Getting Economic Security Right

For most of the postwar period, U.S. international economic policy was primarily aimed at seizing opportunities: opening global markets, promoting growth, improving efficiency. Today, it is largely about managing risks, whether transnational challenges like pandemics or climate change, technological advances that offer enormous promise but also pose threats to national security and jobs, or competition with an assertive China. Indeed, a new term has emerged to describe this burgeoning area of policy: “economic security.”

Governments everywhere are understandably preoccupied with mitigating risks to national security and the foundations of their economies. Yet they need to keep perspective so that their efforts don’t overwhelm other national interests, such as supporting economic growth and competitiveness, keeping inflation low, maintaining close relations with allies, and preserving a rules-based international order.

Other members of the Group of Seven (G7) advanced democracies have been trailblazers in economic security policy. Japan enacted an Economic Security Protection Act in 2022 and has established a slew of new bureaucratic functions in this area. The European Union released an economic security strategy in early 2024 and is acting along multiple fronts: establishing an EU-level investment screening policy, creating an anti-coercion instrument to counter China’s bullying, and, most recently, announcing countervailing duties against electric vehicles from China. And, at their 2023 summit in Hiroshima, G7 leaders issued a first-ever statement on economic security.

While the term itself has not gained the same currency in the United States, Washington has been enacting laws, regulations, and policies over the past several years that are effectively aimed at enhancing economic security. In 2018, citing a legal provision designed to protect national security, President Donald Trump imposed tariffs on steel, aluminum, and other products imported from several trading partners (and later that year, imposed broad tariffs on goods from China under other provisions of trade law). While maintaining the Trump tariffs, the Joe Biden administration in May 2024 imposed new duties on $18 billion worth of imports from China. Both administrations have expanded the legal scope and use of export controls and investment screening mechanisms, particularly vis-à-vis China. The Biden administration has also greatly increased the use of industrial policies, winning congressional approval for four major laws that have collectively provided some $1.6 trillion of federal spending and subsidies for sectors deemed critical to national security (e.g., semiconductors) or economic competitiveness (e.g., electric vehicles).

As this inventory of new G7 policies makes clear, economic security is being interpreted to cover a broad range of activities where government sees a market failure or risk and feels compelled to intervene. Relevant risks include but are not limited to ones clearly related to national security, such as the transfer of sensitive technologies to adversaries or inability to procure items essential to a country’s defense capabilities (critical minerals, for example). The term is also used to apply to other risks—from pandemics, climate change, or broader supply-chain vulnerabilities—that may not be directly related to national security but that threaten citizens’ livelihoods or the country’s economic competitiveness.

The problem with this broad interpretation of economic security is that it can easily become an excuse for the unwarranted protection or weaponization of economic activity. While tariffs can be justified to provide temporary economic relief to domestic companies and workers or to counter unfair foreign practices, using them in the name of economic security should not give governments license to protect any favored industry from normal market competition. Similarly, it is reasonable for governments to want certain dual-use (i.e., commercial and military) technologies to be kept out of the hands of adversaries; but where the link to national security is more tenuous, policymakers should be careful not to restrict benign commercial activity based on theoretical or exaggerated risks.

Even when fully justified, government interventions in the name of economic security come with costs. Tariffs raise prices for downstream consumers and can harm a country’s exports if trading partners targeted by the tariffs retaliate. Export controls can deprive exporters of revenues they need to reinvest in developing the next generation of products that keep them ahead of the competition. Domestic subsidies obviously have a fiscal cost, but they can have a diplomatic one as well by harming the interests of allies and partners. And unilateral tariffs and subsidies that violate a country’s international commitments can do damage to multilateral institutions that underpin the rules-based order. All those costs have been highlighted in one way or another by the China-related actions taken by the Trump and Biden administrations.

Some risk mitigation is worth paying for—this is why homeowners buy insurance and install alarm systems—but the premium needs to be calibrated to the risk and potential payout. At a minimum, governments should be transparent about the costs and benefits of economic security policies and spell out the trade-offs involved in alternative approaches. They should also evaluate the effectiveness of their actions after the fact and adjust them as appropriate.

All of this suggests that the U.S. government needs a more articulated guide to economic security policymaking. This includes principles for when and how the government should intervene in the market to mitigate risks. Relevant principles include rationalization (ensuring that any proposed intervention is justified in terms of advancing specific national interests), proportionality (aligning the scope and scale of any action with the harm it seeks to address), likelihood of success, and consideration of costs and unintended consequences.

Economic security policymakers also need a set of tools fit for purpose—not just adequate laws, regulations, and policies for risk mitigation itself but also tools for assessing risks before action is taken and evaluating the effectiveness of measures after. U.S. policymakers could learn from the experience of other G7 partners, including Japan’s implementation of its Economic Security Protection Act and the EU’s development of an anti-coercion instrument.

An effective economic security policy also requires coordination along three challenging vectors: first, within the U.S. government itself, where relevant legal authorities are spread among multiple agencies; second, between government and the private sector, as the latter undertakes most of the activities—technological development, exporting, and supply-chain management—that are the target of economic security policy; and third, among allies and partner countries, because alignment of approaches is essential to keeping sensitive technologies out of adversaries’ hands and ensuring truly resilient supply chains.

Perhaps the most important element of an effective economic security policy is the mindset that policymakers bring to the task. Risk aversion is the dominant mood in Washington these days. This is understandable, but it needs to be tempered with confidence in the fundamental strength of the U.S. economy and its ability to weather threats and risks that are properly managed. Policymakers could usefully think of economic activity as falling along a red-yellow-green spectrum and start by identifying major risks to national security or the foundations of the economy that need to be eliminated or substantially mitigated; those would fall in the red part of the spectrum. Other activities that pose significant but manageable risk would fall in the yellow zone and could be subject to some regulation. The rest—ideally most of the spectrum—would be green, allowing growth- and competitiveness-enhancing activities to continue with little or no government intervention.

All of that is admittedly easier said than done. Over the months ahead, the CFR RealEcon initiative will delve more deeply into the issues identified here, with the goal of producing a detailed guide for policymakers tasked with ensuring U.S. economic security.