What a difference a few decades make. Trade ministers from the United States and European Union recently felt compelled to sit down for special high-level ministerial forum in hopes of strengthening their relationship after years of transatlantic tensions on all manner of digital-age economic and trade matters—from digital service taxes to cross-border data flows—which together reflect fundamental differences of geopolitical strategy for the digital economy.

This never would have been necessary in the Cold War, when there was a clear, Manichean struggle between the democratic, market-based West and the authoritarian-communist East. It would have been inconceivable in those days to have such differences “across the pond.” There was strong bipartisan support in the United States—and parallel support in Europe—for a cohesive approach to the geopolitical economy that aimed to attract allies and isolate the Soviet Union and China by supporting Western business interests and spreading democracy around the world.

 

But now, as the Cold War fades into history and as the global economy is increasingly driven by digital and information technologies instead of heavy industry, that consensus view of the geopolitical economy has fractured. The old “free markets and free people” camp has maintained a foothold in the United States, and authoritarian statism is still deeply rooted in the parts of the East, but alongside them there are now other competing visions—including social democratic regulation in Europe and a rising form of digital protectionism in countries such as India, Indonesia, and Vietnam.

If the United States is to effectively advance its interests, which now hinge on spurring faster and deeper digital innovation and transformation, then U.S. policymakers need to recognize this new formation, while embracing a new framework for the geopolitical economy that is better suited to the times: national developmentalism. The overriding priority should be advancing domestic technology competitiveness instead of sacrificing U.S. economic interests on the altar of other foreign policy goals as America often did in the Cold War. Failure to execute this strategic pivot will produce a technologically weaker U.S. economy.

Until recently, America had only one big idea when it came to geopolitical economics, embodied in the neoliberal “Washington consensus.” Policymakers advocated at home and abroad for open markets, deeper trade, limited regulation, budget constraints, the rule of law, and a modest role for government. That approach worked in the Cold War, but there are two problems with it now: First, it ignores the fact that government plays a key role in helping develop and spread digital technologies, as we have seen in the history of the Internet, semiconductors, computing, and technologies like GPS—all of which the federal government spurred. Advancing growth in the era of digital innovation requires more than firms and markets acting on their own. Second, when U.S. policymakers point to the Washington consensus as the only alternative to China’s seemingly successful state-directed model, it gives nations looking to grow their own digital economies a limited choice: Do little and hope markets work things out for the best or be aggressive by copying Beijing’s statist model.

As in the Cold War, some nations today continue to embrace authoritarian statism, but with a digital edge and a more market-friendly veneer. China and Russia are the torchbearers for this formula, with China taking it to the greatest extreme. For China’s central planners, the approach is more than authoritarian; it is deeply mercantilist, seeking not just to build up domestic technology firms by any means necessary, but also to harm foreign competitors—as when Chinese firms coerce their Western counterparts into transferring intellectual property as the price of doing business in China while also enjoying lavish subsidies for “going out” to challenge Western firms for global market share.

This is a model that empowers U.S. adversaries and harms global innovation, because by employing tactics such as massive subsidies, IP theft, and coerced technology transfers, China is empowering its firms to take market share away from more innovative firms in other nations. Moreover, China scoffs at concepts such as freedom and democracy, and in global governance forums, its strategy is to ensure that its formula prevails over the U.S. model of freedom and human rights with private and civil-sector governance.

Meanwhile, where the United States and Europe once were closely aligned on economic and foreign policy, their goals and interests have now diverged. In the EU’s social democratic approach to the digital economy, the government’s main role is to regulate, rather than promote, technology and technology companies (especially U.S. companies) to achieve social policy goals. The EU is doing everything it can, including using carrots and sticks, to bring other nations into its orbit, offering its model as a third-way alternative to Chinese authoritarianism and what it considers to be America’s “cowboy capitalism.” The result is a spread of a digital regulatory system marked by higher taxes, onerous rules, and strict antitrust enforcement, which constrains global innovation and weakens U.S. competitiveness. And unfortunately, many U.S. policymakers, particularly on the left, see this as an appealing alternative to the Washington consensus they believe has been discredited.

But ultimately social-democratic regulation of the digital economy will prove to be a dead end. Even though EU social democrats and their U.S. allies profess to be pro-innovation, the reality is that onerous regulations on privacy, competition, “fairness,” and other areas result in less innovation, slower economic growth, and worse experiences for consumers.

On a separate track are unaligned nations that often charted their own path in the Cold War era. Today, many of them are defaulting toward digital protectionism as a preferred approach. For example, India, Indonesia, and Vietnam, among others, see limiting foreign IT and digital market access as the key to growing their domestic digital economies. To that end, they take measures such as limiting cross-border data flows, favoring domestic digital firms, and otherwise discriminating against foreign technology firms. This, too, will likely prove to be a dead end. Digital protectionism usually doesn’t work, in part because it doesn’t just harm the interests of U.S. firms and others, but often drives up the costs of digital technologies domestically, thereby limiting their use and forgoing the productivity benefits they offer.

Against this backdrop, the United States faces a host of new challenges, but it also has an opportunity to secure a new era of prosperity for itself and others by embracing a national developmentalist model in which government helps coach firms within its borders to compete globally, innovate, and boost productivity. This entails supporting innovation, markets, and business—including big business. But it also recognizes that the state should play a key role in supporting digital innovation in areas like broadband, health care, education, and governance while defending U.S. firms from unfair foreign competition. Among the nations moving toward the national developmentalism model are the Scandinavian bloc, the United Kingdom (as conservatives increasingly move beyond their Thatcherite traditions), Israel, Singapore, and Taiwan. Some U.S. policymakers on both sides of the aisle have begun moving in this direction, too, as evidenced by the Senate’s United States Innovation and Competition Act.

While the doctrine of national developmentalism presents a more realistic picture of the world, recognizing that nations seek competitive advantage in IT and digital industries, it also counsels a “race-to-the-top,” wherein nations support digital innovation with policies related to research and development, worker skills, and digital infrastructure, plus conducive regulatory and tax policies, and government leadership in using the technologies themselves.

The United States should fully embrace this burgeoning national developmentalism at home and work methodically to bring as many other countries as possible into the U.S. national developmentalist orbit—selling it as a compelling and effective alternative to social democratic regulation, protectionism, and authoritarian statism. We are no longer locked in a Manichean struggle; there are now several models on offer. But one is clearly the best.

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Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation, the leading think tank for science and technology policy.