global architecture

U.S. Plans Mammoth New Global Architecture

11 July 2023

7 MINS

Facing major threats to global stability, the Biden Administration plans to reshape the global strategic and economic architecture on a scale not seen since the Roosevelt-Truman era after World War II. Can its $US3.5 trillion plan be delivered?

The war in Ukraine, the largest conflict in Europe since World War II, has ended the “long peace” that was orchestrated by the creation of the European Union, backed globally by the Bretton-Woods Agreement. This war, along with the growing belligerence of Beijing, the world’s second-largest economy, disruptions to global supply chains and financial stability by the 2007-09 global financial crisis (GFC) and the covid pandemic, have shown the weakness and vulnerabilities of deep globalisation economic policies in the face of new strategic and economic challenges.

Mugged by new global realities, a new Washington consensus involving mammoth new industrial, financial and strategic policies has been flagged in two speeches: first by Janet Yellen, Secretary of the Treasury and former chairwoman of the U.S. Federal Reserve; and in more detail by U.S. National Security Adviser Jake Sulli­van, to the Brookings Institution in Washington.

In short, the plan involves:

  • Massive investment in U.S. infrastructure and strategic industries.
  • Accompanying legislation to foster and guard these industries.
  • Huge investment in allied developed and developing economies that come into this plan.
  • Rebuilding the U.S. middle class after the policies of deep globalisation saw industries and jobs move offshore.
  • Encouraging the growth of wages and jobs in allied nations and alleviation of debt in low-to-middle income countries.
  • Curtailing deep globalisation economic policies.

The overall objective is to de-risk and diversify rather than decouple from China, and also achieve net zero emissions.

Janet Yellen said that “national security is of paramount importance in our relationship with China” and to America’s new economic policies. She accused Beijing of misusing its economic power to retaliate against and coerce vulnerable trading partners to force sovereign governments to capitulate to its political demands.

The new proposed international architecture will include Beijing, in so far as it is “willing to play its part”, while preventing competition with Beijing from spilling into conflict. However, America is not going to compromise on national security and its economy in managing the new strategic realities.

The Challenges

To that end, Jake Sullivan spelled out four challenges.

First, America’s industrial base has been hollowed out by “tax-cutting and deregulation, privatisation over public action and trade liberalisation”, based on the assumption “that markets always allocate capital productively and efficiently, no matter what”. Without “discounting the power of markets”, he said that the result of an oversimplified concept of market efficiency was that “entire … industries and jobs … moved overseas”.

Second, it was assumed “that economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative.” But Beijing “continued to subsidise at a massive scale both traditional industrial sectors like steel, as well as key industries of the future, like clean energy, digital infrastructure, and advanced biotechnologies”.

Economic integration did not stop Beijing from expanding its military ambitions or stop Russia from invading Ukraine.

Moreover, by ignoring the rules-based order, “Beijing and Moscow are prepared to exploit for economic or geopolitical leverage, things like energy uncertainty in Europe, supply chain vulnerabilities in medical equipment, semiconductors, and critical minerals”.

Third, there is the challenge from past “policies like regressive tax cuts, deep cuts to public investment, unchecked corporate concentration and active measures to undermine the labour movement that initially built the American middle class”. These have “frayed the socioeconomic foundations on which any strong and resilient democracy rests”.

Fourth, as expected from the Biden Administration, there is a big emphasis on investing in renewable energy.

The New Architecture

Sullivan said that the total public capital and private investment for this agenda will be $US3.5 trillion over the next decade.

First, a new American industrial strategy aims to identify “specific sectors that are foundational to economic growth, strategic from a national security perspective, and where private industry on its own is not poised to make the investments needed to secure our national ambi­tions. It deploys targeted public investments in these areas that unlock the power and ingenuity of private markets, capitalism, and competition to lay a foundation for long-term growth…

“It’s about making long-term investments in sectors vital to our national wellbeing, not picking winners and losers.”

He pointed to the history of the Defense Advanced Research Projects Agency in helping to develop the internet and to NASA developments in space technology that led to commercial satellites.

To redress the fact that the United States produces only about 10 per cent of the world’s semiconductors, the 2022 bipartisan CHIPS and Science Act has “already seen an orders of magnitude increase in investment into America’s semiconductor industry”. It provided around $US280 billion in new funding to boost domestic research and manufacturing of semiconductors. This includes $US39 billion in subsidies for chip manufacturing on US soil along with 25 per cent investment tax credits for costs of manufacturing equipment, and $US13 billion for semiconductor research and workforce training.

The 2021 Bipartisan Infrastructure Deal (Infrastructure Investment and Jobs Act) allocated $US550 billion in new federal investment in America’s roads and bridges, water infrastructure, resilience, internet, and more.

Second, Sullivan said that, as “it isn’t feasible or desirable to build everything domestically”, we are “working with our partners to ensure they are building capacity, resilience and inclusiveness too”.

The U.S. has committed with Europe to high-level development; signed an agreement deepening cooperation on critical minerals supply chains; is working with several countries in Europe, South Korea, Japan and India; and working with Taiwan to coordinate approaches to semiconductor incentives.

Australia has been one of the most committed nations on earth to the policies of deep globalisation. Its challenge will be to rethink its economic policies and take advantage of this new global architecture.

Third, regarding trade, Sullivan said the 1990s priority was reducing tariffs. That has gone as a priority. Today it is about “creating those diversified and resilient supply chains, mobilising public and private investment for a just clean-energy transition and sustainable economic growth, [and] creating good jobs along the way” … “Ensuring trust, safety and openness in our digital infrastructure. Stopping a race to the bottom in corporate taxation. Enhancing protections for labour and the environment. Tackling corruption.”

“That is a different set of fundamental priorities than simply bringing down tariffs,” he said.

The United States is still interested in trade agreements, but not the “traditional FTAs” (free trade agreements). Rather, trade policy will be “less about tariff reduction and more about fully integrating into our economic strategy at home and abroad”.

This includes negotiating improvements in working conditions in emerging economies and “continuing to lead a historic agreement with 136 countries to finally end the race to the bottom on corporate taxes that hurt middle-class and working people”.

Fourth, the plan aims to mobilise trillions of dollars in investment into emerging economies with solutions that those countries are fashioning on their own, but with capital that is enabled by a different brand of U.S. diplomacy. Part of this involves evolving the multilateral development banks, including the World Bank, so that they are up to the challenges of today.

It aims to boost infrastructure in low and middle-income countries through the Partnership for Global Infrastructure and Investment, mobilising hundreds of billions of dollars in energy and in physical and digital infrastructure financing by the end of the decade.

This is clearly designed to counter Beijing’s huge Belt and Road programs.

Fifth, Sullivan says, the U.S. will protect its foundational technologies “with a small yard and a high fence” to ensure next-generation technologies work for, not against, our democracies and our security. Carefully tailored restrictions limit the most advanced semiconductor technology exports to China, while “there will be [enhanced] screening of foreign investments in critical areas relevant to national security” and of “outbound investments in sensitive technologies”.

Sullivan was suggesting that this new architecture is on the scale of that created at the end of World War II. He said it will not be built overnight, just as the architecture of the 1944 Bretton-Woods agreement took years to build to bring a rules-based order to a traumatised and fragmented world.

Out of Bretton-Woods came the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade (GATT), now known as the World Trade Organisation.

Is It Possible?

Can such a comprehensive architecture be brought together and operate successfully in the 21st century?

On the one hand, the U.S. has a history of mobilising enormous resources when a crisis or change in global geopolitics occurs. It proved that during and in the wake of World War II.

It has a seasoned military leadership that has been continuously involved in conflicts since World War II, whereas Beijing’s military has had no conflict experience in almost 70 years.

Today, Beijing’s economy with the backing of 1.4 billion people, can pose major strategic challenges. However, if the industrial might of the U.S., the EU and Japan can be mobilised, they together represent over 900 million people. (Russia’s population is 147 million.)

On the other hand, there are many differences to 80 years ago.

U.S. military expenditure has dropped from 6.8 per cent of the economy (gross domestic product) in 1982, to 2.9 per cent in 2010 and recovering slightly to 3.5 per cent in 2021. The nation has a long way to go to revitalise its armed forces.

The emphasis of the U.S. and the EU on achieving net zero emissions means that the U.S. and its allies in Europe are going to risk high-cost renewables undermining the other objectives of this new architecture.

U.S. and EU multinationals are major players. They are global organi­sations committed to maximising profits. They are not driven by the patriotic loyalties that existed at the time of Bretton-Woods, when corporations had domestically located head offices. Will today’s corpora­tions tag along with these huge new plans?

In the short term, it may boost inflation at a time when global debt is already higher as a percentage of global GDP than at the end of World War II. In the medium term, massive investment expenditure may help boost the supply of goods and services, and eventually reduce inflation.

The challenge for Australia will be that policies on which it has operated for the past 50 years – free markets, free trade and the interdependent globalised order – are being buried by its architect, the United States, as it undergoes the biggest reboot of its industrial sector, the biggest reset of the strategic positioning of itself and its allies, and the biggest overhaul of the global economic governance and development institutions since their beginning in the 1940s.

Australia has been one of the most committed nations on earth to the policies of deep globalisation. Its challenge will be to rethink its economic policies and take advantage of this new global architecture.

___

Originally published in News Weekly. Photo by Pixabay.

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