In Economic Security, Trade-Offs Abound

A regular series on the choices faced by international economic policymakers

Difficult Trade-Offs Hinder U.S. Industrial Policy on Health 

Thomas J. Bollyky and Chloe Searchinger 

During the early months of the COVID-19 pandemic, the world ran out of everything. Shortages in global supply chains—from ventilators and masks to construction materials and car computer chips—worsened health outcomes, disrupted businesses, and sparked a rise in U.S. consumer prices that persists today.   

The vulnerabilities exposed during the pandemic and their associated geopolitical risks moved policymakers, especially in the United States, to embrace government intervention—tariffs, export restrictions, and subsidies—as a means of promoting supply-chain resilience and self-sufficiency. Days into his presidency, President Joe Biden prioritized four critical sectors: semiconductors, electric vehicle batteries, critical minerals, and pharmaceuticals and active pharmaceutical ingredients (APIs). 

One of the ironies of the COVID-19 pandemic is while the health crisis helped prompt this shift in U.S. industrial policy, pharmaceuticals has made the least progress compared to the other critical sectors. To address that issue, the United States needs an industrial policy for global health. But it will not be an easy fix. 

One major reason is that difficult political trade-offs hinder progress on U.S. industrial policy on health. Reducing U.S. dependence on China for cheap APIs and other inputs while requiring manufacturers to improve the quality and reliability of their supply chains would likely raise already-high U.S. drug prices at a time when President Biden has promised to lower them. Domestic manufacturing is politically popular because it aligns health-security objectives with U.S. job creation, but true self-sufficiency requires onshoring manufacturing of finished products and all their major inputs. Such costs would be significant.   

And so, while semiconductors, critical minerals, electric vehicle batteries, solar panels, and wind turbines have been the subject of landmark U.S. legislation and more than $800 billion in U.S. manufacturing subsidies, recent U.S. pharmaceutical supply-chain initiatives have been comparatively modest: a new interagency task force to address supply-chain disruptions; a supply-chain resilience and shortage coordinator at the U.S. Department of Health and Human Services; and authorization to use the U.S. Defense Production Act and $35 million to boost domestic production of sterile injectable medicines, the U.S. drugs most often in shortage. 

Much more is needed. U.S. pharmaceutical shortages surged to all-time highs in 2023, affecting dozens of drugs, including antibiotics like penicillin and amoxicillin, carboplatin and other commonly used cancer drugs, and critical emergency medications such as epinephrine and morphine. Many of those shortages are persistent, spanning months or even years, and involve products on the U.S. Food and Drug Administration’s list of essential medicines “that are medically necessary to have available at all times in an amount adequate to serve patient needs and in the appropriate dosage form.” A 2024 U.S. Department of Defense analysis concluded that 54 percent of the department’s pharmaceutical supply chain was dependent on sourcing from China and India, or sources unknown. Nearly three-quarters of the generic API manufacturers supplying the U.S. market for drugs reside overseas, and there is little indication that number has shifted significantly since COVID-19.  

A U.S. industrial policy for global health should be a targeted strategy. It would (1) invest in domestic self-sufficiency only where it is attainable and important for U.S. economic and security interests; (2) leverage the Food and Drug Administration and the enormous purchasing power of U.S. entitlement programs to reward quality, reliability, and transparency in critical U.S. supply chains; and (3) facilitate international collaboration with manufacturers in other well-regulated markets to promote human health and a more resilient economy worldwide.   

Now or Later, Rich or Poor. Who Will Pay for Climate Change? 

Alice Hill 

In 2007, the economist Nicholas Stern observed that “the greatest market failure the world has seen” caused climate change. The market has not accounted for the harms of burning fossil fuels, including to unborn generations. With climate change, the trade-off is between costs now and costs later: the cost of transitioning away from fossil fuel use today versus the cost of escalating and irreversible harm from the profound alteration of earth systems.  

Who bears those costs—and when—is not the same. Energy transition costs will fall hard on some countries that profit from oil and gas exports, while others will benefit as demand soars for critical minerals, such as cobalt and lithium, that are essential for clean technologies. Geopolitical risks increase with the energy transition: countries that control minerals gain leverage, those that produce oil compete for market share, and the have-nots face an even tougher future.  

Meanwhile, the costs of a worsening climate catastrophes fall on everyone, but those that have contributed the least to global warming—the poorest, less-developed nations and their future generations—pay the steepest price. Just how severe that price will be is unclear.  

Economic modeling to date has yet to capture the range of harms climate change brings—monster wildfires that leave thousands homeless in an hour, powerful storms that break supply chains, and extended droughts that desiccate crops leading to widespread hunger and food inflation. But the costs are mounting. They will continue to mount with every fraction of a degree of additional warming.  

So far, the earth’s atmosphere already holds more greenhouse gases than at any point in the last 4.3 million years, and humans keep adding more. Nations are now far off track from the goal set by the 2015 Paris Accord of limiting heating to 2°C, preferably 1.5°C. Meanwhile, efforts to adapt to worsening climate impacts have remained reactive, incremental, and small in scale. For example, in its first climate risk assessment issued in 2024 [PDF], the European Environment Agency found that Europe’s efforts had not kept pace with the escalating risks and would largely prove insufficient. This leaves people and communities dangerously unprepared.  

Last July, global average temperatures climbed to the highest level since approximately 120,000 years ago. This year, temperatures will likely meet or exceed those of last. Yet, so far, the heaviest-polluting nations have chosen to postpone full-on climate action. They view the costs of transition as too high. Meanwhile, damage has escalated across the planet, with poorer countries and the most vulnerable suffering the most.  

U.S. leadership is essential to balance the trade-offs. As the world’s largest economy, largest historical emitter, and biggest oil and natural gas producer, the United States is a bell weather for how other nations should act. If it fails to act with urgency, the rest of the world likely dallies as well. To address global warming, human society must rapidly wean itself from fossil fuels while simultaneously preparing to withstand worsening climate impacts.  

In the absence of strong government intervention to reduce emissions, prepare for climate impacts, and assist the most vulnerable, those of us alive today will have traded short-term economic security for long-term loss, leaving a far-less livable world to future generations.  

Economic Security on China Looks Different for the U.S., Japan, and EU  

Zongyuan Zoe Liu 

Strengthening economic security has become a shared pursuit among major global economies. In May 2023, Group of Seven leaders outlined a vision of economic security across seven areas in a joint statement after the Hiroshima Summit in which they vowed to enhance “strategic coordination on economic resilience and economic security.” However, differing domestic circumstances and dependence on the Chinese market and suppliers mean that the United States and its allies will inevitably have different approaches to strengthening their respective economic security. Those varied approaches incur trade-offs at various levels, but they all collectively risk losing long-term leverage over the Communist Party of China and the Chinese government. 

The Joe Biden administration has revitalized industrial policies to bolster domestic manufacturing against China’s rising geoeconomic sway. The U.S. Department of Commerce has explicitly prioritized enhancing domestic production and supply chains in its 2018-2022 Strategic Plan. The plan emphasizes the crucial role of a strong domestic industrial base as “essential for U.S. national security, economic security, and technological leadership.”  However, the Biden administration’s initiatives along those lines are not free. For example, according to Goldman Sachs, the energy and climate items in the Inflation Reduction Act would cost U.S. taxpayers $1.2 trillion by 2032.  

As the U.S. government actively encourages its allies and firms to China-proof their supply chains, the Communist Party of China and the Chinese government are incentivized to pursue an alternative trade and investment systems. Diminishing economic ties, combined with the expansion of an alternative system, risks diluting the centrality of the U.S. economic and financial power globally, including the ways in which the U.S. government can exert economic pressure on the Party and the Chinese government.   

U.S. allies have not fully embraced the U.S. government’s onshore-oriented economic security approach. Japan and the European Union are two examples. Japan’s domestic resource and labor constraints and reliance on exports determine that it cannot realistically pursue an onshore approach. The Kishida Fumio administration has instead taken legislative measures to strengthen Japan’s economic security, as exemplified by the Economic Security Promotion Act (ESPA) passed in May 2020. ESPA focuses on securing stable supplies of essential materials, stabilizing critical infrastructure, fostering public-private partnerships for competitive advanced-technology development, and establishing a classified patent system. While ESPA’s focus aligns with the Japanese government’s existing industrial support framework, it provides a pass for additional initiatives to support Japanese companies’ access to external resources and strengthen Japan’s domestic competitiveness.  

Despite differences in approach, Prime Minister Kishida emphasizes Japan’s partnership with the United States, as evidenced by the United States-Japan Joint Leaders’ Statement in April 2024. This alignment strengthens the U.S.-Japan alliance to “unprecedented heights,” but also complicates Japan’s pursuit of a more independent economic security strategy, potentially impacting Japanese companies with interests in the Chinese market. 

The European Union has taken a de-risking approach to strengthen the bloc’s economic security. A month after the Hiroshima Summit, it released the European Economic Security Strategy, which aims to leverage economic openness while minimizing risks from interdependence. In line with this strategy, in January 2024, the EU Commission adopted five initiatives, including proposals to strengthen inbound investment screening, monitor and assess outbound investment risks, and introduce EU-wide export control of dual-use items.  

Recent EU-level proposals are converging toward the existing U.S. economic security risk management framework. However, the actual implementation of the high-level initiatives by member states remains problematic, and the impact of those measures on the European single market process and EU integration remains uncertain. Varied reliance on the Chinese market among member states—especially those with multinationals whose revenues and profits depend heavily on the Chinese market—creates inertia and frictions that result in implementation incoherence and regulatory leakages. Centralizing trade, investment, and regulatory policymaking at the EU level implies diminished decision-making autonomy among individual sovereign members. With the surge of populism across Europe, this top-down approach risks increased EU fragmentation, as domestic stakeholders in member states could try to prevent losing market shares in China or oppose the diminished sovereign autonomy.  

Different approaches to economic security entail intricate tradeoffs. The quest for strengthened alliances and policy coherence necessitates sacrificing some degree of policymaking autonomy. Conversely, pursuing independent initiatives risks fostering disjointed policies that hamper effective implementation. Adhering to top-down economic security imperatives can force tough decisions on firms, potentially resulting in stranded asset problems for those compelled to recalibrate their business operations in China or with Chinese suppliers. Hidden beneath those deliberations is a fundamental tension: diversifying supply chains away from China to mitigate near-term risks could cost the West long-term leverage over the world’s second-largest economy.   

The Trade-offs In the Bretton Woods Blueprint 

Benn Steil 

In July 1944, just weeks following the D-Day landings at Normandy, the United States convened forty-four Allied nations in Bretton Woods, New Hampshire, to lay down monetary foundations for a postwar international economic order. The primary goal was to end what Treasury Secretary Henry Morgenthau called “economic aggression,” which he saw as a primary cause of the political antagonisms that paved the ruinous path to world war. 

The creation of a robust and enduring international-trade regime was the main vehicle by which the Franklin D. Roosevelt administration hoped to end economic aggression—aggression that came in the form of high tariffs and serial competitive devaluations. But Treasury believed it was politically easier and more urgent to gain consensus on new international monetary arrangements before trying to create an international trade organization to remove trade barriers. Such arrangements would be enshrined in the rules underpinning the International Monetary Fund, which would begin operations in March 1947. 

Those arrangements involved difficult trade-offs, which were at times intemperately debated between Washington and London, not to mention within the U.S. Treasury, in the two-year run-up to Bretton Woods. The main such trade-offs can be summarized as follows: 

• Should there be a new supranational currency? The head of the British delegation, the famed economist John Maynard Keynes, strongly supported such a currency (which he called “bancor”). The U.S. Treasury briefly considered a neutered version of one (a gold-deposit receipt called “unitas”), but in the end Washington backed the U.S. dollar as the sole “gold-equivalent” international currency. The dollar’s special status afforded the United States unique power to conduct financial statecraft (such as imposing crippling sanctions) and eliminated foreign-exchange risk for its exporters. But it has also required the United States to absorb the underpriced surplus production of its trading partners as a means of keeping them well-stocked with dollar-denominated debt. 
• Should currencies be fixed against one another? Fixed (but adjustable) exchange rates had the advantage of precluding beggar-thy-neighbor competitive devaluations to gain a pricing advantage in international markets. But they came at the cost of making economic adjustments within nations, which might require painful deflation and unemployment, more necessary. In the end, currencies were fixed in value against the U.S. dollar, which was in turn fixed in value against gold. The system operated, often under great strain, for twenty-five years until 1971, when it broke down. 
• Should capital flows be free or restricted? Whereas it is today taken for granted that capital flows relatively freely across borders for investment and speculative purposes, it was widely accepted at Bretton Woods that such flows would and should be restricted by governments to avoid financial instability. That consensus broke down in the 1980s, after which cross-border flows soared. It remains a matter of great debate among economists and policymakers whether the benefits of free capital flows sufficiently exceed the costs—particularly in the form of periodic crises in developing nations.