political map and US international policy with lasting consequences. Trump’s victory was grounded, above all, in the shift of white working-class voters into the Republican column, including many who had voted twice for Barack Obama. At the 2016 election, the Republican candidate’s advantage among white working-class voters reached the unprecedented margin of 31 points.⁸⁸ His crusade against globalisation, trade agreements and the loss of manufacturing jobs marked a defining element of Trump’s America First narrative and agenda.

Trump’s crusade against globalisation, trade agreements and the loss of manufacturing jobs marked a defining element of Trump’s America First narrative and agenda.

There is evidence to suggest it played a decisive role in his victory, especially given the concentrated demographic and geographic fallout from the China trade shock. Economic analysis showed that industries more exposed to China saw higher exit of plants, larger contractions in employment and lower incomes for affected workers. The local labour markets that were home to these industries endured greater job losses and larger increases in unemployment, nonparticipation in the labour force and greater uptake of government transfers. A consistent finding from the China shock literature is that white non-college-educated males, a core constituency of Donald Trump, experienced particularly adverse employment outcomes.

Extending their economic analysis to political variables, Autor and his colleagues found exposure to rising import competition from China to be “strongly associated with an increased Republican vote share and political realignment.”⁸⁹ Congressional districts where competition from Chinese imports increased rapidly became more politically polarised after 2008 as “ideologically strident” candidates replaced moderates, with net gains by anti-trade GOP representatives. Other studies showed Republicans becoming more likely to incorporate anti-China trade messages into communications with voters at the same time.⁹⁰

Analysis by the Wall Street Journal prior to the 2016 election found that in Republican presidential primary races, Donald Trump won 89 of the 100 counties most affected by competition with China.⁹¹ Though no more than suggestive, a counterfactual analysis of closely contested states by Autor and his coauthors following the election concluded that a 50% lower trade shock (growth in Chinese import penetration) would have seen Hillary Clinton win Michigan, Wisconsin and Pennsylvania and hence a majority in the electoral college.⁹² Analysis of voter surveys also links Trump’s victory in 2016 directly to economic shocks from globalisation and the inability of the US political establishment to respond adequately.⁹³

Trump as change agent

The implications of the Trump ascendancy would reach far beyond the politics of trade. First, Trump’s success in 2016 registered a profound change in the Republican Party and the American conservative movement. In the wake of Mitt Romney’s unsuccessful bid for the presidency in 2012, Trump exploited successfully the growing ideological rift between the GOP leadership and an increasingly fractious party base.⁹⁴ His message of economic nationalism, immigration control and anti-establishment sentiment resonated strongly throughout Rust Belt and rural America. While alienating parts of the former Reagan coalition — the so-called ‘three-legged stool’ of foreign policy hawks, social conservatives and free market advocates — Trump forged the outline of a new voting bloc on the right — at once more populist, more nationalist, more worker-oriented and more suspicious of the benefits of American global leadership.

This realignment was obscured somewhat by Joe Biden’s victory in the 2020 election. Biden reduced Trump’s national advantage from 2016 among white working-class voters, which helped him carry the key states of Michigan, Pennsylvania and Wisconsin. Yet Biden still lost white working-class voters by 26 points, and Trump drew more votes nationally than he did in 2016.⁹⁵ As Matthew Continetti argues in his historical study of the American right, Donald Trump successfully “re-grounded the GOP upon a base of white working-class and rural voters who are anti-elitist, suspicious of government, doubtful about America’s overseas commitments, and fearful of globalization.”⁹⁶ With clear antecedents to the Republican Party of the 1920s and 1930s, a cornerstone of the Trump-led GOP is now the conviction that national sovereignty and independence are vastly more important than global flows of goods, capital and labour.

Among the custodians of liberal internationalism within the Democratic Party, Trump’s victory in 2016 would be the catalyst for a searching reassessment of the extent to which Americans benefited from globalisation and abstract notions of a rules-based international order.

Second, Trump disrupted and reordered the balance of political and ideological forces within the Democratic Party. He exposed the growing chasm between the culturally progressive, activist wing of the party and the more traditional working-class constituency that had formed the core of the New Deal voting coalition. Among the custodians of liberal internationalism within the Democratic Party, Trump’s victory in 2016 would be the catalyst for a searching reassessment of the extent to which Americans benefited from globalisation and abstract notions of a rules-based international order.⁹⁷ Henceforth, it would become an article of faith among a new generation of Democrat policy advisers that “the United States needs to move beyond the prevailing economic ideology of the past few decades (sometimes imperfectly termed neoliberalism) and rethink how the economy operates, the goals it should serve, and how it should be restructured to serve those goals — and this is a geopolitical imperative as well as an economic one.”⁹⁸

Third, Trump served as the circuit breaker and conduit for a bipartisan shift in US foreign policy thinking about China. His administration’s 2017 National Security Strategy witnessed the formal return of great-power competition as the dominant lens for US grand strategy. It stated that: “For decades, US policy was rooted in the belief that support for China’s rise and for its integration into the post-war international order would liberalize China.”⁹⁹ Instead, it went on, “China seeks to displace the United States in the Indo-Pacific region, expand the reach of its state-driven economic model, and reorder the region in its favor.” The Trump White House would hammer a list of economic grievances against China that included currency manipulation, forced technology transfer, massive state subsidies, industrial espionage and protectionist measures that had successfully thwarted earlier WTO commitments.

As Elizabeth Economy has observed, under the America First banner “the two rationales for engagement (with China) — buttressing the current rules-based order and promoting political and economic reform — became irrelevant.”¹⁰⁰ Strategic competition with China now became the fulcrum of an emergent new Washington Consensus as geopolitical and economic forces converged to undercut the logic of engagement at any cost. Obama/Biden advisers Kurt Campbell and Jake Sullivan, writing in 2019 at the height of US-China tariff wars, pointed to the “rapid coalescence of a new consensus.”¹⁰¹ The United States, they argued, was in the midst of the most consequential rethinking of its foreign policy since the end of the Cold War. While Washington remained bitterly divided on most issues, “there is a growing consensus that the era of engagement with China has come to an unceremonious close. The debate now is over what comes next.”

There is some debate over whether Donald Trump should be considered more symptom than cause of the demise of the old Washington Consensus. This often turns crucially on the China question. For example, several erstwhile free trade supporters have concluded that neither the GATT nor the WTO regime contemplated the arrival of a very large economy structured completely differently from the market-based and mixed economies that established them.¹⁰² Among the more commonly identified weaknesses of the multilateral trading system are the inability to discipline state subsidisation and non-market behaviour of state-owned enterprises, as well as the protection of intellectual property. Such problems are seen to be compounded where the ‘rules’ of the rules-based system allowed an economy the size of China to self-identify as a developing country.¹⁰³

At the broader strategic level, it is undeniable that Trump oversaw a new consensus on China take root at the heart of the US foreign policy establishment. Richard Hass, then President of the Council on Foreign Relations, summarised neatly this consensus five years after Donald Trump’s ascension and a decade after President Xi’s:

The wager that integrating China into the world economy would make it more open politically, more market oriented, and more moderate in its foreign policy failed to pay off and has even backfired. Today, China is more repressive at home and has vested more power in the hands of one individual than at any time since the reign of Mao Zedong. State-owned enterprises, rather than being rolled up, remain omnipresent, while the government seeks to constrain private industry. China has regularly stolen and incorporated the intellectual property of others. Its conventional and nuclear military might has increased markedly. It has militarized the South China Sea, economically coerced its neighbours, fought a border clash with India, and crushed democracy in Hong Kong, and it continues to increase pressure on Taiwan.¹⁰⁴

An enduring paradigm shift, as noted previously, rests on its capacity to take hold across the political spectrum. In defeating Trump at the 2020 election, Joe Biden ensured the demise of the old Washington Consensus reached the threshold of co-ownership between both major US political parties. Biden distanced his administration’s policies from Clinton-Obama economics almost as pointedly as Donald Trump repudiated the Republican attachment to free trade. The Biden administration put its imprint on the demise of liberal economic orthodoxies with a progressive agenda marked by vigorous government involvement in the economy, significant public investment and large-scale industrial policy.

Biden’s China competition strategy, meanwhile, took on a scope and ambition that in many domains exceeded his predecessor’s more transactional approach. The Biden administration’s 2022 National Security Strategy described China as “the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to advance that objective.”¹⁰⁵ Under Biden, strategic competition with China became the dominant prism through which to understand the evolving nature of US hard power, grand strategy and economic statecraft.

Burying neoliberalism at Brookings

In a speech at the Brookings Institution in April 2023, National Security Advisor Jake Sullivan delivered the most authoritative statement of the new Washington Consensus of the Biden presidency.¹⁰⁶ Sullivan presented a sweeping critique of the thinking that had oriented US grand strategy and economic policy in the wake of the Cold War and that (at least prior to Donald Trump) formed mainstream currents in both the Democratic and Republican parties.

In effect, Sullivan proposed a new doctrine of US statecraft for an age of strategic rivalry and weaponised economic interdependence. It rested on two interlocking propositions: first, that US success or failure in geopolitics would be determined by economics; and second, that shifts in grand strategy from time to time necessitate fundamental change in economic policy. “Much of the international economic policy of the last few decades,” Sullivan argued, had relied on the premise that “economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative — that bringing countries into the rules-based order would incentivize them to adhere to its rules. It didn’t turn out that way.”

National Security Adviser Jake Sullivan speaking at the Brookings Institution, April 2023. Source: Brookings

The core of the Sullivan thesis was that “the prevailing neoliberal economic philosophy of the past forty years” had failed the American people on four fronts: industrial hollowing out, a rising China that was more rather than less belligerent, climate change and a frayed domestic social compact. The crux of the Sullivan Doctrine lay in the statement that the United States could no longer ignore or accept economic dependencies that had built up over decades of liberalisation and that “could be exploited for economic and geopolitical leverage.” Among examples cited by the US National Security Advisor were supply-chain vulnerabilities in medical equipment, semiconductors and critical minerals.

Blame for the hollowing out of US manufacturing was laid at the feet of “embedded assumptions” of market liberalism that allowed essential sectors to atrophy. Among the flawed assumptions, according to Sullivan, were that markets always allocate capital productively and efficiently, that all growth is good and that the type of growth does not matter. Thus, “in the name of oversimplified market efficiency, entire supply chains of strategic goods — along with the industries and jobs that made them — moved overseas. And the postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept.”

The second failing of the old Washington Consensus went to the strategic intent of China and Russia to reorder the global system. The logic that economic integration and engagement would make a country like China a responsible stakeholder in the post-war order stood discredited. On the economic front, Sullivan stressed the challenges presented by a large non-market economy whose integration into the global system allowed large-scale subsidisation of multiple sectors. That economic integration failed to stop China from expanding its military ambitions, only discrediting the old paradigm further.

To Sullivan, a third shortcoming was the failure to promote a “just and efficient energy transition,” given the threat of climate change. The Biden administration’s revival of industrial policy in the form of the Inflation Reduction Act was touted as a necessary “hands-on investment strategy to pull forward innovation, drive down costs, and create good jobs.” Finally, Sullivan argued that Washington had failed to properly account for the “consequences of our international economic policies.” He assailed the prevailing assumption that:

trade-enabled growth would be inclusive growth — that the gains from trade would end up getting broadly shared within nations. But the fact is that those gains failed to reach a lot of working people. The American middle class lost ground while the wealthy did better than ever. And American manufacturing communities were hollowed out while cutting-edge industries moved to metropolitan areas. … [T]he so-called ‘China shock’ that hit pockets of our domestic manufacturing industry especially hard — with large and long-lasting impacts — wasn’t adequately anticipated and wasn’t adequately addressed as it unfolded.

The first Trump administration flayed the old liberal order as it crumbled gradually, then suddenly, under the weight of political, economic and strategic forces. The Biden administration sanctified its burial and sought to put its own stamp on an emergent new Washington Consensus grounded in scepticism about the benefits of free trade and globalisation, the imperative of rebuilding US industrial capabilities and a China strategy geared towards multi-dimensional competition. Evoking a “new Washington consensus,” Jake Sullivan sought to portray the Biden team as focused not just on the United States or the West alone. The goal, he argued, was “a fairer, more durable global economic order, for the benefit of ourselves and for people everywhere.”

No such sentiment or motivation would animate the renewed America First vision of the second Trump administration. In his January 2025 confirmation hearing, secretary of state-designate Marco Rubio foreshadowed what would be the more muscular, nationalist and coercive approach to international economic policy that President Trump would pursue in following months. Describing the idea of a “liberal world order” as nothing more than a “dangerous delusion,” Rubio offered his own critique of the old Washington Consensus:

Here in America, and in many of the advanced economies across the world, an almost religious commitment to free and unfettered trade at the expense of our national economy, shrunk the middle class, left the working class in crisis, collapsed industrial capacity, and pushed critical supply chains into the hands of adversaries and rivals.

While America far too often continued to prioritize the ‘global order’ above our core national interests, other nations continued to act the way countries always have and always will, in what they perceive to be their best interest. And instead of folding into the post-Cold War global order, they have manipulated it to serve their interest at the expense of ours.

We welcomed the Chinese Communist Party into this global order. And they took advantage of all its benefits. But they ignored all its obligations and responsibilities. Instead, they have lied, cheated, hacked, and stolen their way to global superpower status, at our expense. …

The postwar global order is not just obsolete; it is now a weapon being used against us.¹⁰⁷

3. Rewiring the American state

The instruments of US economic power and purpose have been transformed in roughly a decade. Policy tools long viewed as relics of misguided thinking on trade have been pressed into service. Ideas seen as heresy by custodians of economic orthodoxy have received bipartisan support. Government agencies regarded not so long ago as marginal to US power and national security have been given expanded authorities to command and control commercial activities and to disrupt international economic transactions.

The new Washington Consensus of the Trump-Biden-Trump years places far fewer barriers in the way of interventionist and coercive instruments of state power. This section examines the rewiring of the American state through the prism of trade, industrial and technology policies as US policymakers have sought to protect jobs, boost manufacturing capability, diversify supply chains, alter foreign trade and economic practices, defend national security interests and cement US leadership in foundational technologies. With an undisguised stamp of economic nationalism, the shift towards managing trade, steering resources towards priority sectors and impairing the technological capabilities of strategic rivals adds up to a sea-change in US economic statecraft.

With an undisguised stamp of economic nationalism, the shift towards managing trade, steering resources towards priority sectors and impairing the technological capabilities of strategic rivals adds up to a sea-change in US economic statecraft.

The first Trump administration embraced tariffs in a way not seen since the 1930s while simultaneously returning great-power competition to the centre of US national security strategy. Beginning in 2018, President Trump launched a series of protectionist actions, including escalating tariffs on China. The subsequent US-China trade war saw average tariffs on bilateral trade rise to around 20%. The Biden presidency left most of the Trump tariffs in place and deployed further targeted tariffs aimed at countering trade dependency on China. On his return to the White House in 2025, President Trump unleashed a broad-based tariff barrage without historical precedent in a bid to reset global trade relations in the United States’ favour.

Joe Biden’s presidency and his expansive view of government extended the overthrow of the old Washington Consensus. Three pieces of industrial policy legislation — the Infrastructure Investment and Jobs Act (2021), the CHIPS and Science Act (2022) and the Inflation Reduction Act (2022) — formed a centrepiece of Bidenomics. Donald Trump’s subsequent assault on clean energy subsidies notwithstanding, a solid body of Washington opinion on both the left and the right now views industrial policy intervention in different forms as a core component of modern US economic statecraft.

The rewiring of the American state has similarly witnessed a transformation in US technology policy. The first Trump administration took forceful actions to impair China’s access to advanced semiconductor technologies. The Biden administration put in place a more sweeping framework to deny strategic technologies to China as part of a “small yard, high fence” strategy. While the second Trump administration’s trade brinkmanship has thrown up a less coherent picture, with tighter technology restrictions in some areas and loosening in others, a form of technological ‘decoupling’ is now baked into the US-China bilateral economic relationship.

This new era of US economic statecraft is a work in progress. Persistent — and deliberate — policy uncertainty under President Trump cautions against generalisations and points to why paradigms are best seen as ways of thinking, rather than as defined lists of policies. Even so, the direction of policy travel — away from market-based economic liberalism and towards greater state control over economic relations at home and abroad — is unmistakable.

3.1. The ascent of Tariff Man

Tariffs have a long and complex place in the political economy of the United States, pitting different parts of society, regions of the country and philosophical viewpoints against each other. Under the shifting terms of the tariff debate, the central goal of US trade policy has evolved over the Republic’s nearly 250-year history — from raising revenue for the new federal government, to building domestic industry behind a tariff wall, to concluding agreements with other nations to reduce trade barriers and expand exports.¹⁰⁸

The modern era of US trade policy began with the 1934 Reciprocal Trade Agreements Act, passed by Congress barely four years after the Smoot-Hawley Tariff Act of 1930 resulted in sharply increased US tariffs and invited a wave of retaliation widely seen as deepening the Great Depression. The 1934 law provided President Roosevelt with the authority to negotiate the reduction of tariffs and non-tariff barriers via reciprocal trade agreements. By 1945, the United States had entered into agreements with 27 countries, granting tariff concessions on 64% of all dutiable imports and reducing rates by an average of 44%.¹⁰⁹

Under US leadership, trade negotiations went multilateral in the post-war period. Under the General Agreement on Tariffs and Trade, signed in 1947, the United States and its (Western) trading partners negotiated a series of ‘rounds’ that saw further tariff cuts and a network of codes developed to regulate government practices affecting international trade. The cornerstone of the system was the most-favoured nation (MFN) principle, whereby a trade concession granted to one country was granted automatically to other nations with MFN status. By the conclusion of the Tokyo round in 1979, under negotiations authorised by Congress, the US average tariff level on dutiable imports had been reduced from 60% in 1931 to under 6%.¹¹⁰

No less than other nations, the United States’ commitment to freer trade and the rules-based global trading system in the postwar years remained far from comprehensive or consistent. Interest in pursuing liberal trade waxed and waned under various administrations. By the 1960s, sustained recovery of economies in Europe and Asia from wartime devastation placed increased import pressure on US producers in sectors such as steel, automobiles and labour-intensive manufactures. Trade laws and remedies sought both to limit import competition in select areas and to force changes in foreign trade and economic practices, at times on a unilateral basis. Even so, for the better part of 80 years — from Roosevelt to Obama — US trade policy was characterised by a broadly liberal approach that coupled narrow protectionism with reciprocal trade agreements directed towards opening markets at home and abroad.

Assuming office in January 2017, Donald Trump exhibited only disdain for this legacy and the work of his predecessors. His inaugural address reprised major themes on trade and globalisation from his campaign. “For many decades, we’ve enriched foreign industry at the expense of American industry,” he said. “One by one, the factories shuttered and left our shores, with not even a thought about the millions upon millions of American workers left behind.”¹¹¹

President Trump’s America First trade policy promised to fight back to salvage jobs and wealth lost to overseas. “We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.”

President Trump’s America First trade policy promised to fight back to salvage jobs and wealth lost to overseas. “We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.”¹¹² President Trump’s executive order withdrawing the United States from the TPP would be one of his first acts in office. Renegotiation of NAFTA would be an early priority of President Trump’s new US trade representative, Robert Lighthizer, a veteran trade lawyer and fierce critic of past trade agreements.

In practice, the first Trump administration’s trade agenda evolved haphazardly; partly a sign of an administration coming to terms with a shock victory, and partly a product of internal battles for the president’s ear as protectionist hardliners battled more pro-trade members of the administration.¹¹³ Following a series of trade reviews in 2017, President Trump initiated a period of US tariff escalation in early 2018. Safeguard tariffs (Section 201, Trade Act of 1974) were imposed on imports of washing machines and solar panels. These were soon followed by tariffs of 25% on imports of steel and 10% on aluminium on national security grounds (Section 232, Trade Expansion Act of 1962). Both measures applied to all US trading partners initially, with the national security tariffs hitting US allies especially hard. In response, China, the European Union, Canada, Mexico, India, Russia and Turkey took targeted retaliatory action, mostly on US farm goods.¹¹⁴

US-China trade war: Round 1

President Trump’s next tariff wave focused squarely on China. In March 2018, he announced new tariffs on US$60 billion of Chinese imports. At the same time, trade representative Robert Lighthizer released a 215-page report on unfair Chinese trade practices based on an investigation under Section 301 of the Trade Act of 1974.¹¹⁵ The report identified four means by which China engaged in unfair practices to obtain US intellectual property and technology: forced technology transfer requirements, discriminatory licensing restrictions, state-directed investment in US technology, and cyber intrusions and theft. China’s actions were found to be unreasonable and discriminatory, justifying the use of Section 301 tariffs.

The Section 301 provision did not constrain how much or what type of trade would be subject to tariffs. This discretion saw the Trump administration impose tariffs on a shifting set of products with duties covering nearly half of bilateral imports by September 2018. Trump took to social media at the height of the conflict to declare, “I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so.”¹¹⁶

After a brief truce, tariff escalation resumed in 2019, and by the end of the year more than 80% of US imports of intermediate inputs from China faced tariffs of 25%. China’s tariff retaliation focused disproportionately on agricultural and seafood products. By the time of the Phase One US-China agreement in January 2020, both countries had increased average duties on the other to roughly 20% (Figure 3.1). That agreement included Chinese commitments on intellectual property protection and technology transfer, purchases of American agricultural products and improved US market access for financial services. Research by Chad Bown of the Peterson Institute for International Economics points to China purchasing less than 60% of the total exports that it committed to buy under the agreement, though a partial explanation can be found in the COVID-19 pandemic and supply chain disruptions.¹¹⁷

As a candidate for president in 2016, Donald Trump fed speculation that he might pull the United States out of the WTO. While this did not eventuate, the former champion of the multilateral trading system settled into a relationship of simmering hostility towards the Geneva-based international trade body. The WTO’s disputes process served as the main target of Washington’s ire, with the WTO Appellate Body (charged with hearing appeals in trade disputes) accused of judicial overreach. These concerns arose initially in the Obama administration, but with the blocking of new judicial appointments to the body, the Trump administration effectively rendered it inoperative by the end of 2019.¹¹⁸

Trade issues took a backseat in the 2020 election year as the US death toll from the COVID-19 pandemic climbed to among the highest rates in the developed world. After securing the nomination of the Democratic Party, former Vice President Joe Biden made winning back support in blue-collar America, a voting base Donald Trump had targeted successfully in 2016, a core plank of his bid for the presidency. An instinctive pragmatist with a populist bent, Biden criticised President Trump’s aggressive approach towards US allies while also stressing his pro-worker credentials.¹¹⁹

The Biden campaign found its economic voice via a new generation of Democrat advisers chastened by Trump’s electoral success in 2016 and determined to distance a future Democrat administration from what they saw as a Clinton-Obama era too wedded to pro-market economics and corporate interests. Trade policy should have “a laser focus on what improves wages and creates high-paying jobs in the United States, rather than making the world safe for corporate investment.”¹²⁰ Biden’s “worker-centred trade policy” reflected this thinking and became synonymous with union interests and groups aligned with the progressive wing of the Democratic Party.¹²¹

No less than his predecessor, Biden in office championed Buy American laws and swore off new market access negotiations. The bulk of the Trump tariffs were left in place, while senior officials echoed the Trump-era critique of past trade agreements. In the words of President Biden’s trade representative Katherine Tai, such agreements imposed “significant costs: concentration of wealth, fragile supply chains, deindustrialization, offshoring, and the decimation of manufacturing communities.”¹²²

The Biden administration considered no new trade agreements and allowed the congressional mandate for trade negotiations to expire.¹²³ Nor did the administration alter in any meaningful way the United States’ disposition towards the WTO. The closest approximation to a new trade initiative would be the Indo-Pacific Economic Framework (IPEF) talks launched with 13 regional partners in 2022. After a year of talks and facing a backlash within his party, President Biden abandoned the trade component of IPEF on the eve of a summit with Indo-Pacific nations in late 2023.¹²⁴

In the 2024 election year, President Biden (prior to withdrawing from the presidential race) put his own stamp on US tariff policy with a series of targeted actions against China. In April 2024, citing Chinese overcapacity and industrial subsidies, he called for tariffs on Chinese steel and aluminium imports to be more than tripled, flagged pressure on Mexico to prevent China from shipping goods to the United States via Mexican ports and called for an investigation of Chinese subsidies for its shipbuilding industry. The following month, after a review of the Trump administration’s Section 301 China tariffs, President Biden announced new tariffs on a range of products, including electric vehicles (EVs), EV-related batteries and semiconductors, designed to reduce dependency on China in critical sectors.¹²⁵

“The most beautiful word”

The 2024 election campaign saw Donald Trump again put trade and tariffs at the centre of his pitch to win the White House. “To me, the most beautiful word in the dictionary is tariff, and it’s my favourite word,” Trump told Bloomberg in October 2024.¹²⁶

Apart from threatening new tariffs of 60% on China and 10-20% on other US trading partners, Trump repeatedly flagged his determination to wield tariffs as a source of geopolitical leverage. Far from being spared, American allies confronted the argument that nations benefiting from US security commitments should be forced to pay a price for access to the US market. In the words of a Trump campaign video: “We believe that other countries should pay for the privilege of selling their products to the American market and we believe that the United States should not have to export American jobs to buy the loyalty of foreign nations that we are paying billions of dollars in order to defend them.”¹²⁷

Apart from threatening new tariffs of 60% on China and 10-20% on other US trading partners, Trump repeatedly flagged his determination to wield tariffs as a source of geopolitical leverage.

Trump accused Democrats of seeking to resurrect the Trans-Pacific Partnership under the guise of the Indo-Pacific Economic Framework, describing it as “another massive globalist monstrosity designed to turbocharge outsourcing to Asia.”¹²⁸ Importantly, tariffs found renewed favour as a source of increased government revenue, principally to pay for future tax cuts. On the campaign trail, Trump went so far as to claim tariff revenue could replace US income tax entirely. In the modern era, tariffs account for less than 2% of federal revenue, whereas income taxes account for around half.¹²⁹ Following his November election victory, the Trump tariff threats took on more tangible and expansive form. The President-elect threatened tariffs of 25% on Canada and Mexico unless they cracked down on migrants and fentanyl crossing the US border, an extra 10% on China based on fentanyl exports and tariffs on any country that flirted with reducing its use of the US dollar.¹³⁰

President Trump’s second inaugural address again reflected his zero-sum view of international economic relations. “Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens,” he declared.¹³¹ Amid a flurry of executive orders on inauguration day, the White House issued the America First Trade Policy Memorandum commissioning a top-to-bottom review of US trade relations.¹³² Subsequent statements outlined President Trump’s Reciprocal Trade and Tariffs agenda and an America First Investment Policy.¹³³ The President’s 2025 Trade Policy Agenda, released by USTR, encapsulated the paradigm shift of the US executive branch. The arm of government that for decades had toiled to negotiate tariff reductions with trading partners now proclaimed President Trump’s “new consensus that tariffs are a legitimate tool of public policy.”¹³⁴

Despite the first Trump administration’s break with the past, a credible argument can be made that its actions fell short of the president’s anti-trade rhetoric; that the Trump ‘bark’ was worse than the ‘bite’. Changes to NAFTA under the new US-Mexico-Canada Agreement (USMCA) were relatively modest in practice. Agreements with trading partners such as China and the European Union lacked the sort of protectionist enforcement teeth that might have been anticipated. And trade representative Robert Lighthizer was widely credited as retaining a strong attachment to legal processes and to congressional partnership on trade matters.

President Trump seemed determined in 2025 to ensure no such charge could be levelled against his administration the second time around. The speed, scale and scatter-gun nature of the Trump tariff barrage would far exceed anything witnessed in his first term. In early February, the president invoked the International Emergency Economic Powers Act (IEEPA) to declare national emergencies related to fentanyl trafficking and immigration, imposing new tariffs on China, Canada and Mexico. The additional 10% tariff on Chinese imports was doubled in early March. The 25% tariffs on goods from Canada and Mexico were announced, suspended, announced again and suspended again. In March, 25% duties were levied on steel and aluminium on national security grounds (Section 232 tariffs). All US trade partners were captured, including Australia, which had secured an exemption from similar duties in 2018. These were followed soon after by further sectoral tariffs of 25% on cars and car parts.

Launching his ‘everywhere all at once’ trade war, the president railed against friends and foes alike as having “looted, pillaged, raped and plundered” the United States for decades.

These measures proved a foretaste to President Trump’s sweeping “reciprocal tariffs” plan announced on 2 April — so-called “Liberation Day.” Invoking the IEEPA again based on a purported national emergency over the “large and persistent” US trade deficit, President Trump announced tariffs of between 10% and 50% on almost every country in the world.¹³⁵ Launching his ‘everywhere all at once’ trade war, the president railed against friends and foes alike as having “looted, pillaged, raped and plundered” the United States for decades.¹³⁶ While the original justification for new reciprocal tariffs had been unequal trade barriers, the new tariff rates were controversially based on a formula tied to bilateral trade deficits in goods.¹³⁷

The dash for deals

Faced with soaring US bond yields and a falling dollar, President Trump announced a 90-day pause in the steepest tariffs on 9 April, except for duties on China. Tit-for-tat retaliation saw the United States raise tariffs on China to 145% (with some exceptions) while Beijing ratcheted up tariffs on US imports to 125%, alongside other measures including restrictions on rare earths exports. Following high-level talks in mid-May, the United States and China agreed to a 90-day pause in their bilateral trade war, with US additional tariffs set at 30% and Chinese additional tariffs at 10%.¹³⁸

In late May, the US Court of International Trade (a federal court that hears cases on trade laws) struck down President Trump’s tariffs under IEEPA, arguing that levying tariffs based on broad claims of national emergencies exceeded presidential authority.¹³⁹ The US Court of Appeals later granted a temporary pause on the ruling in advance of a Supreme Court hearing that commenced in early November 2025. With the tariffs still in place, the Trump administration embarked on a series of negotiations with trading partners with the promise of 90 deals in 90 days. An already chaotic policy process failed to cope with simultaneous negotiations of this magnitude. The administration first extended the deadline prior to President Trump sending letters to more than 25 government leaders proposing new tariffs ranging from 20% to 50% due to take effect on 1 August. At the same time, the timeline for reaching a more complete agreement with China was adjusted to mid-August.¹⁴⁰

Alongside the blizzard of reciprocal tariffs, the Trump administration continued to announce a series of sectoral (Section 232) tariffs on national security grounds. These included current or prospective tariffs on steel, aluminium, motor vehicles and parts, pharmaceuticals, critical minerals and rare earths, semiconductors, commercial aircraft, copper and drones, among other products. On 31 July 2025, the US Government issued an executive order modifying previously imposed reciprocal tariff rates, effective 7 August (again excluding China). The modified reciprocal tariffs included rates of up to 41%, with a baseline tariff of 15% applying to countries where the United States runs a trade deficit. Many countries in the Indo-Pacific region faced higher rates. Some countries — including Australia, where the US runs a trade surplus in goods — were left off the list or subject to a lower baseline tariff rate of 10%.

The adjusted reciprocal tariff rates by this point reflected several bilateral deals covering tariffs, other alleged barriers and investment commitments aimed at rebalancing economic relations in favour of the United States. Between May and December 2025, 15 such deals or agreements were announced, including with major partners such as the European Union, Japan and South Korea, as well as several Southeast Asian countries. The adjusted tariff rates for a number of these deals are shown in Figure 3.2. While many US trading partners negotiated tariff rates down from Liberation Day settings, others, including India and Brazil, saw higher tariffs applied for reasons unrelated to bilateral trade.

Writing in the New York Times in August, US trade representative Jamieson Greer proclaimed the start of what he called the “Trump round” of international trade, saying the president had “laid the foundations for a new global trading order.” The United States, Ambassador Greer argued, had “paid for the (old) system with the loss of industrial jobs and economic security,” labelling as “untenable and unsustainable… the current nameless global order, which is dominated by the World Trade Organization and is notionally designed to pursue economic efficiency and regulate the trade policies of its 166 member countries.”¹⁴¹

After the first phase of Trump dealmaking, the least settled trading relationships look to be those with the United States’ three largest trading partners — Mexico, Canada and China. Mexico and Canada, the largest and second-largest US trading partners respectively, though much smaller economies, maintain highly asymmetric trading relationships where they both send more than three-quarters of their exports to the United States.

After threatening high tariffs on all trade from Mexico and Canada in early 2025, the president was persuaded to pause implementation on account of USMCA provisions and concerns from US auto companies. All trade with Mexico and Canada that complied with USMCA terms avoided reciprocal tariffs, though 50% tariffs on steel and aluminium imports remained in place with major impacts on Canada. White House letters in July threatened duties on non-USMCA goods of 25% on Mexico and 35% on Canada. These imposts were further suspended for Mexico, but not for Canada. US-Canada trade relations continued to sour when President Trump broke off trade discussions in October in response to a Canadian province airing advertisements citing Ronald Reagan’s criticisms of protectionism. A review of USMCA in 2026 will revisit the full suite of North American trade issues and provide a forum for further demands by the United States.¹⁴²

The greater structural symmetry in the US-China relationship ensures a very different dynamic. China stands as the only country with both the capacity for effective retaliation against US tariffs and the wherewithal to exert strategic economic leverage in bilateral trade talks. In response to US tariff escalation in February and March, China retaliated with 10% tariffs on US natural gas, coal, machinery and agricultural products. After Liberation Day, China imposed 34% tariffs on all US goods. When the United States imposed port fees on Chinese ships, China countered with fees on American vessels. When Washington expanded its Entity List in September 2025 to cover more subsidiaries of Chinese firms with export controls, Beijing responded in early October with sweeping export controls on rare earth elements and magnets.¹⁴³

China stands as the only country with both the capacity for effective retaliation against US tariffs and the wherewithal to exert strategic economic leverage in bilateral trade talks.

After months of escalation and de-escalation, an interim trade deal — more in the realm of a one-year truce — was struck in late October. The structural foundations of strategic competition, along with the policy architecture for tariffs, export controls and other decoupling measures, remain in place. Under the deal, the United States reduced reciprocal tariffs (from 125% to 10%), fentanyl-related tariffs (from 20% to 10%), suspended port fees on Chinese ships and delayed export controls that would have barred more Chinese firms from US technology. For its part, China temporarily reduced additional duties on US imports (from 125% to 10%), suspended most rare earths restrictions announced in early October for one year, agreed to crack down on fentanyl, committed to buying US soybeans and promised to “properly resolve” a dispute over TikTok.¹⁴⁴

More than a year on from President Trump’s election victory, US trade policy remains a study in policy uncertainty amid unilateral tariffs, reciprocal tariffs, sectoral tariffs, bilateral deals and myriad exemptions. Many of the announced deals are not legally binding. Some do not have formal, written terms, relying instead on a mix of verbal descriptions of what has been negotiated, White House fact sheets and framework documents subject to further discussions. Several include commitments cast by President Trump in very different terms from his foreign counterparts.

Tariff rates can change quickly at the whim of the president. President Trump’s senior trade official has warned trading partners: “Rather than the drawn-out dispute settlement process favored by the old guard of trade bureaucrats, the new US approach is to closely monitor implementation of the deals and swiftly reimpose a higher tariff rate for noncompliance if needed.”¹⁴⁵ The MFN principle no longer applies to US trade policy in any meaningful sense, and the WTO no longer appears in any way a restraining force on US trade action. Uncertainty remains a feature (not a bug) of US trade policy under the second Trump administration.

A higher tariff benchmark?

As of late November 2025, the Yale Budget Lab calculates the US average tariff rate at almost 17%, seven and a half times higher than in January 2025 (Figure 3.3). There are several reasons to believe a higher tariff benchmark will endure.

First, President Trump can legitimately claim to have used tariff leverage to secure meaningful concessions from trading partners. Second, even if higher tariffs are viewed by economists and parts of the business community as a net negative for the economy, the concentrated benefits that accrue to certain sectors and interests mobilise political resources to defend them. There is evidence of congressional support to codify through statute the higher country-specific tariffs and terms of the Trump deals.¹⁴⁶ Third, increased government revenue from the Trump tariffs, given the large and persistent US budget deficit, further reduces the prospects of a viable political coalition in Washington forgoing such revenue. Estimates by the non-partisan Tax Foundation are that higher US tariffs will raise between US$1.8 trillion and US$2.4 trillion in revenue over the next decade, depending on the scale of behavioural effects.¹⁴⁷

It should not be assumed that President Trump has the field to himself on trade or that his economic agenda is popular, given cost of living pressures. According to Gallup polling, the president’s job approval rating (including on his handling of the economy) had fallen to 36% by the end of November, the lowest level of his second term.¹⁴⁸

The looming judgement of the US Supreme Court on the legality of President Trump’s use of IEEPA to impose sweeping tariffs in response to “unusual and extraordinary threats” stands as an obvious source of further uncertainty at the end of 2025. Yet even in a scenario where the Supreme Court finds the president has overreached with IEEPA, there are few reasons to believe anything like the status quo ante of January 2025 will be restored.

Many countries have gone through the difficult process of striking new trade deals with the United States and will not see it in their interests to reopen negotiations given basic power dynamics. More directly, President Trump retains considerable tariff authority through other legislative instruments. Speculation surrounds potential backup plans that will see greater reliance on duties under Section 232 of the Trade Expansion Act of 1962 for national security matters, Section 301 of the Trade Act of 1974, which authorises tariffs in response to other countries’ unfair trading practices, and Section 122 of the Trade Act of 1974, which allows tariffs of up to 15% for up to 150 days to address balance of payments issues. In short, the Trump tariff toolkit remains considerable (Figure 3.4).

3.2. The industrial policy revival

Tariffs hold special appeal to Donald Trump as a tool of economic policy to address all manner of domestic and international issues. Yet they are by no means the only policy instrument that has found renewed favour in Washington in recent years. Support has built across the political spectrum for a more energetic approach to industrial policy to promote strategic sectors and technologies and to address a wide variety of economic and non-economic objectives.

Traditionally, market-liberal economists have regarded industrial policy as creating market distortions and imposing costs on the economy that exceed any potential benefits. The presence of concentrated benefits, diffuse costs and political incentives for rent-seeking behaviour saw Juhász, Lane and Rodrik conclude that: “[t]here are few economic policies that generate more knee-jerk opposition from economists than industrial policy.”¹⁴⁹ The title of a 2019 paper by two IMF economists — “The Revival of the Policy That Shall Not Be Named: Principles of Industrial Policy” — captures the prevailing tenor of the old Washington Consensus.¹⁵⁰

Industrial policy refers in this context to select government support targeting specific sectors, firms, technologies or geographic regions. In practice, it can take a variety of forms, including subsidies, tariffs and other trade restrictions, tax incentives, government procurement measures and preferential access to credit.¹⁵¹ In little more than five years, the case for industrial policy has gained new political, institutional and intellectual backing in Washington and in other national capitals. The COVID-19 pandemic, the full-spectrum China challenge and Russia’s invasion of Ukraine have bolstered the argument that the private sector alone cannot or will not deliver the investments and actions needed to address national security imperatives, ensure resilient supply chains for essential products or facilitate economy-wide transitions in areas like clean energy systems and the digital economy. The new Washington Consensus sees a compelling case for greater state intervention (either carrots or sticks) to rebuild US manufacturing capability in support of national and economic security objectives and to compete with China.¹⁵²

The new Washington Consensus sees a compelling case for greater state intervention (either carrots or sticks) to rebuild US manufacturing capability in support of national and economic security objectives and to compete with China.

Washington’s central role in supporting US defence technological advancement over many decades undercuts any simple notion that US governments have foresaken industrial policy under the sway of neoliberal ideology. Through bodies such as the Defense Advanced Research Projects Agency (DARPA), US policymakers have long recognised a “security-industrial exception” to market-based orthodoxy, resulting in significant federal government support for technologies critical to US national security.¹⁵³ Some obvious forms of industrial policy also arose at the supposed height of neoliberal hegemony in the 1980s and 1990s, driven by concerns about US competitiveness and the economic challenge from Japan. A conspicuous example was the SEMATECH initiative — a co-funded consortium of the federal government and 14 US semiconductor firms formed towards the end of the Reagan administration to revive US semiconductor manufacturing in the face of the challenge from Japanese industry.¹⁵⁴

Nonetheless, this was still the exception that proved the rule in the realm of economic policy objectives like growth, productivity and competitiveness. Under the old Washington Consensus, US government support for industrial and technological advancement relied overwhelmingly on broadly based measures for R&D promotion and business development. The case for industrial policy on economic, social and environmental grounds found proponents within the Democratic Party and among progressive policy institutions, but the conventional wisdom among Washington policy elites and on Wall Street remained suspicious of active government intervention designed to shape the composition and performance of the American economy.

Without embracing industrial policy explicitly, the Obama administration undertook a series of crisis-driven sectoral initiatives in the wake of the GFC. The most significant were the rescue plan for US auto companies and clean energy incentives under the American Recovery and Reinvestment Act of 2009, the largest clean energy package prior to the Inflation Reduction Act of 2022. Based on a conventional economic policy philosophy and mindful of fiscal constraints, the Obama administration’s industrial innovation strategy tended to focus on relatively modest initiatives like Manufacturing USA — a national network of public-private institutes designed to spur advanced manufacturing.¹⁵⁵

Outside of tariff threats, the first Trump administration came to office showing little overt interest in industrial policy, while leaning heavily into traditional Republican priorities of tax cuts and deregulation. Regulatory levers and procurement authorities were used to ease constraints on fossil fuel and manufacturing projects. The push to reshore manufacturing production saw the president threaten tariffs on several firms. A review of supply chain vulnerabilities in the US defence industrial base commissioned by the Trump administration in 2017 highlighted sectoral weaknesses in vital areas of national security, including critical minerals, microelectronics, missile and munitions production, shipbuilding and aerospace components. This led to the administration taking a series of actions through 2018 and 2019 under Title III of the Defense Production Act (DPA), which authorises the president to provide financial assistance to private industry to “create, maintain, protect, expand, or restore domestic industrial base capabilities essential for national defense.”¹⁵⁶

A sharper spotlight fell on national vulnerabilities and on the US Government’s relatively limited industrial policy toolkit in 2020, a reflection of supply chain crises in the COVID pandemic, growing alarm about US reliance on foreign-made semiconductors and deepening concerns about China’s rapidly advancing technological capabilities. The COVID-19 crisis saw President Trump invoke the DPA to ensure production of ventilators, respirators and other medical supplies. In the face of semiconductor shortages and the China challenge, Trump administration officials worked closely with congressional leaders on the CHIPS for America Act (the forerunner to the CHIPS and Science Act) and stepped-up pressure on Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading contract chipmaker, to build an advanced semiconductor fabrication plant in Arizona.¹⁵⁷

Few would credit the first Trump administration with having a developed industrial policy philosophy. Two caveats are warranted, however. First, President Trump’s embrace of economic nationalism helped catalyse a realignment of policy priorities within the Republican Party, clearing the path for those supportive of federal actions to reshore manufacturing capabilities.¹⁵⁸ Second, the Trump administration produced an example of striking industrial policy success — Operation Warp Speed (OWS) in the context of COVID-19. Begun in 2020 amid the first wave of the virus, OWS drove the development of effective vaccines in a record eight months. This exercise in government-led industrial policy included support for a portfolio of different technologies, guaranteed contracts that enabled production to evolve alongside development, flexible contracting mechanisms that saw rapid procurement and intervention into supply chains, fast-tracked technology certification of new vaccines, mapping supply chains and filling gaps to assure rapid production and product distribution.¹⁵⁹ As Columbia University’s Adam Tooze later observed, “Trump delivered the first demonstration of an industrial policy that a short time later would be claimed as the greatest historical novelty of Bidenomics.”¹⁶⁰

By the end of the first Trump administration, a substantial bipartisan chorus supportive of a bolder approach to industrial policy had taken root in Washington.

By the end of the first Trump administration, a substantial bipartisan chorus supportive of a bolder approach to industrial policy had taken root in Washington. Among senior Republican lawmakers, (then) Senator Marco Rubio and Senator Tom Cotton lent explicit intellectual support to a more active role for government in the economy. Think tanks aligned to the pro-manufacturing, economic nationalist Trump narrative, including American Compass and the America First Institute, also emerged as agenda setters in a Republican Party increasingly sceptical of liberal economic orthodoxies now labelled as “free market fundamentalism.”¹⁶¹

The Biden industrial policy trifecta

The presidency of Joe Biden brought with it the most full-throated and ambitious embrace of industrial policy since the 1930s. The administration’s “modern industrial and innovation strategy” — complete with large-scale public investment and a heavy dose of economic nationalism — became a signature of Bidenomics and its determination that government should play a greater role in the US economy.¹⁶²

The Biden industrial policy agenda drew self-consciously on an American tradition of government-led industrialisation dating back to the earliest days of the Republic and the quest to foster domestic manufacturing industry led by the first US Treasury Secretary, Alexander Hamilton. It marked a discernible break from the old Washington Consensus based on an economic philosophy of using government power and resources to actively reshape the structure of the US economy.

In practice, the strategy took shape between 2021 and 2023 through a series of executive orders and three major pieces of legislation — the 2021 Infrastructure Investment and Jobs Act, the 2022 CHIPS and Science Act and the 2022 Inflation Reduction Act. All leveraged subsidies, tax credits, loan guarantees and other tools, such as Buy American provisions to support production and investment in select areas of the economy. Estimates put the combined cost of the three pieces of legislation at more than US$2 trillion over 10 years, though these estimates can be regarded as conservative and at the lower end of expected revenue costs given reliance in key areas on uncapped taxation credits.¹⁶³

US President Joe Biden delivers remarks on his Bidenomics agenda in Washington DC, October 2023. Source: Getty

Five objectives characterised the Biden administration’s industrial policy: (1) rebuilding US industrial strength in key sectors; (2) addressing supply chain vulnerabilities; (3) positioning the United States at the forefront of the green energy transition; (4) competing with China across a full spectrum of military, economic and technological domains; and (5) providing increased support and economic opportunity to geographic regions regarded as left behind by globalisation and structural change. A high degree of conditionality attached to industrial policy support — ranging from mandates on labour standards and childcare arrangements to China-related restrictions and clean technology supply chain requirements. Such elements added to both the ambition and the complexity of Bidenomics.

The COVID-19 pandemic and major supply chain disruptions were instrumental in framing the longer-term industrial policy project and narrative. A month after taking office in January 2021, President Biden signed an executive order commissioning a 100-day sprint to assess critical supply chain vulnerabilities. Releasing the review findings in June, the White House stressed that:

decades of underinvestment and public policy choices led to fragile supply chains across a range of sectors and products. Unfair trade practices by competitor nations and private sector and public policy prioritization of low-cost labor, just-in-time production, consolidation, and private sector focus on short-term returns over long-term investment have hollowed out the US industrial base, siphoned innovation from the United States, and stifled wage and productivity growth.¹⁶⁴

These themes and policy directions would be developed in speeches and executive actions by Biden administration officials in the months ahead, while also being embedded in key pieces of legislation.¹⁶⁵

The first leg of what would become a Biden industrial policy trifecta came in the form of the Infrastructure Investment and Jobs Act (IIJA) — often referred to as the Bipartisan Infrastructure Law. Signed by President Biden in November 2021, the IIJA authorised US$1.2 trillion of federal funding on transport and clean energy projects. Of US$550 billion in new investments and programs, US$284 million was earmarked for upgrading roads, bridges, ports, airports, public transit and rail systems. Energy investments made up a further US$76 billion of funding, with programs targeting clean hydrogen and carbon capture and storage technologies, as well as grid modernisation, integration of renewables into the electricity system and climate adaptation. The law carried a strong Made in America stamp, incorporating the Build America, Buy America Act, which expanded requirements to ensure that all federally funded infrastructure projects be built with US iron, steel, manufactured products and construction materials.¹⁶⁶

The next major piece of industrial policy legislation shepherded through Congress by the Biden administration was the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act. Signed into law in August 2022, the CHIPS Act sought to revitalise advanced semiconductor production domestically while also supporting US technological leadership in areas such as nanotechnology, quantum computing and artificial intelligence. Its principal objective was to arrest the decline in the United States’ role in global semiconductor production. Having invented the semiconductor, the United States accounted for only around 10% of global production and virtually none of advanced chip production by the second decade of the 21st Century.¹⁶⁷ East Asia had reached what many in government and industry saw as a level of unhealthy dominance by accounting for roughly 75% of global production, while more than 90% of the world’s most advanced chips were made by one firm — TSMC in Taiwan (Figure 3.5).

Semiconductor shortages during COVID-19 helped galvanise support within Congress behind the CHIPS Act. Automotive companies were forced to scale back production while surging consumer electronics demand added to shortages. Lead times for advanced semiconductors stretched in some cases to more than six months. By mid-2022, pressure on Congress helped unlock bipartisan support for a package that added new manufacturing subsidies to bills that had previously focused on R&D subsidies. Among the lead authors of the legislation would be Republican Senator Todd Young from Indiana.

The Biden administration set a target of having 20% of the world’s advanced semiconductors made in the United States by 2030. The CHIPS Act allocated almost US$53 billion for semiconductor manufacturing investments, R&D and workforce development, with US$39 billion in targeted incentives for the construction and expansion of semiconductor fabrication facilities and a further US$24 billion in tax credits for capital expenses for manufacturing of semiconductors and related equipment. Around US$11 billion was allocated to advanced semiconductor R&D, with additional spending authorised for the wider US innovation ecosystem, including the National Science Foundation, the National Institute of Standards and Technology and the Department of Energy’s Office of Science.¹⁶⁸

The Inflation Reduction Act, aimed at vaulting the United States to the forefront of the global green transition, would form the third (and most controversial) leg of the Biden industrial policy trifecta. Signed into law on 16 August 2022, it was heralded by the White House as the “most significant action Congress has taken on clean energy and climate in the nation’s history” and would form the centrepiece of the administration’s commitment to reduce US greenhouse gas emissions by 50-52% below 2005 levels by 2030.¹⁶⁹ The US Department of Energy estimated at the time that the IRA and the IIJA together would drive about 80% of the slated reduction in emissions on this timescale.

Via a mix of new spending and tax breaks, the IRA sought to lower energy costs, accelerate investment in clean energy transmission and technologies and spur the production of critical minerals in the United States while opening new opportunities for American manufacturing workers. Other provisions that sought to lower health costs gave the legislation its somewhat awkward and unlikely title.¹⁷⁰ While offering a variety of subsidies, tax incentives and loan guarantees, most of the estimated costs took the form of tax credits. Major provisions included:

• Manufacturing of solar panels, wind turbines, batteries, biogas, geothermal plants and critical minerals processing: US$30 billion of tax credits
• Assisting utilities in transitioning to clean energy: US$30 billion in grants and loans
• A “green bank” to support clean energy projects: US$27 billion
• Cutting agricultural emissions: US$20 billion
• Developing green hydrogen and other sustainable and alternative fuels: more than US$10 billion of tax credits
• Developing electric vehicle (EV) manufacturing and renewable energy technologies: US$10 billion in tax credits
• Supporting heavy polluters in industrial manufacturing (steel, chemicals, cement) to reduce emissions: almost US$6 billion of tax credits and grants¹⁷¹

Firms were provided incentives to use and produce components and equipment within US-centric supply chains, either sourced only from the United States or from free trade agreement partners. Additional tax credits were designed to incentivise companies to pay union wages, use registered apprentices and to locate projects in low-income communities or regions that traditionally relied on industries like coal. Consumer incentives included tax credits of up to US$7,500 and US$4,000 for the purchase of new and used electric vehicles, respectively, while rebates sought to incentivise the electrification of homes and the fitting or retrofitting of energy-efficient appliances such as heat pumps.¹⁷²

Subsidies were designed to ensure final assembly of electric vehicles occurred in North America. To qualify for the largest tax credit on a new vehicle, 50% of the value of battery components needed to be produced or manufactured in North America, with the minimum percentage increasing annually. Forty per cent of the value of critical minerals used for the vehicle needed to be extracted, processed or recycled domestically or in a US FTA partner country, again with the minimum percentage increasing annually.¹⁷³ The required share of battery components produced or manufactured in North America was slated to rise from 50% in 2023 to 100% in 2029, while the required share of critical minerals extracted or processed in the United States or an FTA partner rose from 40% in 2023 to 80% in 2027. From 2024, an EV battery could not contain any critical minerals extracted, processed or recycled by a “foreign entity of concern” (FEOC) — code for China.

Assessments of President Biden’s industrial policy are inevitably coloured by the president’s political demise, his failure to sell the merits of Bidenomics and by the Trump assault on clean energy subsidies in the One Big Beautiful Bill Act of 2025. At best, results appear mixed. There is evidence of a rebound in US manufacturing investment in targeted sectors like semiconductors, with subsidies helping to ‘crowd in’ private investment. With President Biden preparing to leave office, administration economic officials could point to investment in manufacturing structures as a share of nominal GDP rising to its highest level since 1982 by the second quarter of 2024.¹⁷⁴

An August 2024 investigation by the Financial Times found that approximately 40% of major projects connected to the Inflation Reduction and CHIPS Acts were either paused or delayed.

At the same time, numerous examples exist of implementation challenges. An August 2024 investigation by the Financial Times found that approximately 40% of major projects connected to the IRA and the CHIPS Act were either paused or delayed.¹⁷⁵ The chair of President Obama’s Council of Economic Advisers, Jason Furman, has provided a wider critique of Bidenomics based on its failure to take adequate account of budget constraints and policy trade-offs. At a macro-level, this gave rise to higher inflation and acute cost pressures in many parts of the US economy, while at a micro-level, the complex conditions attached to industrial policy subsidies appear to have constrained program delivery, highlighting unresolved tensions between competing policy objectives.¹⁷⁶

Trump 2.0: Industrial policy, but not as we’ve known it …

In the 2024 presidential election campaign, Donald Trump vowed to wind back key elements of his predecessor’s industrial policy, especially the IRA. He also criticised CHIPS Act subsidies on the basis that tariffs would provide the necessary incentive for investment in US facilities. Tariff protection, tax cuts, less regulation and affordable energy formed the core of the Trump vision of a “New American Industrialism.” Under a future Trump administration, it was claimed: “The United States will give you the lowest taxes, the lowest energy costs, the lowest regulatory burdens, and free access to the best and biggest market on the planet — but only if you make your products here in America and hire American workers for the job.”¹⁷⁷

Far from winding back state intervention in the US economy, President Trump’s second term has seen him put his own stamp on industrial policy via the most expansive assertion of executive branch power since the New Deal. While eager to tag his predecessor’s approach to industrial policy as wasteful overreach, President Trump has shown no hesitation in using a variety of fiscal and regulatory tools to support favoured sectors and firms. As has been aptly stated, the Trump administration’s “flurry of industrial policy experiments has scrambled ideological constituencies and sparked fresh debates about the role of the federal government in the economy.”¹⁷⁸ Some have gone so far as to label the Trump industrial policy a new chapter of American “state capitalism.”¹⁷⁹

The quest for American “dominance” in such sectors as energy and AI, plus efforts to bolster US industrial capability and reduce supply chain vulnerabilities, has witnessed a spree of norm-breaking industrial interventions. The administration has made good on its vow to slash Biden-era green energy subsidies through major cuts to renewable energy tax credits, grants and loans. Renewables projects on federal lands must also undergo more stringent review processes.¹⁸⁰ Yet even as it has moved aggressively to expand fossil fuel energy, the Trump administration has also reoriented government support towards select clean energy sectors (such as hydropower, nuclear and geothermal projects) while disincentivising solar and wind projects. In line with earlier priorities, President Trump has taken steps to boost domestic shipbuilding capability while also taking action to shore up supply chains for 17 elements crucial to defence and national security technologies.

A series of industrial interventions based on executive orders, legislative instruments and company-specific deals has seen widespread use of unconventional tools such as federal government equity stakes and profit-sharing arrangements. The president has personally brokered deals to shape where companies and countries allocate capital, while the departments of Commerce, Defense and Energy have acquired equity stakes in individual companies.¹⁸¹ The list of Trump 2.0 industrial interventions includes:

• Government approval of Nippon Steel’s takeover of US Steel in exchange for a “golden share” giving Washington certain rights over strategic decisions and investment commitments
• A US$400 million (7.5%) direct equity stake by the Pentagon in rare earths producer MP Materials, plus credit facilities, off-take guarantees and minimum floor price provisions
• Deals (later modified) whereby semiconductor firms Nvidia and Advanced Micro Devices provide the US Government with a 15% share of China-related revenues in return for export licenses to resume selling certain AI chips to China
• The conversion of earlier CHIPS Act grant commitments into a 9.9% US government stake in Intel to support advanced semiconductor manufacturing in the United States
• A brokered investment by Japan in Westinghouse to support construction of nuclear power reactors, with the option of an 8% US government stake.¹⁸²

The Pentagon-MP Materials agreement and the wider push to secure new supplies of critical minerals and rare earth elements underlines the kaleidoscopic nature of Trump administration interventions based on a mix of established authorities and new forms of state power. The administration has won praise in some quarters based on its creative and expansive use of the authorities under the Defense Production Act, which has seen MP Materials elevated to de facto national champion status. At the same time, concerns have been expressed about reliance on ad-hoc deal-making that fails to incorporate private sector cost sharing or establish policy frameworks that foster due process, competition and innovation.

What has distinguished the Trump administration’s approach is the degree of firm-level intervention outside times of economic crisis, a notable departure from Obama-era corporate rescues and Biden-era sector-wide incentives.¹⁸³ Whether President Trump’s “art of the deal” approach to industrial policy will leave a lasting imprint on US economic policy remains uncertain. More certain is that, while precise policies and instruments may differ, the desired ends of active US industrial policy intervention — rebuilding manufacturing capabilities, addressing supply chain vulnerabilities, reducing dependencies on China and striving for American dominance in strategic technologies — will remain at the heart of the new Washington Consensus.

3.3. China and the tech wars

The old Washington Consensus had little to say about technology policy. More accurately, it held to certain implicit assumptions. The first was that low barriers to the flow of technology (like free trade) helped US firms and consumers, delivering major benefits to the US economy. Second, it was assumed that globalisation undercut the capacity of governments to control the spread of most technologies in any case. Cold War instruments like export controls, if required, should focus on a narrow set of “dual use” technologies and a small band of rogue actors. A third premise was that the United States, as the world’s technological leader, was best served by what analysts called a ‘run faster’ strategy that prioritised positive measures like R&D, infrastructure support and workforce development rather than defensive measures like technology restrictions.

In just a few years, a very different consensus would take hold in Washington. The prevailing view in both parties and across much of the executive branch, Congress and the foreign policy establishment is that the United States is in a fierce, zero-sum battle for technological supremacy with China. Beijing is seen to have exploited technological interdependence to steal secrets, force technology transfer, spread disinformation, hold US infrastructure hostage and leap ahead in key areas of economic competition and modernise its military arsenal.¹⁸⁴ Yet the US Government is far from powerless in the face of this challenge. The forces of globalisation and interdependence offer the United States sources of political and technological leverage to constrain China’s technological advancement. In this setting, positive measures are all well and good, but they are not sufficient for winning the technology race of the 21st century.

The new Washington Consensus sees technology competition and the use of technology controls as central to US national security and economic security. President Donald Trump’s China trade fixations and highly transactional approach to diplomacy have seen export controls transition at times from national security tools to trade policy bargaining chips. Yet the broad direction towards tighter, more comprehensive technology restrictions remains intact, with the United States and China seemingly locked in a partial ‘decoupling’ of technology ecosystems.

In tracing the evolution of US technology policy and the thinking that underpins it, the latter part of the Obama administration again offers a picture of tectonic plates and dawning realisations, but with a reluctance to break with established orthodoxies. Chris Miller captures this transition period in Chip War, his detailed study of the contest for supremacy in advanced semiconductors.

By around 2015, from deep in the US government, gears slowly began to shift. The government’s trade negotiators saw China’s chip subsidies as a flagrant violation of international agreements. The Pentagon nervously watched China’s efforts to apply computing power to new weapons systems. The intelligence agencies and Justice Department unearthed more evidence of collusion between China’s government and its industries to push out American chip firms. Yet the twin pillars of American tech policy — embracing globalization and “running faster” — were deeply ingrained, not only by the industry’s lobbying, but also by Washington’s intellectual consensus.¹⁸⁵

As in other domains, the early years of the first Trump administration exposed deep cracks in this consensus. A small cadre of US national security officials, alarmed at what they saw as the technological threat posed by China and the complacency of established assumptions in Washington, would play a disproportionate role in setting a changed course.¹⁸⁶ While President Trump’s tariff wars grabbed headlines, the most intense and complex battleground in US-China economic relations shifted into the world of technology export controls, investment restrictions, divestment orders, regulatory licenses and visa denials.

The rise of the chip wars

Beginning in 2018, the US Government moved to strengthen export controls to restrict China’s access to advanced semiconductor technologies and its ability to produce advanced chips. An important early test case had origins in traditional US foreign policy objectives in the final year of the Obama administration. In March 2016, the US Commerce Department’s Bureau of Industry and Security (BIS) added China’s second-largest telecoms company ZTE (Zhongxing Telecommunications Equipment Corporation), to its “Entity List.” The list identifies foreign persons and entities who are involved, or have the potential to be involved, in activities contrary to US national security or foreign policy interests. It requires American companies to seek licenses to sell components to such entities. ZTE, highly reliant on US chips, stood accused of illegally shipping US components to Iran and North Korea, both under US sanctions.¹⁸⁷

Soon after the Trump administration took office, ZTE agreed to take a series of steps that included paying almost US$1.2 billion in fines, then the largest ever settlement for an export control case. Export restrictions were removed before they had taken force. In April 2018, however, armed with evidence that ZTE had failed to comply with its undertakings, Commerce Secretary Wilbur Ross took the unusual step of issuing a “denial order,” banning US firms from selling semiconductors and other products to ZTE for seven years. Within less than a month, ZTE had ceased operating; a powerful demonstration of Washington’s capacity to weaponise high-end US technology. The fallout saw China’s President Xi Jinping appeal directly to President Trump on ZTE’s behalf amid the 2018 US-China tariff war. Keen to land a trade deal, President Trump agreed to concessions. While exposing the US President’s mercurial policy attachments, the episode also confirmed to Trump administration officials that the cards held by the United States across the semiconductor supply chain could be used to devastating effect.¹⁸⁸

ASML’s EUV lithography machine on display during the 4th China International Import Expo in Shanghai in November 2021. Source: Getty

By 2018, a solid bipartisan consensus in Washington had come to see Beijing’s military-civil fusion policies designed to apply commercial technological advancements in semiconductors, AI and other technologies for military purposes as a major threat to US national security. In August that year, President Trump signed into law reforms that strengthened the authority of the Committee on Foreign Investment in the United States (CFIUS), the body tasked with blocking attempts by foreign firms to acquire US companies if the acquisition poses national security concerns. The law ensured that any foreign investment involving critical technology first obtain approval from CFIUS, empowering the committee to block even minority investments.¹⁸⁹

Other laws further strengthened export control authorities with a focus on foundational technologies essential to national security. Following passage of the Export Control Reform Act in 2018, the Trump administration initially considered controls on a wide array of technologies prioritised by Beijing’s “Made in China 2025” plan, including AI, additive manufacturing, robotics and advanced materials. Concerns from US industry and the research community narrowed the focus to controls related to chemical and biological weapons, high-end semiconductor manufacturing and areas related to digital forensics.¹⁹⁰

Affirming its more assertive role in national security and economic security, the Commerce Department in October 2018 placed Chinese chipmaker Fujian Jinhua on the Entity List in response to claims of intellectual property theft by Micron, the United States’ largest manufacturer of memory chips. Grounded in a more expansive definition of national security, this was further evidence, in the words of Edward Fishman, that “an agency whose hodgepodge responsibilities included forecasting the weather and conducting the census, was taking a seat at the high table of US national security policy.”¹⁹¹ In the months that followed, the BIS launched a series of actions that would tighten export controls of semiconductors and manufacturing equipment on national security grounds. The Trump administration also leaned on the Netherlands to restrict sales of the most advanced extreme ultraviolet (EUV) lithography tools made by ASML to China’s leading chipmaker, the partially state-owned Semiconductor Manufacturing International Corporation (SMIC).

Attention turned inevitably to China’s telecoms national champion, Huawei. While debate surrounded the extent of Huawei’s ties to China’s military and its capacity to do the bidding of the Chinese Communist Party, for US national security officials and many in Congress, the larger strategic issue concerned the scale and global reach of Huawei in technologies where the United States sought to remain preeminent, particularly semiconductor supply chains. As Miller concludes: “Hobbling Huawei’s rise became a fixation of the [Trump] administration.”¹⁹²

In May 2019, Huawei was placed on the Entity List, ensuring it could no longer buy US-origin goods and services (principally US-made chips) without an export license. In May 2020, these measures were expanded with the application of the “Foreign Direct Product Rule” (FDPR). This prevented sales to Huawei from foreign companies substantially reliant upon US inputs. The Commerce Department declared that it would “protect US national security by restricting Huawei’s ability to use US technology and software to design and manufacture its semiconductors abroad.”¹⁹³ The use of extraterritorial controls sought to cut Huawei off from the world’s entire advanced semiconductor infrastructure, except for chips the US Commerce Department deemed it could buy under license. Though debate surrounds its ultimate effectiveness, the Huawei campaign reflected the strategic and economic reality that virtually all essential links in the advanced semiconductor supply chain required tools, materials or software produced by a small number of firms, many of which were in American hands or controlled by firms in close US allies.¹⁹⁴

As with trade policy, the first Trump administration broke the mould of the old Washington Consensus. In scope and severity, it established new benchmarks for government intervention in high-tech global supply chains, largely using a toolkit of Cold War-era export controls.

The next major target would be SMIC. In December 2020, the United States added SMIC and several other Chinese companies to the Entity List. These included entities deemed to have, among other things, enabled human rights abuses, supported unlawful maritime claims in the South China Sea and engaged in theft of US trade secrets. Washington’s biggest concern remained that SMIC could gain access to the machines made by Dutch company ASML. The fear was that this would put it on a path to rival Taiwan’s TSMC. The Trump administration drafted a new Foreign Direct Product Rule before it left office. Though never issued, it gave the US Government the necessary leverage with the Dutch Government to prevent any such sale.¹⁹⁵

As with trade policy, the first Trump administration broke the mould of the old Washington Consensus. In scope and severity, it established new benchmarks for government intervention in high-tech global supply chains, largely using a toolkit of Cold War-era export controls. Under President Trump, the US Government imposed significant semiconductor export controls on China, aiming to slow China’s chip industry and to retain US leadership of semiconductor technologies. This would pave the way for an even more ambitious tech strategy under President Biden.

“Small yard, high fence”: As large a lead as possible in the AI age

By the time the Biden administration assumed office in January 2021, perceptions of the China threat — militarily, economically, diplomatically and technologically — had crystallised to be one of the few areas of genuine bipartisan consensus in Washington. President Biden would oversee the expansion of Trump-era firm-based semiconductor export controls into a stronger and broader regime of restrictions aimed at constraining China’s ability to compete in foundational technologies.

The first phase saw more Chinese entities added to the Entity List, alongside strengthened technology-based and country-based controls for advanced chips and related semiconductor manufacturing equipment. Working with the Netherlands and Japan, the Biden administration expanded and codified the Trump administration’s policy legacy, restricting both sales of equipment and the most advanced chips themselves. New CFIUS powers were used, including with extra-territorial reach, when the Biden administration intervened in 2021 to block the sale of South Korean chipmaker Magnachip to a Chinese entity. The following year, President Biden issued the first-ever formal presidential guidance to CFIUS. The executive order directed that, in connection with “countries of concern” such as China, the Committee should take account of new risk factors, such as whether a transaction impacts US leadership in technologies relevant to national security.¹⁹⁶

In September 2022, the Biden administration unveiled a new strategy that reflected US determination to maintain a technological edge over China. Announcing the strategy, National Security Advisor Jake Sullivan spoke of the need for the United States to “revisit the long-standing premise of maintaining ‘relative’ advantages over competitors in certain key technologies,” where the United States would look to “stay only a couple of generations ahead.” “Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible,” Sullivan stated.¹⁹⁷

Sullivan identified the related technologies of AI, advanced semiconductors and quantum information technologies as “force multipliers” for US technological leadership. Other technologies bracketed in this category were biotechnologies and biomanufacturing and clean energy technologies. The strategic core of the new policy was the recognition that access to the most advanced semiconductors would be a precondition for developing and deploying AI at scale. It marked the evolution from containment to an explicit focus on constraining China’s AI industry. It also heralded the most far-reaching US response thus far to China’s civil-military fusion strategy. Rather than attempt to distinguish between military and commercial purposes, it applied for all uses and purposes in China with a “bright line test” to prohibit the export of technologies based on the degree of technological advancement.

The Biden administration was at pains to stress that the United States was not seeking full-blown technological “decoupling” from China. It was rather implementing what it termed a “small yard, high fence” strategy based on national security concerns. Releasing President Biden’s National Security Strategy in October 2022, Jake Sullivan pointed to the use of relevant technologies to develop and field advanced military systems, including weapons of mass destruction, hypersonic missiles, autonomous systems and mass surveillance. “Chokepoints for foundational technologies have to be inside that yard, and the fence has to be high,” Sullivan explained, “because our strategic competitors should not be able to exploit American and allied technologies to undermine American and allied security.”¹⁹⁸

The policy’s overall thrust has been well summarised by Emily Kilcrease from the Centre for a New American Security:

No longer would the United States try to stay just a generation or two ahead of Chinese competitors; instead, we should try to freeze them in place. No longer would the United States try to differentiate between civilian and military purposes in China, which had become a complex if not outright impossible task. Instead, the United States was publicly naming the zero-sum competition for global leadership in the technologies that matter most for future military competition and declaring that any advance by China in these areas, whether civilian or military, was a de facto national security risk to the United States.¹⁹⁹

In October 2022, the Commerce Department gave effect to the policy with new export controls designed to foreclose China’s ability to obtain advanced chips, technology, manufacturing equipment and know-how. An update the following year ensnared more Chinese entities involved in advanced computing and AI, adjusted thresholds to close gaps in export controls for certain chips that fell below earlier thresholds and expanded controls on equipment based on new negotiated terms aligning SME export controls on China with Japan and the Netherlands.²⁰⁰

In parallel, the Biden administration in 2023 formally embarked on a new regulatory framework to restrict outbound investment in the semiconductor, quantum information and AI sectors in foreign “countries of concern” — again, code for China. Under rules published by Treasury the following year, certain US investments in sensitive technology businesses in China would be prohibited or subject to mandatory notification. The explicit rationale was to prevent US capital — including managerial expertise and know-how — from enabling the United States’ principal strategic adversary to develop or deploy technologies that could strengthen their military, intelligence, surveillance or cyber-enabled capabilities.²⁰¹

Towards the end of 2024, the Biden administration further restricted exports to 16 Chinese entities and expanded the FDPR to apply to semiconductor manufacturing equipment and dynamic random-access memory chips, in the process extending controls to South Korean firms operating in China. Finally, in one of its last official acts, the Biden administration in mid-January 2025 released arguably the most expansive and ambitious US export control policy ever attempted. The global AI Diffusion Rule proposed strict limits on how many advanced AI chips could be exported to specific countries, seeking in the process to curtail Chinese access to advanced chips and AI computing power through third countries. In the three-tiered framework for export controls on advanced chips, computers and AI model weights, Tier III countries included China, Russia and North Korea based on a presumption of denial.²⁰²

In tech policy as in other areas, the second Trump administration has shown a proclivity for unpredictability, presidential whim and policy whiplash. In relation to the AI contest with China, however, one theme has been consistent: the quest for US “dominance.” In some areas, this has translated into the loosening of state controls. An early and notable example was the rescinding by President Trump of the Biden administration’s AI Diffusion Rule, a decision that, for example, wound back proposed controls on Chinese access to third-party computing centres. At the same time, the administration’s AI Action Plan in July 2025 actively promotes the US export of “its full AI technology stack — hardware, models, software, applications, and standards — to countries that join America’s AI alliance.”

Amid US-China trade talks in mid-2025, Trump officials reportedly held back proposed export control actions, and in July, the BIS rescinded license requirements on firms after China agreed to resume licensing rare earth magnets for US firms. In August 2025, Trump approved Nvidia’s H20 and Advanced Micro Devices’ MI308 GPUs for sale in China under terms whereby the US Government would receive 15% of proceeds. Most controversially, in December the president approved the sale of Nvidia’s H200 chips to “approved customers” in China, in exchange for the US Government getting 25% of revenues.

In other areas, however, the administration has tightened export controls. In March 2025, 42 Chinese entities were added to the Entity List and a further 23 entities, in September. In May, the BIS issued guidance stating that Huawei had developed its Ascend chips in violation of US controls and warned firms that using such chips would violate US export controls. In this way, US actions have continued to focus on sustaining a clear lead in advanced chips and related computing and AI applications, while slowing China’s development of competitive capabilities.

Drawing clear paradigmatic lines with President Trump in office appears even more fraught in 2025 than in 2017.

The linkage of export controls with trade negotiations has opened Trump 2.0 to criticism that, compared with both Trump 1.0 and the Biden administration, there is less clarity on how it views export controls as part of a broad trade and national security strategy, as distinct from “simply as a transactional point of leverage the administration can use to extract any range of concessions from foreign governments or US companies.”²⁰³ Drawing clear paradigmatic lines with President Trump in office appears even more fraught in 2025 than in 2017.

But this should not obscure the bigger picture that surrounds the rewiring of the American state for high-stakes technological competition with China. The vast majority of the tools the US Government has used to curb technological interdependence with China and hobble its technological advance remain in place. Defensive measures continue to multiply, including in the form of new bills in Congress, and the paradigm that says technology is an arena for interstate struggle rather than a neutral global marketplace continues to infuse Washington political and policy discourse. As Jon Bateman has observed, US law combines great power and great complexity in the world of technology policy, providing officials with a high degree of discretion. Most restrictive powers, he notes, have been used to only a small fraction of their full potential.²⁰⁴

4. Economic security goes global

This study focuses on the United States’ turn towards a more nationalist, interventionist and security-focused approach to economic policy, especially over the past decade. It is nonetheless important to record that the demise of the old Washington Consensus is by no means simply Made in America.

This section explores common threads connecting resurgent state intervention in economic affairs and the retreat from liberal policy frameworks to ambitions and concerns in Beijing, Tokyo, Brussels and elsewhere. The structural drivers and political authors of this resurgence are many and varied. Mediated through global power dynamics and unique national circumstances, similar policy directions are to be found in both advanced and developing economies as governments have come to see international economic interdependence in various domains as a source of vulnerability that needs ‘derisking’.

To Henry Farrell and Abraham Newman, this trend is manifest in the rise of what they call the “new economic security state” in a world where “economics and national security have collided.”²⁰⁵ Based on a range of motivations and with a variety of instruments, governments are placing greater emphasis on security and resilience over the logic of market efficiency and openness.

Renewed great-power rivalry, the COVID-19 pandemic and war in Europe are just some of the drivers focusing the minds of policymakers everywhere on economic security. Many Western governments have re-embraced state intervention as they look to convince sceptical publics they possess solutions to challenges such as weaker economic growth, lagging competitiveness, climate change and rapid technological change. This resurgence of state activism in economic affairs can be seen in the return of industrial policy globally, one of the defining features of the international economy in the second decade of the 21st Century.

This resurgence of state activism in economic affairs can be seen in the return of industrial policy globally, one of the defining features of the international economy in the second decade of the 21st Century.

From a geopolitical standpoint, there is a case for seeing the rise of the new economic security state as Made in China. China’s power projection and its particular model of state capitalism have tested the liberal foundations of the postwar economic order in ways that go well beyond Washington-centric debates and policy responses. Under President Xi Jinping, China’s strategic assertiveness and mercantilist economic practices — through strategies such as “Made in China 2025” (2015), “civil-military fusion” (2017) and “dual circulation” (2020) — offer few illusions as to Beijing’s own nationalist, interventionist and security-focused approach to economic statecraft.

China’s geoeconomic playbook has led many countries to reassess and recalibrate economic policy through a security and resilience lens. Liberal democracies have converged around measures to harden critical infrastructure, protect strategic technologies, screen foreign investment and preserve sovereign capability in select industries. Japan has been a first mover on economic security statecraft, but many others have followed.

The search for economic security and resilience through increased government intervention in the economy remains contested policy terrain. While there will be no return to the status quo ante or quick revival of liberal order ideals, nor are there necessarily firm foundations for faith in a revived paradigm of state intervention. For most countries, the pragmatic response is to balance competing imperatives and navigate the line between openness and security through policies that mitigate risks and build strategic capabilities, while seeking to preserve the benefits of international economic interdependence.

4.1. Not just Made in America: The rise of the economic security state

Economic security is arguably a concept in search of a policy paradigm. An agreed definition remains elusive. The term is sufficiently capacious to leave lots of room for analysts and political entrepreneurs to frame debates from a variety of angles, especially when sources of economic ‘insecurity’ can spring from virtually anywhere. The intellectual boom around labels such as “polycrisis” and “permacrisis” to denote a world beset by multiple, persistent and overlapping crises seemingly attests to this reality.²⁰⁶

From a national wellbeing standpoint, Bown usefully frames economic security to mean a situation where countries get the goods and services they need, when they need them, at a reasonable price, acknowledging that economic openness entails interdependence with the outside world.²⁰⁷ Mitchell observes that “economic security is about how the state decides to manage the risks and opportunities of global flows of resources — goods, services, people, money, information and ideas — in an interconnected and dangerous world.²⁰⁸ Farrell and Newman emphasise that protecting economic security “means keeping an eye on trajectories for growth and innovation while managing anticipated security threats and creating enough policy bandwidth to tackle unanticipated ones.”²⁰⁹ Viewed this way, the challenge for policymakers is to “navigate a thin line between openness and security.”²¹⁰

For some analysts, economic security begins and ends with geopolitics. This is far from new terrain. As many scholars have noted, there is a very long history of measures by states and international actors designed to advance strategic or national security objectives through economic tools and instruments.²¹¹ From this vantage point, the post-Cold War era of US-led deep globalisation, with its relatively benign view of economic interdependence, can perhaps be seen as an outlier or anomaly — synonymous with an unusually lopsided power structure, the (temporary) triumph of liberal democracy and a liberal “hegemon.”²¹²

A more contested, fragmented and challenging global environment has clearly driven the new focus on economic security globally. A binary lens of US-China strategic competition fails to capture the full range of dynamics. The number of small state conflicts has grown, greater political uncertainty surrounds elections in established democracies and middle powers are exercising greater agency in a more multipolar global economy. Preserving and developing strategic industries, with a view to reducing reliance on imports from strategic adversaries and geopolitically distant trading partners, is central to the current economic security dynamic. As Kristalina Georgieva, Managing Director of the IMF, has observed, greater attention to national security in a multipolar world means “where things are made may matter more than how much they cost. The logic of national security says that a broad range of strategic goods, from computer chips to steel, must be made at home, and that this is worth paying for. Self-reliance is staging a comeback.”²¹³

China’s President Xi Jinping speaks during the opening session of the 20th Chinese Communist Party’s Congress in Beijing, October 2022.Source: Getty

Yet geopolitical turmoil and the associated fracturing of the international economic order are by no means the sole drivers of greater government intervention, discontent with liberal policy frameworks and the quest for greater resilience. Since the GFC, sluggish economic growth across many advanced economies has stoked political battles over everything from the balance between the state and the market to whether elites and experts can be trusted with the levers of power. These battles are bound up with debates over economic security and national resilience, what it ultimately entails, and what steps should be taken to support it.

Transnational challenges and shocks have also driven the rise of the economic security state. The COVID-19 pandemic, the greatest combined health and economic crisis in a century, exposed risks and vulnerabilities in supply chains that policymakers had either not imagined or discounted. The threat posed by climate change and efforts to spur the clean energy transition have registered urgent calls for government action to reduce carbon emissions and transform economies. Rapid technological change alongside strategic competition over the world’s next generation of foundational technologies have led governments to seek to establish guardrails against new risks even as they race to secure sovereign capability in the same technologies.

Finally, a sense that certain countries ‘play by the rules’ of the global economic system while others do not has led to an erosion of trust in international institutions and notions of a ‘rules-based order’. As a result, many governments have turned towards inward-looking policy instruments, sometimes under the guise of national security or in response to economic dislocation, putting bodies such as the WTO under unprecedented strain and undercutting attempts at international cooperation through forums like the G20.

As this list of concerns and grievances implies, identifying what falls under the banner of economic security, let alone defining a constellation of policies that support it, is wickedly challenging.

As this list of concerns and grievances implies, identifying what falls under the banner of economic security, let alone defining a constellation of policies that support it, is wickedly challenging. Frameworks of analysis and ideologies necessarily run up against each other. Economists invariably view interventions through the prism of trade-offs, stressing that the collective economic benefits from openness through innovation and growth are likely to be impaired by security-oriented measures that damage economic efficiency. Political scientists and historians insist that economic systems always rest on political foundations. Policy practitioners tend to start from a premise that prosperity and security are inevitably co-dependent and that government policy decisions aim invariably to reconcile multiple objectives based on some definition of the national interest or social welfare.

At a national level, how economic security is conceptualised and applied through policies varies depending on the size and structural characteristics of different economies, strategic interests and imperatives, and based on shifting coalitions and interests in domestic politics. As one comparative study points out:

each country has a unique mix of interest groups, commercial strategies and foreign policies that shape its outlook on the potential and limits of economic statecraft. Therefore, economic security is closely tied to a country’s ability to strategically integrate and remove itself from international economic relations in a way that protects and advances idiosyncratic interests. In other words, economic security lies in the eye of the beholder.²¹⁴

Industrial policy: “The instrument of choice for managing geopolitical risk”

As the US experience implies, the rise of the economic security state can be seen on multiple policy fronts. A useful prism for capturing trends globally is the surge of industrial policy interventions in recent years. There has been a step-change in the degree to which countries have sought to reshape their economies by targeting public support to specific sectors, firms and technologies. Industrial policy can take multiple forms, and motivations vary across jurisdictions and through time. A non-exhaustive list of policy objectives includes protecting manufacturing jobs, boosting productivity growth, diversifying economic activity, supporting local supply chains, accelerating the energy transition, and backing strategic industries for national security and self-reliance purposes.

The Global Trade Alert (GTA) database tracks industrial policy interventions from online sources (mostly official government documents) and includes in its definition both monetary and in-kind transfers (e.g. state aid and preferential access to land and other factors of production), plus policies that entail a transfer of risk to the government (e.g. loans and loan guarantees) and losses in government revenues (tax breaks). The New Industrial Policy Observatory database, a collaboration between the IMF and GTA, first released in December 2023, has extended the earlier GTA machine-driven database with greater coverage and wider classification of types of policy intervention.²¹⁵

As shown in Figure 4.1, there has been significant growth in industrial policy interventions since 2017. The use of industrial policy increased ninefold between 2017 and 2023, with a notable acceleration associated with the COVID-19 pandemic. Advanced economies have driven most of this growth. In 2023 alone, more than 2,000 new industrial policies were recorded, of which two-thirds were put in place by advanced economies. More than 70% of measures were recorded as trade distortive. China, the European Union and the United States accounted for almost half of all new measures in 2023.

Between 2020 and 2023, more than 50 economies introduced industrial policy packages. While this structural shift was triggered in large part by the COVID-19 pandemic, the trend has extended beyond the health emergency, pointing to a move from “exceptional” to “systemic” use of industrial policy. The fastest growing categories of support are direct grants, tax credits and rebates, preferential loans and guarantees and state equity injections. Tariffs and quotas still matter, but for most countries, they are not the main channels.²¹⁶

There is also evidence of a shift in government motivations surrounding industrial policy. For roughly a decade from the GFC, the most frequently cited industrial policy motives were competitiveness and climate. Since 2020, however, motivations relating to supply chain resilience, national security and geopolitical concerns have come to the fore. As shown in Figure 4.2, the percentage of industrial policy actions in G7 economies, South Korea and Australia citing security or geopolitical reasons increased from 26% in 2023-24 to 63% in 2025.

In summarising recent evidence, Simon Evenett and Fernando Martin of Global Trade Alert observe that:

Before 2020, most industrial policy measures followed a familiar logic where governments offered tax breaks, subsidies, or research grants to make their economies more competitive. The goals were straightforward: create jobs, foster innovation, and accelerate the green transition.

That logic has changed. Our analysis shows that since 2020, the motives behind industrial policy have shifted sharply. Today, governments are less focused on productivity and far more concerned with security of supply and control of certain corporate transactions and investments. Industrial policy has become the instrument of choice for managing geopolitical risk.²¹⁷

Other trends are worth highlighting. In general, and traditionally, high per-capita income economies lean more heavily towards corporate subsidies, while developing countries rely more on import barriers. Over the past decade, however, subsidies have been the main instrument for industrial policy in both advanced economies and emerging market and developing economies (EMDEs). While trade measures are deployed more commonly by EMDEs, there is evidence of greater convergence over time.

There is also strong evidence of a tit-for-tat dynamic around industrial policy. Data reported for China, the European Union and the United States shows that on average there is a 73.8% probability that a subsidy for a given product by one major economy is met with a subsidy for the same product by another major economy within one year.²¹⁸

The Global Trade Alert database, it should be noted, does not include information about the monetary value of subsidies or the role of ‘legacy’ subsidies introduced before 2009. This point is especially relevant in considering analysis of China’s industrial policies. China is the largest user of subsidies measured by number of policy interventions based on GTA data on subsidies and other policy instruments from 2009 to 2022. By 2022, there were approximately 5,400 subsidy policies introduced and in force, representing 95% of all GTA monitored policies introduced by China. That these sorts of measures do not capture the full picture of Chinese industrial policy is explored further below.

4.2. Chinese state capitalism and the Xi factor

If Donald Trump and Joe Biden are co-authors of a new Washington Consensus in an era of renewed state activism, another superpower helmsman — China’s President Xi Jinping — has claims to being principal scriptwriter of the story’s ‘meta-narrative’.

As outlined previously, China’s reemergence as a global superpower, at a scale and speed without historical precedent, upended power structures and fractured assumptions on which both US foreign economic policy and the postwar order itself have rested. Since 2012, Xi Jinping has used the levers of power in modern China in a quest to make China great again and reorder the global system in China’s image.

As Martin Wolf, among others, has pointed out, China’s rise is the most important single shock to the global economic order that the world has seen since the 1940s.²¹⁹ Under Deng Xiaoping, China began to emerge from its self-imposed isolation with the pursuit of market-friendly policies through the “reform and opening era.” These trends accelerated in the 1990s and were reinforced by China’s entry into the WTO in 2001. Trade and investment barriers were reduced, price controls were removed and forms of non-WTO-compliant state support were curbed. For many Western observers, including at the highest levels of the US Government, the hope was that WTO entry would support further liberalisation of China’s economic and political systems.

With hindsight, many of those same observers have conceded this was never a script the Chinese Communist Party was destined to follow. If one national ambition above others has defined and united the CCP’s approach to governance in the 21st Century, it is to close the wealth and power gap with the West. As Rush Doshi notes, “Xi Jinping’s brash vision of mid-century rejuvenation is the product not simply of personality or parochialism but something more powerful: a nationalist Party consensus” with origins deep in humiliations of the past.²²⁰

Under Xi, “socialism with Chinese characteristics” would become more ideological, more Party-led, more assertive in claiming China’s place in global affairs and more openly critical of the US-led international order and Western models of development. The Xi era of Chinese state capitalism has replaced reform-era pragmatism with the ever-deeper consolidation of state control over the economy, the subordination of economic goals to national security and political objectives, and the aggressive deployment of instruments of inducement and coercion with the aim of building a Sino-centric world order across all domains.

The Xi era of Chinese state capitalism has replaced reform-era pragmatism with the ever-deeper consolidation of state control over the economy, the subordination of economic goals to national security and political objectives, and the aggressive deployment of instruments of inducement and coercion with the aim of building a Sino-centric world order across all domains.

On coming to power in 2012, Xi moved to tighten the grip of the CCP on all aspects of national life, in the process reshaping China’s political economy and reform path. Xi’s consolidation of state control reflected his personal belief that market reforms and liberal ideas had granted too much power to entrepreneurs and private actors. Hence, the first phase of his leadership witnessed a sweeping anti-corruption campaign designed to weed out enemies, undercut rival centres of power and discipline economic elites. This would provide the pretext for larger ambitions, including wielding economic tools aggressively for national strategy and security ends.

Deepening political control of economic decision-making would be manifest in mandated Party committees in state-owned enterprises (SOEs), private firms, joint venture and foreign investment companies. Party leadership was formally reestablished in the corporate governance of SOEs. In 2014, Xi announced the Comprehensive National Security doctrine whereby economic security, financial security and technological security were elevated as national security dimensions equivalent to military and political security. National rejuvenation, a strong military and technological self-reliance henceforth would be woven together into a single national project.

The launch the following year of “Made in China 2025” marked a watershed in state direction of the economy, state funding of industrial policy and in the quest for self-sufficiency in advanced manufacturing and technology with an emphasis on ‘indigenous innovation’. Large-scale state funds were established at the national level, complemented by an array of provincial-level financing vehicles for strategic sectors, while foreign market access was further truncated. Externally, inducements and economic coercion became more conspicuous as Xi’s brand of Marxism-Leninism unapologetically located China on the right side of history, portraying the United States as “struggling in the throes of inevitable capitalist decline, consumed by its own internal political contradictions and destined to fall by the wayside.”²²¹

Richard McGregor writes instructively that:

… if there is a period that crystallised perceptions of Xi, and his world view and ambitions, that moment was in late 2017 and early 2018 when foreigners, and many Chinese as well, finally started to take him at his word. Xi was confirmed as leader of the Chinese Communist Party in October 2017 and then abolished term limits on his presidency in March 2018, removing any obstacles to his remaining in power in perpetuity. On renewing his oath of office, he extolled the absolute leadership role of the Party to the exclusion of all other institutions. ‘Government, military, society and schools, north, south, east and west — the Party is the leader of all,’ Xi said at the opening of the once-every-five-years party congress in October 2017.²²²

At this juncture, President Xi also formally launched the national strategy of civil-military fusion designed to erase the boundary between China’s civilian economy and military power, ensuring that commercial innovation directly supports military modernisation. Though hardly a new doctrine, it provided a further signal of Xi’s quest to ensure the private sector served the strategic goals of the Party-state.

In May 2020, in the face of a more hostile environment under the Trump administration, President Xi unveiled the dual circulation strategy. The internal dimension was styled as accelerating a shift toward domestic-led growth and innovation, while the external dimension proposed continued engagement with global markets but with a greater focus on reducing dependencies. The result has been to embed “Made in China 2025” and China’s wider industrial policy into an economic ecosystem in what amounts to a closed loop of innovation, manufacturing and consumption. The focus is on reducing external dependence by strengthening domestic sourcing by local firms, alongside the drive for self-sufficiency in key technologies.

In The World According to China, Elizabeth Economy sets out in exhaustive detail the distinctive playbook that has been instrumental in the global rise of the economic security state. Elements centre on a highly centralised Party-state that possesses the ability to mobilise resources from the public and private sectors, to deploy those resources across multiple domains, to control the content and flow of information, to penetrate societies and economies globally and to leverage the power of the country’s vast market, as well as its military.²²³

To fully capture the external dimensions of Chinese state capitalism in the Xi era would require a separate treatise. What is instructive in the context of the rise of the economic security state, however, is a snapshot of recent evidence on Chinese state subsidies.

Chinese state subsidies: Recent evidence

A lack of comparable data across countries and sectors remains a challenge for those looking to do detailed research on industrial subsidies. The opaque nature of Chinese government funding and other forms of state support makes it especially difficult to determine exactly how much money is being spent and in what manner. Nonetheless, the scope and scale of China’s industrial subsidies and other market-distorting practices have received growing scrutiny in recent years.

China has long used various industrial policy tools to support priority economic sectors, including (but not limited to) cash subsidies, tax benefits, subsidised credit, subsidised land, and trade and regulatory barriers that benefit incumbent firms. Some close observers see more continuity than change; others have sought to define distinct turning points. Even so, there is broad consensus among scholars of Chinese state capitalism that “the CCP wields expanding de facto and de jure power over nearly all areas of political and economic activity in China” and that President Xi has commanded a more assertive and expansive form of state capitalism during his tenure.²²⁴ This has raised major issues not only in understanding the workings and structure of China’s economy, but also how market economies can and should respond.

Different approaches yield varying results, but the overall picture points to Chinese state support — both conventional and unconventional — greatly exceeding that of other countries. A 2022 study by Gerard di Pippo, Scott Kennedy and Ilaria Mazzocco from the Center for Strategic and International Studies was one of the first to grapple with the nature and scale of Chinese state subsidies in the Xi era. Based on conservative estimates and focusing only on conventional state support like direct grants and tax incentives, the trio put China’s industrial policy spending at more than 1.7% of GDP in 2019. This was more than twice the share of GDP of the second-largest spender in relative terms (South Korea) and far exceeded major OECD economies, with China spending more than twice the United States in dollar terms.²²⁵

More recent work by staff at the IMF suggests this figure may underestimate the scale of Chinese industrial policy subsidies by a significant margin. Based on financial reports of listed firms and the registry of land transactions, Garcia-Macia, Kothari and Tao estimate the equivalent fiscal cost of industrial policy in China to be about 4% of GDP between 2011 and 2023 (Figure 4.3).²²⁶ Cash subsidies were the costliest instrument, followed by tax benefits, land subsidies and subsidised credit. Most of this support was directed to the manufacturing sector, with industries like semiconductors, high-tech manufacturing and automobiles benefiting especially from cash subsidies and tax benefits.

Comprehensive comparative research has come from the OECD’s MAnufacturing Groups and Industrial Corporation (MAGIC) database. This database provides firm-level information about the scope and scale of industrial subsidies grouped by three types: (1) government grants, (2) tax concessions and (3) below-market borrowings. It relies on declarations by industrial groups of subsidies received and inferences from financial statements about below-market lending from state bodies. The current version focuses on 482 of the largest industrial firms (listed and non-listed) in 14 manufacturing sectors producing either durable goods or industrial raw materials across both OECD and non-OECD countries over the period from 2005 to 2022.

These firms collectively account for at least two-thirds of global sales or capacity in their respective sectors. Around one third are from China. The research highlights some notable differences in the mix of instruments used in different jurisdictions, with some relying relatively more on grants (e.g. the European Union) while others rely relatively more on corporate tax concessions (e.g. Japan and the United States). Though subsidies are (mostly) modest on average relative to firm revenue, they are found to be larger on average for firms based in China by a notable margin (Figure 4.4).

There are cases of very large subsidies, exceeding 15% of revenue. These cases are dominated by companies based in China, especially in the aluminium, cement, glass and semiconductor industries, which receive “not only large but long-running government support.” Total subsidies in relation to revenue tend to be larger for smaller firms and state enterprises.²²⁷

A core finding from the OECD research concerns the large role in Chinese industrial policy played by below-market borrowings. This reflects Chinese authorities’ greater control of the banking system. The largest state-owned commercial banks held almost 42% of all commercial bank assets in China at the end of 2023. The OECD researchers state matter-of-factly that “state banks are regularly instructed by authorities to support government industrial objectives by lending at rates close to the base lending rate.”²²⁸

Econometric evidence points to mixed impacts of subsidies, with one exception: subsidies tend to increase market shares. Chinese firms correspondingly account for the market share gains internationally, while firms in OECD member countries have seen erosion of market shares. The impact is deemed economically sizeable. While the analysis is careful to point out that there is no evidence that impacts are confined to China-based companies, “the fact that they received larger subsidies than firms based in other jurisdictions could partly explain their bigger market share gains over the longer term.”²²⁹

According to the OECD research, the finding that subsidies are associated with increases in market shares does not seem to be explained by efficiency gains and higher profitability. It stresses that the relationship could result from the ability of firms receiving subsidies to cover part of their operating costs and lower their prices or deter competitors from making investments — in other words, through strategic behaviour.

A report by the Rhodium Group released in March 2025 attempts to both draw together various studies and capture what is distinctive about China’s industrial policy landscape. Camille Boullenois, Agatha Kratz and Daniel Rosen look to differentiate “conventional” state-support mechanisms (direct grants, tax incentives and below-market access finance, equity, land, energy and other intermediate inputs) from what they describe as “persistent systemic distortions” in China’s economy that generate some of the same effects as conventional measures. In this way, the paper seeks to take account of non-conventional forms of state support beyond the scope of WTO rules.²³⁰

They conclude that “China uses instruments and practices in a much broader way than other countries, distorting market competition and providing advantages to domestic firms. The state’s pervasive and systemic participation in China’s economy also happens on a larger scale than in other countries.” The Rhodium study finds that China spends more through direct grants and tax benefits than any other major economy, both in absolute amounts and as a share of GDP. Looked at over time, they conclude that direct grants have increased at about the same pace of GDP growth over the past decade, while tax benefits have grown faster. Echoing the OECD work, they argue that “China’s use of below-market borrowing and equity is much more pervasive than in other economies” and that this is largely because of the significant weight of state ownership in China’s banking system and widespread state investment in companies.²³¹

China’s rapid manufacturing growth, state subsidies and unique system of Party-state capitalism continue to place the “embedded liberalism” of the global economic system under acute strain. This has been an important vector in the rise of economic security concerns in many economies in the past decade.

While there remains lively debate over the effects and effectiveness of China’s subsidies, international and domestic developments have continued to highlight rising imbalances in China’s economy in the form of persistent overcapacity, a growing manufacturing trade surplus and deflationary pressures. The inability of the existing rules-based trading system to effectively address the scale and complexity of China’s state-driven economic model has fed growing frustration and a backlash that extends well beyond Washington.

In short, China’s rapid manufacturing growth, state subsidies and unique system of Party-state capitalism continue to place the “embedded liberalism” of the global economic system under acute strain.²³² This has been an important vector in the rise of economic security concerns in many economies in the past decade.

4.3. Balancing openness and security in the Global West and the Global South

Several major economies have developed formal strategies and instruments designed to balance the benefits of economic openness with risks and challenges arising from geopolitical threats, economic dependencies and vulnerabilities of various kinds. Shocks such as the COVID-19 pandemic and Russia’s February 2022 invasion of Ukraine have been pivotal in galvanising action, though systemic reassessments of geopolitical and economic assumptions have also shaped economic policy thinking in national capitals.

Japan was the first major economy to develop an explicit economic security strategy. Geographic proximity to a rising China and a growing sense that Japan needed to strengthen the economic foundations of its national security sharpened Tokyo’s attention to economic security risks and tools. The desire to de-risk economic interdependence with China has loomed large in relation to issues such as technology theft, state subsidies, Beijing’s ‘indigenisation’ plans to control entire supply chains and economic coercion. China’s de facto ban on rare earth exports to Japan in 2010 is often seen as a catalyst for the drawing together of national security and economic policy more systematically into a single frame of reference.²³³

Japan’s economic security strategy has focused on strengthening supply chains (designating 12 strategic products where it aims to reduce import dependencies), protecting critical infrastructure, investing in R&D (designating 20 critical technologies) and promoting dialogue between government and industry. Two concepts have grounded Japan’s economic security mindset from the outset:

• Strategic autonomy — implying that Japan should not be overly dependent on other countries (or at least any single country) for critical products, and
• Strategic indispensability — meaning positive measures should be taken to make Japan an indispensable part of the global economy via critical industrial or technological capabilities.

Strategic autonomy has elements of a defensive posture, designed to ensure the normal functioning of the Japanese economy without excessive dependence on other countries. Strategic indispensability is a more proactive concept centred on building prosperity and national security by developing critical capabilities where Japan is indispensable to the international community.

Formal development of Japan’s economic security strategy has gone together with steps to reshape its bureaucracy. The establishment of the National Security Secretariat (NSS) in the Cabinet office in 2014 signalled the Abe government’s determination to reevaluate Japan’s response to a changing strategic landscape. An economic security division would later form part of the formal NSS structure.²³⁴ Economic security also became a key focus of policy processes within the ruling Liberal Democratic Party (LDP). An LDP Policy Research Council report released in December 2020 — “Recommendations Toward Developing Japan’s ‘Economic Security Strategy’” — would help crystallise policy priorities.²³⁵ The appointment in 2021 of Japan’s first economic security minister marked a further evolution towards greater central coordination on economic security matters.

The passage of the Economic Security Promotion Act in May 2022 resulted in a series of specific initiatives taken under four themes: (1) securing the stable supply of critical commodities; (2) ensuring the safety of key infrastructure; (3) supporting the development of cutting-edge technologies; and (4) non-disclosure of patent applications and systems.

While continuing its proactive role in shaping regional economic architecture, Japan has also taken a leadership role internationally on economic security issues, notably at the G7 summit in Hiroshima in 2023, developing work on a “Coordination Platform on Economic Coercion.”²³⁶

The European Union has developed arguably the most technocratically ambitious approach to economic security in the face of rapidly evolving geopolitical, economic and technological developments. Under EU Commission President Ursula von der Leyen, the European Union has defined economic security around the theme of “derisk — not decouple.” This was twinned in a major speech in March 2023 with a harder-edged message about China’s strategic posture and its “deliberate use of dependencies and economic leverage to ensure China gets what it wants from smaller countries.”²³⁷ Unilateral trade actions by the first Trump administration and the Biden administration’s expansive approach to export controls were also factors prompting development of a formal EU strategy.²³⁸

The European Union has developed arguably the most technocratically ambitious approach to economic security in the face of rapidly evolving geopolitical, economic and technological developments.

Released in June 2023, the European Economic Security Strategy seeks to respond to a long list of risks and vulnerabilities exposed by the COVID-19 pandemic, Russia’s invasion of Ukraine, economic coercion actions, cyber and infrastructure attacks, foreign interference and disinformation. “More than ever,” the strategy states, “our security is deeply intertwined with our ability to make ourselves more resilient and reduce the risks arising from economic linkages that in past decades we viewed as benign.”²³⁹

The strategy flags the “inherent tensions” that exist between bolstering economic security and ensuring the European Union continues to benefit from economic openness. Concepts such as “open strategic autonomy” and the mantra “as open as possible, as closed as necessary” herald the (awkward) attempt by Brussels to walk the thin line between openness and security by reducing economic vulnerabilities without succumbing to protectionism.²⁴⁰

The European Union’s three-pronged economic security strategy is geared to:

• Promoting the European Union’s economic base and competitiveness.
• Protecting against economic security risks.
• Partnering with others.

The “promote” pillar aims to strengthen the competitiveness and growth of the European Union by enhancing its scientific, technological and industrial bases. In some areas, Europe moved more quickly than others to an industrial subsidy footing, especially in green and digital transitions. COVID-induced supply shortages saw the European Union take steps to boost production in semiconductors even before legislation found its way into the US Congress. Under the banner of ‘strategic autonomy’, the European Union unveiled its own Chips Act in February 2022, providing access to €43 billion in state aid and direct EU funding.²⁴¹ An EU version of the Inflation Reduction Act would follow in the form of the Green Deal Industrial Plan in 2023, designed to scale up the European Union’s manufacturing capacity for the net zero technologies and products. A Critical Raw Materials Act (December 2023) also set targets for domestic extraction, processing and recycling of critical minerals and encourages stockpiling and exploration.²⁴²

European Commission President Ursula Von der Leyen attends a press confrence in Brussels in December 2025. Source: Getty

The European Commission has identified four types of economic security risks as most pressing: (1) risks to supply chain resilience, particularly in sectors such as energy, raw materials, health and food; (2) risks to physical and cyber security of critical infrastructure; (3) risks surrounding technology security and technology leakage; and (4) the weaponisation of dependencies in the form of economic coercion, foreign interference and unfair economic and trade practices. The tools of the European Union’s economic security strategy mirror closely those in other advanced economies — active industrial policy, technology export controls and investment screening — all designed to reduce identified risks and vulnerabilities. The 2023 Economic Security Strategy was followed in January 2024 by a suite of proposed measures to increase foreign investment screening, coordinate dual-use technology export controls, support R&D for dual-use tech and IP protections and evaluate outbound investment risks.

Several challenges continue to beset the European Union in executing its economic security strategy. Some relate to internal constraints, such as those imposed by strong competition regulations and state aid rules. Others reflect the structural tension that resides inescapably from Brussels having authority on trade and external economic issues, but not national security decision-making. Deeper economic security concerns surround Europe’s productivity and growth challenges. A combination of low economic dynamism, high energy costs and a failure to reap efficiency benefits from technological change continues to elevate concerns among senior European policymakers about a “competitiveness crisis.”²⁴³

South Korea also adopts a “3 Ps” — promote, protect, partner — approach to economic security with a strong focus on supply chain resilience and strengthening its presence in key sectors and technologies. Korea’s developed tradition of industrial policy has seen it undertake major investments in 12 “national strategic technologies” together with the K-Chips Act, in response to the US CHIPS Act. From a Korean perspective, the traditional economic case for industrial policy hinged around either ‘infant industry’ protection or addressing externalities. Increasingly, however, geopolitics is superseding economics in justifying industrial policy.²⁴⁴

Developing economies, without adopting the formal language of economic security, are also taking action to reduce economic dependencies and to increase local production. India, as the world’s fifth-largest economy and a leading voice of the Global South, has constructed its own pillars of resilience, self-reliance, strategic sectors and trusted partners. Though it still retains significant tariff and non-tariff barriers, India has undergone a shift toward subsidy-based industrial policy, selective import substitution and investment screening in strategic sectors, particularly since 2020. Initiatives such as “Make in India” and the Production-Linked Incentive Scheme (across 14 strategic sectors) aim to build a more robust industrial base.²⁴⁵ Indonesia, the largest economy in Southeast Asia, also pursues a development model of economic security without explicitly embracing the term, with a focus on industrial upgrading, sovereignty over natural resources, export restrictions and local processing requirements.

Within this patchwork quilt of policies and tools, economic orthodoxies are under challenge and economic strategies geared to a world of deep globalisation are being transformed as countries seek to build industrial capacity in key sectors, secure advanced technologies, climb global value chains and de-risk economic vulnerabilities. As a concept, economic security has gone global, and the risk is that it can mean whatever governments want it to mean. At the same time, national strategies continue to be shaped by distinctive geographies, institutions and politics where benefits from openness jostle with geopolitical and security risks.

Finding right the balance is both tricky and essential, not least for a country like Australia.

5. Australian economic statecraft in a more fractured world

Policy assumptions and strategies that have underpinned Australia’s modern prosperity are being tested by geopolitical and economic fragmentation. The era of US-led deep globalisation is over. Economic tools are being deployed more aggressively to promote and defend national interests. Rules and norms that have supported global economic integration are being discarded. Strategic rivalry between Australia’s cornerstone security ally (the United States) and largest trading partner (China) will remain a defining feature of a more fractured world.

In 2025, Australia’s national security and economic interests are intertwined in ways that imply sharper policy trade-offs and less margin for error compared with earlier decades. The question inevitably arises as to whether Australia’s bureaucratic architecture and economic policy toolkit are fit-for-purpose for this world of greater disorder and disruption. While Canberra’s response to this more complex strategic environment has evolved over the past decade, this issue has not received the attention it deserves. This final section makes a series of recommendations for the renovation of Australia’s economic statecraft.

The question inevitably arises as to whether Australia’s bureaucratic architecture and economic policy toolkit are fit-for-purpose for this world of greater disorder and disruption.

First, the Albanese government’s signature Future Made in Australia (FMIA) agenda should be recast to give greater weight to national security and economic security interests. While posing many of the right questions, FMIA suffers from political overreach and policy design that is overweight the green transition and underweight core strategic objectives. A refashioned FMIA should take a cue from Japan’s economic security strategy and make ‘strategic indispensability’ a guiding principle for investments, with critical minerals as a key testcase for industry policy.

Second, the Australian Government should establish a new National Economic Security Agency (NESA) within the Treasury, drawing together national security and economic policy expertise under one roof. The core function of NESA would be to assess Australia’s primary economic security risks and provide policy recommendations to government on ways to mitigate them and to build critical national capability for both defensive and offensive purposes. In effect, NESA would become the analytical hub, policy driver and ‘muscle memory’ for a new phase of Australian industry policy.

Third, the Department of Foreign Affairs and Trade, in coordination with NESA, should be charged with negotiating a new generation of Economic Security Partnerships (ESPs). These partnerships would aim to strengthen key strategic and economic relationships, coordinate economic security initiatives across like-minded countries and unlock opportunities for Australian industries as global value chains are reset in coming years. A strengthened economic security partnership with Japan would be the natural starting point for this initiative. At a sectoral level, Australia should capitalise on its role as a trusted and reliable supplier of food and energy — sources of economic security that matter most to many countries — while looking to capture new opportunities across areas such as defence industry, advanced technologies and critical minerals.

None of these recommendations attempt to overturn economic orthodoxy or to reimagine the core drivers of Australian prosperity. They seek to preserve, as far as possible, economic openness as a foundational principle of policy, balanced with a robust and durable framework to support Australia’s national security, state sovereignty and liberal democratic values. Getting the balance right will require a new marriage of economic rationalism and state capacity geared to Australia’s unique strategic circumstances and an increasingly volatile global economic environment.

5.1. Facing the future: Aligning national security and economic security

Numerous official statements have drawn attention to the deterioration in Australia’s geopolitical and economic environment over the past decade or so.²⁴⁶ The 2024 National Defence Strategy (NDS) states that Australia confronts “the most complex and challenging strategic environment since the Second World War.”²⁴⁷ The liberal-order optimism that followed the Cold War, the NDS argues, “has been replaced by the uncertainty and tensions of entrenched and increasing strategic competition between the US and China.”²⁴⁸ It draws attention to China’s “unprecedented conventional and non-conventional military build-up” as a major source of strategic instability.²⁴⁹

The 2024 Independent Intelligence Review, released in March 2025, casts Australia’s strategic challenges in similarly foreboding terms.

The post-Cold War order has collapsed. It is not yet clear what will take its place, but for the foreseeable future Australia faces a world shaped by competition between nation-states and global geopolitical and economic fragmentation… Major-power conflict is no longer unimaginable. New security threats are prominent, many amplified by technological change. The fragility of borders, a feature of our security landscape for some time, is more evident than ever. Australia faces both a more dangerous international environment and a growing need to defend itself against threats to its democracy, social cohesion and essential infrastructure.²⁵⁰

Several government institutions and policy strategies are geared to these challenges. Over recent years, successive Australian governments have acted to counter growing security threats, including through large-scale defence commitments (such as the AUKUS agreement), critical infrastructure and technology protection and tighter screening of foreign investments. The injunction that all arms of national power should be harnessed in the face of growing strategic challenges is a fixture of government statements and speeches.²⁵¹

Yet there remains a nagging question as to whether Australia’s bureaucratic architecture and economic policy toolkit are fit-for-purpose for a world of greater disorder and disruption. China’s more assertive global and regional posture, the deepening alignment of authoritarian powers led by China and Russia and the Trump administration’s assault on the global trading system in 2025 have combined to make this question more urgent. Reviews of Australia’s diplomatic and intelligence services have addressed this issue only in limited ways.²⁵²

The principal economic program aimed at managing geopolitical risk and securing Australia’s place in a changing global landscape is the Future Made in Australia strategy. Announced in 2024, FMIA elevated the concept of ‘economic security’ as part of the Australian Government’s governing narrative and policy agenda for the first time. Treasurer Jim Chalmers, returning from IMF and World Bank meetings in April 2024, highlighted the need for Australia to better “align our national security and our economic security interests … as an antidote to the kinds of risks that we are seeing escalating around the world.”²⁵³

Prime Minister Anthony Albanese outlined the Future Made In Australia plan during an address to the Queensland Media Club in April 2024.Source: anthonyalbanese.com.au

Prime Minister Anthony Albanese used a major speech the same month to outline the FMIA strategy. He pointed to new geopolitical and economic realities resulting in a “fundamental shift in the way nations are structuring their economies.” Nations, he observed, are “drawing an explicit link between economic security and national security” with a “new and widespread willingness to make economic interventions on the basis of national interest and national sovereignty.”

The Prime Minister stated that the “so-called ‘Washington consensus’ has fractured and Washington itself is pursuing a new direction” while other jurisdictions are also moving to boost manufacturing subsidies and, in some cases, adopt formal economic security strategies.²⁵⁴ Describing strategic competition as “a fact of life,” Albanese warned that Australia needed “sharper elbows when it comes to marking out our national interest.” This meant being prepared to “break with old orthodoxies and pull new levers to advance the national interest” with government intervening more actively in the economy as “a participant, a partner, an investor and enabler.”²⁵⁵

Describing strategic competition as “a fact of life,” Albanese warned that Australia needed “sharper elbows when it comes to marking out our national interest.”

Elsewhere, the Treasurer spoke enthusiastically of Future Made in Australia as heralding a “new growth model for a new generation of prosperity” driven by a “generational shift in our thinking and policies.”²⁵⁶ Backing the vision of Australia as “a renewable energy superpower, and an indispensable part of the global net zero economy,” Chalmers saw Australians as among the greatest beneficiaries of a “new economic orthodoxy” in “a world of churn and change.” This optimistic narrative focused overwhelmingly on the global net zero transition and defined the government’s advocacy of FMIA, including through parliamentary passage of the Future Made in Australia Act.²⁵⁷

At the core of the FMIA agenda is the active embrace of industrial policy based on two central objectives. The first is to position Australia to make the most of the net zero transformation. The second is to reinforce Australia’s national security and economic resilience. Under the program, public funding and government intervention are deployed to boost “priority industries” using “meaningful but targeted incentives” for private investment, where existing incentives are not aligned with broader national interest objectives.²⁵⁸

In the 2024-25 federal budget, the Australian Government announced a A$22.7 billion package of commitments aimed at “maximising the economic and industrial benefits of the move to net zero and securing Australia’s place in a changing global economic and strategic landscape.”²⁵⁹ A new National Interest Framework (NIF), to be administered by the Australian Treasury, was charged with providing “rigour to Government decisions on significant public investments in industry on the basis of the national interest, particularly when they are used to incentivise private investment at scale.”²⁶⁰ Three sources of market failure were tagged as justifying public investment:

• Externalities: where carbon is not priced into production, creating an uneven playing field and an undersupply of products, drawing on cleaner production methods.
• Security: where firms fail to appropriately price the required level of security and resilience in critical sectors and supply chains.
• Knowledge spillovers in infant industries critical to the net zero transition:where early movers cannot capture full economic rents, resulting in underinvestment in cleaner production methods.

In keeping with the FMIA mandate, the NIF has two investment streams: Net Zero Transformation (NZT) and Economic Resilience and Security (ERS). The NZT stream targets “industries that can make a significant contribution to achieving net zero, where Australia has grounds to build enduring comparative advantage.” The ERS stream focuses on industries “that are critical to our resilience, are vulnerable to supply disruptions and that require support to unlock sufficient private investment.”²⁶¹ The 2024-25 budget nominated five industries tied to these two streams:

• Renewable hydrogen — NZT stream
• Green metals — NZT stream
• Low carbon liquid fuels — NZT stream
• Processing and refining of critical minerals — ERS stream
• Clean energy manufacturing, including battery and solar panel supply chains — ERS stream.

Under the NIF, public investments are assessed against five criteria: (i) Australia’s grounds for lasting competitiveness; (ii) the role the industry will play in securing an orderly path to net zero; (iii) the role the industry will play and in building Australia’s economic resilience and security; (iv) whether the industry will build key capabilities; and (v) whether the barriers to private investment can be resolved through public investment in a way that delivers compelling public value. Investments in priority industries are also subject to a set of Community Benefit Principles “with a focus on investment in local communities, supply chains and skills, and promoting diverse workforces and secure jobs.”²⁶²

Two features stand out from the initial phase of FMIA activity. The first is the expansive set of objectives attached to the strategy. Drawing on government statements, a non-exhaustive list of FMIA ‘missions’ includes: transforming Australia into a “renewable energy superpower,” enhancing the diversity and “complexity” of the domestic economy, “investing in manufacturing to make more things here,” “bringing new jobs and opportunities to communities in every part of our country,” “lasting economic empowerment” in remote Indigenous communities and “backing Australian ideas in technologies critical to net zero.”²⁶³

Attaching so many objectives to a single program raises questions about overall policy coherence and the relationship between means and ends.²⁶⁴ The Productivity Commission, in its 2023-24 Trade Assistance Review, pointed to the broad yet ambiguous scope of FMIA. Among concerns expressed by the Commission are that the full suite of measures under FMIA remains unclear, decision makers have broad discretion regarding which measures fall under FMIA’s umbrella, sector assessments are not mandatory (meaning assistance does not need to align with the objectives of the NIF) and significant spending is delivered through off-budget concessional finance which can be less transparent than budgetary assistance.²⁶⁵

In its current form, Future Made in Australia suffers from political and rhetorical overreach, with myriad objectives and exuberant claims of a new economic orthodoxy and growth model. Economic traditionalists have rightly pointed to economy-wide settings for market dynamism, economic openness, cost competitiveness and productivity growth as superior enablers of higher living standards and Australia’s success in the global economy.²⁶⁶ Inordinate faith in government’s capacity to engineer growth-enhancing resource allocation only serves to blur the connection between policy means and ends, with insufficient attention to resource constraints and policy trade-offs. The idea of FMIA as offering a new model or orthodoxy for superior economic growth and productivity is both unnecessary and unconvincing.

Short-changing national security and economic resilience

A second characteristic of FMIA is the degree to which the net zero transformation goal dominates and, indeed, ‘crowds out’ the other mandated area of focus on national security and economic security risks. Of the A$22.7 billion investment package announced in the 2024-25 Budget, at least A$15 billion is allocated to clean energy industry development. The largest components are production tax credits for critical minerals (A$7 billion over 11 years beginning from 2023-24) and hydrogen (A$6.7 billion over 10 years beginning from 2024-25).²⁶⁷ Other major investments include A$1.7 billion in a Future Made in Australia Innovation Fund for the deployment of technologies and facilities linked to the net zero transition, A$1 billion in the Solar Sunshot program to support solar photovoltaic manufacturing and A$500 million for the Battery Breakthrough Initiative to support battery manufacturing in Australia.

Figure 5.1 provides a breakdown of FMIA funding commitments using data from the Productivity Commission for the first six years of the program from 2023-24 to 2028-29. Leaving aside “supporting measures,” the net zero stream accounts for more than two-thirds of designated funding, with hydrogen accounting for the largest component of allocated funds at more than A$3.4 billion. Moreover, the analytical underpinning of investments in the economic security and resilience stream is unclear, at best, if the goal is to unlock investments in sectors crucial to national resilience and vulnerable to supply disruption. Almost A$1 billion in this category is slated for solar panels and batteries with no clear rationale based on national interest claims, externalities or vulnerability to supply disruption.

The sectoral priorities of the Australian Government’s Office of Supply Chain Resilience (OSCR) offer a useful benchmark for assessing policy coherence and coordination. Located in the Department of Industry, Science and Resources (DISR), OSCR was established in response to supply chain challenges during the COVID-19 pandemic with a mandate to focus on “critical supply chain vulnerabilities that could impact Australia’s national interest.”²⁶⁸ Priorities for supply chain resilience, set out on the DISR website, are personal protective equipment, critical pharmaceuticals, agricultural chemicals, semiconductors, telecommunications equipment, water treatment chemicals and critical plastics. None figure in FMIA sectoral investments.

Another notable feature is the absence of any direct role for FMIA in supporting enhanced national defence capability. This is justified based on separate investment processes conducted through the National Defence Strategy and Integrated Investment Program (IIP), as well as the Sovereign Defence Industrial Priorities in the Defence Industry Development Strategy. Yet other programs, such as the National Reconstruction Fund (NRF), have a mandate for investment in defence capability outside the NDS and the IIP. The case for removing national defence from FMIA sectoral investments is accordingly diminished. At a minimum, there is a strong presumption in favour of better coordination of defence-related investments to integrate FMIA with the pursuit of national security objectives and capabilities.

In summary, Future Made in Australia has elevated Australia’s more challenging strategic circumstances as a prism for rethinking economic policy. It usefully highlights the need to better align national security and economic security objectives, and it identifies correctly that well-designed industry policy can play a role in this context. In practice, however, FMIA falls short in terms of policy design and application for two main reasons. It suffers from political and narrative overreach. And it is overweight net zero transformation and underweight national security and economic resilience. Future Made in Australia and the National Interest Framework should be recast with future investments linked more explicitly to Australia’s national security and economic security challenges and interests.

‘Strategic indispensability’ as a guiding principle: Critical minerals and rare earths

This proposed FMIA course correction need not be at the expense of opportunities (including decarbonisation opportunities) in areas of comparative advantage, such as critical minerals and rare earths. As the world’s largest producer of lithium and a top 5 producer of critical minerals such as cobalt, manganese, tantalum and rare earth elements (REEs), Australia is well positioned to secure strategic and economic gains through targeted policies that crowd-in private sector investment in this sector.

Critical minerals and rare earths sit squarely at the intersection of national security and economic security policy in the context of heightened US-China strategic rivalry, the challenges surrounding the clean energy transition and the desire of many countries to maintain sovereign manufacturing capability while diversifying and de-risking sources of critical minerals supply. Access to these materials has become increasingly politicised and subject to greater restrictions and government controls in recent years. China’s dominance of rare earths supply chains — up to 99% in some products — provides an especially powerful tool for coercion that can undercut industries and national security in other countries.

Taken as a whole, China controls around 40% of the world’s rare earth element reserves, accounts for 69% of mined production and around 90% of processing.²⁶⁹ It has demonstrated both the ability and intent to exploit this critical chokepoint, beginning with actions against Japan in 2010. More recent examples in the context of economic disputes with the United States include the imposition of new restrictions on gallium and germanium in 2023, antimony in 2024 and on an expansive list of rare earths in 2025 (Figure 5.2).

With extraterritorial reach, Beijing’s development and weaponisation of a new regime of export controls for REEs and magnets used in the defence, energy and automotive sectors has sharpened international attention on the strategic vulnerabilities arising from China’s dominance of global critical minerals processing capacity. In response, governments are scrambling to develop a wide array of demand and supply policies, bilateral friendshoring strategies and multilateral efforts to diversify supply sources.²⁷⁰

World-class geological reserves, established mining expertise, political stability and strong economic governance place Australia at the centre of this newest terrain of economic warfare and strategic contest. Yet taking advantage of this opportunity will require difficult policy choices and a level of coordinated action not yet contemplated. Eli Hayes and Darren Lim make the essential point that not every critical mineral is equal — and Australia’s policy should reflect this fact. Critical minerals, they note, are “wildly heterogeneous” — chemically, in market size and in their buyers and sellers. “The sensible move is therefore to reset the policy to a much narrower definition — one aligned with the minerals that could be weaponised.”²⁷¹

As Secretary to the Treasury, Dr Steven Kennedy made a similar point in speaking of Australia’s role in the global supply of critical minerals in the context of Chinese market dominance and predatory behaviour. He observed in a speech in June 2024 that “when a nation state is seeking to dominate particular markets for broader aims, the response should not be viewed primarily through an economic lens, but through a national security lens.”²⁷²

Limited government resources mean that prioritisation is essential. Decisions on public sector support should be based on an integrated assessment of strategic importance and relative attractiveness of operations. One approach to prioritisation is to assess strategic significance and supply chain vulnerability through the lens of five characteristics that could be considered a high priority mineral: (1) applications in national security industries, (2) no feasible substitutes in these applications, (3) sizeable Australian endowment, (4) low resilience supply chain due to concentration to non-partner nations, and (5) limited established market volumes.

Australia is seen as a relatively attractive producer for all nine high-priority minerals based on geological reserves. While economically challenging, the research finds that existing capabilities — either in Australia or in partner countries — offer prospects for processing of heavy rare earths, light rare earths and antimony.

Browns Range rare earths project.Source: Primero

Australia’s Critical Minerals Strategy already has several policy strands on which a sharpened, more strategically focused agenda can be based. Key pillars include the Critical Mineral Financing Facility administered by Export Finance Australia, production tax credits to support processing and refining of critical minerals under the FMIA architecture, and additional industry support through bodies such as the NRF and the Clean Energy Finance Corporation. Australia has entered into a series of agreements with the United States, Japan, South Korea, Canada, the United Kingdom, India, Germany and the European Union to streamline critical mineral resources development. The framework agreement with the United States announced in October 2025 will see joint investments to accelerate priority projects. At the same time, the Albanese government is establishing a Critical Minerals Strategic Reserve, which will be operational by the second half of 2026. The challenge is to bring greater clarity, coherence and coordination to the task ahead. A further review of Australia’s Critical Minerals Strategy due in 2026 offers the opportunity to do so.²⁷³

As part of this policy evolution, a reconfigured FMIA should enshrine the concept of ‘strategic indispensability’ as a guiding principle of its investment mandate. Borrowing explicitly from Japan’s economic security strategy referred to in the previous section, the idea is to make Australia an indispensable part of global industrial and technology systems in domains on which many other countries depend.

Francesca Ghiretti identifies the virtues of strategic indispensability as a conceptual underpinning for national industry policy in an era of geopolitical contest and weaponised interdependence.²⁷⁴ First, she argues, it forces greater scrutiny of priority capabilities based on a clear strategic rationale. Second, it takes explicit account of the global geopolitical landscape and the risks and opportunities this can present, including in building strategic leverage and asymmetric economic advantage against coercive behaviour. Third, if done in the context of cooperative partnerships, targeted actions are likely to incentivise other like-minded actors to invest in different areas of economic and strategic importance, in turn helping to safeguard an interdependent world economy against fragmentation pressures.

The weaknesses of the current FMIA strategy become even more apparent in this light. Investing in sectors subsided heavily by other major economies — notably mass-manufactured green technologies such as solar panels and batteries — is a distinctly inferior option compared with developing capabilities or technologies that few other actors have. There is a high risk of scarce government resources (both public funds and policy capability) being dissipated on projects of marginal economic and strategic importance. Larger economies subsidising manufactured goods or technologies at scale reduces rather than increases the case for Australian taxpayers to follow suit, a point highlighted by the Productivity Commission in relation to subsidies for battery making.²⁷⁵

The long-hanging fruit of policy reform involves better coordination and deployment of scarce government resources towards well-defined priorities. Industrial policy should be less focused on general goals relating to the green transition or “making more things here” and more on addressing specific economic security risks (e.g. supply chain choke points or single points of failure) and developing capabilities where national security and economic security interests align. The opportunity exists to refine and refocus FMIA on priority sectors where this is the case. Critical minerals and rare earths should be the test case.

5.2. Mitigating risk, building resilience: A National Economic Security Agency

Refocusing Future Made in Australia onto priority national security and economic security risks and interests demands consideration of the ‘how’ of policy making, not just the ‘what’. China’s growing regional assertiveness and the Trump administration’s attempt to reset the global trading system provide the pretext for a broad-based reassessment of Australia’s institutional architecture.

Taking the Treasurer at his word, the aim should be to define more precisely what “aligning national security and economic security interests” means in practice, given the dual imperatives of mitigating risks and building greater national resilience. The reality is that economic and security interests are increasingly intertwined and will become more so. With a sense of urgency, Canberra should seek to build enhanced analytical muscle and strengthen central policy coordination across relevant economic security domains. At present, there is a ‘below the radar’ Coordination Mechanism on Economic Security led by the Department of the Prime Minister and Cabinet (PM&C) at deputy secretary level. However, the metronome is moving too slowly, given the heightened risks of geopolitical and economic fragmentation and weaponised interdependence in 2025.

The 2024 Intelligence Review recommended a stronger role for Treasury in advising government on economic security decision-making. At the moment, however, the Canberra policy community lacks a clear mandate for doing much more than taking stock of issues and initiatives as they emerge. It needs to be geared towards forward-looking policy development based on analytical frameworks and tools that draw together ends and means via clearly articulated principles.

Currently, advice on economic security issues comes forward to Australian government ministers from various departments and agencies. These include the central agencies (the Departments of the Prime Minister and Cabinet, Treasury and Finance) as well as the Department of Foreign Affairs and Trade, the Department of Industry, Science and Resources, the Office of National Intelligence, the Department of Home Affairs, the Attorney General’s Department and the Department of Defence. Other departments with relevant responsibilities on specific economic security issues include Health, Disability and Ageing; Agriculture, Fisheries and Forestry; and Infrastructure, Transport, Regional Development, Communications, Sport and the Arts.

While strong capabilities exist on specific issues across government, they remain too fragmented and siloed to be fully effective. The critique offered by Jonathan Black in a Westminster context is as relevant to Canberra. Issues that cross the domains of economics, national defence, domestic security and intelligence do not have a natural home, and good practice relies too much on the energy and policy entrepreneurship of individuals and ad hoc arrangements.²⁷⁶

Issues that cross the domains of economics, national defence, domestic security and intelligence do not have a natural home, and good practice relies too much on the energy and policy entrepreneurship of individuals and ad hoc arrangements.

To improve policy coherence and coordination, the Australian Government should establish a new National Economic Security Agency (NESA), drawing together national security and economic policy expertise under one roof. The core function of NESA would be to assess Australia’s primary economic security risks and make policy recommendations to government on steps that should be taken to mitigate them and to build critical national capability. The current National Interest Framework, designed to guide the Future Made in Australia strategy, would necessarily be remodelled to fulfil this new mandate.

By design, NESA would be a relatively small agency working closely with the intelligence community in developing advice on risks and capabilities. It would look to harness expertise across such domains as technology policy, supply chain resilience analysis, sanctions policy, export controls, alongside broad policy areas such as trade and defence, as well as critical infrastructure systems, especially finance, energy and telecommunications. Over time, it would aim to cultivate a cadre of officials with experience at the intersection of national security and economic policy. This would assist the development of integrated intellectual frameworks that capture different conceptions of risk across economic and security domains, thereby strengthening policy coherence as well as coordination.²⁷⁷ It would also seek to develop and maintain specialist industry policy skills in areas such as finance and project management.

In line with the thinking in the 2024 Independent Intelligence Review, there is a strong case for NESA to be housed in the Department of the Treasury, given the importance of central agency coordination and Treasury’s carriage of the existing National Interest Framework architecture. At the same time, NESA’s whole-of-government mandate suggests the need for broad oversight. The heads of PM&C, Treasury, Foreign Affairs and Trade and Defence should be collectively charged with setting the agency’s work program based on the agreement of Cabinet’s National Security Committee (NSC).

A Director-General of NESA, appointed by the Prime Minister, would assume primary responsibility for the development and coordination of integrated economic security advice to government. As a first step, the agency would be charged with bringing forward to the NSC detailed assessments twice a year of Australia’s economic security risks and recommended actions. In the interests of political accountability, the Treasurer should make an annual statement to Parliament on economic security matters. This statement would provide an important community reference point on Australia’s economic security interests, risks, policy objectives and guiding principles.

A whole-of-government framework would aim to improve resource allocation and policy focus. It would draw on a large body of knowledge developed over the past five years through the COVID-19 pandemic, Chinese economic coercion and ‘grey zone’ tactics, the accelerated development of advanced technologies, and the shifting sands of US international economic policy. The foundations would be established for a formal Australian economic security strategy, following the approach taken by a number of other advanced economies. The question naturally arises as to whether Australia requires an overarching National Security Strategy as part of this process. There is a strong case for ‘nesting’ an Australian economic security strategy within such a framework, but this should not delay institutional reform and policy development on areas of primary risk and vulnerability and on required capability development.

Bringing the private sector along on the economic security road

As well as being the Australian Government’s principal adviser on economic security issues, NESA would need to work closely with state and territory governments, the business community, universities and research institutes and other private sector stakeholders. Incorporating business input into policy development is a central preoccupation of other jurisdictions seeking to build greater state capacity on economic security. Consultation with business to ensure policy instruments that impose restrictions are precise and proportionate to the risk environment is essential. Possible models in this context include mechanisms for more systematic sharing of market insights and security assessments between government and business, the establishment of formal advisory bodies and early warning devices on economic security risks and coordination bodies in sectors such as energy, telecommunications, finance and the payments system.

There is also scope for NESA to play a useful role in bridging the gap that exists in Australia between discussions in elite policy circles on geopolitical and economic fragmentation risks and community awareness of associated vulnerabilities, not least within the small business community that tends to sit outside such circles but carries acute exposure to such risks. Useful parallels come from earlier periods of Australian economic statecraft and diplomacy.

The former East Asia Analytical Unit (later renamed the Economic Analytical Unit) within the Department of Foreign Affairs and Trade established a strong reputation in the 1990s for deepening private sector understanding of the rapid changes taking place in East Asian economies, albeit in a more benign strategic environment. As partner governments in the Indo-Pacific region seek to navigate similar threats and risks, NESA could play a regionally significant role as part of Australia’s foreign economic policy toolkit in areas ranging from the provision of information and analysis of economic security risks to capacity building.

Far from discarding or diminishing economic ways of thinking on economic security issues, the purpose of a body such as NESA is to embed such thinking more systematically into Australian industry policy than is the case now.

Establishing new, formal architecture for a National Economic Security Agency inevitably carries challenges. For economists, concerns are likely to centre on the potential to ‘over-securitise’ economic policy, where governments deploy restrictive measures on economic activity disproportionate to actual risks. Such political economy concerns are similar to those highlighted previously in relation to the FMIA program; namely policy overreach and a permissive environment for both rent seeking and bureaucratic discretion over decisions that distort or restrict economic activity. The importance of appropriate levels of transparency alongside rigorous, evidence-based approaches with clear policy objectives, strong cost-benefit analysis and established ‘off ramps’ should policies fail to achieve their stated objectives is no less relevant.

Far from discarding or diminishing economic ways of thinking on economic security issues, the purpose of a body such as NESA is to embed such thinking more systematically into Australian industry policy than is the case now. The goal is not to overturn economic orthodoxy or to imply that industry policy holds the keys to the next wave of Australian prosperity. It is to ensure policy interventions are subject to appropriate scrutiny based on strong decision-making principles and cost-benefit analysis. Economy-wide policy settings on taxation and regulation across all sectors to promote market dynamism, cost competitiveness and productivity growth do not simply remain essential to Australian prosperity and security in this new era. They are even more important in an environment where government is being asked to intervene more actively and directly via industry policy to respond to security externalities and to build critical national capabilities that align national security and economic security interests.

5.3. Renovating Australia’s international economic statecraft

The Great Unravelling of power structures, institutional guardrails and policy mindsets that supported global growth and economic integration in the era of deep globalisation presents major new challenges for Australia’s international economic statecraft.

Australia’s economy has benefited from decades of rising prosperity supported by a relatively open and stable international economic order. Beginning in the 1980s, economic reforms opened the domestic economy to global competition and the pursuit of freer trade, market-based resource allocation and greater specialisation in economic activities helped to support higher living standards and a period of unbroken economic growth from the early 1990s through to the COVID-19 pandemic. Deeper integration into the growth economies of East Asia — not least a rising China — has been the dominant international tailwind for modern Australia’s prosperity.

Australia’s active role internationally in building cooperative economic arrangements and in reducing trade barriers through multilateral, plurilateral and bilateral agreements contributed powerfully to this record of economic success. Through the deep globalisation era, Australian economic policy frameworks rested on implicit assumptions of a benign international environment that is stable and conducive to Australian interests. Such assumptions now appear increasingly strained, if not naïve.²⁷⁸ The corollary from an economic lens, as Paul Tucker, the former deputy governor of the Bank of England, has observed, is worth highlighting explicitly: “Economic models take peace and order for granted.”²⁷⁹

Australia’s active role internationally in building cooperative economic arrangements and in reducing trade barriers through multilateral, plurilateral and bilateral agreements contributed powerfully to this record of economic success.

In response to a deteriorating strategic environment — not least a more ambitious and assertive China — successive Australian governments have adopted a more conditional approach to economic openness, with greater use of defensive tools such as investment screening, critical infrastructure protection and foreign interference legislation. Such interventions continue to be weighed and balanced against a strong commitment to markets, open trade and investment and rules-based economic institutions.

Better aligning Australia’s national security and economic security interests will require active, forceful and opportunistic (in the best sense of the word) Australian economic statecraft abroad. Helpfully, Australia has many assets to draw on. An enduring security alliance and economic partnership with the United States, strong relationships and partnerships across the Indo-Pacific region, a network of bilateral and plurilateral trade agreements, membership in groupings such as the Quad and flagship initiatives such as Australia’s Southeast Asia Economic Strategy all offer a solid platform for creative and ambitious Australian agency.²⁸⁰

Japanese Foreign Minister Iwaya Takeshi, Indian Foreign Minister Subrahmanyam Jaishankar, US Secretary of State Marco Rubio and Australian Foreign Minister Penny Wong at a Quad Foreign Ministers’ Meeting in Washington DC, January 2025. Source: Getty

A new generation of Economic Security Partnerships

Building on these foundations, the Department of Foreign Affairs and Trade should be charged with negotiating a new generation of Economic Security Partnerships (ESPs) with like-minded countries, working in close coordination domestically with NESA. These partnerships would be designed to strengthen key strategic and economic relationships, coordinate economic resilience initiatives and unlock opportunities for Australian industry as global value chains are reset in coming years.

In a more fractured world, priority should be given to deepening engagement and alignment on economic security settings with major G7 economies and like-minded partners such as South Korea and New Zealand. In the case of partners such as Japan, the European Union, the United Kingdom and South Korea, this would look to build on either existing formal economic security strategies in some jurisdictions or existing bilateral economic security dialogues.

The starting point for Australia should be to seek an elevated Economic Security Partnership with Japan, based on the two countries’ deep and abiding alignment of strategic and economic interests. Australia and Japan lie at the heart of the US alliance network in the Indo-Pacific. Both share enduring interests in a regional order that remains stable, free and open to the maximum extent possible, consistent with common security imperatives. Under the renewed Joint Declaration on Security Cooperation, Australia and Japan continue to strengthen security ties and better integrate respective defence-industrial bases and defence-related science and technology cooperation.

The starting point for Australia should be to seek an elevated Economic Security Partnership with Japan, based on the two countries’ deep and abiding alignment of strategic and economic interests.

The Japan-Australia Economic Partnership Agreement signed in 2014 — Australia’s first bilateral free trade agreement with a major North Asian economy — secures strong economic connections. Japan is Australia’s second-largest export market and fourth-largest source of foreign investment. In October 2022, the two governments signed the Australia-Japan Critical Minerals Partnership, establishing a formal framework to build secure critical minerals supply chains and to promote cooperation on research, investment and commercial arrangements. Australia and Japan also share a track record of pooling resources and capabilities to support joint economic security projects in the region. Polling data shows that Australians’ confidence in Japan is strong and rising. The 2025 Lowy Institute survey found a record 90% of Australians said they trusted Japan to act responsibly in the world, the highest figure for any country and an increase from 87% in 2024.²⁸¹

The two countries hold an annual Australia-Japan Economic Security Dialogue — a framework for exchanging information on economic and strategic risks. Officials level discussions have so far focused on cooperation to strengthen supply chain resilience, protect critical infrastructure, improve data security and governance and support research security and integrity. A more formal Economic Security Partnership would aim to deepen policy alignment, coordination and resource pooling on shared economic security projects.

Ideally, an Australia-Japan ESP would establish a template for other arrangements, including at a sectoral level. Prospective areas for ESP collaboration more broadly include:

• Building the resilience of supply chains in critical minerals and other key production inputs
• Deepening government and private sector collaboration on infrastructure financing
• Promoting alignment among like-minded countries on strategies to develop and protect strategic technologies
• Building disciplines into industrial policy to avoid a wasteful subsidies race
• Deepening connections between government and industry to ensure economic security policies are proportionate and effective

Building trust around traditional market access issues would also be a worthwhile exercise based on the prospect of greater global economic volatility in what the IMF has called a “more shock-prone world.”²⁸² Food security and energy security continue to loom large in this context — for advanced and developing economies alike. Indeed, for many of Australia’s economic partners in the Indo-Pacific and across the Global South, these are the sources of economic security that continue to matter most. Reinforcing Australia’s credentials as a trusted and reliable trading partner is a natural focal point for an Australian network of ESPs in the face of growing economic fragmentation pressures in commodity markets.

The IMF has warned that global supply chain fragmentation — especially in commodity markets for grains, fertilizers and energy supplies — poses serious risks to the availability and affordability of food and energy globally, and that risks become more acute in the wake of geopolitical crises.²⁸³ Australia should look to capitalise on opportunities to deepen long-term partnerships in areas of traditional comparative advantage, including those that arise from geopolitical disruption. This would not be to the exclusion of pursuing new and emergent areas of sectoral opportunity for Australia, including in the defence industry, critical minerals, clean energy and advanced technologies.

By virtue of its geography, size and strategic interests, Australia will continue to play an outsized role in working with Southeast Asian and Pacific nations on economic security issues. A new National Economic Security Agency would be well-positioned to become a partner of choice for capacity building. Other like-minded jurisdictions with established economic security strategies — notably the European Union and South Korea — offer strong prospects for future Economic Security Partnerships framed around the promote, protect and partner themes.

By virtue of its geography, size and strategic interests, Australia will continue to play an outsized role in working with Southeast Asian and Pacific nations on economic security issues. A new National Economic Security Agency would be well-positioned to become a partner of choice for capacity building.

The China challenge will remain a focal point for economic security strategies — formal or informal — in Canberra, Washington, Brussels and across the Indo-Pacific. In moving beyond the sharp deterioration in Australia-China relations that followed Beijing’s imposition of extensive bans on Australian exports, the Albanese government has sought to anchor bilateral relations around a concept of “stabilisation,” twinned with a narrative that in dealings with China, Australia seeks to cooperate where it can, disagree where it must, and engage in the national interest.²⁸⁴

The Australian Government is at pains to challenge what it sees as the “false binary” whereby safeguarding Australia’s sovereignty is mutually exclusive with productive economic ties.²⁸⁵ Realistically, however, China’s actions continue to set binding limits on economic security cooperation. Australia’s most senior security and intelligence officials continue to point to China’s intimidatory demonstrations of military power, intrusions into critical infrastructure networks, cyber operations and coercive trade measures as part of a strategy to “turn access into leverage — and interdependence into malign influence.”²⁸⁶

The place of the United States in this context is complicated by cross-cutting factors. The Trump administration’s America First approach — defined by unilateralism, transactionalism and mercantilism — has effectively neutered provisions of the bilateral free trade agreement for the time being. Trump administration officials make no secret of their mission to extract one-way concessions from trading partners. At a practical level, however, this has not stopped both governments forging enhanced cooperation in the form of deeper defence industrial base integration, advanced technology cooperation, expanded efforts to diversify critical minerals and rare earths supply chains and continuing growth in what is by far Australia’s largest two-way investment partnership.

The United States continues to be Australia’s principal strategic and economic partner in a more dangerous and contested world. At the right time, Australia should look to upgrade the strategic economic dialogue with the United States as a prelude to a more formal economic security partnership. The Australia-US Strategic Commercial Dialogue (AUSSCD), first held in 2022, has yet to find a place within the framework of the Australia-United States alliance commensurate with the importance of issues at the intersection of national security and economic policy. Upgrading the bilateral strategic economic dialogue would complement annual AUSMIN talks and put economic security discussions on a parallel footing with those on national security, defence and foreign policy issues. To reach this threshold, the AUSSCD needs to be augmented by Treasury representation at Cabinet-level from both Australia and the United States.

Towards a doctrine of economic statecraft

For the moment, neither the United States nor China feel compelled to work within the constraints of liberal economic norms. Australia has a strong record of supporting a rules-based international trading system, including supporting the role of the WTO as a rulemaking and dispute settlement body. Equally, Australia has a strong interest in better defining norms and guardrails for this new era of economic statecraft, where the capacity of the WTO to exercise authority over great powers appears limited or non-existent. This is the new challenge presented by the Great Unravelling.

In this context, Michael Froman, US trade representative under President Obama, has advocated for a variable geometry of “coalitions of the like-minded” to remake rules from the ruins of the rules-based trading system. The aim is a modest one — to prevent unilateralism from spinning out of control. Some coalitions would be mechanisms for economic integration and liberalisation. Others in the realm of economic security might look to secure supply chains or even restrict economic activity in the name of national security.²⁸⁷

Daleep Singh, deputy national security advisor for international economics in the Biden administration, makes an even more ambitious case for a new doctrine of economic statecraft that can put some boundaries around economic coercion. Amid strategic competition and geopolitical tensions, he suggests, the temptation is to regard economic statecraft as secondary to the development and deployment of military instruments of national power. However, something closer to the opposite lens is more apposite in a world of mutually assured destruction. Barring catastrophic military miscalculation, “direct confrontation is more likely to play out in the theater of economics than on the battlefield.”²⁸⁸

Singh’s basic point is that, compared with military affairs — where doctrines have set long-established rules of engagement and escalation — no such body of thinking has emerged to set limits or institutional safeguards on economic statecraft. Realism is essential. There needs to be a recognition that states will continue to use restrictive tools (tariffs, sanctions, export controls, investment screening, etc.) and positive support measures (industrial policy subsidies, supply chain resilience mechanisms, etc.) to safeguard national security and economic security interests. “The era of hyperglobalization is over, but the world economy remains more connected than ever, providing nations the opportunity to break linkages of trade, capital, and technology (or threaten to do so) for geopolitical advantage.”²⁸⁹

For the likes of Australia and Japan, enmeshed in efforts to support a stable regional order in partnership with the United States, the aim would be to limit the overreach of restrictive or punitive tools of economic statecraft.

The key challenge is to better define the trade-offs around the use of various tools, to avoid a spiral towards coercive measures. A doctrine of economic statecraft would lay down some guiding principles for restrictive or punitive tools. It would also set out rules of engagement to govern why, when, what, how and against whom restrictive measures are deployed.²⁹⁰ For the likes of Australia and Japan, enmeshed in efforts to support a stable regional order in partnership with the United States, the aim would be to limit the overreach of restrictive or punitive tools of economic statecraft. This would preserve space for mutually beneficial economic exchange in support of economic growth and development. In a hopeful scenario, it might aspire to move the United States closer towards a positive vision of economic statecraft that can assure others it is not simply “firing economic weapons in an arbitrary or reflexive manner.”²⁹¹

Economic rationalism and state capacity

The biggest challenges for Australia will nonetheless be at home. Australia’s economic policy settings remain ill-prepared for this new era. The task of making our economy more resilient is multidimensional; necessarily bound up, for example, with fostering economic growth, improving budget discipline and pursuing pro-productivity structural reform. No amount of industry policy or international engagement can solve those challenges.

In an underreported speech following Australia’s May 2025 federal election, his last as Secretary to the Treasury before taking the reins at the Department of the Prime Minister and Cabinet, Steven Kennedy issued both a warning and a challenge to Australian policymakers. He noted that “for the foreseeable future the world will be characterised by a persistent high level of uncertainty, a level not experienced for decades.” This should be regarded as permanent, he argued. In this world, policy trade-offs are starker, the margin for error is smaller, and the need for insurance against damaging outcomes is higher.²⁹²

Then Secretary to the Treasury Dr Steven Kennedy PSM addressing the United States Studies Centre’s Economic Security Conference in June 2024.Source: USSC

In the coming years, whether willingly or not, Australia will be forced to construct our own variant of an economic security state. This will be a demanding task. It will require enhanced state capacity to distinguish between essential economic security needs and non-strategic economic transactions. The boundaries will not always be obvious, and a country such as Australia will not have ‘strategic autonomy’ in defining them. It will require new partnerships, both to preserve economic openness and the benefits of interdependence and to address vulnerabilities that arise from that same interdependence. It will require different policy approaches and cooperative models from both government and the private sector, working together to ensure Australian industry policy meets clear objectives and to build genuine capability and strategic advantage for Australia.

This new era of economic statecraft will inevitably involve elements of trial-and-error and learning-by-doing. It will involve difficult choices with knock-on effects to Australia’s economy and international relationships. Resources will remain scarce, and Australian governments will need to set priorities in a way that is both uncomfortable and outside current policy mindsets.

Muddling through is not a strategy. Australia has significant assets to draw on, but the metronome on economic security in Canberra needs to speed up. Shaped by the nation’s unique strategic circumstances and challenges, Australian governments will need to forge a new marriage between economic rationalism and state capacity, fit for a more fractured and contested world and a more volatile global economy.