A Democratic Trade Partnership: Ally shoring to counter coercion and secure supply chains

China Economy & Business Politics & Diplomacy Russia Trade

June 1, 2022

A Democratic Trade Partnership: Ally shoring to counter coercion and secure supply chains

This report was produced in collaboration with Marianne Schneider-Petsinger of Chatham House

This is the fifth and final report in a five-part series of Atlantic Council publications, as part of a project on revitalizing the rules-based international system and positioning the United States and its allies to succeed in an era of strategic competition.

The first publication, Present at the Re-Creation: A Global Strategy for Revitalizing, Adapting, and Defending a Rules-Based International System, sets forth an overarching global strategy for the United States and its allies to uphold the rules-based system by strengthening cooperation among the world’s democracies, while seeking to cooperate with other global powers on areas of common concern.

The second report, From the G7 to a D-10: Strengthening Democratic Cooperation for Today’s Challenges, proposes the creation of a new D-10 core group of influential democracies across North America, Europe, and the Indo-Pacific, aimed at deepening strategic collaboration on the most pressing challenges facing the rules-based order.

The third report, An Alliance of Democracies: From Concept to Reality in an Era of Strategic Competition, suggests that an Alliance of Democracies could foster cooperation among a larger group of nations committed to shared values and goals, potentially as a standing body stemming from the Biden administration’s series of democracy summits.

The fourth report, Toward a Democratic Technology Alliance: An Innovation Edge that Favors Freedom, calls for a new alliance that would ensure that the free world prevails in the race for advanced technologies by jointly investing in innovation, countering unfair practices, and developing rules and norms consistent with democratic values.

This report contends that a Democratic Trade and Economic Partnership could provide an integrated economic framework for leading democracies and other partners to reduce strategic dependency on revisionist autocracies, coordinate on economic challenges, and foster free, fair, and secure trade.

A Democratic Trade Partnership: Ally shoring to counter coercion and secure supply chains

Report Jun 13, 2022

Toward a Democratic Technology Alliance: An innovation edge that favors freedom

By Ash Jain, Matthew Kroenig

A Democratic Technology Alliance would facilitate the development of common rules and norms in the technology space, consistent with democratic values, and ensure that the free world prevails in the race for advanced technologies.

China Economy & Business

Report Dec 7, 2021

An Alliance of Democracies: From concept to reality in an era of strategic competition

By Ash Jain, Matthew Kroenig, and Jonas Parello-Plesner

With the rules-based democratic order under threat, the United States and its allies need new entities that facilitate cooperation not just across the transatlantic, but among larger groups of democracies worldwide.

Australia Economy & Business

I. Executive summary

The post-World War II global economic order is in the midst of a profound transition. The first phase of this order, established by the United States and its allies around the Bretton Woods system of institutions, encouraged free markets and open trade, and focused primarily on economic engagement within the free world. The second phase, which began with the end of the Cold War, expanded the order to include all nations willing to reduce trade barriers. But the era of inclusive globalization now appears to be coming to an end. In the aftermath of the 2008 global financial crisis, the COVID-19 pandemic, and more recently, Russia’s invasion of Ukraine, the global economic order is entering a new third phase.

The precise contours of this new phase are still unclear, but a few trends are emerging. As China and Russia act more aggressively to challenge the rules-based order, the United States and other leading democracies have begun imposing new trade barriers, including a widening range of tariffs and sanctions, against them. At the same time, free trade has become less salient, particularly in the United States, where both political parties have begun to emphasize supply chain resilience and domestic onshoring. While free trade still appears to have resonance in other parts of the world, the question is whether this third phase of the order will be characterized by increasing protectionism, or whether a new model for economic engagement can emerge that fosters secure supply chains and, at the same time, maintains the benefits of an open global trading system.

This report seeks to encourage the latter. It suggests that a new Democratic Trade and Economic Partnership (D-TEP) could provide an integrated framework for the United States and its allies and partners to work together to counter the economic challenges posed by revisionist autocracies, while ensuring that the global economic order remains free and open, as well as stable and secure.

Challenges to the global order

From Russia’s invasion of Ukraine to China’s increasingly assertive actions to undermine key tenets of the global order, the world is at an inflection point, entering what President Joe Biden has called a long-term global “struggle between democracy and autocracy.”¹

In the economic domain, the rules-based order, led by the United States and its democratic allies since the end of World War II, has advanced an interconnected global economy based on free markets and open trade and finance. While its benefits have often been uneven, this order has resulted in dramatic increases in global economic prosperity and improved living standards for people around the world.

Among the biggest beneficiaries of this open economic order have been China and Russia. But rather than liberalizing their political systems as they integrated into the global economy, as many had hoped, the authoritarian leaders in Moscow and Beijing have reaped the benefits of the global trading system while consolidating their repressive regimes. To fuel their economic growth, China, and to some extent Russia, have engaged in intellectual property theft, forced technology transfers, and other unfair trade practices, while taking advantage of unfettered access to global markets.²

At the same time, as corporations have relocated production facilities abroad and increased global trade, the United States, its European allies, and other democracies around the world have become dependent on China and Russia across a range of critical economic sectors. In the energy sector, for example, the European Union (EU) relies on Russia for more than 40 percent of its natural gas imports and over a quarter of its crude-oil imports. Dependency on China is even more dramatic. The United States and other democracies are deeply reliant on Chinese supply chains across a range of industry sectors, from pharmaceutical ingredients to lithium batteries to essential earth minerals.

The concern over supply chain dependencies is not just theoretical. Moscow and Beijing are using their economic clout to coerce democratic nations to accede to their political demands. In recent months, China has acted to restrict Australian imports after its leaders called for an independent investigation into the origins of COVID-19³, and forcefully retaliated against Lithuania for its decision to allow Taiwan to open a representative office in its own name. Many analysts have suggested that China and the United States are in a situation of “mutually assured economic destruction.”⁴ Were China to engage in more aggressive actions, such as taking military action against Taiwan, the rapid imposition of sanctions and the increasing decoupling that the West has employed against Russia would be far more difficult to impose against China, given the potential economic consequences.

The COVID-19 pandemic served as a wakeup call for supply chain dependencies, prompting democratic governments to look for alternative sources of supplies as it became clear that China was the dominant source for personal protective equipment (PPE) and other health supplies. With Russia’s invasion of Ukraine, the United States and its allies have moved swiftly to isolate Russia from the global economy, cutting off trade and investment across large swathes of the Russian economy. Recognizing the growing strategic dependencies on autocracies, policymakers have begun to look to ways to promote supply chain resilience by seeking to promote domestic manufacturing in certain industries, such as semiconductors.

Rather than relying strictly on domestic on-shoring, which would be costly and impractical, a growing chorus of voices have suggested that the way to establish more resilient supply chains is through “ally shoring”— sourcing essential goods and services with countries that share democratic values and a commitment to an open, rules-based international order.⁵ The White House has called for “work[ing] with America’s allies and partners to strengthen our collective supply chain resilience,”⁶ and Treasury Secretary Janet Yellen spoke about the need for “friend shoring” among countries that “have strong adherence to a set of norms and values about how to operate in the global economy.”⁷ Congress has also begun to take steps to promote supply chain resilience among allies and partners.⁸

The Biden administration’s launch of the Indo-Pacific Economic Framework (IPEF) is a concrete manifestation of this effort. With its parameters still being developed, the initiative seeks to strengthen economic engagement among US allies and partners in the Indo-Pacific, as a complement to the Quad’s ongoing discussion on supply chains. Separately, the US-EU Trade and Technology Council is facilitating an economic dialogue among transatlantic partners, including on supply chains.

While potentially impactful, the current patchwork of multilateral supply chain dialogues and initiatives remains too narrow, both in terms of economic and geographic scope. Rather than approaching the challenges systematically, these efforts have tended to focus on a handful of sectors, such as semiconductors, with outcomes that are bifurcated along regional lines. Yet today’s supply chains, particularly those involving China, are global, not regional, and the same set of strategic and economic challenges impacting the United States are also impacting America’s allies across both Europe and the Indo-Pacific. What is lacking is an integrated framework that would bring together leading democracies to coordinate a free world strategy on these challenges.

A new economic framework

Given the significant vulnerabilities they face, the United States and its democratic allies must adopt a fundamentally new approach to deal with the growing economic challenges to the rules-based order.

The United States and leading democracies in Europe, North America, and the Indo-Pacific should lead the establishment of a new strategic trade and economic framework for the twenty-first century: a Democratic Trade and Economic Partnership (D-TEP) that would bring together willing democracies, and potentially other nations that meet certain criteria, to act together under a common economic umbrella. D-TEP would provide a holistic and systematic framework for the United States and its allies and partners to coordinate on the economic challenges posed by revisionist autocracies and help position the free world to succeed in an era of strategic competition.

D-TEP would provide a holistic and systematic framework for the United States and its allies and partners to coordinate on the economic challenges posed by revisionist autocracies and help position the free world to succeed in an era of strategic competition.

D-TEP would be focused primarily on achieving the following goals.

Reducing strategic dependence on China and Russia. D-TEP would aim to reduce vulnerability among democracies to coercion, blackmail, or potential economic disruptions from revisionist autocracies – namely China and Russia – by encouraging the shifting of supply chains in certain areas toward more stable and trusted partners. The goal is not to cut off all trade and investment, particularly with regard to China. Rather, it is to identify critical economic sectors in which the United States and its allies cannot afford to continue allowing unfettered trade and investment flows, and to take impactful steps to reduce strategic dependence in these sectors.
Expanding free, fair, and secure trade among democracies, by bringing down trade and investment barriers in the industry sectors around which supply chains would be reorchestrated under this framework. The goal is to expand the benefits of free, fair, and secure trade, while pushing back against rising protectionism and encouraging greater openness within the democratic world.
Incentivizing nations on the fence to join the free world in upholding the rules-based order. With the economic benefits of supply chain shifts accruing to member states, the prospect of D-TEP membership could serve as a powerful inducement for nonaligned democracies and other nations to work more closely with the United States and its allies to advance shared interests and reduce strategic vulnerabilities to autocracies that are challenging the order.

All three of these goals are important and interconnected. Reducing strategic dependence on China and Russia will require shifting supply chains to more reliable and trusted allies and partners. For this to work, the private sector needs meaningful incentives, including the reduction of trade barriers in the affected industry sectors, which could facilitate new opportunities to foster more free and secure trade. Nations that are part of this framework will accrue significant economic benefits, and access to these benefits can be used as an incentive to persuade governments on the fence to join and take meaningful steps toward upholding the rules-based order.

To be clear, D-TEP would not be intended to supplant or undermine the World Trade Organization or the existing bilateral and multilateral trade and investment agreements that D-TEP members have in place among themselves or other states. The United States and its allies should continue looking for ways to strengthen the WTO and reinforce its efforts to expand open trade and investment worldwide, even as it builds a more tailored economic framework with democratic allies and partners.

In pursuit of these goals, D-TEP would be organized around four core pillars, each of which would entail commitments by member states and corresponding benefits.

Pillar one would entail an agreement among member states on a common framework for regulating trade and investment flows to China and Russia. The framework would distinguish between three categories: (i) strategic sectors vital to national security, such as arms and advanced technologies that could have security applications, in which trade would be restricted; (ii) critical and sensitive sectors, such as energy and pharmaceuticals, in which incentives would be developed to encourage the shifting of supply chains away from China and Russia; and (iii) other economic sectors, such as furniture and appliances, in which trade would generally be permitted without restrictions (except where subject to sanctions related to other issues).

Pillar two would set forth a commitment by D-TEP member states to take collective action to assist other members if they become the subject of economic coercion. Some have likened this to NATO’s Article V, where an attack against one is considered an attack against all.⁹; ¹⁰ A commitment by democracies to act together under this pillar could serve as a significant deterrent against economic coercion and a channel to coordinate joint assistance to those that are targeted.

Pillar three would outline an agreement between member states to reduce trade barriers among themselves in specific industry sectors. Such an agreement would be structured in a narrow and practical way, beginning with the critical sectors identified in Pillar One, where it is in the interest of D-TEP members to promote the shifting of supply chains away from China and Russia. Over time, D-TEP could also facilitate agreements to reduce trade barriers in other industry sectors, serving as a platform to revitalize discussions among the United States and its allies on fostering more free, fair, and secure trade.

Pillar four would constitute a set of bold economic initiatives in areas where autocratic powers, particularly China, are at risk of outcompeting the democratic world, and where the United States and its allies have a particularly strong interest in working together to maintain a strategic edge. These initiatives, with a potential focus on global infrastructure, digital commerce, and clean energy technology, as well as other critical technologies, could help limit Beijing and Moscow’s attempts to co-opt nations in the global South by making them more economically dependent on China and Russia.

Together, these four pillars would facilitate a series of mutually reinforcing activities and provide an integrated framework to reduce strategic dependence on autocracies and advance the rules-based economic order. D-TEP would pool the economic power and influence of the world’s leading democracies based around shared interests and a common willingness to act. At the same time, it would consolidate a meaningful package of economic benefits that many nations around the world—in particular, developing nations—could find compelling and attractive.

Importantly, D-TEP would not force member states to choose between trading at large with China and the West. Rather, it would focus on restricting trade or incentivizing supply chain shifts in specific industry sectors, leaving unchanged the ability to engage in trade and investment across a wide range of other (except, as noted, where targeted sanctions have been imposed) areas. In addition, D-TEP could help rekindle domestic political support for global economic engagement.

To achieve its objectives, D-TEP may benefit from a two-tiered membership structure. DTEP allies, or full members, would consist of nations that are free-market democracies, committed to the rule of law, and willing to embrace the full scope of obligations required under D-TEP. This could include the leading democratic economies of the G7—the United Kingdom, Canada, France, Germany, Italy, Japan, and the United States—and the D-10, which also includes Australia, South Korea, and the European Union.¹¹ The partnership would aspire to bring in other rising democracies, particularly Mexico and India.

DTEP associates would include free-market economies that are willing to commit to most, but not all, of the required obligations. This could provide an avenue for association with nondemocratic, but increasingly significant, economic partners, such as Vietnam. Associates would gain partial access to the supply chain reorchestration and other benefits under this framework.

While seeking to maximize participation, D-TEP’s success will not be determined by how many nations end up joining. Rather, it will depend on having the full commitment of the world’s largest democratic economies. If it can facilitate agreement among the G7 or D-10 across its four pillars, D-TEP could have a significant impact on reducing strategic dependence on China and Russia and advancing free, fair, and secure trade.

Key recommendations

While the rationale for establishing a new trade and investment partnership along the lines of D-TEP is compelling, several obstacles and concerns must be considered, including whether such a framework could further polarize the global order, undermine the WTO, involve significant economic costs, or become too unwieldy or impractical to implement. Moreover, bringing D-TEP to fruition will require determined US leadership and support from key allies. To move this forward in a feasible way, the following recommendations should be considered.

The United States should establish a senior diplomatic envoy, based at the State Department or National Security Council (NSC), that would be responsible for developing and coordinating strategies to reduce supply chain dependencies, and other leading democracies should follow suit. In addition, Washington should consider establishing a dedicated Office of Strategic Competition that would focus on integrating a wider range of strategies—across the areas of trade, technology, security, disinformation, democracy, and development—that are required to position the United States and its allies to succeed in the long-term systemic competition with rival autocracies.
The United States should engage a small core group of like-minded allies to discuss the possibility of establishing a new integrated trade and economic partnership. Initially, this core group could include some combination of the G7 or D-10, including Germany, Japan, and the United Kingdom, which—together with the United States—constitute the world’s four largest democratic economies. If agreement on a basic framework can be reached, discussion could expand to include the remaining G7 and D-10 members.
Given their economic and political significance, Mexico and India, among other rising democracies, should be approached early on in the consultation process. Bringing these nations into this framework would provide an enormous boost, and the United States and its allies should prioritize efforts to include them – ideally as full members if they are willing to sign on to the required obligations, but at least as associates, with a pathway toward full membership over time.
The Biden administration should also consult Congress early in the process, as dedicated funding and implementing legislation will be required to make D-TEP a reality. Similarly, lawmakers in other leading democracies should be consulted to help build support among allies and partners. In addition, the private sector should be engaged to ensure that the incentives for supply chain reorchestration are appropriately designed, and to help build a broader base of support for this framework.
Finally, even as it pursues a new trade and economic partnership among allies and partners, Washington should seek to reinvigorate efforts to strengthen and reform the WTO, and foster efforts to expand greater economic openness. At the same time, it should continue to engage with Beijing to discuss trade and economic issues, while seeking to reassure China that the supply chain reorchestration called for under this proposal would not cut off China from the global economy.