April 2023 marked a momentous month in US economic policy. While US economic policy regularly impacts the global economy, in the age of strategic competition and deepening alliances, understanding the implications for Australia and other US allies and partners has rarely been more crucial.
On 20 April, US Treasury Secretary Janet Yellen delivered a speech outlining the Biden administration’s view of the US-China economic relationship. One week later, on 27 April, US National Security Advisor Jake Sullivan gave an address on US economic policy more broadly. Sullivan acknowledged it was unusual for a US National Security Advisor to give a major policy speech on economics, indicating the deeper integration of economic policy with security.
Both speeches are significant because they provide the Biden administration’s economic and trade policy rationale and indicate the future direction of US resources and attention in this space.
The shift in US thinking around economic policy
For decades, the United States championed an international economic order based on free trade and deregulation. However, the Yellen and Sullivan speeches reinforce the United States’ significant departure from free trade towards industrial policy with protectionist elements that favour US security interests. While both speeches broadly supported a market-based competitive economic order, Yellen advocated for government intervention for national security and market failures, and Sullivan went further, questioning the underlying assumptions of the old US economic order that “markets always allocate… efficiently” and that “all growth was good growth.”
The Yellen and Sullivan speeches reinforce the United States’ significant departure from free trade towards industrial policy with protectionist elements that favour US security interests.
In his speech, Sullivan acknowledged that the pursuit of free trade has not equally benefited all Americans, pointing to the decline in the US manufacturing industry as companies moved operations to other, cheaper countries, such as China. Instead, he proposed “a foreign policy for the middle class”, echoing statements by President Biden. This policy aims to rebuild the US industrial base, particularly in sectors where China dominates the supply chain or where spreading risk is important.
To achieve this, Sullivan flagged a shift away from a traditional, market-based economic order to one where the US Government plays an active role in incentivising industry through subsidies. This is a form of protectionism for which the United States has historically criticised China, including raising disputes with the World Trade Organization (WTO) over China’s subsidisation of its aluminium and auto manufacturing industries.
So far, the US Government has passed two major pieces of legislation that provide public investment to domestic manufacturing and critical supply chains:
- The Inflation Reduction Act (IRA), which offers tax credits for electric vehicles (a proportion of vehicle battery components must be assembled in North America, and a proportion of the battery minerals must be extracted and processed in the United States or a country with which it has an FTA), which was passed on 16 August 2022.
- The CHIPS and Science Act, which offers tax credits for companies to establish semiconductor chip manufacturing plants and semiconductor design and manufacturing production in the United States, which was passed on 9 August 2022.
What “de-risking” the US-China economic relationship means
Yellen and Sullivan’s shared position was clear: the United States is prioritising national security and resilience in its economic policy and pivoting away from an international economic order focused on deregulation, free trade, and globalisation. This is particularly evident in their comments on China, where both Yellen and Sullivan emphasised a “de-risking” approach.
De-risking is the preferred term of US officials to discuss economic strategy towards China, as opposed to “decoupling”. Decoupling differs from de-risking as the former attempts to sever economic ties with China while the latter is focused on addressing economic security vulnerabilities through diversifying trade and reducing dependencies. In her speech, Yellen acknowledged that decoupling the Chinese and American economies would be “disastrous for both countries” and “destabilizing for the rest of the world”. However, she defended de-risking particular industries and reinvesting in US domestic industry, pointing to Chinese Government intervention in markets, intellectual property theft, and coercive economic tactics.
Both speeches emphasised the need to build resilience into supply chains to withstand geopolitical tensions, pandemics, and supply chain bottlenecks, pointing to the European energy crisis that resulted from Russia’s invasion of Ukraine.
Both speeches articulate that de-risking will entail diversifying supply chains away from China, rebuilding domestic industries in critical technologies, and drawing allies and partners into the process. In particular, the United States seeks to “de-risk” industries and technology of critical importance for national security including semiconductors, military technology, and lithium-ion batteries. Both speeches emphasised the need to build resilience into supply chains to withstand geopolitical tensions, pandemics, and supply chain bottlenecks, pointing to the European energy crisis that resulted from Russia’s invasion of Ukraine.
While the two speeches addressed areas where the United States wants to compete with China, such as critical technologies, they also clarified areas where America seeks to cooperate. This includes climate change and the clean energy transition. Yellen and Sullivan also called for China’s cooperation to assist developing countries facing debt distress and reforming multilateral institutions such as the World Bank and WTO.
What does this mean for US allies and partners?
From an ally and partner perspective, American industrial policy is concerning in some respects while also holding opportunity in others.
On the concerning side is America’s movement away from decades of support for free trade towards protectionist policies that may harm global competition. In an economic context, US continued promotion of a ‘rules-based’, ‘free and open’ regional order comes across as hypocritical. Contributing to this perception is the fact the United States has criticised China for subsidising its domestic industry. The shift in US trade policy, while maintaining prior messaging and criticism of China, lessens America’s credibility, which is bad for US allies and partners.
The other concern is diminishing hope for allies and partners of lower tariffs and greater access to US markets, at least in the near term. The Sullivan and Yellen speeches signalled that the United States is moving away from traditional free trade agreements (FTA) that include tariff reductions. Sullivan said the United States is pursuing “innovative new international economic partnerships focused on the core challenges of our time” and that “For the problems we are trying to solve today, the traditional model doesn’t cut it”. Sullivan’s comments suggest the Biden administration has no intention of re-joining trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which US partners that are current members desire.
Sullivan’s comments suggest the Biden Administration has no intention of re-joining trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which US partners that are current members desire.
Further, the speed with which US industrial policy is being drafted has meant that some US allies without an existing FTA with the United States, were overlooked in the initial legislation. This has led the Biden administration to create workarounds via separate agreements to allow partner nations to tap into US subsidies and supply chains. For example, the United States and Japan signed a critical minerals agreement allowing Japan to be considered in the same way as other FTA countries. Until the United States was able to demonstrate how partners and allies could plug into its industrial policies, there was strong pushback from its partners, including European countries threatening a tariff war. Turning partners into competitors in an area where economic resilience and supply chain security was the goal was an oversight.
For Australia specifically, there are two concerns. Firstly, in decarbonising the US economy, IRA subsidies stand to incentivise economic growth and create jobs in the United States – making it harder for similar Australian Government initiatives to succeed domestically. As scholar James Bowen has argued, “The estimated US$386 billion US support for clean energy under the IRA instantly overshadowed Australia’s relatively weak commitments in this space, threatening to monopolise the available capital”. As capital and opportunities migrate to the United States post-IRA, Australia could find it harder to capitalise on the opportunities presented by the green economy transition.
The second concern is that US industrial policy benefits are currently off-limits to Australian companies doing business with China. The IRA stipulates that, in order to be eligible for the tax credits, 40 per cent (rising to 80 per cent by 2027) of the critical minerals in an electric vehicle’s lithium-ion battery must be extracted or processed from the United States or a country with which it has an FTA. Australia has an FTA with the United States and is the world’s largest producer of lithium. But the majority of its critical minerals are processed in China, making a large proportion of Australian companies ineligible for IRA subsidies. Unless and until Australian companies develop domestic processing capacity, or shift capacity to America, US subsidies will undercut them in the global market.
However, the IRA and a recent companion compact also present Australian industry with substantial new opportunities. While Australia had been concerned about the IRA drawing capital away from its shores, these concerns are being addressed through the Climate, Critical Minerals and Clean Energy Transformation Compact. Signed on 20 May, the agreement commits the two countries to expand and diversify clean energy and critical minerals supply chains. This includes enhancing investment flows between the countries and aligning projects connected to the IRA and Canberra’s Powering Australia plan. The Biden administration is also seeking to have Australia designated as a US “domestic source” of critical minerals in its Defense Production Act, which would allow the US Government to invest in critical minerals projects located in Australia. If successful, this could open a range of new opportunities for Australian businesses, not previously available.
The United States is clearly on a new path to compete with China more effectively in trade and economics. Washington is trying to shift the balance of power in critical supply chains quickly, while incorporating partners and allies. Throughout this process, we can expect American allies and partners to support the US approach in some areas and push back in others. The major challenge is that, unlike defence and security cooperation where there is broad appreciation for the collective benefit, trade and economics can be more zero-sum. As such, even close allies can be expected to remain fierce competitors in some areas.