Senator Shaheen on U.S. Soft Power and Competition with China
July 15, 2025 • 8:45 – 10:15 am EDT
Hosted by Geopolitics and Foreign Policy
Policy Volatility Beckons a Disorderly Economic Transition
Photo: Michael Nagle/Bloomberg/Getty Images
Gone are the days when the primary risks to the U.S. economy and security either emanated from beyond our shores—–oil crises, pandemics, and acts of terrorism—–or resulted from the cumulative impact of actions by millions of people over time, such as the financial crises or climate change. U.S. policymakers have indeed contributed to economic vulnerabilities and risks, such as rising public indebtedness and evermore frequent threats to shut down the government. However, the prevailing formal rules of the game, in this instance, of the federal appropriations process, have offered the means for mitigating these risks.
In recent weeks, we have been living through an altogether different risk exposure. The conduct of U.S. government policy itself is now the main source of risk to the U.S. economy and U.S. markets. Policy volatility seems to be the point. The centerpiece of Trump’s economic policy is an on-again, off-again tariff agenda (intraday tariff rates are a new thing) directed at allies and adversaries alike: It is reflective of a transactional approach that is intended to achieve a wide array of economic and noneconomic goals, from trade balances and fentanyl interdiction to generating revenue to pay for extending income tax cuts. In a parallel, notwithstanding legal challenges, a rapid and chaotic Department of Government Efficiency effort continues to downsize departments and staffing levels, and cut appropriated spending that it deems to be “wasteful” and “fraudulent.” An added dimension is the reordering of long-established U.S. alliances, dramatically underscored by Vice President Vance’s speech at the 61st Munich Security Conference, the Oval Office meeting during which Ukrainian President Zelensky was publicly berated, and casual talk at the highest levels of government of annexing hemispheric neighbors.
To be clear, the problems that many of the Trump administration’s policies ostensibly aim to fix—the decline in manufacturing employment, bloated and slow-moving bureaucracies, the perceived one-sided nature of U.S. bilateral and multilateral engagements, and weaknesses in the U.S. science and technology ecosystem—are legitimate and longstanding. A rethink of U.S. strategy has been long overdue, and in many ways, was already underway with strong (albeit underappreciated) continuities across the Trump 1.0 and Biden administrations. Ultimately, a bipartisan approach, however elusive it may seem today, will be needed to match China’s long game. To get there, we will need open-minded and good-faith debates about new, even heterodox ideas, including the substance of those reflected in the Trump 2.0 domestic and international economic agenda.
It does not help that the Trump 2.0 roll-out to date has lacked strategic coherence and effective orchestration. The resulting policy volatility is already flowing through to financial markets and, by some accounts, to the real economy and communities around the country. If history is an indicator, we can expect impacts on capital expenditure plans across sectors as U.S. companies take a “wait-and-see” approach to investment (Figure 1). The private sector in the United States, as well as those in neighboring and allied economies that have long been integrated with ours, are feeling the economic uncertainty and voicing their concerns.
Remote Visualization
Most concerning is the likely impact on the United States’ technology innovation ecosystem. The very sectors that will drive long-term competitiveness—chips, AI, quantum, and life sciences—are part of global value chains that are most vulnerable to wild swings in trade policy, disruptions to the investment climate, and highly constrained immigration and labor market policies. They are also highly dependent on continued investment in public and private research and development—both of which are currently at risk.
Like it or not, we are well into a transition—not just away from the economic interdependence and value chain integration, but potentially, a disorderly transition away from the principles, or rules-based economic order, that we have known for three generations. What is hard to discern is the new order to which we are transitioning. The current chaotic approach to policymaking and execution has not helped.
For more than 80 years, U.S. administrations, both Democrat and Republican, have by and large managed economic policy against a relatively high bar based on predictability, transparency, and reliance on institutional rules. They may have fallen short from time to time, but the expectations both for the substance of policy and the process of policymaking were known. When administrations met the bar, they served the country well. As a result, the United States was able to grow and sustain technology advantages, attract investment, navigate short- and long-term debt cycles, and exercise global economic leadership.
It begs a few questions about what we can expect from those in the driver’s seat today in terms of economic governance. What is the desired end state of current U.S. economic strategy and policy—for instance, is it economic autonomy as opposed to interdependence to mutual benefit, trade surpluses, or sustained advantages across advanced technologies, government efficiency, or government effectiveness? What should we expect in terms of the rationale and justification for specific policies and government actions? Additionally, who gets to call balls and strikes when it comes to policy impact?
At various points in history, Americans have been willing to make sacrifices in service of national goals, for instance, during World War II, the Cold War, the Space Race, and the pandemic. It is plausible that many would be willing to suffer short-term pain again provided that the national goal and purpose were clear, coherent, and compelling.
For many, one version of that goal and game plan would be to ensure that we stay ahead in the global technology race by relying on our strengths—our economic dynamism, creativity, entrepreneurial spirit, and long tradition of scientific discovery. There is much in the current administration’s policy agenda that could potentially hit the mark—its focus on unleashing innovation on AI and chips, delivering on the massive energy needs of a U.S. data center build-out, ensuring secure and modern digital infrastructure, attracting investment in industries of the future, and more. But given the global nature of technology innovation, this endeavor will necessarily involve allies and partners and may even require setting a floor in the relationship with China.
It remains to be seen whether the current levels of policy volatility will give way to some kind of equilibrium or whether both economic and political markets will have to price in for the foreseeable future a higher level of uncertainty. In the conduct of public policy, like the functioning of markets, there are corrections, and we can hold out hope that the coming weeks and months will offer opportunities for just that. Regardless, it will be important to traverse the current transition period with the American people in tow.
Navin Girishankar is president of the Economic Security and Technology Department at the Center for Strategic and International Studies in Washington, D.C.