Allied Strategic Competitiveness: Partnerships Will be Key

The post-World War II economic system is no longer “fit for purpose” to tackle current problems. With innovation occurring ever more rapidly, an ongoing massive energy transformation, and rising new geopolitical actors, belief in future economic prosperity has dissolved. Fear and a sense of unfairness in an unbalanced world has shattered confidence in that.

Technology and digitalization are among the areas evolving quickly, requiring speed to market, scale, and constant innovation. All three are also required if investment in breakthrough technologies is to be sustainable. Countries and companies that provide the foundation for this environment are winning the game.

State-directed capitalism, which is rewriting the rules of the global economy to advance strategic interests, is among the victors. It provides planning stability and a focus on scaling manufacturing and technology to win. The United States, however, takes another approach. It unleashes competitive “animal spirits” in a low-regulatory environment to nurture the best ideas and allow markets to select winners. Europe sits in the middle, regulating new industries to protect citizens but providing neither the planning direction nor the financial support nor the regulatory freedom to innovate that other systems do.

Democracies, while providing individual freedoms to thrive, struggle to keep pace with state-directed capitalist systems. For too long, the transatlantic alliance has moved too slowly, producing too few results for the size and scope of its economic relationship. But alliances matter. They provide the scale needed to tackle today’s challenges facing trusted partners that share objectives. Unfortunately, the return on time invested in allied competitiveness has been minimal. To improve that, the United States and its allies must recommit their partnership to doing, not just debating.

Western postwar institutions are creaking under the weight of 21st-century challenges. The rules-based order has eroded, leaving a vacuum that rivals are all too eager to fill. The United States and its allies need new forms of collaboration given that multilateral organizations such as the World Trade Organization and bilateral forums such as the Transatlantic Trade and Technology Council (TTC) are being rebooted or retired. It is time for “radical change”, as former Italian Prime Minister Mario Draghi put it an April 2024 speech.

Europe needs to improve its competitiveness in part because Donald Trump believes that they, among other countries, are taking advantage of US largess. To rebut that, Europe must become a stronger partner and equalize the transatlantic relationship. In 2008, the eurozone and the United States had nearly equivalent gross domestic products (GDP) of, respectively, $14.2 trillion and $14.8 trillion. By 2023, eurozone GDP had stagnated at just over $15 trillion, while the United States’ soared to $26.9 trillion. Draghi and another former Italian prime minister, Enrico Letta, noted this growing imbalance in their 2024 European Commission reports on Europe’s economic challenges. They also proposed ways for improving the continent’s growth in three fundamental areas: defense, energy, and innovation.

There are additional reasons for Europe to put its economy in higher gear, and for the United States to support that effort. Recent experience with Chinese electric vehicles, exports of which jumped from 1 million in 2020 to 6.4 million in 2024, provides a template for Beijing’s potential ability to grow and supplant transatlantic companies. Speed is essential to prevent this.

The United States cannot lose sight of the economic challenges and should rededicate itself to working with allies to boost collective and individual competitiveness, align economic policies, encourage collaboration, and establish mutual support mechanisms against economic coercion and theft of our innovations. Rivals are not biding their time. They are making technological breakthroughs that strengthen their grip on global supply chains. The transatlantic partners need to respond by focusing on common goals and to work continually to advance their citizens’ economic prosperity. Pace and prioritization are the pathways to action and breakthroughs. 

Policy Recommendations

The Trump administration should pursue a policy of “promote and compete”. Now is not the time to take the foot off the gas. The United States, with the EU and other allies, needs to go all out to maintain or regain leadership in the industries critical to the present and future. This includes:

• rebooting and reconstituting the TTC. Launched during Trump’s first term, the TTC has become unwieldy, its mandate too broad. It needs to focus on turbocharging collective allied policies for maximum impact. More collaboration is needed, such as that the TTC fostered with quick, joint economic responses to Russia’s invasion of Ukraine. More tangible action through prioritization and accelerated work is needed.
• creating attractive environments for investment. This includes appropriate regulatory environments, attractive returns, and fair taxation—without new and unnecessary disputes with allies.
• managing disputes over long-standing and emerging issues. A commitment to tackle disputes quickly and respectfully via bilateral mechanisms will allow allies to focus on joint efforts to address unfair competition from China and other malign actors. Fighting among allies diverts attention from the global race with China and its partners.

The United States must collaborate with allies to exploit complementary but unique advantages and to nurture breakthrough technologies. Bloomberg predicts China will be at par with the West or leading on 12 of the 13 most critical technologies by 2030. Allies must work together to accelerate innovation and disrupt Beijing’s march to economic and technological dominance. Areas of opportunity include:

• pooling individual strengths to reinforce supply chains in critical legacy industries, such as transportation (autos) and aviation. 
• collaborating with allies to create cross-border ecosystems to support the most critical emerging technologies, such as semiconductors, quantum competing, and artificial intelligence.
• prioritizing joint research and commercialization of technologies, such as biosolutions, energy technologies, and pharmaceuticals.
• tackling areas in which common dependencies exist, such as critical minerals
• expanding joint development assistance tools for nonaligned countries in the “Global South” that foster partnership and entry into supply chains. 
• considering sectoral, supply chain, and free trade agreements with allies.  AUKUS is providing some new supply chain options, and the United Kingdom and Greenland could be strong partners for new trade and economic frameworks. 

Lastly, the United States and its allies need a common approach to protect markets and supply chains from hostile threats. The incoming administration should continue efforts for joint responses to economic coercion and joint use and enforcement of economic tools by: 

• confirming, as a first step, priorities for technology and energy infrastructure.
• enhancing dialogue with allies, via G7 or bilateral forums, for greater coordination. 
• ensuring that all allied countries adopt policies that ensure a level playing field with authoritarian, state- directed competition.
• coordinating economic security actions, including tariffs, sanctions, investment screening, and export controls.

Penelope Naas is the lead, GMF Allied Strategic Competitivness.