Maybe US limits trade to friends?

In a recent speech to the Atlantic Council, Treasury Secretary Janet Yellen offered a conceptual start to a postUkraine trade policy.

Clarity about the prevailing geopolitical dynamic came from the invasion of Ukraine and the Joint Statement issued by Russia and China a few weeks prior. The statement was a forceful rejection of the norms of democratic capitalism and an international order based upon them. Competition and tension between democracy and authoritarianism will, or should, now drive international relations.

Economic interactions are, or should be, part of this. The leverage Russian oil and natural gas gave over the response of democratic Europe to the invasion of Ukraine is well recognized as a geopolitical vulnerability and mistake. And Europe seems genuinely committed to weaning itself off of Russian sources, even though it will increase costs.

The leverage that trade with China creates is less straightforward. Nevertheless, the Joint Statement and Chinese conduct under strongman Xi Jinping puts paid to the belief and hope that economic engagement will result in a China trending toward more democratic governance and individual rights or acceptance of an international order based upon the norms of democratic capitalism.

Economic disengagement is the prudent path.

Yellen called the concept she introduced “friend-shoring.” Friend-sourcing would be more descriptive. The idea would be to reengineer supply chains to avoid countries with the reality or the prospect of geopolitical tension.

Yellen offered no specifics regarding governmental policies to engender friend-sourcing, nor has the Biden administration developed any beyond sanctions to penalize Russia for the Ukrainian invasion.

So, this might be just a conceptual trifle Yellen thought timely to decorate her speech, not a serious policy initiative.

If so, that would be unfortunate and an opportunity lost. Friend-sourcing would be an important component of reorienting American foreign and economic policy to the new reality harshly exposed by the Ukrainian invasion and the Joint Statement.

The specifics would be difficult to construct and implement. In a freemarket economy, the government doesn’t dictate supply chains. Those are formed through the individual and independent decisions of private businesses.

The government can choose to override those decisions, as it has in banning oil imports from Russia. And it can try to guide and influence those decisions through tariffs.

A tariff structure based primarily on the governance and geopolitical conduct of other countries would be something very different. And it would upend the existing international trade order.

That order is established and overseen, at least on paper, by the World Trade Organization. There are rules that supposedly govern trade relations between member countries.

There are 164 countries who are members of the WTO. In contrast, Freedom House rates only 83 countries as free.

Constricting supply chains based upon governance and geopolitical conduct would increase consumer costs.

But a free trade zone among democratic capitalist countries, and excluding others, would be a powerful geopolitical influence.

Whether European or Asian democracies would be willing to similarly restrict supply chains is doubtful at present. And there is a question as to whether this is an issue that extends much beyond Russia and China, two authoritarian regimes with major militaries that have announced an intention to reorder international relations to their liking.

Trade with autocratic Vietnam doesn’t pose the same geopolitical concerns or risks as trade with China.

Still, the world changed as a result of the Ukrainian invasion and the Joint Statement. If U.S. foreign policy is to be reoriented to recognize the centrality of the competition and tension between democracy and authoritarianism, trade has to be part of that.

The Biden administration should tackle the difficult specifics and provide a detailed path toward friend-sourcing. It should become more than an intriguing and useful thought floated in a speech.