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

This is the dilemma facing the US as it raises tariffs and restricts foreign trade and investment to bolster economic and national security. The US must simultaneously strengthen its engagement with emerging markets and developing economies (EMDEs) to counterbalance the influence of the PRC. United Nations recently votes on Russia’s invasion of Ukraine highlights that the US cannot take EMDE for granted. Strategic competition requires that the US try to promote economic diplomacy in the developing world amid the restrictions necessary to maintain security.

Protectionist measures are often politically popular, but they can also be impulsive. Exist bipartisan pressure to put pressure on the PRC, but few voters understand in practical terms how tariffs work. It is important to remember that foreign trade and investment play a crucial role in shaping US economic and diplomatic relations with other countries, enabling them to foster ties that align with our strategic interests.

The unintended consequences of protectionist policies abound. Tariffs on Chinese products that promote decarbonization benefit America’s supply chain resilience. Restrictions on Chinese software in vehicles are important for safety. However, this will make decarbonisation more expensive and could contribute to inflation. Similarly, export controls will help prevent American technology from benefiting from the PRC’s military capabilities. But they may also lead to China becoming even more of a contender 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 a comparable quantity, but with their industrial strength, domestic market and China’s strong EMDE relations, they will take market share and undercut the sales of the Western leaders, limiting what they can pull back. in research and development to stay ahead.

Meanwhile, government-imposed restrictions on overseas investment may also have far-reaching implications. As the US prepares to enact such restrictions for the first time, full range potential consequences must be considered.

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

Industrial groups have ADVISED the new rule could increase costs, exacerbate supply chain weaknesses and hurt the global competitiveness of American companies. But other ripple effects of the rule may be even greater than these justifiable concerns.

Even if the restrictions are necessary for security purposes, they can be seen as anathema to the US position as the main proponent of global economic integration and advocate for the free movement of capital across borders. To the extent that 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 largest source of foreign direct investment (FDI) flows globally. This means that it sets the tone and drives the direction of FDI. Limiting US foreign investment, combined with the imposition of 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 endangering American business 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, thus creating a less liberal international economic environment. The european union announced earlier this year plans to introduce its own screening mechanism for foreign investment. Globally, protectionist winds are blowing strongly against FDI, even without the US exacerbating the trend. Conformable UN Trade and Development57% of new investment measures introduced in developed countries in 2023 were unfavorable to foreign investment, with FDI screening mechanisms becoming increasingly popular.

With all of this in mind, how can the US protect its technology while maintaining global dominance in technology products and generating mutually beneficial partnerships with EMDE? There are five key modes:

First, to maintain global leadership, the US should align its infrastructure support efforts to foster development that will promote the adaptation of US technologies in friendly countries. Infrastructure investment can too advance resilience in critical supply chains. This requires coordination between the US International Development Finance Corporation, the Export-Import Bank, private sector investors and international partners. Building infrastructure that increases connectivity (digital and logistics) and supports industries such as manufacturing, renewable energy, critical mineral extraction, and semiconductors will strengthen supply chains for the benefit of U.S. exporters, allies, and trading partners.

Second, efforts should focus on US-aligned or US-leaning EMDEs in Africa, Eastern Europe, Latin America, and Southeast Asia. US investment in these countries is already increasing as part of a “friendshoring” tendency. Continued efforts to increase trade and investment ties will benefit all parties. Investments that bring know-how, raise the level of skills and help establish the positions of these countries in global value chains will be particularly beneficial and welcome. Closer economic partnerships 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 technologies. The first thing EMDEs will be looking for in America is to help them tap into the booming technology market. They all want to make semiconductors. However, it is uncertain which parts of the advanced semiconductor supply chain can be trusted in these countries to prevent any diversion to the PRC. This is particularly problematic because the most appropriate manufacturing step to not produce locally in the US is the final step – testing and packaging. If the US does not want the PRC to have a hold on legacy chips, this may be an opportunity to attract EMDEs helping them develop as alternative sources.

Fourth, there are opportunities to exploit weaknesses or consequences of the PRC’s trade position. China presents itself as a champion of the developing world. However, China is trying to reboot itself blocked economy by flooding the markets with more exportsthis will create tension with EMDE. Essential mineral countries looking to add processing may find that predatory PRC prices limit this opportunity. This could create an opening for the US to improve its supply chain resilience by supporting mineral processing in other countries.

Finally, and perhaps most importantly, the US should regain its role as the champion of global trade and pursue a policy of mutually beneficial expansion with friendly nations. This would help the US maintain its technological leadership and diversify supply chains. Protecting national security without undermining broader US economic and geopolitical interests will always be a delicate balancing act. Security must not be compromised. The US must recognize the tensions in the many facets of today’s strategic competition and navigate them in ways that maintain its leadership role.