Kennan’s Warning on Ukraine
Ambition, Insecurity, and the Perils of Independence
For many citizens, the American dream has been downsized. In recent decades, the United States has ceased to be the world’s workshop and become increasingly reliant on importing goods from abroad. Since 1998, the widening U.S. trade deficit has cost the country five million well-paying manufacturing jobs and led to the closure of nearly 70,000 factories. Small towns have been hollowed out and communities destroyed. Society has grown more unequal as wealth has been concentrated in major coastal cities and former industrial regions have been abandoned. As it has become harder for Americans without a college degree to reach the middle class, the withering of social mobility has stoked anger, resentment, and distrust. The loss of manufacturing has hurt not only the economy but also American democracy.
China has played a significant role in this deindustrialization of the United States. The explosion in job losses occurred after the U.S. Congress granted China the status of “permanent normal trade relations” in 2000, ahead of China’s accession to the World Trade Organization. Between 1985 and 2000, the U.S. trade deficit with China had grown steadily from $6 billion to $83 billion. But that deficit ballooned more dramatically after China joined the WTO in 2001, and it now stands at a stratospheric $309 billion. Once in the WTO, China unfairly undermined U.S.-based manufacturing by using exploited labor and providing sweeping state subsidies to Chinese firms. Even more than NAFTA—the 1994 free trade deal that allowed many U.S. manufacturing and farm jobs to move to Mexico—the liberalization of trade with China decimated factory and rural towns, particularly in the Midwest and in the South. This devastation fueled the rise of anti-immigrant xenophobia, anti-Asian hate, and right-wing nationalism that has threatened democracy at home through extremism and violence in U.S. politics.
It has become standard practice in U.S. foreign policy circles to rue American naiveté in believing that Beijing and Washington would benefit equally from China’s inclusion in the system of global trade. But that recognition has not always been accompanied by the requisite clarity and ambition in U.S. policymaking. The Biden administration has taken important steps in encouraging the return of jobs from overseas, supporting U.S. manufacturers, and seeking to deny China access to cutting-edge U.S. semiconductor technology. But the United States needs to enhance this agenda with specific place-based strategies to revitalize struggling parts of the country and strengthen partnerships between the public and private sectors.
Americans should embrace a new economic patriotism that calls for increasing domestic production, bringing jobs back from overseas, and promoting exports. An agenda focused on regional revitalization will offer hope to places that have endured decades of decline as policymakers watched haplessly and offered little more than Band-Aids to people laid off as a result of automation and outsourcing. A commitment to rebuild the U.S. industrial base does not mean the country should turn its back on the world and adopt the kind of insular economic nationalism that powered the 2016 Brexit vote in the United Kingdom. Instead, the United States can revive important industries while still preserving key trading relationships, welcoming immigrants, and encouraging the dynamism and innovation of its people.
Economic imperatives must drive U.S. foreign policy toward China, as much for domestic and global security as for national prosperity. Reducing the trade imbalance will lower tensions and mitigate the risk of populist anger or supply shocks inflaming conflicts between the geopolitical rivals. In every conversation with Beijing, Washington should focus on rebalancing production. U.S. policymakers should set annual targets for reducing the trade deficit with China. They can meet such goals through tough negotiations—for instance, regarding China’s artificially depreciated currency—and by unilateral policy adjustments, such as supporting manufacturers in the United States and in friendly countries. Such actions will help address the job losses, deindustrialization, and consequent opioid crises that have destabilized U.S. society. By realizing this vision, the United States will not just improve relations with China but further the goal of building a thriving, multiracial democracy that is an example to the world.
The trade deficit is an important proxy for the decline of the United States’ industrial base. In the first decade of this century, as MIT economist David Autor has shown, the United States lost 2.4 million jobs because labor-intensive industries moved to China. Beijing’s new trade status and low wages, along with its undervalued currency, incentivized U.S. companies to relocate manufacturing facilities there. Two decades later, the job loss count is up to 3.7 million, owing to the mushrooming trade deficit with China. The deficit reflects the decline in domestic industry: manufacturing accounted for 71 percent of the world’s trade in 2020, and nearly 73 percent of U.S. imports from China in 2019 were manufactured goods. Put bluntly, by running a trade deficit with Beijing, Washington creates jobs in China instead of in the United States.
Many economists and business owners do not regret the loss of manufacturing in the United States, arguing that the country’s economy has become more oriented around the service sector and producing knowledge and innovation. But innovation is intrinsically linked to production. Manufacturing companies account for more than half of U.S. domestic spending on research and development. And, as Intel chief Andrew Grove argued more than a decade ago, a key part of innovation is the “scaling” up that happens as new technologies move from prototype to mass production. That scaling happens less and less in the United States because so much manufacturing has shifted overseas. “Without scaling,” Grove lamented, “we don’t just lose jobs—we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.”
Manufacturing workers are also more likely to belong to unions, receiving protections that secure their membership in the American middle class; a solid industrial base and strong union participation expanded the middle class by leaps and bounds from the 1940s to the 1970s. The replacement of U.S. manufacturing jobs with service-sector jobs is, in truth, the erasure of reliable well-paying jobs in favor of more precarious low-paying ones.
Trade pacts are not suicide pacts.
Some argue that automation, more than the flight of industry to China, is to blame. Automation and shifts in the manner of production no doubt account for some of these losses. But a comparison with Germany, where automation has also affected the workforce, is illuminating. Between 2000 and 2010, the United States lost around 33 percent of its manufacturing jobs, whereas Germany lost only 11 percent, largely because it maintained a trade surplus. When both were still in office, British Prime Minister Tony Blair asked German Chancellor Angela Merkel to explain Germany’s success. She responded, “Mr. Blair, we still make things.” In Germany, as the economist Gordon Hanson has observed, workers pushed out of jobs in textiles and furniture making were able to transition to manufacturing machine jobs because Germany expanded exports of machine parts. Around 20 percent of Germany’s labor force works in manufacturing jobs; only eight percent of the U.S. workforce does. Germany was able to cushion the hit from the growth of Chinese industry by expanding its own export-oriented manufacturing. U.S. workers, on the other hand, were left to find employment in the low-wage service sector, dealing a severe blow to the country’s middle class. Germany has also invested heavily in apprenticeship programs and in training its workforce for the high-tech future; the United States has not.
The enormous trade deficit with China has become a flash point in U.S. politics. During the trade war waged by U.S. President Donald Trump, the deficit with China decreased by nearly $100 billion between 2018 and 2020. Although his tariffs began to patch holes in the sinking ship of the U.S. manufacturing sector, Trump lacked a comprehensive agenda to get the United States to make things again. He cut corporate taxes instead of investing in next generation manufacturing, and big companies funneled their gains from the tax cuts into speculation in secondary financial and tertiary derivatives markets. The deficit spiked back up in 2021 during the COVID-19 pandemic, as Americans stayed at home more and increased their purchases of housewares and electronics made in China. In 2021, the United States imported $135 billion worth of Chinese-made electronic equipment, such as semiconductors and cellphones, and $60 billion worth of televisions, cameras, and cordless telephones. It also imported $116 billion in Chinese machinery and $40 billion worth of toys, games, and sporting equipment. China has also supplanted the United States in making car parts; it produces 30 percent of the global automobile supply chain. These dynamics reflect more than the habits of U.S. consumers and producers; they manifest in shuttered factories, desolate towns, and struggling communities across the United States.
Of course, the assessments of technocrats debating the extent to which trade and automation have hurt workers in the United States are not more important than those of the American public. In a democratic country, the lived experience of citizens matters. Anyone who has spent time in North Carolina, Ohio, or Pennsylvania will attest that many Americans there believe the job losses in their communities are directly tied to offshoring to China, Mexico, and Asia more broadly. They have reached that conclusion through deep consideration and through the record of their own lives. Policymakers inside the Beltway need to spend time visiting factory towns and listening to what people there have to say.
Every U.S. industry faces a major obstacle when trying to export products: the strength of the U.S. dollar. The dollar is more attractive and stable than the euro, the rupee, the yen, or the renminbi. The deep irony of having the world’s reserve currency is that the United States is effectively subsidizing the rest of the world’s exports while making U.S. products and services too expensive to aggressively compete in global markets. At the same time, China, the world’s largest exporter, continues to keep the value of its currency artificially low, boosting its own exports. The United States must work swiftly to counteract these market distortions.
First, the United States can negotiate a currency and goods accord with China, just as U.S. President Ronald Reagan did with the 1985 Plaza Accord with Germany and Japan, when both agreed to limit the dumping of their manufactured goods on the United States and accepted the depreciation of the dollar to strengthen global demand for ailing U.S. exports. Each government’s central bank agreed to coordinate purchases of one another’s currencies to keep the dollar from rising too high. Germany and Japan also agreed to impose restraints on their exports to the U.S. market. Although these agreements were voluntarily negotiated, Germany and Japan were told in no uncertain terms what the alternative would be: the United States would have no choice, in the absence of an accord, but to act unilaterally both to curtail German and Japanese imports and to devalue the then overpriced dollar.
U.S. officials should use a similar approach with China. Beijing is unlikely to cooperate unless Washington threatens targeted tariffs as it did in the 1980s with Germany and Japan. In essence, Washington must make clear to Beijing precisely which industries it sees as vital, explain what targeted tariffs and quotas it will impose if forced to act unilaterally, and then explain what voluntary measures China can take to avoid those consequences. In the final analysis, the greatest beneficiaries of lopsided trade imbalances also have the most to lose if those trade relationships are terminated. Trade pacts are not suicide pacts, and the United States must make plain to China that the slow-motion economic deindustrialization of the past decades will end—with or without Chinese cooperation.
The United States should also revitalize and invest in the Export-Import Bank, the official export credit agency of the U.S. government that helps U.S. companies sell their goods abroad. For too long, Washington has refused to back its exports. It can no longer afford to do so. By assisting U.S. firms in marketing their products abroad, the EXIM Bank removes risks that disincentivize investment in U.S. industry, such as the threat of losing out to competing firms abroad whose governments massively subsidize them. Although the United States should be careful not to use the EXIM Bank to hamper the establishment of industries in low-income countries, Washington should focus on subsidizing exports of clean energy technology around the world to compete with China’s subsidized clean energy exports, such as batteries and solar panels. The United States should boost its own exports, just as its rivals do.
I made many of these arguments to Qin Gang, the Chinese ambassador to the United States, earlier this year. He told me that he was willing to talk about the trade imbalance. In turn, he wanted the United States to more strongly reaffirm its commitment to the “one China” policy, which recognizes the People’s Republic of China as the sole legitimate government of the country and does not recognize the Republic of China, based in Taiwan, as a separate sovereign entity.
Acknowledging the dangers of trade deficits, he pointed out that the Opium Wars between China and the United Kingdom in the nineteenth century stemmed from the trade imbalance between the two countries. The United Kingdom and the West had a strong demand for Chinese goods, such as tea, porcelain, and silk, in the early 1800s. China, however, did not care for British goods, such as wool. The British paid for Chinese goods in silver, which led to an outflow of millions of pounds of silver, weakening the pound. To rebalance the trade deficit, British merchants sold opium to the Chinese. British opium profits skyrocketed as millions of people became addicted, unraveling Chinese society, which ultimately led the Chinese emperor to ban and destroy the drugs imported from Britain. This act started the First Opium War in 1839. Yes, the conflict took place in the context of an era of aggressive European imperial expansion, but the ambassador suggested that this episode was a powerful example of how trade deficits can provoke conflict between countries.
Today, great-power competition and underlying Chinese overreach certainly inflame tensions between China and the United States, but the trade deficit feeds animosity and exacerbates the fears of many Americans, who simply seek economic security. Rebalancing trade will lessen the resentment in the United States against China for job losses, deindustrialization, and the harm those economic developments have caused to the social fabric of the country, including in the form of the opioid crisis (made worse by the import of Chinese-made fentanyl).
China will not easily accommodate the United States’ economic goals. Chinese President Xi Jinping will be hesitant to rebalance trade, out of concern for factory owners who do not want to lose business. Local Chinese Communist Party leaders also have a vested interest in not losing manufacturing and in protecting large factories as visible symbols of a thriving economy. But over the long term, as Xi recognizes, overproduction is not healthy for the emergence and maintenance of a middle class. What is underway in China is a conflict pitting the parochial short-term interests of party hacks and factory owners against the sustained long-term growth of China’s middle class. Xi has long believed that China must slowly wean itself from dependence on exports and develop a more consumer-driven economy whose engine would be the increased purchasing power of the Chinese middle class. The United States must continue to press the case publicly and privately that rebalancing trade will ultimately lead to a stable and sustainable middle class in China.
To become a more committed exporter, the United States needs to make more things at home. The administration can unleash manufacturing and production at a level not seen since World War II. First, it should set up a new Economic Development Council, which would report to the president, to invest in and build partnerships with industry. It would have the authority to study the trade deficit and solicit information from across the federal government, academia, and the private sector. This Economic Development Council should convene key agencies—including the Departments of Commerce, Defense, Energy, the Interior, State, and the Treasury, along with the Office of the U.S. Trade Representative—as well as private-sector representatives, to determine the necessary capital investment needed to make the United States the world’s preeminent manufacturing power again. In crafting strategies for revitalizing deindustrialized parts of the country, it should look, for example, at the volumes of data that Hanson is compiling on both the economic and the social conditions in distressed economic regions. Executing a broad agenda of reindustrialization requires a coordinating body to ensure that all agencies are working in sync.
The Economic Development Council should use federal financing and purchase agreements to help companies access the capital needed to rebuild the country’s manufacturing base. The government must make its financial interventions targeted, surgical, and finite, with a particular focus on communities affected by deindustrialization in the Midwest and South. The government should not indefinitely support firms with public capital and should help facilitate the scaling up of only those projects that have already attracted private-sector financing.
Congress, too, has a role to play. It should pass a tax credit to persuade companies to bring production back to the United States and, conversely, levy a ten percent offshoring corporate tax on U.S. firms that close facilities in the United States and move manufacturing jobs overseas. Congress should also increase funding for the Manufacturing Extension Partnership, which is a public-private partnership that provides various forms of technical assistance to manufacturers. The budget that President Joe Biden proposed this year calls for a $125 million increase to the partnership, but it should provide ten times that amount to support small- and medium-sized manufacturers across the United States.
The United States should aim to revitalize production in certain key industries. In 1970, U.S. steel made up 20 percent of global production; today, that figure is down to just four percent. The United States is now the 20th-largest steel exporter in the world but the second-largest steel importer. China, by contrast, makes up 57 percent of the global steel market. Since 1990, the number of people working in U.S. steel mills has dropped from around 257,000 to around 131,000. The federal government can ramp up U.S. steel production through financing as well as requiring federal infrastructure builders to purchase American-made steel. U.S. steel exports do not need to dominate the global market, but the United States can take the lead in innovations, such as the next-generation lightweight and high-strength steel that will allow electric cars to go farther on a single charge. New U.S. facilities are already heading in this direction: the Nucor steel plate manufacturing plant under construction in Kentucky, for example, will provide the thick precision steel needed for in-demand machines such as wind turbines.
Unfettered globalization hurts democracies.
Aluminum is another industry in which the United States has lost considerable ground to China. In 1980, the United States was the world’s top producer, but it fell last year to ninth place in global aluminum production. China accounts for 57 percent of global aluminum production. In 2001, the United States had over 90,000 aluminum workers; today, it has about 56,000. Cheap and cost-effective aluminum smelting depends on low-cost energy sources, which is why China uses coal plants for aluminum production. The United States can use cleaner green energy to produce aluminum and take the lead in another industry of tomorrow, in the process bringing back tens of thousands of jobs.
The Biden administration’s Inflation Reduction Act and the CHIPS and Science Act have revitalized industry by investing hundreds of billions of dollars in key technologies of the future. As a result, a new $20 billion Intel semiconductor factory complex in Ohio will create more than 10,000 jobs in the state. The memory and data storage firm Micron, an American company that also has three locations in Taiwan, will invest $100 billion and create 50,000 new jobs in upstate New York, and Kentucky will be home to a potentially $1 billion Ascend Elements lithium-ion battery facility. The return of these companies to the United States was enabled in part by automation. But they will still create many better-paying jobs than are now available. The United States is already on pace to bring back 350,000 jobs from overseas in 2022. Reshoring manufacturing to the United States is possible.
Some will argue that government investments in industry will encourage companies that lose productivity and competitiveness to become reliant on federal funding to stay afloat. But history offers many examples to the contrary. Companies such as Chrysler, General Motors, and Lockheed Martin that received significant federal funding during World War II and the U.S.-Soviet space race remained productive and successful. Companies backed by federal funds were also better able to raise private capital. For instance, Intel’s initial investment in Ohio is $20 billion, but that investment could increase to $100 billion. Only a fraction of that funding will come from the CHIPS Act. Private capital will power the reindustrialization of the United States. Moreover, the government must support only firms that have participated in open and competitive bidding processes, and it must make sure that companies that receive government funds have survived some level of market rigor to avoid situations such as that of Solyndra, the failed solar energy startup that won government backing during the Obama administration. Although Solyndra remains a Republican talking point, the Obama administration deserves more credit for successfully supporting other companies such as electric vehicle manufacturer Tesla and the spacecraft manufacturer Space X. And the GOP continues to call for government investment in companies all the time with their tax incentive policies and subsidies at the state level.
The government should support not just advanced manufacturing but also the next generation of care jobs. As the economist Dani Rodrik has argued, digital technologies can specifically help increase the productivity of employees in the growing care industry. The government should provide technology grants and incentives to improve childcare and eldercare work and in the process make those jobs better paying.
A new economic patriotism would represent an explicit rejection of Chinese-style state capitalism. Unlike the United States, China has state-owned companies and banks. The Chinese state rewards companies on the basis of local political imperatives and favoritism. The market does not get to decide which enterprises are truly productive and successful, which weakens Chinese companies in the long run. Additionally, China doesn’t have the federal, state, local community, and electoral checks on wasteful government spending, much less the scrutiny of a free press, that protect the American system. The Wall Street Journal editorial board pilloried the CHIPS Act week after week. But such criticisms in an open society help minimize the risk of crony capitalism. Leaders in government, business, and education can work together to develop human capital and support high-paying jobs in communities that will generate dynamic growth, building a progressive capitalism for the twenty-first century.
As the United States revives traditional industries, it also needs to focus on acquiring the materials and components for the industries of the future. China currently has 76 percent of the world’s lithium battery production capacity and 60 percent of rare-earth metals needed for building electric vehicles, wind turbines, and solar energy. The United States accounts for eight percent of the world’s lithium batteries and 15.5 percent of rare-earth metals.
In the run-up to World War II, the Roosevelt administration understood this imperative. As Cornell economist Robert Hockett has pointed out, to avoid relying on adversaries for key products, the administration preemptively bought up American products and natural resources and made major investments in domestic productive capacity before conflict began. The success of U.S. efforts in Europe and Asia during and after World War II relied in part on this approach, as did the country’s industrial preeminence during the decades that followed.
The United States today needs a plan to acquire the necessary lithium, cobalt, and graphite to build the green energy future at home. The battery company Novonix, a beneficiary of the Inflation Reduction Act, is charting new territory by opening a factory in Chattanooga that will produce synthetic graphite, which with new procedures can be much cleaner to process than natural graphite. The government should act swiftly to support similar efforts.
The government can also use the National Defense Stockpile, which stores rare-earth minerals in the event that U.S. supply chains are disrupted. Over the last 70 years, the value of this stockpile has fallen from $42 billion (inflation adjusted) in 1952 to $888 million in 2021. Congress should at least double the value of the stockpile and purchase domestic rare-earth materials.
Most urgent, U.S. officials must determine which defense systems rely on Chinese-made products. The United States is dependent on China for a variety of essential materials, including the antimony used in night-vision goggles and nuclear weapons. Congress should require the defense department to determine the country of origin of the content of all defense equipment and to identify alternate sources in case of future troubles and disruptions.
Perhaps no product developed abroad is more essential for modern life than the smartphone. The cellphone supply chain underscores both the difficulties and the imperative of making the United States less dependent on China, where most smartphones are packaged and assembled. For example, according to the latest available data, 25 percent of the Apple iPhone’s value chain runs through China. Over 80 percent of the cellphones the United States imports have a component assembled in China.
Washington should encourage companies to move the production of valuable component parts—display screens, semiconductor chips, batteries, sensors, and circuit boards—to the United States or to allied countries. It also needs to push friendly countries such as Australia, India, and Japan to increase their own production of electronic components for phones. With the right combination of action in the United States and those countries, the percentage of Chinese-assembled phones the United States imports could be cut in half in five years.
Reindustrializing the United States need not come at the expense of the rest of the world. The United States and the G-7 should offer an alternative to China’s vast Belt and Road Initiative, which finances infrastructure outside China. To do so, Washington should find out what developing countries need and want, respect their right to self-determination, and chart a development future that best serves their people instead of creating debtor countries as Chinese policies have done. Washington should also share technological know-how with friendly low-income countries so they can develop their own modern industries. Not every part of the supply chain can return to the United States, so Americans will need to help partners gain access to the materials and develop the production capability to build the goods the United States still needs to import.
The ramifications of restoring U.S. industry would be immense. Unfettered globalization has failed to help democracies thrive—in fact, it has fostered their decline. In the last 20 years, as globalization has intensified, democracies around the world, including the United States, have experienced backsliding. In Europe and the United States, polarization and far-right nationalism have increased, with many political figures inciting fears of immigrants in the wake of industrial job losses. Across the globe, high-income countries have prioritized the profits of multinational corporations over the civic health of communities and the lives of their citizens.
In 1996, as the forces of market liberalization rippled largely unimpeded around the world, the legal scholar Richard Falk captured the limits of globalization, cautioning against embracing “cosmopolitanism as an alternative to nationalist patriotism without addressing the subversive challenge of . . . market-driven globalism.” Twenty years later, China had long failed to live up to its WTO promises, and Trump, who called NAFTA the “worst trade deal in history,” became president. In the United Kingdom, the percentage of industrial workers had dropped from almost half the workforce in 1957 to just 15 percent in 2016. This trend allowed the far right in the United Kingdom to weaponize fear of immigrants, drive a cultural wedge between the deindustrialized north and the more prosperous south of England, and win the referendum to leave the EU. Neighboring France’s domestic production capacity is 20 percent lower than it was 20 years ago—a fact not unrelated to the rise of Marine Le Pen, a far-right leader who denigrates immigrants and French Muslims and appeals to many disillusioned working-class voters by saying, “We can no longer accept this massive deindustrialization.”
The United States has seen its own share of xenophobic backlashes, but the country’s rich diversity remains a model for the world, especially in contrast to China, which seeks to suppress its own political, cultural, ethnic, and religious diversity. But as Falk insisted, it is no good singing the praises of diversity while allowing communities to be decimated by the forces of global capital. U.S. leaders must revitalize communities across the country by boosting domestic production and rebalancing trade. Shared prosperity will allow every American to contribute to an overarching national culture built on an eclectic mix of traditions. This patriotism need not veer into a bristling nationalism. Whereas patriotism reflects pride in community and place, nationalism turns pride into chauvinism and seeks to make a community insular and exclusive.
Even if the United States rebalances its trade, China will remain a rival, and Washington will need a comprehensive national security strategy to deter the invasion of Taiwan. But the United States must not default to a Cold War McCarthyism against the Chinese or any other people or country. It should work with China to prevent competition from erupting into war, and the two countries should cooperate on issues of mutual interest such as climate change, global food security, and arms control.
A new economic patriotism calls for a globalization rooted in the interests of ordinary Americans, not the unrestricted version that has shredded the United States’ economic and social fabric over the past four decades. Rebalancing trade through domestic production will help lessen tensions with China, realize the promise of a thriving democracy at home, and ensure that globalization works for all Americans, not just some.