Thinking About the Trump Administration’s "Doctrine of Economic Statecraft"

Mohamed El-Erian, a professor at the Wharton School who was chair of President Obama's Global Development Council, had a recent NY Times op-ed entitled "America Was Being Played. The Bessent Doctrine Says Those Days Are Over." What he says in the piece is consistent with some thinking I have heard expressed now and then in recent years in relation to U.S. trade and foreign policy, from people on both the left and the right. I'll say more about this at the end of the post, but I think there's a good chance that, to some extent at least, this view is more reflective of the latest Washington policy narratives than it is of a permanent new direction in policy. But let me get into the specifics of the piece first.

At the outset, I want to say something about the title. In my view, America was not, in fact, "being played" by what the piece refers to as the "global economic system." You can argue that the system had some flaws in it, and I can certainly point to many things I didn't like. But the system was largely something U.S. policymakers wanted. If Bessent and the Trump administration don't like it, that's fine, and they have an opportunity at the moment to make some changes. But for the most part, the system that exists is an American-built system, and portraying the arrangement as other governments somehow taking advantage of America misunderstands how we got to where we are. I doubt many of these other governments believe they were the ones with the advantage, and they all have grievances of their own.

Turning to the substance of the piece, El-Erian puts forward "the five core principles that now underpin the administration’s doctrine of economic statecraft":

• "National economic capacity is critical to economic security."
• "Trade and investment openness must be strictly reciprocated."
• "The United States must proactively set standards for emerging technologies."
• "The global dominance of the U.S. financial system must be actively protected and leveraged as an instrument of statecraft."
• "All of this must be aimed at visibly improving the welfare of American households."

Let's look at each one.

The first principle sounds like he's calling for some degree of autarky, but what degree exactly is unclear. Unlike most countries, the United States is probably big enough to produce just about all the goods and services Americans need, but it's important to keep in mind that the more you promote "national economic capacity" in a way that contravenes market principles, the higher the economic costs will be. To be clear, "economic security" is obviously important, and there are areas of the domestic economy where we want to make sure there are national actors even if there are high costs to doing so. But you need to define clearly what you mean by economic security, as it can easily be extended beyond recognition. I think that if you approach the scope of economic security on the basis of evidence and reason, it will likely end up covering much less ground than some people are pushing for at the moment (e.g., imports from allies would not be considered a threat to economic security).

On reciprocal trade and investment openness, I'm not sure this is actually what the Trump administration folks have in mind. They may say this sometimes, but I don't think it's what they actually mean. Instead, what the administration seem to want is balanced trade flows. The problem with this objective is that the actual cause of the U.S. trade deficit (i.e., the unbalanced trade flows) is macroeconomic factors, and a trade regime based on reciprocally open trade and investment rules is not likely to achieve their goals in relation to trade balance. Thus, I don't think it's correct to say that reciprocal openness is their focus. For them, it's not about degree of openness but about trade flow outcomes.

On standards, proactive setting for emerging technologies doesn't seem to be happening much right now. At some point Congress will probably need to step in and craft something, but I'm not sure when that will happen. (Yes, the industry could self-regulate, but that possibility seems a bit far-fetched at the moment.)

On the financial system, global dominance has been U.S. policy for a while now. Some people in the Trump orbit have pushed back against this and complained about the impact on the value of the U.S. dollar. I'm not sure the administration is going to be able to reconcile the competing views within its ranks, though, and I feel like we are going to stay about where we are now.

In terms of the welfare of American households, later in the piece El-Erian undermines the point as he explains how the new direction in policy will be bad for this welfare, saying: "... the era of ultracheap imported goods will continue to give way to one with less emphasis on cost and more on supply chain resilience. Consumers, including already stressed low-income households, will face some higher prices as the decades-long prioritization of pure economic efficiency is scaled back in favor of protecting vulnerable domestic industrial segments, bringing back priority processes such as chip fabrication, building backup supply chains and protecting jobs." I think it's clear at this point that Americans don't like higher prices, so this may not go well.

Beyond the administration's economic statecraft doctrine, El-Erian has some thoughts on the post-Trump future of these policies:

The more likely outcome will be the broader weaponization of tariffs, investment and payment systems against economic rivals. This will be accompanied by a more forceful industrial policy, increased use of export restrictions and mounting pressure on third parties, including the threat of secondary sanctions.

It’s a phenomenon that will be evident in peacetime, not just during wars. It will deepen in America in the years to come and inevitably spread to other countries as they adjust. ...

The "deepen in America in the years to come" point is probably right in the short-term, but as the evidence comes in on how the "weaponization" and "industrial policy" are going, I think some reconsideration is likely. My sense is that many governments have decided to live with the weaponization because it is coming from Trump, and they know he will be gone from power in the coming years, so best just to wait it out. If the same approach continued after Trump, though, they are likely to shift away from alignment with the U.S., and people in Washington aren't going to be happy with that.

As to industrial policy, will it last in the U.S.? That may depend in part on the results of the current efforts. And will industrial policy spread to other countries? I can imagine you might see other countries deciding, for example, that they need to develop their own sovereign AI, but again that's not going to be something Washington wants to see.

El-Erian also jumps on the bandwagon of people arguing that "geoeconomics" has replaced "economic efficiency" as the foundation of international economic policy, saying the following:

The transition from an era driven by economic efficiency to one defined by geoeconomics and economic statecraft is no longer theoretical. It is the new operating system for the global economy and its markets. ...

I think some people underestimate the degree to which "geoeconomics and economic statecraft" were part of the prior system, even if those terms weren't used as often, and they also overstate the role of "economic efficiency" back then. Pivotal trade events such as the creation of NAFTA and the U.S. push for China to enter the WTO were, to a great extent, about geoeconomics and economic statecraft. Sure, the economic efficiency folks played a role here too, and contributed arguments to these outcomes. But it never felt to me like they were the driving force. Without the geoeconomics and economic statecraft aspects, I'm skeptical either NAFTA or Chinese WTO accession would have happened.

In terms of what the future holds for the "operating system for the global economy and its markets," I'm not sure I have a better sense than the average blog reader as to what is coming in U.S. economic and foreign policy in 2029. Having said that, I do think there's a tendency for people to (1) get caught up in new policy fads and lingo and (2) extrapolate them into the future. I understand that whatever is happening today can feel like something permanent, but I think it's important to look beyond the current narratives and consider the range of possibilities that might emerge in both politics and economics as we move towards the next era. Most people probably expect the non-trade policy headlines to change in 2029, and I suspect that is likely with trade policy too.