While the mix of statecraft has evolved over time, its deployment has been consistently used to achieve foreign policy objectives, potentially conferring significant strategic benefits to the deploying side.  As such, economic statecraft has become “a tool of first resort to address a range of threats to the national security, foreign policy, and economy of the United States.”¹ (Figure 1)

The second part of our Great Power Competition series examines the rationale behind the deployment of various forms of statecraft and the accompanying industrial policy strategy. In doing so, we highlight the competitive advantages that they may confer domestically and to allies abroad as well as the prospects for a global technological decoupling.  

From Decoupling….

When the Trump administration launched the trade war against China in 2018, its objectives were not just to re-balance trade between the two countries, but also to curtail China’s ambitions to dominate core industries of tomorrow as announced in Beijing’s “Made in China 2025” strategy.² Washington’s commentary at the time focused on decoupling with China, arguing that the fewer ties to China, the stronger the U.S.’ economy and its national security. From July 2018 to January 2020, the Trump administration sequentially imposed tariffs on 66.4% of Chinese exports.³ It also expanded the scope of sanctions and entity-based export controls, primarily through the Specially Designated Nationals (SDN) list, the Entity List, and the Non-SDN Chinese Military Industrial Complex (CMIC) list in an effort to address national security and foreign policy concerns.

To De-risking…

While the Biden administration maintained the Trump-era sanctions, tariffs, and other restrictions, its senior officials emphasized the need to re-define the U.S. economic relationship with China. They acknowledged that decoupling with the world’s second largest economy would be “impractical” and “potentially destabilizing” to the global economy.⁴ Instead, they advocated a strategy that was “premised on straightforward national security concerns” and aimed at safeguarding certain technologies from China that could “tilt the military balance” against the U.S. and its allies, or be used by Beijing to gain economic, political, and strategic advantages. This new strategic concept—protecting national security by safeguarding critical technologies and sectors while avoiding a broad and impractical decoupling from China—has been referred to as the “small yard, high fence” strategy, which was recently explained in a seminal speech by National Security Advisor Jake Sullivan.⁵

To “Small Yard, High Fence” Strategy

At its basic level, the strategy focuses on a limited and specifically defined set of technologies and sectors (“small yard”). These are deemed so important to national security interests that they require highly rigorous protection (“high fence”) to ensure that they are not used by adversaries to gain undesired advantages. For example, in the context of U.S.-China rivalry, the U.S. administration has identified advanced semiconductors, AI, quantum computing, biotechnology, and EVs as technologies and sectors, amongst others, of vital national security (the third part of our series provides first-hand perspective on China’s EV sector).

Consistent with this strategy, the Biden administration banned U.S. companies from selling China advanced chips and chip-making technology, reached an agreement with Japan and the Netherlands (collectively responsible for 90% of the market for chip manufacturing equipment) to control the supply of advanced chip-manufacturing equipment to China, and prohibited or restricted U.S. investments in China’s semiconductor / microelectronic, quantum computing, and AI industries. It also implemented stricter screening processes for foreign investment in an effort to prevent Chinese acquisitions of strategically important companies and technologies. As a result, these measures have curbed China’s access to U.S. semiconductor manufacturing equipment and reduced U.S. investments in the Chinese tech industry by more than 80% in 2023 (Figure 2).

Similarly, in May 2024, the Biden administration increased tariffs on Chinese imports across strategically targeted sectors (EVs, legacy chips, solar cells, etc.) just as congressional efforts were underway to prohibit the Federal government from providing funding to Chinese biotech companies (the BIOSECURE Act) and allow the  Bureau of Industry and Security to use export controls to safeguard future AI systems that threaten U.S. national security from its adversaries (ENFORCE ACT). Meanwhile, a recently released bi-partisan “roadmap” targets a spending level of $32 billion per year to address non-defense AI innovation, in areas such as cross-government R&D, cybersecurity, AI readiness support, etc.⁶

Invest in America Agenda

The Biden Administration coupled defensive statecraft with a proactive industrial policy strategy premised on the idea that national security is indivisible from a revitalized economy with a “strong, resilient, and leading-edge techno-industrial base.” The Bi-partisan Infrastructure Law (November 2021), the CHIPS and Science Act (August 2022), and the Inflation Reduction Act (August 2022) were respectively aimed at boosting country’s infrastructure and competitiveness, supporting the domestic semiconductor ecosystem, as well as strengthening energy security and accelerating the clean energy transition.

The record of these policies has been quite impressive so far. Incentivized by the CHIPS Act, for example, semiconductor investments in the U.S. have amounted to nearly $450 billion across 25 states. The U.S.’ share of global fabrication capacity is also expected to increase from 10% today to 14% by 2032. Furthermore, the U.S. is set to secure more than one-quarter (28%) of global semiconductor capital expenditures (an estimated $646 billion) between 2024-2032, an amount second only to Taiwan. It is also projected to increase its fabrication capacity by 203% by 2032—the largest percentage increase in the world—vs. an increase of only 11% during the prior decade. By comparison, China’s fabrication capacity is projected to increase by only 86% by 2032 (Figure 3).⁷

The U.S.’ proactive industrial policy strategy has also sought to enhance domestic industries’ resilience by encouraging them to diversify supply chains and reduce overreliance on China for critical minerals. Potential weaponization of critical materials—more than 80% of which are processed by China—poses significant security risks to the U.S. and its allies. To counter these risks, the U.S. and Japan signed a Critical Minerals Agreement (CMA) in March 2023, the G7 adopted the “Five-Point Plan for Critical Minerals Security” in April 2024, and members already pledged a record $13 billion in fiscal support for domestic and international projects. Meanwhile, the U.S. and Europe have tried to forge joint partnerships with countries rich in critical minerals. 

Positive Spillover Effects

While the U.S. deployment of defensive statecraft and the launch of its industrial policy strategy are aimed at protecting its national interest, positive spillover effects may accrue to other countries via several channels.

Countries that are long-time U.S. allies (Mexico, Malaysia, Thailand, etc.) or pose no / limited geopolitical risk (Vietnam, India, etc.) stand to materially benefit from supply diversification as new supply chains are built and fresh capital flows in. By 2032, for example, Malaysia and Vietnam are projected to account for 9% (today 7%) and 8% (<1%) of the global assembly, testing, and packaging capacity for chip fabrication, respectively.⁸ Philippines meanwhile has set its sight to become the next manufacturing and logistics hub in Asia with projects valued at $63 billion.⁹ India and the U.S. have advanced their cooperation and dialogue on semiconductors, technology, and climate change, amongst other areas. Elsewhere, the U.S. has partnered with Angola on carbon-free solar panels, and Washington has been instrumental in implementing Indonesia’s Just Energy Transition Partnership (JETP) that will hasten Indonesia’s transition towards cleaner energy. Alongside traditional U.S. allies (South Korea, Taiwan, Japan), these countries will likely form the core of a new interdependent order that is less reliant on China.

Resource-rich countries in Latin America (Chile, Brazil, etc.), Africa (Angola, Ghana, Democratic Republic of Kongo, etc.), Central Asia (Kazakhstan, Uzbekistan), Asia (Indonesia) will become increasingly important amid the growing rivalry between the West and China over energy resources and minerals critical for the green energy transition. For example, the EU-backed Global Gateway strategy to invest €300 billion in sustainable and high-quality projects has already committed to invest more than $45 billion in Latin American and Caribbean countries by 2027.

A “New Brand of Diplomacy”

As the U.S. and China vie to bolster their respective geopolitical spheres, they will likely continue supporting debt sustainability and economic development in low- and middle-income countries.

For example, Beijing has already shifted its approach to multilateral debt negotiations, with deferrals and rescheduling of debt payments drastically declining since 2021 for countries in debt distress (Figure 4). Beijing’s recent willingness to make concessions and align with key external creditors, as was the case of debt relief for Zambia, is a significant step and reflects China’s desire to be seen as a friendly actor to Global South countries. In addition, China’s overseas engagement has also bounced back from the lows in 2020 with investments and construction increasing in EM countries, especially in Southeast Asia and Africa.¹⁰

Meanwhile, to counter China’s influence, the U.S. has aimed to mobilize “trillions in investment into emerging economies… with capital enabled by a different brand of U.S diplomacy.” To this end, as National Security Advisor Jake Sullivan recently explained, the U.S has sought to “evolve the multilateral development banks” to expand “access to concessional, high-quality finance for low-and middle-income countries.” At the same time, the U.S. has launched a major effort to close the infrastructure gap in these countries by mobilizing “hundreds of billions of dollars” in financing via the Partnership for Global Infrastructure and Investment (PGII). The U.S. has also committed to “addressing the debt distress” faced by vulnerable countries and has pushed China to step up as a “constructive force” in assisting debt-stressed countries.¹¹

Concluding Thoughts

China’s response to the U.S.’ export controls and other restrictions has so far been softer than expected. However, a scenario where the U.S. deploys a more punitive form of statecraft would likely trigger an escalation in countermeasures by China. But in this scenario, China would likely design its response in a way not to cause a significant disruption given Beijing’s desire to maintain foreign investors’ interest in the country.   

China’s potential reaction to U.S.’ statecraft may have little deterrent effect for the U.S. As its rivalry with China rivalry intensifies, the U.S. will continue prioritizing national security interests, setting the stage for a more expansive set of vital technologies and sectors (“bigger yard”) that will require even stronger protection (“higher fence”). The U.S.’ strategic balancing act—to protect national security by safeguarding vital technologies while avoiding decoupling—will only succeed if China fails to become technologically self-reliant. Otherwise, technological decoupling between the two rivals is all but assured.