America is breaking the global economy it built

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Since 1945 the world economy has run according to a system of rules and norms underwritten by America. That system brought about unprecedented economic integration that boosted growth, lifted hundreds of millions out of poverty and helped the West prevail over Soviet Russia in the Cold War. Today the system is in peril.

Countries are racing to subsidize green industry, lure manufacturing away from friend and foe alike and restrict the flow of goods and capital. Mutual benefit is out; national gain is in. An era of zero-sum thinking has begun.

The old system was already under strain, as America's interest in maintaining it waned after the global financial crisis of 2007-09. But President Joe Biden's abandonment of free-market rules for an aggressive industrial policy has dealt it a fresh blow. America has unleashed vast subsidies, amounting to $465 billion, for green energy, electric cars and semiconductors. These are laced with requirements that production should be local.

Bureaucrats tasked with preventing undue foreign influence over the economy now themselves hold sway over sectors making up 60% of the stock market. And officials are banning the flow of ever more exports — notably of high-end chips and chipmaking equipment to China.

For many in Washington, muscular industrial policy holds a seductive appeal. It could help seal America's technological ascendancy over China, which has long pursued self-sufficiency in vital areas using state intervention. As carbon pricing is politically unfeasible, industrial policy could foster decarbonization. And it reflects a hope that government intervention might succeed where private enterprise failed, and reindustrialize America's heartlands.

Last year nearly a third of the cross-border business deals that came to the attention of European officials received detailed scrutiny. Countries with the raw materials needed to make batteries are eyeing export controls. Indonesia has banned nickel exports; Argentina, Bolivia and Chile may soon collaborate, OPEC-style, on the output of their lithium mines.

Economic conflict with China looks increasingly inevitable. As China became more deeply integrated into the global economy at the turn of this century, many in the West predicted that it would become more democratic. The death of that hope — combined with the migration of a million manufacturing jobs to Chinese factories — caused America to fall out of love with globalization.

Today Biden's administration frets about the danger of depending on China for batteries the way Europe relied on Russia for gas before the invasion of Ukraine. Democrats and Republicans alike worry that the loss of America's lead in advanced chipmaking to Taiwan will undermine its ability to develop artificial intelligence — on which, they predict, armies of the future will rely to plan strategy and guide missiles.

Some simply want to stop China becoming too rich — as if impoverishing 1.4 billion people were either moral or likely to ensure peace. Others, more wisely, focus on increasing America's economic resilience and maintaining its military edge. A reindustrialization of the heartland, they argue, will rekindle support for market capitalism. In the meantime, as the global hegemon, America can weather other countries' complaints.

This thinking is misguided. Even if zero-sum policies do remake American industry, their overall effect is more likely to cause harm by corroding global security, holding back growth and raising the cost of the green transition.

Another problem is the fury of friends and potential allies. America's genius after the Second World War was to realize that its interests lay in supporting openness in global commerce. As a result it pursued globalization despite, by 1960, making up nearly 40% of global dollar GDP.

Today the U.S. share of output has fallen to 25% and America needs friends more than ever. Yet America's protectionism is irking allies in Europe and Asia.

America must also woo emerging powers. By 2050 India and Indonesia will be the world's third- and fourth-largest economies. Both are democracies but not close friends of America. By 2075 Nigeria and Pakistan will have gained economic clout, too. If America demands that other countries freeze out China without offering sufficient access to its own markets then it will be spurned by rising powers.

A final worry is that the more economic conflict proliferates, the harder it becomes to solve problems that demand global collaboration. Despite racing to secure green technology, countries are squabbling over how to help the poor world decarbonize. It is proving hard to rescue countries in debt distress, such as Sri Lanka, because of obstruction by China, a big creditor. If countries cannot cooperate to tackle some problems, these will become impossible to fix and the world will suffer accordingly.

Nobody expects America to go back to the 1990s. It is right to seek to preserve its military preeminence and to avoid a dangerous dependence on China for crucial inputs. Yet this makes other forms of global integration all the more essential. It should seek the deepest cooperation between countries that is possible, given their respective values. Today this probably requires a number of overlapping forums and ad hoc deals. America should, for instance, join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, an Asian trade pact based on an earlier deal it helped write but then abandoned.