U.S. President Donald Trump jolted the global economy this past weekend when he announced sweeping tariffs on Canada, China, and Mexico, the United States’ three largest trading partners. Although most of these levies were ultimately delayed after a frantic few days of negotiations, Trump’s actions confirmed what his campaign rhetoric had led observers to believe: that tariffs, whether implemented or threatened, will be central to his foreign policy. The moves sparked outcry from industry leaders and economists, who cited the risks of crippled supply chains and higher prices for American consumers and companies. It was a strategic misstep from an administration faced with the opportunity to reshape the rules of the global economy to benefit U.S. national security.
The global economic order, comprising multilateral institutions such as the World Trade Organization as well as regional and bilateral trade and investment agreements, has grown stagnant and no longer advances the United States’ most important concerns. Economic security—the idea that the government should more assertively intervene in the world economy to improve resilience and address national security risks—has emerged as perhaps the central objective of U.S. international economic policy. The United States and other countries increasingly fear that economic interdependence can make them vulnerable to adversaries and susceptible to wider shocks; Russia’s full-scale invasion of Ukraine, in 2022, put this weakness into stark relief. Protecting the U.S. economy from these dangers has become an area of bipartisan consensus in Washington, as evident in a suite of policies enacted during the past two administrations, including sanctions, supply chain reviews, sweeping export controls, and restrictions on both outbound investments and flows of sensitive data.
Many of the United States’ closest trading partners also prioritize economic security. But today’s trade and investment agreements tend to relegate it to the periphery rather than treat it as central to economic relationships. This must change. Working with like-minded partners, the United States should champion economic security as the core organizing principle of a new international economic project that complements the open-market system, which promotes efficiency and growth. Building on their existing commitments, the United States and its close partners should pursue a series of binding bilateral or regional economic security agreements that will nurture greater economic cooperation as well as more effective coordination against outside rivals, particularly China.
The power of economic security agreements will hinge on how they combine defensive economic policies, such as tariffs and export controls, with more proactive ones, such as lowering trade barriers between allies in critical sectors. Such agreements can provide frameworks for partners to counter threats from China and, to compensate for the costs of doing so, deepen the partners’ integration. Washington and its partners should make binding commitments on broad, cross-sector issues, including foiling China’s economic coercion and addressing its production overcapacities and exploitative practices—for example, its massive subsidies for Chinese firms—that distort markets. Those commitments should be paired with efforts to court other markets in critical sectors, such as microchips and energy. At a time when many U.S. allies are wary of Washington’s bludgeoning approach to economic policy, such moves would help align the United States’ economic security tools with those of its trading partners. In the end, Washington cannot pursue its economic security agenda alone.
RIDING THE WAVE
The shift toward economic security in government policy has been building for years. The Great Recession, the COVID-19 pandemic, worsening natural disasters, and geopolitical conflicts have all drawn attention to the fragilities of a globalized economy. In response to Russia’s invasion of Ukraine, for instance, Western governments implemented a vast set of sanctions and export controls to sever Russia, the world’s 11th-largest economy and one of its most important energy exporters, from the global economy. Above all, the intensifying of geopolitical competition between China and the United States—the world’s two dominant economic powers—has made economic interdependence more perilous.
The United States and many of its allies have common economic security objectives. Close U.S. partners in Asia, for instance, are increasingly concerned about the consequences of their economic dependence on China. Europe has built a variety of new economic tools to limit its reliance on China and punish Russia. At the 2023 G-7 summit, member states issued a joint statement on economic resilience and security that signaled a desire to work together in dealing with challenges that arise from economic entanglement, including aligning policies on technology controls.
The current global economic order is defined by rules designed to safeguard openness. Countries agree to abide by those rules but are allowed to deviate from them for issues of national security. As such, the economic order treats these security concerns as exceptions to the norm and assumes their impact on overall trade and investment flows will be negligible. But governments are treating more and more economic activity as matters of national security; as a result, the use of coercive economic measures—sanctions, export controls, investment screening—is at an all-time high. Increasingly, the world is deviating from its rules-based economic system, and policymakers have not fully resolved that the actions they are taking to uphold their countries’ security order may be eroding the economic one.
Washington cannot pursue its economic security agenda alone.
The World Trade Organization, although it remains an important institution for many countries, is ill suited to advance economic security interests, owing to its near universal membership and emphasis on nondiscriminatory trade. And although groups such as the G-7 and the Organization for Economic Cooperation and Development can be useful discussion forums, they do not have the authority to develop the kind of deep and binding commitments the private sector relies on to make long-term investments. Informal and ad hoc efforts to strengthen cooperation, such as the Minerals Security Partnership Forum, led by the European Commission and the United States, or talks between Japan, the Netherlands, and the United States on semiconductor export controls have made some progress on shared economic security concerns. But their scope and ambition are too incremental to achieve a fundamental shift in the economic order. A larger, more formalized architecture is needed.
The Trump administration should invest in economic security agreements that mirror the United States’ latticework of security alliances and partnerships. A central element of the new economic security architecture must be the integration of defensive and proactive economic policies. The United States’ international economic strategy is dominated by defensive measures, such as tariffs and export controls, that tend to be implemented unilaterally. But these will get Washington only so far. For instance, the United States cannot afford to produce all critical goods within its borders, and thus reliable supply chains will require some degree of “friendshoring,” in which goods are sourced from trusted partners. Coordination is also critical: U.S. export controls preventing China from acquiring advanced technologies, for instance, are ineffective if China can simply acquire them from another country.
Washington must adopt a more pragmatic approach to trade, as well. Continued decoupling from China will result in the United States’ losing a big buyer for its goods, a deficit that cannot be wholly addressed by trying to spur domestic demand. Expanding to other foreign markets—in ways that ensure high protections for U.S. workers and the environment, the absence of which has doomed past trade initiatives—will be essential for U.S. firms to grow, innovate, and retain their competitive edge. A more effective strategy is for like-minded governments to deploy all their economic tools—regulatory sticks and incentive-based carrots—in tandem to achieve their common economic security objectives.
TRICKS OF THE TRADE
The Trump administration should be both opportunistic and ambitious in its pursuit of economic security agreements. Small, targeted deals in key areas such as critical minerals or advanced technologies can provide near-term opportunities for the United States and its partners to align—as occurred when the first Trump administration brokered a narrow agreement with Japan on digital trade—while avoiding the pitfalls that come with more comprehensive negotiations. Such deals will be important in reestablishing U.S. credibility with partners that were affected by some of the United States’ prior moves on trade, including its withdrawal from the Trans-Pacific Partnership in 2017 and its threatened tariffs on major trading partners.
U.S. negotiators should design these smaller pacts to be building blocks to broader, more ambitious economic security agreements. These larger deals should include commitments across multiple critical sectors, including semiconductors and artificial intelligence, and enable partners to leverage all their policy tools, both defensive and proactive. The United States will request certain actions from its partners: likely further decoupling from Chinese supply chains and stricter labor and environmental protections. In return, the United States must offer tangible benefits. These could include tariff reductions or the elimination of nontariff trade barriers.
The biggest innovation in economic security agreements will be promoting cooperation on cross-sector issues such as economic coercion. In recent years, China has used its economic might to pressure Australia, Japan, Lithuania, South Korea, and other countries to abide by its geopolitical preferences. For example, it informally blocked large amounts of trade with Lithuania to pressure it to close a Taiwanese representative office and cut off Australian imports as punishment for Australia requesting an inquiry into the origins of COVID-19.
Economic security agreements should enshrine cooperative responses to deter and defeat such behavior, including consultations on instances of suspected coercion—akin to the G-7’s Coordination Platform on Economic Coercion—and commitments to develop or maintain the capabilities to act quickly in support of a coercion target. Each act of coercion will require a bespoke reaction, but a common toolkit of punitive measures (for example, retaliatory tariffs against the coercive country) and mitigative ones (for example, financial aid to the target) will enable faster and more persuasive coordinated responses. Of course, after the recent tariff threats, the United States will need to convince its allies that it will live up to its commitments—and refrain from coercion itself.
Another area in which the United States and its partners can cooperate more deeply is in addressing overcapacity in global markets, including in sectors such as steel, vehicles, and less advanced chips. China has made a practice of manufacturing more products than it can consume domestically and then dumping the surplus in foreign markets, undercutting the global competitiveness of U.S. firms and distorting prices. But joint action between the United States and its partners to combat Chinese overcapacity is currently ad hoc and informal. Economic security agreements could create concrete, more ambitious frameworks for this, including for consultations between partners and joint defensive actions—similar to how Canada, the United States, and the European Union imposed tariffs on Chinese electric vehicles last year in response to China’s rapidly expanding market share in this sector. More ambitiously, members could exempt one another from tariffs or other actions specifically designed to counter Chinese overcapacity.
Like-minded governments should deploy all their economic tools in tandem.
Economic security agreements should also formalize greater alignment on the defensive toolkit of sanctions, export controls, inbound investment screening, and outbound investment restrictions. Many U.S. partners have inadequate authorities or resources to implement these policies effectively. For example, many countries implement only the limited export controls agreed to by multilateral coordination bodies, which often move slowly and struggle to reach a consensus. Signatories to an economic security agreement should commit to creating and maintaining national authorities that can impose controls on a unilateral or plurilateral basis in coordination with the United States, as well as investing in the bureaucratic capabilities to implement them.
As a corollary, members of economic security agreements should pledge to minimize national security-based trade and investment restrictions on their partners. Doing so can enhance joint technological innovation and bolster shared defense-industrial bases. The United States, for its part, has already relaxed certain export controls on Australia and the United Kingdom as part of AUKUS, the countries’ trilateral security agreement. Furthermore, U.S. investment security policies include limited provisions to exempt close security partners from certain review requirements. Although these moves are positive, they have been implemented only narrowly, hampering their utility and irritating U.S. partners in the process.
Economic security agreements could be either built on top of existing free-trade agreements or negotiated as standalone frameworks. For instance, the anticipated renegotiation of the U.S.-Mexico-Canada Agreement is a near-term opportunity to experiment with incorporating economic security principles into a comprehensive trade agreement. Take, for example, the auto sector, which is highly integrated across the North American market. The United States will want to prioritize preventing Chinese-owned automakers from opening factories in Mexico to benefit from the USMCA’s preferential tariffs. Regional auto trade will also be affected by new government policies intended to address national security risks. The United States recently placed restrictions on the use of Chinese hardware and software components in vehicles sold in the U.S. market. (Canada is considering implementing its own restrictions, as well.) To ensure the security and integrity of the North American auto market, the three USMCA partners should discuss these policy tools as part of a more holistic negotiation.
Beyond the USMCA, the United States should focus on Australia, Japan, and the United Kingdom as prime candidates for economic security agreement talks. The U.S.-Australia relationship is ripe for such an agreement: the countries have a trade agreement that needs updating; they already cooperate on defense technology and export controls through AUKUS; and they are both experienced in countering Chinese economic coercion. Japan, a leader in Asia, has advanced technology sectors and wants to enshrine broader protections for trade in digital goods and services. The United Kingdom, already a close security partner, completed several rounds of trade negotiations with the first Trump administration and has strong incentives to strike more deals as it continues to recover from the economic effects of Brexit.
As the Trump administration wields the tariff hammer, both U.S. companies and trade negotiators in capitals around the world are bracing for confrontation. But Trump’s transactional approach to international economics also sets the stage for potential dealmaking. Trump’s attraction to disruption could lead to a shakeup of the moribund international economic order and put in place the conditions for a much-needed transformation. But this past weekend’s tariffs, which amount to coercion of close U.S. security allies, make this task harder by causing trading partners to question the durability of any new U.S. commitments. Should the Trump administration continue with haphazard threats to close partners, these countries may even come to see their integration with and dependence on the U.S. market not as an asset but as a geopolitical vulnerability, a development that would delight Beijing. The challenge will be to focus on the right target—China—and to use economic security agreements to chart a durable path forward for the future of the global economic order.
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