In this excerpt from the Hoover podcast Matters of Policy and Politics, visiting fellow Andrew Grotto talks with Bill Whalen about “economic statecraft”: the wielding of American economic power in the competition between the free world and authoritarian regimes. Listen to their full conversation here.
Bill Whalen: Andrew Grotto is the co-author of an essay with Hoover’s own H. R. McMaster. The title is “Economic Statecraft: The Need for an Integrative Approach.” Andrew, you define economic statecraft as “a country’s pursuit of geopolitical objectives using economic power. These sources of power include US military strength, its global diplomatic reach, the gravitational attraction of American ideals such as liberty and opportunity, and the economy.” What led you and General McMaster to write this?
Andrew Grotto: We’ve been doing economic statecraft in the United States since the founding days of the country. If you think about how the country has grown geographically, that’s been conducted primarily through economic statecraft, through purchases of land. Other countries and societies have been doing this since the ancient Greeks—using economic power to pursue any number of geopolitical objectives.
And what we’ve observed over the past, say, ten years is the acceleration and expansion of the use of this toolkit by successive US presidents. For example, with issues like US-China, great-power competition, and economic sanctions in response to Russia’s invasion of Ukraine. We’ve already seen plenty of activity using economic statecraft under President Trump, too.
But you can go back hundreds of years and see this toolkit being used. After the Cold War, we collectively expanded it through the use of sanctions. The modern export control regime, which tries to control the spread of dual-use and other sensitive technologies, was born out of the Cold War. Presidents find these tools attractive because they don’t involve boots on the ground, and in some cases, they can achieve the objectives leaders set out for them.
There are other tools in the foreign policy toolkit: diplomacy, words and ideas, and military power, that draw on different sources of national power. Different administrations put different emphases on elements of national power and pursuit of US objectives, but the one trend that I think we’ve seen going back several administrations is this rise in the use of economic tools. Consider, for example, the semiconductor export controls that began in Trump 1 that were extended by President Biden and now sort of fall in Trump 2’s lap to decide what to do with them. Ten or fifteen years ago it would have been almost unthinkable that the United States would consider controls that sweeping. And a big reason why there’s such a heightened focus on economic statecraft is the US-China, great-power competition, which in many ways is a technological competition, an innovation competition, and obviously it involves economics.
Bill Whalen: What stands out to me when we talk about Russia and economic consequences from this Ukraine war is that you always hear those in terms of sticks, sanctions, more sanctions, tightening the squeeze on Russia. This would suggest that maybe carrots could be involved.
Andrew Grotto: In theory, there’s a big business opportunity for American and allied energy companies to come in and help the Russians modernize. The Russian economy has been starved of tech since the start of the war. The export controls have tried to clamp down on supplies of technologies that could be used to advance the war machine. The controls aren’t perfect, but they’ve certainly had an impact. Getting those controls lifted has got to be an attractive carrot, from Vladimir Putin’s perspective. But there is an underlying geopolitical dispute over what forms of government are best suited to liberty and other values. I’m just not sure how an economic deal paves over those issues. We could just decide that we don’t care. Maybe if great powers carve the world into spheres of influence, we don’t care if an authoritarian leader with a massive nuclear arsenal gets away with murder, literally. We could decide those things. I think that would be a huge, betrayal of our values and the national interest, but you could imagine a deal where those issues get paved over.
Bill Whalen: Now, let’s apply economic statecraft to Ukraine, the other party in the war, and see what that might look like. Is it as grandiose as a Marshall Plan to rebuild Ukraine?
Andrew Grotto: Ukraine’s economy has obviously been devastated by the war. There are huge infrastructure needs, huge human development needs. Hundreds of billions in investment are needed in the country. A lot of that investment could come from the United States and its allies. China would probably benefit as well. China has excess industrial capacity and has become very skilled at undercutting US and allied companies in competition for infrastructure projects. So, there’s certainly a big economic dimension to Ukraine. But is sacrificing all these other values worth whatever economic gain US industry and allied industry get out of a deal?
Bill Whalen: Tell us a little bit about how economic statecraft will factor into any form of lasting Middle East peace solution.
Andrew Grotto: There are a couple of different dimensions to it. One is using tools like export controls over semiconductors to try to control access by the Chinese. You’ve got several countries in the Middle East that are making big bets on becoming technological hubs themselves, and the United States has an interest in the Middle East developing digital infrastructure that is based on American technology. There are economic reasons for that, but also strategic reasons, because the alternative is China, right?
What’s been missing—and this was a major driver of the report that HR and I did—is thinking about these tools in an integrated, strategic manner. Historically we’ve wielded this toolkit in silos. So, if you talk to someone at the Bureau of Industry and Security, the part of the US government responsible for the dual-use expert control regime, and ask them what they do, they’ll say we do export controls. They won’t say economic statecraft. The same is true if you go talk to a trade negotiator: they don’t do economic statecraft, they do trade negotiations. You talk to someone in economic development: we don’t do economic statecraft, we do development cooperation. And in many cases, there are synergies between them, but in other cases the tools can work at cross purposes.
What we call for in the report is pretty straightforward: the administration should have a strategy. It should try to bring these different parts of the economic-statecraft ecosystem together and use these tools in an integrated manner consistent with American values around free market principles, liberty, and other important values.
There are dozens of agencies across the federal government that are involved in one way or another in economic statecraft, and that’s part of the challenge. How do you even begin to identify this group of agencies? One of the recommendations in the report is that this [executive order] that we recommend the president issue—to direct creation of the strategy—also include a direction for agencies to essentially raise their hands if they do economic statecraft. That way the White House, the National Security Council, and the president can get a full picture of what this toolkit looks like.
Bill Whalen: Let’s talk about China's economic statecraft, the view from Beijing. Is there something the United States could learn from what China does?
Andrew Grotto: I see this temptation in a lot of US policy debate about China: to mirror what the Chinese do when it comes to industrial policy. The Chinese in particular have been really effective, going back decades, at identifying areas of vulnerability in their supply chains and going out and trying to fix them. Energy diplomacy in Africa and elsewhere aims to assure China a supply of fuel. They’ve done similar actions with iron and critical minerals.
Bill Whalen: Now, the way they have gone about this is primarily through a combination of state-owned enterprises and heavily subsidized national champions.
Andrew Grotto: That’s not something that we ought to mirror.
Bill Whalen: We don’t have state-owned enterprises; we don’t have national champions.
Andrew Grotto: So, that’s just an area where we need to find other ways to compete.
