The US election may resolve lots of uncertainties about America’s direction for the next four years, but some of the most important questions facing global investors and corporate executives will go unanswered. America’s protectionist turn continues regardless of which candidate prevails, but just what we plan to protect and how much we are willing to pay remain anybody’s guess.
Donald Trump’s campaign pledges raise the most questions. His apologists insist that frightening tariff threats are simply a negotiating strategy, but it’s unclear just what he wants to negotiate. Sanctions against Russia may be lifted if he imposes peace terms on Ukraine, but are there also deals to be done with Venezuela and North Korea? And the messages are deeply mixed on Chinese investment in the US as when Trump’s views on TikTok shifted from a national security threat to a powerful campaign tool.
But if Kamala Harris styles herself as the candidate who offers a steady hand and continuity with the Joe Biden administration, it’s still hard to know where she might impose the next tariff, direct the next subsidy or block the next foreign investment.
Jake Sullivan, national security adviser, took a crack at defining US economic diplomacy at his second speech at the Brookings Institution in two years. His initial intervention in April 2023 focused on market failures and the need for robust government policy to address the challenges from climate change, China’s rise and domestic inequality. The refreshed version rebuffed suggestions that ‘America was in it for itself at the expense of everyone else,’ insisting that Washington is committed to co-operating with allies and friends on advancing climate change, securing critical mineral supplies and resisting China’s mercantilism.
The speech also felt a need to assert that the US is not ‘walking away from trade as a core pillar of international economic policy’. He noted that US trade flows are now well above pre-pandemic levels and that the US remains the world’s largest source of outbound foreign direct investment.
But even as he clarified this earlier confusion, there remain crucial questions that can only be answered by Sullivan’s successors.
Are the yard and fence coming into view?
Crucial to the future of US security, for example, is the protection of some technologies in what his first speech described as a ‘high fence’ around a ‘small yard’. This time, he offers a four-part test to protect only those technologies that are ‘foundational’ to security, where the US has a clear advantage, where China cannot find easy substitutes and where partners can help ensure restrictions will be effective.
So far, so good. Export controls around leading technologies in quantum computing and artificial intelligence advantages seem sensible when a potential rival is building up an increasingly worrisome military apparatus to back increasingly assertive diplomatic claims.
But then the speech shifts to a potential threat from Chinese electric vehicles: ‘Millions of cars on the road with technology from the PRC, getting daily software updates from the PRC, sending reams of information back to the PRC… doesn’t make sense.’ The administration is already considering restrictions on Chinese-made port cranes that may pose a similar threat.
My own cyber expertise is admittedly limited, but simple logic would suggest that if we start to suspect everything made in China that might be connected to the internet, then we may need to go back to the 1990s. Not only are most of our televisions and refrigerators suspect, but our mobile phones and laptops are mainly made in China, too.
Maybe we need to put tariffs on Chinese cars to compensate for the embedded subsidies but banning them altogether seems like a very dangerous precedent that suggests our fence may need to enclose a vast and expanding prairie.
Surely, we need to find other methods to secure the data gathering and software updates just as we might for any German, Japanese or Korean product. It’s also possible that embedded data and software in American goods might be vulnerable to theft or manipulation by some malign power, which means we need to think more creatively than outright bans.
The deployment of tariffs, export controls, investment reviews and financial sanctions represent an increasingly muscular part of America’s diplomacy, but they come with significant long-term costs. Artificially reducing competition with the world’s second-largest economy looks inevitable given concerns for China’s cheap exports, America’s supply chain resilience and rising military tensions. But they also inevitably increase prices for American consumers and dull the incentive for American companies to innovate.
Regardless of the outcome tomorrow, American price stability and competitiveness depend increasingly on the wisdom of future national security advisers building on Sullivan’s tests to keep that yard a reasonable size.
Christopher Smart is Managing Partner of Arbroath Group and writes the ‘Leading Thoughts’ column on Substack.
This is an edited version of the original Substack article.