America’s Isolation vs. Innovation Impulse – Which Will Win Out?

We are in the early innings of a multi-front trade war of our own making.

Many in the American business and investment community, and several U.S. trading partners, had hoped that “Liberation Day” would be more bluster than bombshell. That was not to be. By the afternoon of April 2, President Trump had instituted the most expansive use of tariffs in a century. China and Canada have announced retaliatory actions, and the European Union signaled its intention to follow suit. The impact on financial markets was immediate, with a double-digit drawdown in equities, circuit breakers in Asian future markets, and more dislocation expected.

This startling development had me going down memory lane. I came of age when Ronald Reagan, Margaret Thatcher, and others were cementing a neoliberal order based on a global trading system that was negotiated and built systematically for generations. It rested on the understanding that open and competitive markets, as well as cross-border trade and investment, would serve as engines of wealth creation and growth. It was also based on the wisdom that economic integration—no matter how imperfect—was preferable to the “beggar thy neighbor” policies of previous eras that could easily turn economic wars into hot wars. This paradigm guided the policy establishment in the United States and other countries for decades. 

As a graduate student, I found the neoclassical framework as compelling in analytical clarity as it was frustrating in narrow assumptions of how the world worked (for instance, perfect information, perfect competition, no transaction costs, and no security externalities). As I would learn through experience, economic policy is both engineering and art. Success requires a passion for the mechanics of markets, as well as a passion for the people who navigate them. And that, perhaps, has been one of the biggest failings of the policymakers of the last two generations. We discounted the full costs of economic reforms—whether due to global trade, technology, or Chinese mercantilism—borne by American workers across the country. And it was only a matter of time before the discontents of the “forgotten men and women” found expression in our politics, and dramatically so in the 2016 presidential election and elections thereafter. 

Exactly 30 years ago, in his book, The Revolt of the Elites, the American historian Christopher Lasch warned of the widening chasm between policy elites and the general population, and the erosion of the “reciprocal obligation” that characterized earlier eras. He was prescient in anticipating—and uncritically encouraging—the populist wave that would eventually crash against the rock of the American political establishment. That is now part of our history. If populism had a superpower, it is the ability to identify problems in emotive and powerful ways, and President Trump’s prowess in doing that is undeniable.

Lasch failed to acknowledge the consistently poor track record of populism and populists—in their varied expressions across countries and time periods—in delivering economic solutions and favorable outcomes. As of now, this administration, with its chaotic and incoherent tariff plan and the havoc it is causing in global markets, does not appear to be bucking this trend. We can hope for a circuit breaker—one that will forestall a historic and massive economic policy failure just two months into the administration’s term. That, however, will depend on which of two impulses will drive Trump’s economic strategy in the weeks and months ahead.

The first impulse is revanchist and isolationist, based on the notion that the United States has, on net, been exploited by the world. Tariffs are meant to fix this imbalance, motivate reshoring of manufacturing, and increase industrial self-reliance in the United States. While the administration has been transparent about its intention to use tariffs as its instrument of choice (and about the curious math behind its tariff formula!), it has been less forthcoming about the actual gameplan going forward – for instance, whether tariffs are source of leverage or source of revenues – and its desired end-state for the United States’ role in a new order. 

The second impulse behind the administration’s economic agenda is innovationist—most clearly reflected in its approach to achieving U.S. full stack leadership on artificial intelligence, including by meeting its infrastructure and energy needs, as well as the president’s intentions to revitalize the U.S. science and technology system. The administration presumably aims to leverage and protect the U.S. innovation system – the largest, most dynamic, and most geographically dispersed in the world. Yet, preserving our innovation advantage is ultimately the work of many hands – federal, state, and local; public and private; American and allied.

In this issue of the Economic Security Spotlight, we are assessing in real-time both the evolving trade war and its likely impact on the United States and its (erstwhile) allies, as well as the U.S. innovation agenda, centered around AI and other critical and emerging technologies. In these turbulent times, it is important to keep our eyes on the prize—preserving the economic dynamism and technology advantages that are essential to our prosperity and security. 

- Navin Girishankar, President, Economic Security and Technology Department