Advancing Both National Security and Economic Diplomacy in the Developing World

The strategic competition between the US and the People’s Republic of China (PRC) is multifaceted. Actions taken to achieve a policy goal in one arena can have disadvantages relative to other strategic priorities. 

This is the dilemma the US faces as it increases tariffs and restricts trade and outward investment to bolster economic and national security. The US must concurrently strengthen its engagement with emerging markets and developing economies (EMDEs) to counterbalance the PRC’s influence. Recent United Nations votes on Russia’s invasion of Ukraine highlight that the US cannot take EMDEs for granted. Strategic competition demands that the US seeks to advance economic diplomacy in the developing world amid necessary restrictions to preserve security.

Protectionist measures are often politically popular, yet they also can be impulsive. There is bipartisan pressure to put the squeeze on the PRC, but few voters understand in practical terms how tariffs work. It is important to remember that trade and outbound investment play a crucial role in shaping the US’s economic and diplomatic relationships with other countries, allowing it to foster ties that align with our strategic interests.

Unintended consequences of protectionist policies abound. Tariffs on Chinese products that advance decarbonization benefit America’s supply chain resilience. Restrictions on Chinese  software in vehicles are important for security. Yet this will make decarbonization costlier and could contribute to inflation. Similarly, export controls will help keep American technology from benefiting the PRC’s military capabilities. But they can also lead to China becoming even more of a competitor for global leadership as controls limit America’s ability to capture export markets. 

A competitive Chinese national champion in any category may not initially have comparable quantity, but with their industrial might, internal market, and China’s strong relations with EMDEs, they will take market share and reduce the sales of Western leaders, limiting what they can plow back into R&D to stay ahead.

Meanwhile, government-enforced restrictions on outbound investment can also have far-reaching implications. As the US prepares to bring into force such restrictions for the first time, the full range of potential consequences must be considered. 

In August 2023, President Joe Biden issued an executive order limiting US investments in semiconductors, quantum computing, and artificial intelligence in the PRC. The order is under a period of consultation and a final rule is expected to be issued by the end of 2024. Although the planned restrictions focus on the PRC, the administration has not ruled out extending them to other countries. 

Industry groups have warned the new rule could raise costs, make supply chain weaknesses worse, and harm the global competitiveness of US companies. But other ripple effects of the rule can be even greater than these justifiable concerns. 

Even as restrictions are necessary for security purposes, they can be seen as anathema to the US’s position as chief proponent of global economic integration and advocate for the free flow of capital across borders. To the extent the restrictions could be seen as a retreat from these principles, they risk undermining US leadership, as well as its ability to shape international norms.

By most measures, the US remains the largest source of foreign direct investment (FDI) flows globally. This means it sets the tone and drives the direction of FDI. Limiting US outbound investment combined with imposing trade tariffs can lead to a more fragmented global economy, thereby weakening trade networks, dragging down FDI volumes, reducing the overall efficiency of capital allocation, and ultimately, jeopardizing US businesses and global economic stability.

There are also issues of reciprocity and retaliation, increasing the likelihood that other countries or blocs will respond with their own restrictions, therefore creating a less liberal international economic environment. The European Union announced earlier this year plans to bring in its own screening mechanism for outbound investment. Globally, the protectionist winds are blowing strongly against FDI, even without the US exacerbating the trend. According to UN Trade & Development, 57% of new investment measures brought into force in developed countries in 2023 were unfavorable to foreign investment, with FDI screening mechanisms becoming increasingly popular. 

Considering all this, how can the US protect its technology while also retaining its global dominance in tech products and generating mutually beneficial partnerships with EMDEs? There are five key ways:

First, to retain global leadership, the US should align infrastructure support efforts to help spur development that will promote adaption of US technologies in friendly countries. Infrastructure investment can also advance resilience in critical supply chains. This requires coordination among the US International Development Finance Corporation, Export-Import Bank, private sector investors, and international partners. Building up infrastructure that increases connectivity (digital and logistical) and supports industries such as manufacturing, renewable energy, critical minerals extraction, and semiconductors will strengthen supply chains to the benefit of US exporters, allies, and trading partners.

Second, the efforts should be focused on EMDEs aligned with or leaning toward the US in Africa, Eastern Europe, Latin America, and Southeast Asia. US investment into these countries is on the rise already, as part of a worldwide “friendshoring” trend. Continued efforts to increase trade and investment ties will benefit all sides. Investment that brings know-how, raises skills levels, and helps establish these countries’ positions in global value chains will be particularly beneficial and welcome. Closer economic partnership with countries of great geopolitical importance—the Philippines in particular—would strengthen these crucial relationships.

Third, the US can embrace other countries as sources of legacy chips and other non-strategic technology. The first thing that EMDEs will look to America for is to help them tap into the booming tech market. They all want to make semiconductors. Yet it is uncertain in which parts of the advanced semiconductor supply chain these countries can be trusted to prevent any diversion to the PRC. This is particularly problematic in that the stage of production most appropriate for not producing locally in the US is the final stage—testing and packaging.  If the US does not want the PRC to have a strangle hold on legacy chips, this can be an opportunity to woo EMDEs by helping them develop as alternative sources.

Fourth, there are opportunities to exploit weaknesses in or consequences of the PRC’s trade posture. China presents itself as a champion of the developing world. Yet with China seeking to restart its stalled economy by flooding markets with more exports, this will create tension with EMDEs. Countries with critical minerals seeking to add processing may find the PRC’s predatory pricing constrains this opportunity. This could create an opening for the US to improve its own supply chain resilience by supporting mineral processing in other countries.

Finally, and perhaps most importantly, the US should recapture its role as a champion of global trade and pursue a policy of mutually beneficial expansion with friendly nations. Doing so would help the US retain tech leadership and diversify supply chains. Protecting national security while not undermining the US’s broader economic and geopolitical interests will always be a delicate balancing act. Security must not be compromised. The US must recognize the tensions across the many facets of today’s strategic competition and navigate them in ways that maintains its leadership role.