China Strategy: US Policy Errors & Risks | Foreign Affairs

The Erosion of American Economic Power: Risks from Fiscal Irresponsibility adn a Misguided China Strategy

The United⁤ States stands at ⁢a critical juncture. While maintaining global economic preeminence seems assured, a confluence of factors – reckless fiscal⁤ policy, politically motivated attacks on‍ institutional ‌independence, and a counterproductive approach ⁤to ‌economic ⁢competition with China – are actively eroding ​the foundations‍ of American power. This⁣ isn’t merely ​a matter of economic ⁢theory; it’s a tangible threat to the dollar’s global role, American prosperity, and national security. As someone who⁣ has closely ⁢followed and analyzed these trends (as detailed in⁣ my work ​in Foreign‌ Affairs, including a review of Lael brainard’s Exorbitant⁣ Pillage), ⁣the urgency of addressing these issues cannot be overstated.

The Perilous Path of Fiscal and Monetary Policy

For decades, the dollar’s dominance has ​rested‍ on the bedrock of U.S. creditworthiness and the independence of the Federal Reserve.These pillars are now demonstrably cracking. ​The recent $4 trillion expansion of federal debt, enacted despite ​a U.S. credit ‍downgrade, is a stark illustration of fiscal carelessness. This expansion didn’t simply add to the national debt; it weakened the dollar and drove yields on 30-year ​U.S. Treasuries above⁤ five percent – a clear signal of diminishing‌ investor confidence.

Compounding this ⁣fiscal irresponsibility is an unprecedented assault on the Federal Reserve’s independence. The attempts‍ to⁤ remove Senate-confirmed governors without due process, the appointment of individuals with clear ⁤conflicts⁣ of interest (remaining on the President’s staff while serving on the Fed), and direct pressure to lower ​interest rates to alleviate⁤ debt burdens are⁢ deeply concerning. Such actions​ aren’t just‍ breaches of established norms; they fundamentally undermine the credibility of ‌U.S.monetary policy. Investors rationally demand⁣ higher interest rates on long-term Treasuries when they perceive political interference in the Fed’s mandate to control inflation, further exacerbating the debt problem. Congress’s surprising acquiescence to these actions is‍ especially troubling, given its original delegation of currency control ‍to the ⁤fed and the safeguards it put in place to protect the institution from political manipulation.

The consequences of this ⁤erosion are ​significant. While the renminbi⁢ currently lacks the liquidity and depth to replace the dollar outright, beijing’s deliberate de-dollarization campaign is gaining traction. The increasing allocation of gold reserves ‍by foreign central ⁢banks, rivaling their holdings of U.S. treasuries, and the growing hedging activity against‌ dollar assets ‌are not isolated⁣ incidents. They represent‌ a systemic‍ shift in sentiment, and ⁤the absence of ⁣a single, immediate choice to the dollar offers little comfort. A diminished dollar means higher import costs for ⁤Americans, ⁢reduced purchasing power, and a loss of geopolitical leverage.

A Failed Strategy Towards China

Simultaneously, the current⁣ governance’s economic strategy towards China is​ actively dismantling the progress⁢ made by both the Biden‌ and Trump administrations’ earlier approaches. The imposition of sweeping tariffs, ostensibly designed to maximize revenue,⁤ is backfiring. ⁢ American manufacturers are suffering,consumers are facing higher prices,and crucial alliances are‍ being⁢ strained. this approach fractures the coalitions necessary to maintain U.S. technological‌ leadership.

furthermore, the rollback of incentives for advanced manufacturing and clean ⁢energy investment, coupled with⁣ the reversal ‌of targeted technology‍ export⁣ controls, is weakening the very industries that are vital to long-term American⁢ competitiveness. This isn’t “America First”; it’s self-sabotage. ‍

A Path Forward: Rebuilding American​ Strength

To reverse this risky trajectory, the United ‍States needs a⁢ coherent and strategically ⁣sound economic policy focused⁣ on sustaining American preeminence in critical sectors. This requires a fundamental shift in approach:

* Targeted Tariffs, Not Blanket Protectionism: Instead of broad tariffs, the U.S. should implement targeted tariffs ⁣on Chinese imports specifically ⁣designed to prevent Beijing from establishing chokeholds‍ on strategic supply chains.
* Strengthen Alliances, Don’t Alienate Partners: The U.S. must actively cultivate strong relationships with allies and partners through preferential access,investment partnerships (particularly in critical minerals and rare earths),and regulatory alignment. this will position the U.S. at the center⁤ of a robust ​and resilient‍ global technology ecosystem.
* Invest in Innovation: Sustained U.S. tech leadership requires significant investment in advanced manufacturing, clean energy, and rare earths. ‌ ⁢This necessitates‌ fostering ‍strong partnerships between universities, federal research institutions, and the ⁣private sector, as well as attracting and developing the world’s top talent.
* Maintain Strategic Export Controls: Targeted export controls on advanced‌ semiconductor technology are crucial for maintaining the U.S.lead in frontier AI models. ⁣ These controls should be buttressed, not bargained away.
* Safeguard Dollar Dominance: ‌ The U.S.⁤ must reaffirm its commitment to the international financial system, fiscal sustainability, and the institutional independence of the Federal Reserve.Demonstrating these commitments is the most effective way